All things being equal, there’s more to be said about Britain’s rich than you'll find in Thomas Piketty's Capital in the Twenty-First Century

In the row over Thomas Piketty’s book on wealth and capitalism, some valuable points were missed

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Inequality. What on earth should we make of the row over the work of Thomas Piketty? His 557-page Capital in the Twenty-First Century has become a bestseller but is now the subject of a hard-hitting attack by Chris Giles, economics editor of the Financial Times, for dodgy statistics, some of which he writes “appear simply to be constructed out of thin air”. On Friday, Piketty responded to this in a 4,400-word piece on his website, arguing that the FT was “simply wrong”.

Piketty, a French economist, argues that inequality has been increasing in the West for the past 30 years, and that the core reason for this is that returns on capital are higher than those on labour. So, people who own capital will get richer faster than those who have to work to earn a living. His remedy is a wealth tax.

Some of the numbers looked a bit odd and my colleague John Rentoul did query them. He got a stock response. However, Giles has crawled over the stats in detail and concluded that wealth disparities have not increased over the past 30 years – if anything, the reverse. For example, Giles noted that Piketty claimed that the top 10 per cent of people in Britain owned 71 per cent of national wealth, whereas the Office for National Statistics puts the figure at 44 per cent. Piketty’s response is that ONS figures underestimate the wealth of the richest Brits and that inheritance tax returns give a different picture.

Oh dear. I had better make a confession. I have been trying to avoid writing about Piketty, partly because I couldn’t bear ploughing through the book’s spreadsheets and partly because the whole debate has become so unpleasantly politicised. However, nudged by my colleagues who rather kindly have said they want to know what I think about this, here goes. Six thoughts.

One: Piketty has touched a nerve, particularly in the US, where there is a profound concern both that the very rich are garnering a disproportionate share of wealth and that middle-class living standards have not risen for a generation. Whatever the detail, something does seem to be going wrong with the American dream.

Two: the data on inequality everywhere is both incomplete and confusing. There are huge gaps in Piketty’s statistics but there are huge gaps everywhere, even within the UK. For example, last week our ONS explained that it will count activities such as drug-dealing and prostitution as part of the economy when it revises its methodology later this year. As a result, our economy will appear quite a lot larger than was previously estimated. Another issue: as far as wealth is concerned, do you take into account pension rights? The answer surely should be yes, for someone who retires with a pension pot of £500,000 is in much the same position as someone on a government index-linked pension of £20,000 a year. But you can see the wealth in the first instance, not in the second.

Three: there is an important distinction between wealth inequality and income inequality. In countries where home ownership is high and property prices have been strong, a large chunk of the population is statistically quite wealthy but may not feel it.

Four: as far as income inequality is concerned, it does seem to have risen over the past 40 years – though recently not much in the UK. But there are two quirks. One is that incomes had become very compressed after the Second World War. So, in a way, we have been reverting to a more normal spread. The other is that the whole story is skewed by very high returns for specialist skills, notably sports stars, entrepreneurs, top professionals and senior executives. But this is not the top 1 per cent; it is the top 0.01 per cent and even the 0.001 per cent. Knock those off and, in the US at least, the top 1 per cent and top 10 per cent have not significantly increased their share.

Five: the core thesis that the returns on capital are higher than on labour does, to some extent, stand. The data varies, but as a general proposition, real pre-tax returns on a mix of assets (equities, bonds, property, and cash) over the past 100 years are about 3.5 per cent a year – a bit more on equities, a lot less on cash. Real increases in wages are somewhat lower, nearer the 2.5 per cent increase in productivity. There is a gap, but it is not huge, is reduced by taxation, and may disappear in the future.

Six: the really big story about inequality over the past 40 years is the dramatic narrowing that has taken place in both income and wealth internationally. In 1974, income per head in the US was about 15 times that of China and India. Now it is still about 10 times that of India but only about four for China. Nothing like this has happened as fast as this in human history. It creates many problems, but on balance I think it’s wonderful – and vastly more important than quite small distributional issues in the developed world.

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