How a Book About Economics Became a Hit.

piketty capital

Can an economist be a “rock star”? Can tax policy be a game changer?”
It seems so. And as nerdy as it sounds, I couldn’t be happier.

Thomas Piketty’s "Capital in the 21st Century" has been hailed as a book that changes everything - from how we understand the economy, and growing inequality to the role of taxes. In true rock star form, the professor at the Paris School of Economics is at the centre of controversy. That hasn’t hurt book sales which are peaking past the 100,000 mark and currently sold out in Canada. Not bad for a 700+page economics tome that proposes progressive taxation as a major solution.

Piketty has achieved rock star status by writing about one of the most politically charged and divisive issues of our time: economic inequality. The data set he puts forward melds history and economics. It provides detailed historical and economic data that reinforces much of what many of us have been saying.

For instance, while real wages for most workers in the U.S. have been stagnant since the 1970's, the top 1% are making 165% more money than they did in the 70's. And for the 0.1%, that increase is 362%.  Piketty points directly to regressive tax policy changes around the world as a major factor. Pretty definitive.

Everyone, it seems, has an opinion on Piketty's historical research and prescription, even if they haven't cracked open the cover. This week the Financial Times released a scathing criticism of perceived data errors in a chapter that deals with wealth accumulation. Kevin O’Leary, fast becoming the Don Cherry of business broadcasting, piled on in a very awkward way.

Other mainstream economists have defended Piketty’s use of different data depending on the country as reliable historical data is difficult to get, and he seems to have had good reasons for choosing the data sets he did.

Still others, such as economist James Henry have suggested that, if anything, Piketty underestimates the degree of wealth concentration because he uses a very low estimate of wealth hidden in tax havens, a point Piketty acknowledges in a Financial Times blog post when he says, "Finally, let me say that my estimates on wealth concentration do not fully take into account offshore wealth, and are likely to err on the low side..."

In an interview on CBC’s Sunday Edition, Piketty suggests that the breakthrough of this book was that he chose to combine history and economics in a comprehensive way.

Economist Mel Watkins is impressed by that methodology: “He (Pilketty) does not begin by enunciating an abstract theory and then testing it. Rather he collects the megadata of history of many countries, from many sources, graphs it and looks for patterns. In many instances those patterns leap off the page.”

In other words, pay attention. History has a tendency to repeat itself.

It is a warning that Broadbent Institute Senior Policy Advisor, Andrew Jackson echoes in a recent post: “Piketty’s big fear is that we are on our way back to the “Gilded Age” society of the late nineteenth century in Europe and North America in which the top 1% owned about half of all wealth. He warns that, if we allow wealth to become concentrated in very few hands, the past will again “devour the future.”

This is a message that tax fairness advocates have been repeating for years. In a recent column, researcher Monia Mazigh pointed out that: “the difference between Piketty and protest groups is that his work can't be brushed off as lousy, simplistic or the work of some anarchists. He uses a statistical method that tracked income and wealth over a long period of time. He was able to follow inequality through two dimensions: across social classes and through time.” She also points out that Piketty “emphasizes wealth instead of income as the most important tool for studying inequality -- and for this he studied tax records instead of relying, like other economists, on surveys about salaries and income.”

Will this book do as Nobel prizewinning economist, Paul Krugman, predicted in a recent review and “change both the way we think about society and the way we do economics?” Hard to tell, but they are talking about it everywhere from the White House, to the IMF to the United Nations.
It is definitely a body blow to conventional economic wisdom.
Piketty has given a comprehensive view of how bad economic policy decisions create even greater wealth inequality that is bad for the economy and for all of us. And It makes the case that fair tax policies, including taxes on wealth, as well as income, is critical to correcting this dangerous trend.