Reading through Piketty

I’ve not finished so perhaps he does deal with this later. But so far I’d say that he’s missed pensions. The rise in the capital to GDP ratio is entirely the rise of pensions savings. And pensions savings aren’t really returns to capital either. They’re delayed compensation to labour. So it’s difficult to state that the labour share of income is falling when quite obviously the amount of delayed compensation to labour is rising but being counted as a return to capital. Finally, pensions aren’t a concentration of capital to the wealthy, they’re a dispersal of it among the populace.

And if we’ve not really got a rising ratio of capital to GDP, haven’t got a rising share of returns to capital in GDP, a falling labour share, and we’re seeing a dispersal not concentration of wealth then there’s not very much left of his argument, is there?

I will be doing a series on all of this at the ASI when I have finished it. There’s all sorts of fun corollaries to his evidence and theories. But that will all wait for that series.

18 thoughts on “Reading through Piketty”

  1. My Lefty acquaintances look upon Piketty’s work as the Second Coming of Marxist Economics. They ignore that Marx never finished his work because he realised he was disappearing up his own fundament and was in the middle of a major re-think upon his death. There is a growing body of opinion that Piketty may have followed Marx into his Maze. In Piketty’s favour is that he has invited discussion and even promoted debate upon his findings, unusual for “progressives”. Go to it, Tim. If you’ve got a pot somewhere I’ll gladly throw something into it to lubricate the synapses.

  2. He’s made his data and spreadsheets available, which puts him a cut above Climate Scientists and other charlatans.

    The pension point is good – pensions seem also to cause trouble when people are calculating wealth, but that may be deliberate of course.

  3. You are assuming that pensions are an importantly different category of wealth. Which it certainly was.
    I guess the counter argument is that pensions can now be bequeathed/inherited post the recent changes (at least in the UK), so it does now for the first time have many of the characteristics of the other types of wealth.

  4. @ Gary
    Only a pretty small minority of pension wealth can be inherited by children (widow’s pensions are a more useful minority of the value of a pension in the better DB schemes). You are talking about “Personal Pensions” where the guy goes into drawdown and doesn’t spend it all. However, by far the greatest amount of pension wealth is in DB schemes (not just the public sector and the few remaining open private sector schemes but the accrued amounts of DB benefits in private sector schemes closed to new entrants and/or future accruals). I have been saving longer into my personal pension, and at a significantly higher %age of my income, that I did in my ex-employers DB scheme but at current annuity rates it is worth less than half as much.

  5. John77 but all DC can be inherited now. That’s a big change that fundamentally alters the nature of this category of wealth.

    Tim adds: well, they can only be inherited if they’re not consumed first. Spent on an annuity or summat.

  6. @Tim. Yeah, but that’s true of any other type of asset as well. Which is the point really – pension used to be purely a form of deferred income that was basically not possible to inherit. It now looks much more like the other forms of wealth (its possible to bequeath but you might choose to consume the lot yourself first, etc).
    It seems quite important to the Piketty argument (implicitly).

  7. He doesn’t include state pensions. So that is an asset worth £250,000 per person.

    Nor does he include free access to the NHS, which would be an asset worth tens of thousands in privatised systems (or in the C19th to which he says we are going in terms of inequality).

  8. @ Gary
    BUT *only* DC and Personal Pensions (which are a subset of DC). Most pension wealth is in DB schemes.
    Private sector DB schemes covered by the PPF amount for £1.3 trillion. Local government pension schemes add £150bn, USS £38bn makes nearly £1.5 trillion
    Add several hundred billion for the unfunded civil service, NHS and teachers’ pension scheme
    DB pensions well over £2 trillion. DC pensions (including “personal pensions” less than £0.5 trillion

  9. @john77. Good stats are always welcome. I think the wider point about Piketty missing pensions is basically correct, but – as I said in my opening comment – I can imagine this will be the counter argument. And is an argument which is true, and it is still true but, as your numbers point out, the argument is trivially true.

  10. @john77 @diogenes

    You both might be over-reading my comments. I am far from defending Piketty. I was already aware of the shoe horizon and the weird data anomalies that Krugman chose to dismiss, and I believe it is a subtle but important observation that he chose not to go through the ‘peer reviewed version then popularised version’ route that is more common.
    My point was no more and no less than attempt to anticipate rebuttals to our hosts point. But John. £0.5bn out of £2bn is a minority, and it might just be described as trivial, but ‘truly trivial’ is a stretch too far.

  11. @ Gaary
    I was not reading you as supporting Picketty
    My last comment was trying to be clever, which is usually a mistake, but Household Wealth excluding state pensions (a big omission) is well over £10 trillion so that some part of, typically, 60% after tax of a sum less than £0.5 trillion – so 1-2% of total household wealth – can now be inherited is a pretty trivial argument compared to saying that his assumption that the rich spend none of their income is blatantly wrong.

  12. Gary/John 77

    Could I ask for a clarification:

    Does inheritance of accrued pension enititlements stretch to those entitlements of an employee who dies in service before he/she is able to access their entitlement? If so, who can benefit and who can’t? And do they need to wait until the time when the deceased member would have been able to access his/her funds?

    A wider point is Tim’s: Picketty’s argument, or rather conclusion, is based not so much upon r>g, but on it leading to inherited wealth’s share of the world’s spoils increasing. If the face of Capital changes and pensions come to form an ever greater share of it, then our response to r>g (if it is correct) needs to change as well. In interview Picketty, frankly, hasn’t struck me as thinking any more deeply about that question as anyone else.

  13. Two comments if I may; first that the excitement with which the usual suspects are embracing Pikkety is extremely similar to the last time they thought someone had justified a big tax and spend scheme – AGW – suggesting the latter has lost its appeal to the bien pensant, big government, tax my enemies to pay my friends squad. Poverty is the new global warming. Second, and I confess that like most people I haven’t read all 700 pages, but I gather part of his thesis is that the rich can generate 8-10% income on their wealth in perpetuity. Interesting then that out in the real world US state pensions have all revised down their expectation to 6-8% since the former Pikketty level assumptions have left them all under water. Now if we apply his proposed wealth and his 80% marginal tax rate then we can see that only a return in excess of 6% earns you anything at all – below 6% and you have a negative return on your capital. Ergo capital flight until the risk return come back into balance. Net result is lower tax revenues and a higher cost of capital for everybody. Another triumph for socialism.

  14. @ Ironman
    That depends upon the terms of the pension scheme. Different schemes have different rules.
    For instance, in some DB schemes, a widow’s pension is payable, at half the rate of the member’s pension, only to those who were married at the date of retirement and are still married at the date of death; in other cases we have seen courts award a divorcing wife half the guy’s pension fund.
    Some schemes pay out a large lump sum to widow/other dependents in lieu of a pension if a member dies in service – my old employer used to pay five times salary. Others pay a pension to the widow (with some paying it at a higher rate until all the children have grown up). Some pay a lump sum and a widow’s pension.
    So, sorry but I cannot answer that.

  15. john77

    Thank you for this. I guess what I was searching for was an example of a current employee with accrued benefits dying in service and his offspring inheriting the full NPV of those rights. That would be true ‘inheritance’. As it is we seem to have enhanced rights for the spouse/civil partner; not quite the same.

    I think the fundamental point of the post is worth keeping in mind: pension wealth changes how we view ‘Capital’.

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