The Piketty Craze — How Should It Be Viewed?

[Seoul Sinmun · Open World · July 2, 2014]

Yun Suk-myung, Research Fellow at the Korea Institute for Health and Social Affairs (KIHASA) and Adjunct Professor of Economics at Korea University

Professor Thomas Piketty's "Capital in the Twenty-First Century," published in French last year, has been causing a great stir worldwide since it was translated into English early this year. Because the weight of the research results is so significant, the debate surrounding the content seems to be equally heated. Prominent economists, including Nobel laureates, are divided into the progressive and conservative camps, engaging in an intense debate. As a Korean edition is scheduled for publication soon, it seems that the debate over Piketty's research findings and policy prescriptions will begin in earnest in Korea as well.

Professor Piketty points out that because existing economic methodologies build sophisticated models based on abstract assumptions, their explanatory power regarding economic reality is low compared to the effort put into constructing those complex models. His position is that only when the real economy is understood accurately based on proper statistical data can correct policy prescriptions be derived. With this awareness of the problem, Professor Piketty has been analyzing income distribution trends in major countries from the early 1800s to around 2010. As a result of analyzing major advanced countries, including Japan, he concluded that capital accumulation occurred rapidly based on high rents produced by capital, as the interest rate (averaging 5%), which is capital income, was significantly higher than the economic growth rate (averaging around 1.5%). When income is divided into capital income and wage income, it is assessed that the share of capital income is overwhelmingly higher than that of wage income, making capital income the primary factor in income polarization.

While income polarization is a common phenomenon in both advanced and emerging economies, it seems that the fact that the degree of income inequality is widening significantly between the U.S. and continental Europe (excluding the UK) among advanced countries serves as the background for the amplification of the debate. This is because while income inequality in continental Europe was high between 1900 and 1910, the inequality that grew in the U.S. has been deepening since 1970. In 1970, the income share of the top 10% in the two regions (34% in the U.S., 30% in Europe) did not show a large difference, but by 2010, they showed a significant gap (48% in the U.S., 35% in Europe).

A passage in Professor Piketty's book that catches my eye is the trend of minimum wage changes in the U.S. and France (p. 309). Based on 2013 purchasing power, the hourly minimum wages of the two countries in 1950 (3.8 dollars in the U.S., 2.1 euros in France) were significantly reversed by 2013 (7.3 dollars in the U.S., 9.4 euros in France). This is a statistical figure that proves the criticism made by Professor Reich of UC Berkeley—a representative progressive scholar who served as Secretary of Labor under the Clinton administration—that due to the mass production of low-wage workers, a significant portion of the U.S. economically active population earns an income below the minimum cost of living even when working full legal hours.

Based on these statistics, the prescription Professor Piketty provides to resolve income polarization is the necessity of global policy coordination. He argues that regional political integration is the only solution, given that there are limits to the policy efforts of individual countries to properly control capital that moves worldwide in search of high returns and low taxes. There is also considerable criticism of these research results by Professor Piketty. Representative examples include points regarding the lack of realism in the policy prescriptions and errors in the research methodology. While additional verification of the research content is necessary in the future, it seems there are more assessments that there are no errors significant enough to shake statistical trends spanning 200 years. If so, what does the Piketty craze suggest to us? The deepening trend of regional income polarization pointed out by Professor Piketty will likely serve as a catalyst for intensifying the debate over the direction of income redistribution and welfare policies. Given that our society is closer to the Anglo-American model than to continental Europe, the debate over income polarization trends and the effectiveness of income distribution policies is expected to begin in earnest.

In a situation where forming a consensus is becoming increasingly difficult, reliable statistical indicators can serve as a channel for dialogue. In this context, it seems necessary to keep in mind that there is considerable controversy regarding the calculation of the Gini coefficient, a representative income distribution indicator. This is because when the target group for Gini coefficient calculation is expanded to include high-income earners, the Gini coefficient rises, indicating higher income inequality. It seems it is now time to accelerate the production of statistics that properly represent our reality. This is because it is difficult to secure the momentum to push forward policies in a situation where a significant number of members of society do not accept statistical indicators.

Source: Seoul Sinmun (original article)