Thomas Piketty's flawed analyses of public debt and executive compensation.

• Author: Boudreaux, Donald J.
• Position: Book review

Thomas Piketty's book Capital in the Twenty-First Century (2014) has already earned an extra sizable share of the world's attention and has prompted a disproportionately large outpouring of ink. This ink has been spilled glowingly (Krugman 2014), lukewarmly (Summers 2014), and devastatingly (Jones 2014). Yet despite the many reviews--including my own in Barron's (Boudreaux 2014)--much remains to be said about Piketty's attention-grabbing analyses of modern capitalism.

In this article, I highlight two parts of Piketty's book that deserve closer scrutiny but have largely escaped attention. Although my selection of the parts of Capital in the Twenty-First Century to scrutinize here is unavoidably idiosyncratic, I hope that my analysis of those parts will nevertheless contribute productively to today's conversation about Thomas Piketty's impact on our understanding of economic inequality.

Piketty on Public Debt

While discussing late-eighteenth- and early-nineteenth-century Britain, Piketty writes that "it is also quite clear that, all things considered, this high level of public debt served the interest of the lenders and their descendants quite well, at least when compared with what would happen if the British monarchy had financed its expenditures by making them pay taxes. From the standpoint of people with the means to lend to the government, it is obviously far more advantageous to lend to the state and receive interest on the loan for decades than to pay taxes without compensation" (2014, 130). Wrong. This passage reveals a surprisingly weak grasp of basic public-finance theory.

Piketty reasonably assumes that if government finances its expenditures with taxes, then the rich would pay a disproportionately large share of those taxes. But he unreasonably assumes that debt financing of government expenditures not only allows the rich to escape higher taxes in the future but also simultaneously gives them a lucrative stream of returns that adds to their net wealth. Unfortunately, alas, for the rich (and for everyone else), real wealth cannot be created in this rabbit-from-a-hat manner.

To see why, first understand that the value of real resources transferred initially by the rich to the government is the same with public-debt issuance as it is with taxation. (We readily accept Piketty's assumption that it is the rich who pay the taxes and that, with debt financing, it is the rich who buy the bonds. (1)) If government today gets x amount more real resources to use, then the private sector thereby has x amount fewer real resources to use. This reality holds true regardless of the method government employs to get these resources. Therefore, during the current period (the period when the loans are made and before interest starts to be paid on the debt), the amounts of real resources at the disposal of the rich are reduced by public-debt issuance as much as by...