JAMES FREEMAN: HILLARY VS. PIKETTY
http://online.wsj.com/articles/hillary-vs-piketty-1404910205
Hillary vs. Piketty
Mrs. Clinton agrees income inequality is a problem and then explains why it’s not.
Media reaction to this week’s Hillary Clinton interview with the German magazine Der Spiegel has focused on her humorous claims of poverty at the time she and husband Bill left the White House. But perhaps most interesting are Mrs. Clinton’s thoughts on Thomas Piketty’s “Capital in the Twenty-First Century.”
It’s good people aren’t wasting their time, for as Martin Feldstein noted in these pages, Mr. Piketty’s thesis rests on “a flawed interpretation of U.S. income-tax data, and a misunderstanding of the current nature of household wealth.”
But despite the book’s failure to advance public understanding of economics or to command reader attention, it remains a political powerhouse. And that’s why Mrs. Clinton’s comments on Mr. Piketty’s ideas are significant.
In the Spiegel interview, Mrs. Clinton at first agrees that income inequality is “threatening democracy.” But when pressed on the subject of her own gargantuan compensation, she goes in another direction:
“SPIEGEL: The average annual income of an American household is $43,810… You earn up to $200,000 an hour for a speech. Can you understand if people are bothered by that?
“Clinton: Well, certainly, I can understand that, but that’s never been the crux of the concern in our country, because we’ve always had people who did better than other people. That’s just accepted. The problem is that people on the bottom and people in the middle class no longer feel like they have the opportunity to do better. The question is, how do we get back to having an economy that works for everybody and that once again gives people the optimism that they too will be successful.”
Whether self-serving or sincere, Mrs. Clinton is exactly right. The key issue is not income inequality, but rather income mobility—that is, the ability to rise up the economic ladder.
Inequality is mainly of interest to political activists and reports of the phenomenon are often bogus. As Robert Grady has noted in these pages, inequality studies typically fail to account for taxes paid by the affluent and benefits paid to the non-affluent. And even when measured accurately, inequality metrics are of questionable utility. Does the average person really suffer with each increase in George Soros’s earnings?
Economic mobility, on the other hand, is critical to maintaining a vibrant economy, and a culture of opportunity for all. The ability of an individual to move up or down the income ladder based on her own talent and effort is at the heart of the American market. And that basic bargain appears to be robust, according to a 2013 paper from economists in the U.S. Treasury’s Office of Tax Analysis.
Writing in the December issue of the National Tax Journal, Gerald Auten, Geoffrey Gee, and Nicholas Turner report that only about “30 percent of the dependents of families in the bottom income quintile in 1987 were themselves in the bottom quintile of their peers 20 years later.” The authors add that “about one-fifth rose to each of the three middle quintiles and 11 percent to the top quintile. In other words, most low-income children were in higher relative positions than their parents.”
And as for the infamous “one percent” demonized by the left, it turns out that many of them are quickly replaced by other Americans rising to take their places. According to the Treasury researchers, “Analysis of short-term persistence in the top 1 percent over five-year periods from 2000 through 2010 shows that from 37 to 47 percent dropped out after one year.”
If she decides not to run for President, even Mrs. Clinton could experience a sudden decline in earnings that might conceivably knock her out of the 1%. Does anyone believe she receives $200,000 per hour because of her unique talents as a motivational speaker?
The latest Morning Editorial Report is always available at wsj.com/morning. Follow on Twitter @FreemanWSJ.
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