Thomas Piketty is wrong about education

Rock star left-wing economist Thomas Piketty caused a minor stir in recent days with comments suggesting that public discussion of his best-selling book Capital in the Twenty-First Century kind of misrepresented the book itself.

In a new paper, Piketty says that commentators have misused his famous r > g formula — which essentially says that the return on capital (r) exceeds the economy's growth rate (g), making the gap between rich and poor ever wider as time goes on. When people use r > g as a total explanation for today's shameful level of inequality, Piketty says, they are not correctly representing his book's argument. Instead, his book should be read as an explanation for the massive inequality of pre-Great Depression capitalism, and a prediction of what will happen if we don't take action to prevent wealth concentration. As he says in the book, about one-third of current inequality is due to capital income; the rest is due to wage inequality.

When it comes to the content of his book, Piketty is on solid ground — and critics who have been dinging the economist for retreating or revising (including my colleague Jim Pethokoukis) are wrong to suggest that Piketty has somehow now been intellectually obliterated.

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But outside of this new kerfuffle, it's true that Piketty has indeed put forth some highly questionable arguments — namely by pinning some of the blame for inequality and the terrible growth in Europe on a lack of education. He blames wage inequality in part on "rising inequality in access to skills and to higher education." In an interview with Der Spiegel, Piketty put a lack of investment in higher education as the reason Europe is not growing as strongly as the United States:

Here, Piketty is dead wrong.

Of course it's true that better-educated people tend to make more money. But as I've pointed out before, it does not necessarily follow that increasing educational attainment would improve overall wages. Since 1973, we've almost tripled the level of college attainment, and during that time inequality skyrocketed. Instead of seeing a large and growing wage premium to education, as one would expect from the skills-shortage story, wages for college graduates have actually fallen since 2000.

The story of how education is supposed to operate also fails on an individual level. If a lack of skills explains why median incomes are stagnant, then presumably we would see lots of poor people who managed to scrape into college shooting up into the middle and upper class, while rich people who don't would fall down. In fact, the opposite is true: Kids from rich families who don't even go to college are two and a half times more likely to end up rich than poor people who do go to college.

Piketty's European argument is even worse. If his figures are correct, I could see why Europe might want to invest some more in higher ed. But it is unquestionably the case that austerity, not education, is behind Europe's slow growth. If you plot growth rates versus austerity from 2010-2013, as Paul Krugman does here, the relationship is stone obvious. Even the IMF admits it.

Education is as nonsensical as any other supply-side explanation for economic weakness during a depression. It's like saying you need to replace your car's tires to make it go faster when it's out of gas.

Now, to be fair to Piketty, these are only very small portions of his various arguments (which are generally pretty good), and he is certainly no fan of austerity in general. Nothing here should be construed as an attack on education per se, only on the idea that it alone can solve inequality or slow growth.

But there is already far too much focus on education as some kind of economic panacea from the Davos set. Piketty shouldn't be giving them any ammunition.