A new purported debunking of Thomas Piketty's Capital in the 21st Century is out, from Robert D. Arnott, William J. Bernstein, and Lillian J. Wu, and it purports to show that, historically, rich families do not stay rich over time. Reason's Ron Bailey and the Economist's Buttonwood columnist are both very impressed.
But while I would say they raise some good points about charitable giving and the splitting of inheritances across multiple children, their core methodology is badly flawed. As Buttonwood writes, "the authors point out that the rapid turnover of the Forbes 400 suggests that inherited wealth is unstable. Three-quarters of the families in the original list no longer appear on it."
The Forbes 400 list can't study multigenerational wealth
It's important to understand that the Forbes 400 list is a journalistic undertaking, not a peer-reviewed study of wealth. And it turns out to be a very shaky foundation on which to build academic research.
As Piketty told me when I asked him about the Forbes list, "the methodology is biased simply because it's much easier to spot large entrepreneurial wealth than large inherited wealth."
Say someone asked you to figure out how rich Steve Ballmer is. I would start by Googling "Microsoft largest shareholders" which would quickly reveal that according to Microsoft's public corporate documents Ballmer owns 333,254,734 shares of Microsoft stock. At the company's current share price of $45.63, that gives him about $15.2 billion worth of Microsoft stock.
Of course that's going to be an underestimate because he also owns other stuff. The LA Clippers are worth about $2 billion, for example, and we know he owns that because it was a big story when he bought the team. With a little more work, we can probably confirm a few billion more dollars.
But what if some third-generation rich guy had $15 billion in index funds? How would we find that out? That wouldn't show up on corporate paperwork. And our hypothetical rich guy wouldn't actually be very interesting. He wouldn't be the CEO of any famous companies or sit on the board or do newsworthy things. He'd just be kind of quietly super-rich.
Past performance is no guarantee of future results
The other big issue with this study is how it deals (or, rather, doesn't deal) with the changing policy environment over time.
It used to be that the United States had a pretty hefty estate tax. Piketty thinks that was a good idea and that today's environment of much-lower estate taxes will lead to dynastic wealth.
The authors purport to show that in the past we did not see a huge dynastic wealth problem. And this is exactly what Piketty thinks! He thinks that in the past we had public policies designed to prevent the emergence of dynastic wealth, and that we should worry about a future in which those policies have been removed.
Piketty might be wrong about the future, but simply pointing to a past in which the policy environment was different can't prove it.