French economist Thomas Piketty struck quite a nerve with the publication in March of his book, “Capital in the 21st Century.” It’s an exhaustive examination of income inequality, based on a formidable database Piketty and others assembled over several years and available online,. It’s an attempt to get past what Piketty calls the “dialogue of the deaf,” where ideology supplants research, analysis, and informed, measured debate. It’s also relatively modest in tone. At several points, Piketty says, I may be wrong here, but this is what the data tell me.
The existence of income inequality and its growth over the past three decades is not news. However, Piketty concludes that inequality is endemic to capitalism and we can decide how bad it gets: “[T]he resurgence of inequality . . . is due largely to the political shifts of the past several decades, especially in regards to taxation and finance. The history of inequality is shaped by the way economic, social, and political actors view what is just and what is not, as well as by the relative power of those actors and the collective choices that result. What’s more, he asserts inequality is a threat to both the economic stability and to democracy.
He has his critics on the Left and the Right. Generally, those on the Left agree with him, but argue his analysis doesn’t go far enough. On the Right, broadly speaking, the criticism has tended to fall into several categories:
1. Don’t listen to him; he’s a Commie!: A French one, at that. Some didn’t bother to read the book but just exhumed Karl Marx’ corpse and wave it around. For them, any critique of capitalism, much less any discussion of redistribution of wealth, is Communist dogma. All I can say is, read the New Testament. Piketty actually critiques Marx. Far from being a new “Communist Manifesto,” Piketty’s book, as University of Virginia political scientist Deborah Boucoyannis explains, echoes several points on inequality and concentrated wealth made by none other than Adam Smith, author of the capitalist gospel, “The Wealth of Nations.”
2. The government already provides enough wealth transfers to offset inequality: This argument carries a grain of truth. “Transfers,” meaning provisions in the tax code and various social welfare programs, from Social Security and Medicare to supports for low-income Americans, do narrow income inequality a bit. However, as the Pew Research Center, analyzing data from the Organization for Economic Cooperation and Development, noted last December, “[T]he OECD data show that U.S. tax and spending policy does relatively little, compared with its peers in the developed world, to reduce inequality. . . .” Piketty notes, “[M]odern redistribution does not consist in transferring income from the rich to the poor, at least not in so explicit a way. It consists rather in financing public services and replacement incomes that are more or less equal for everyone . . .” Economist Jared Bernstein points out, in a recent NY Times blog post, that not only do transfers shave just a smidgen off inequality, they’ve actually provided 74 percent of the income gains of the middle class since 1979. What’s more, there has been a concerted political effort to cut these programs, which would wipe out any buffering effect. Finally, if you think our system of transfers is too generous–a “hammock,” is the word often used–trying living on them for a couple of years, then get back to us.
3. He “appears to have got his sums wrong.”: Chris Giles, economics editor at The Financial Times, struck back, recently, accusing Piketty of errors and even dishonesty, and saying both sins “undercut” the book’s findings. Some heavyweight voices have questioned Giles’ own results, and certainly his sweeping conclusion, including another august British business publication, The Economist, Justin Wolfers, of my alma mater, the Brookings Institution, and Paul Krugman. Piketty himself penned a 10-page response.
4. Tough noogies: This was expressed in billionaire Charles Munger’s advice to millions of Americans, “Suck it in and cope, buddy. Suck it in and cope.” This response essentially concedes Piketty’s main point and, ironically, kicks aside the colloquial defense of free market capitalism, “a rising tide lifts all boats.” Of course, as we’ve found, that’s only if you can afford a boat. If you can’t, you tread water until you grow tired and sink. I will elaborate on this one in a subsequent post, but right now I want to stick with Piketty’s work.
The important thing is, before you praise or scorn, read the book. Otherwise, you are only participating in the dialogue of the deaf.
“Capital in the 21st Century” examines a fundamental assumption about capitalism, that it will eventually lead to less economic inequality, not more; all boats will rise on the tide. He examines the work of economist/demographer Dr. Simon Kuznets, illustrated in the Kuznets curve, which demonstrates that, as capitalism and industrialization accelerate, there will be a growing inequality until a certain income point is reached, and then it will fall:
However, Dr. Kuznets also noted in his paper, “Economic Growth and Income Inequality” (American Economic Review, March, 1955), that “[I]f the lower brackets receive larger shares, and at the same time the very top brackets also receive larger shares–which would mean that the intermediate income classes would not show as great a progression from the bottom–the net effect may well be wider inequality.” This cautionary prediction has shown up in recent years as the hollowing out of the middle class.
So we’re left to decide–and decide we can; we don’t need to leave our fates to the whims of Adam Smith’s famous bit of imagery, the Invisible Hand of the Marketplace — where to go from here. There’s an historical trend towards greater, not less, inequality in society. That is, in part, the result of policy decisions made by our elected representatives (many of them millionaires, let it be noted). We have seen the destabilizing, even disastrous, results of some of those decisions in the recent recession and a recovery that only accelerated the flow of wealth to the top rungs of the economic ladder. We can continue on that path, or we can take a different one. Some will cry, “Eek” Taxes and regulation! You’ll destroy everything!” Well, taxes have been much higher in the past, and the economy grew just the same, and in fact faster. It was a lack of regulation, coupled with a lack of enforcement, that took us to the brink of financial collapse. We should take the reins back into our hands, remembering that capitalism should serve democracy, not the other way around.