The Fiscal Times
By: Rob Garver
April 16, 2014
The French economist and author Thomas Piketty spoke in Washington on Tuesday about his unlikely bestseller, Capital in the 21st Century, a 696-page tome on global economic history. Even though he boiled down his research on economic inequality from data going back hundreds of years, his conclusions were very topical in today's United States.
Piketty's main argument is that historically, human societies have always tended toward inequality. The long-term return on capital has always been greater than the return on labor - sometimes by a very large margin. As a result, wealth will increasingly concentrate in the hands of fewer and fewer people over time.
The old saying that "the rich get richer and the poor get poorer" has a strong basis in economic history, according to Piketty.
The increasing levels of inequality around the globe in the last few decades, he argues, are not remarkable in a historical perspective, but represent a return to historical norms. What was remarkable was the period between the mid-1930s and the early 1970s, when economic inequality plummeted and remained at historically low levels for several decades.
In a forum sponsored by the Economic Policy Institute, Piketty was asked what the continued rise in inequality means for a society, and some of his answers echoed themes common in today's economic debates in Washington.
His biggest concern, he said, is that increased concentration of wealth is "leading to the corruption of our political system." When a small minority of citizens holds an overwhelmingly large share of a nation's wealth, "Political institutions are captured," he said.
As an example, he used pre-World War I Europe, where the top 10 percent of earners took home nearly half of all national income, and governments operated largely on behalf of moneyed interests. He also noted that the level of income inequality in the U.S. is now even greater than it was in pre-war Europe.
Piketty conceded that the United States has been largely different from Europe and most other developed countries when it comes to economic mobility, but much of that difference was due to economic growth driven by population growth. From the French Revolution in 1789 to the present day, the population of France grew by a factor of two, from 30 million to 60 million. Over the same time period, the population of the United States grew by a factor of 100, from 3 million to over 300 million.
Piketty's point about population growth is one that appears to have been largely forgotten in the current debate over reforming the country's immigration laws. Strong population growth driven by immigration has been one of the engines of long-term economic growth and widespread prosperity in the U.S., but is now seen by a large portion of the voting public as something to be sharply limited rather than encouraged.
Piketty also drew an interesting distinction between the rise of inequality in the U.S. and in Europe. He said that in Europe, the trend appears to be toward a reversion to wealth- and inheritance-based inequality. In the U.S. both continue to play a role, but there is also an extremely high level of income inequality, driven largely by executive compensation packages, not present in Europe.
Nobel Prize-winning economist Robert Solow, who was part of a panel discussing the book, agreed with Piketty that there is an extreme income gap in the U.S. However, he suggested that in many respects, executive compensation in the form of stock options and other grants actually behaves very much like income derived from capital rather than compensation for labor.
Piketty's work is longer on history than it is on practical solutions. But in his talk Tuesday, he offered one suggestion: changing the way we tax accumulated wealth.
What he proposes is not to increase the overall amount of taxes collected on capital, driving the rate of return down to the overall rate of economic growth. "That would be a stupid thing to do," he said. However, he does support more progressive taxation of capital - in effect, a wealth tax - that would make it easier for people with less wealth to accumulate it, while reducing the ability of people with significant accumulated wealth to broaden the gap between themselves and the rest of society. Piketty also supports increasing the marginal tax rates on high earners.
Is it fair, he argued, that a person with a $450,000 mortgage on a $500,000 home pays the same property taxes as a person who owns a $500,000 house outright? Clearly, they do not have the same amount of equity in their home, but the tax rate makes it more difficult for the new purchaser to acquire a home (mortgage payments plus tax payments) than it does for the owner to keep it (tax payments alone.)
Add to that the fact that the person who owns the home outright may well have inherited it, and it does appear that the system may be stacked in favor of those who already possess wealth and against those who want to begin accumulating it.