Politico Magazine (CFED)
By: Andrea Levere and Ezra Levin
April 28, 2014
The top-selling book on Amazon.com right now, amazingly enough, happens to be a 696-page treatise on economic history written by a Frenchman. It's the talk of the town in Washington and even a hot topic on cable news. The book, "Capital in the Twenty-First Century," by economist Thomas Piketty, has been called "the most important economics book of the year -- and maybe of the decade" by New York Times columnist Paul Krugman, its stunning findings chewed over by pundits on the left and right. But all the buzz has missed a fundamental implication from Piketty's work: America's public policies devote billions of dollars to an asset welfare system that helps some build wealth, while leaving most working families behind. Piketty's book is a meticulously researched argument in favor of turning these upside-down policies right-side up.
Piketty offers a surprisingly simple explanation for the huge spike in income inequality in developed countries over the past few decades. He finds that the rate of return on capital -- homeownership, business ownership, stock, bonds and everything that makes up a household's net worth -- has regularly outpaced the growth of income. Income tends to grow at 2 to 3 percent annually, while capital tends to grow at 4 to 5 percent each year. Because capital is concentrated among wealthier households, inequality has increased over decades to the levels we are now seeing.
This is a particular problem in countries where wealth is distributed very unequally. In the United States, the top 1 percent of the population owns more than 35 percent of the wealth -- more than the entire bottom 90 percent combined. In fact, our nonprofit organization, the Corporation for Enterprise Development, has found that 44 percent of U.S. households have almost no savings. These "liquid asset poor" families are not only missing out on the returns from wealth -- they're one economic shock away from financial disaster.
It is no surprise that a French economist like Piketty proposes solutions that are political nonstarters in this country, such as a redistributive global tax on wealth. Like Piketty, many U.S. economists and policymakers focus their attention on the concentration of wealth at the top. But a more pragmatic starting place should be looking to see what we can do to help low- and moderate-income working families save, invest and build wealth from the bottom up.
The federal government alone spends more than $500 billion annually to encourage Americans to save, invest and build wealth. But the vast majority of this support goes to high-income households through tax spending on asset support -- for instance to buy a house (mortgage interest and property tax deductions), invest in stocks (reduced rates on capital gains) and save for retirement (exclusion for 401(k) and IRA contributions). This is essentially welfare targeted at high-income households.