Thomas Piketty’s “Capital in the Twenty-First Century”

piketty-capital-21st-centuryI’d sum it up this way: Interesting data, controversial conclusions. Regardless, it’s not often that a 600+ page economics book tops the NYT Best Seller list. However, Thomas Piketty has the right subject at the right time-inequality. It’s a hot and controversial topic for politicians here and abroad. Subtopics are the excesses of Wall Street, minimum wage, and redistribution of wealth.

There does seem to be a consensus that Piketty’s book does a great job tracking the history and status of inequality. His projections for the future and his proposals to remedy inequality, on the other hand, have delighted the left and infuriated the right.

A French born professor at the Paris School of Economics, Mr. Piketty, along with a few colleagues, have done a remarkable job tracking the concentration of wealth deep into the past. In the U.S. and Britain, he goes back to the early twentieth century. And, all the way back to the eighteenth century for France. He also illustrates the wealth of the idle rich of past generations using characters from Jane Austen’s “Pride and Prejudice” and Honore de Balzac “Pere Goriot.” I thoroughly enjoyed how Professor Piketty was able to blend centuries of tax records and history to produce a comprehensive record of the periods of low and high inequality.

Europe’s Belle Epoque and America’s Gilded Age are examples of high inequality. Unequal ownership of assets, not unequal pay, was the prime driver of income disparities. At that time, 20% of the national income went to the top 1%, another 30% to the next 9% and only 20% to the bottom 50%. Contrast that with the low inequality period from the start of WW I to the end of WW II when 7% of the national income went to the top 1%, 18%, to the next 9%, and 30% to the bottom 50%. Since the 1970’s, both wealth and income gaps have been rising to turn of the century levels. As a result, the top 1% again receive 20% of the U.S. income.

Piketty’s contention is that inequality is here to stay and will continue to grow. For him, it’s all about the rate of growth of capital versus the rate of economic growth. He assumes that wealth (aka capital or net assets) will generally grow at a rate of 4-5% greater than inflation. Wages, he contends, can only grow at a rate equal to inflation plus economic growth. In fact, since 1970, wages for most US workers have barely kept pace with inflation, while top earners’ pay has grown at double-digit annual rates. With economic growth falling and returns on capital expanding, the gap will widen, according to Piketty.

Frankly, no one knows what the future might bring. Professor Piketty seems to be simply extrapolating the last 30 years into the future. There is no hard and fast rule of capitalism that this will occur. And, history shows us that, over time, what goes up, generally comes down.

Then, Mr. Piketty really gets everyone’s juices flowing. He suggests that traditional remedies, such as education spending, worker protections, more progressive taxation, etc. may be helpful at the margins, but that inequality will worsen “no matter what economic policies are.” Hence, he suggests that major changes are needed. He proposes a global wealth tax on capital starting at .1% and increasing to 2% annually. In addition, he suggests a progressive income tax up to 80% on incomes above $500,000. These proposals are likely politically unachievable and are considered confiscatory by many.

Certainly, we Americans support equal opportunity. Redistribution of wealth is another matter. If Mr. Piketty’s objective was to spark conversation on a very important topic, he certainly has accomplished that.