The Piketty pessimist

By Felix Salmon
April 25, 2014

Screen Shot 2014-04-25 at 2.12.10 PM.png

This chart comes from the World Economic Forum’s 2014 Global Risks Report, which came out just before Thomas Piketty’s book started becoming the topic of discussion in economic and plutocratic circles.* You can clearly see what you might call the rise of inequality-as-an issue: before 2012 it’s nowhere to be found, but since then it’s been consistently in the top spot. My prediction is that in 2015, thanks to Piketty, the WEF will start talking less about income inequality, and more about wealth inequality.

The big question, though, is whether inequality is really much of a risk at all. After all, from the point of view of the average billionaire WEF delegate, inequality would seem to look much more like a reward.

Chrystia Freeland has a hopeful thesis. “Piketty’s work,” she says, “and the wider shift it surely portends, poses a new, powerful, existential threat to the plutocrats.” Her argument in a nutshell: politicians across the political spectrum, but especially on the left, have historically used the language of criminality to rail against the rich. (See, for instance, how the WEF said that “corruption” was the third-most-likely global risk in 2011.) In other words, capitalism itself is generally assumed to be a pretty good thing, which works well for everybody so long as everybody plays by the rules. But Piketty has challenged that assumption, by showing that even if everybody plays by the rules, inequality is very likely to increase to obscene levels. It’s not the corrupt and venal robber barons who are the problem, it’s rather that unless we make a concerted effort to impede capitalism’s natural tendencies, the entire middle class is likely to get hollowed out.

Freeland limns this debate well: on the one side are the likes of Matt Taibbi and Michael Lewis, always on the hunt for villains; on the other side are people looking at a broader historical sweep, and saying that if you go around blaming individuals you are always going to miss the bigger picture. Piketty, of course, is in the latter camp, but so are people like Erik Brynjolfsson and Andrew McAfee, who see success in the future accruing increasingly to a small group of high-level “ideators”, while the jobs of much of the present middle class become automated.

If the broad public stops being angry at individuals and starts understanding that the entire system is constructed so that it benefits the few at the expense of the many, then that system itself will start looking unsustainable and ripe for dismantling.

Freeland herself concedes that this is unlikely to happen any time soon: “The only thing worse than having plutocrats is not having them,” she writes. “San Franciscans may be rising up against their tech billionaires, even blockading the Google bus, but the rest of the world, from Moscow to Malaysia, is trying to replicate Silicon Valley.” On top of that, as Paul Krugman explains in his masterful NYRB review, the forces described by Piketty are more likely to be self-reinforcing than they are to carry the seeds of their own destruction:

Falling tax rates for the rich have in effect emboldened the earnings elite. When a top manager could expect to keep only a small fraction of the income he might get by flouting social norms and extracting a very large salary, he might have decided that the opprobrium wasn’t worth it. Cut his marginal tax rate drastically, and he may behave differently. As more and more of the supersalaried flout the norms, the norms themselves will change.

Which means that ultimately I have to disagree with Freeland. Her syllogism runs something like this:

-Capitalism has survived this far because it delivered strong, widely-shared growth.
-If capitalism fails to continue to deliver strong, widely-shared growth, then it will fail and die.
-Thanks in part to Piketty, the leaders of the major western democracies — both the politicians and the plutocrats — now understand this.
-Therefore, they will, of necessity and of self-interest, alter the structure of society to preserve (what’s left of) the middle classes.

This starts off well, but becomes increasingly improbable as it goes on. As Piketty shows, capitalism can continue indefinitely with obscene levels of inequality. Politicians and plutocrats are not focused on what’s going to happen decades from now; instead, they’re engaged in a constant battle to maximize their own personal power, even — especially — if that means amassing enormous quantities of wealth for themselves. And finally, for all that it’s the job of politicians (including Freeland) to campaign on the basis that they can change the world in effective and predictable ways, there’s precious little evidence that really they can. Just as the forces of capitalism are bigger than any individual robber baron, so are they bigger than any individual politician or political party.

The many reviews of Piketty’s book are surprisingly unanimous on one point: that the weakest part of the book is the final part, where Piketty moves away from diagnosis and starts attempting to formulate a solution. Piketty’s rather French idea of a global wealth tax isn’t getting nearly the same amount of acclaim as the rest of the book is, and is very unlikely to happen: countries will always compete with each other to attract the stateless rich by not taxing them.

Which means that my reading of Piketty is ultimately pessimistic. The dynamics of the world economy are bad, and they’re getting worse; inequality is natural in human history, and right now we’re reverting to a state of affairs which is highly unfair but also both sustainable and, in its own way, unsurprising. Piketty has diagnosed a nasty condition. But I don’t think there’s a cure.

*Le capital au XXIe siècle was published in French in August 2013, and the WEF is based in francophone Geneva, so it was hovering in the background of Davos 2014 somewhere. Certainly there was some buzz about the book in the Alps this year, even among those of us who don’t read 970-page books in French, thanks to Branko Milanovic’s definitive 21-page review, which came out in October.

More From Felix Salmon
Post Felix
The most expensive lottery ticket in the world
The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
The utility of switching lanes
Comments
5 comments so far

Could Thomas Piketty, with his “Capital” wealth tax on the 1%, unwittingly be working big time for the 0.01% Oligarchs and Plutocrats?
http://teawithft.blogspot.com/2014/04/is -thomas-piketty-with-his-capital.html

Posted by PerKurowski | Report as abusive

Hope you see this Felix. Good luck in your new adventure. I enjoyed reading you over the years and will miss your column.

Posted by Missinginaction | Report as abusive

A capital (net wealth) tax can take many forms. The best lowers taxes on the poor and middle class without soaking the rich – because it is optional. Piketty had never considered this option but the trendy Davos crowd should.

Consider a U.S. option to pay a 2% net wealth tax (excluding $15,000 cash and $500,000 retirement savings) combined with an 8% income tax and no payroll, capital gains, inheritance or gift taxes. It would be a very good deal for all but a few ultra wealthy but they should be allowed to pay a flat 26% of income and estate taxes later if they feel the rates of the poor and middle class would be too much.

The best business tax reform would be an 8% C corporation rate combined with a 4% VAT. Tax expenditures are not needed with low rates. Deferrals on the repatriation of $2 trillion in foreign profits would end with the 8% rate.

The elimination of payroll taxes would also create full employment as Bill Gates said last month at the AEI. Full employment and not a penny more in taxes or spending – something worth considering. It is called the 2-4-8 Tax Plan.

Posted by 248TaxPlan | Report as abusive

Felix, it may be natural but how is it sustainable, outside of the use of force? More and more of the plebes will certainly get restive as they watch their own standard of living fall while the super-wealthy just pile more on.

Posted by kgasmart | Report as abusive

“so long as everybody plays by the rules”

but the rules are rigged

Posted by dajobr | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/