The surprise success of Thomas Piketty
The surprise success of the French economist Thomas Piketty’s income disparity blockbuster Capital in the 21st Century has forced battlelines to be drawn in the world of political economics.
Piketty’s unremarkable contention, after having crawled through two centuries of data, is that the inequitable distribution of wealth in Western society has now led to an intolerable state of affairs. The super-rich have arranged matters so that almost all of a nation’s economic growth is delivered into their bank accounts.
If you do not read anything else from Piketty’s tome, read this: “From 1977 to 2007, the richest 10 percent appropriated three-quarters of the growth. The richest 1 percent alone absorbed nearly 60 percent of the total increase of U.S. national income in this period.”
It is hardly surprising, considering the economic policies put into effect by both Republicans and Democrats, that the rich are becoming richer. Aggressive, highly funded lobbying on behalf of big business, those who run big business and those who benefit from big business has ensured that progressive taxation, where the rich pay more tax than the poor to make society more fair, has been largely abandoned. Increasing the fortunes of a few individuals at the cost of those who make the wealth has become not just an economic imperative, but a political credo, too.
I have no reason to doubt Piketty’s research. There have been few methodical attempts to discover what economic data suggest over the last two centuries. He appears to have crunched the numbers appropriately and found a pattern of behavior that he believes is both immoral and is holding back economic growth.
In terms of heavy lifting, Piketty’s labors compare to Milton Friedman and Anna Schwartz’s dogged data mining in their monumental “Monetary History of the United States.” Through a meticulous examination of the contemporaneous hard figures, they concluded that the Great Depression, set off by the stock market crash of 1929, was exacerbated not by too much money, as some including President Herbert Hoover insisted, but too little money in the system.
It was Friedman and Schwartz’s work that has led central banks to pump money into the economy since 2008, through low interest rates and quantitative easing, in order to counter the threat of the Great Recession.
Piketty’s close examination of the figures concludes that making the top percentage of a society increasingly rich while incomes in the rest of the nation’s workers are kept low does not encourage economic growth.
This is hardly surprising. For those who spend everything they earn (and more) to meet their household bills, every cent goes straight back into the economy in the form of increased consumer demand. For the satiated super-rich, it is a different equation. Removed from the daily anxiety of making ends meet, they are left with the less pressing dilemma of where to stash their wealth.
Once conservatives used to pretend that because the rich “spent” their wealth, there was a trickle-down effect that meant that everyone in a society benefited.. The problem is that the rich do not spend their money — perhaps that is why they are so rich — so nothing much trickles down.
There is a limit to material possessions. After the fourth SUV in the driveway, how many more does one need? Having loaded themselves up with luxury items, the rich tend to hoard the rest of their wealth rather than invest it. They prefer to sink their excess money in dead-end investments that only rich people can access: high-end real estate in a small number of designated areas, jewelry and watches traded between rich people, over-priced contemporary art bought under the impression that it is an “investment,” gold ingots as a hedge against inflation and exotic gambles on fly-by-night tech stocks.
Far from the “job creators” they are cited as, many of the super-rich only make traditional investments in bricks-and-mortar businesses as a last resort. Even then, only when the economy is growing. With the sluggish recovery we have endured since 2008, banks and the rich have hoarded cash rather than risk investing it in businesses that do not look likely to prosper.
Piketty also suggests that wealth disparity is corrosive to society. This, too, is evident. In the last three decades, in which the super-rich have lined their pockets at the expense of the middle class, there has been a rise in grass-roots voter movements. They hold as their central tenet that the way the economy is arranged is profoundly unfair. From the Tea Party on the right to Occupy Wall Street on the left, the plaintive cry is the same: Wall Street, big business and government have conspired to fix everything in their favor.
So what, if anything, can be done? The traditional Socialist remedy was the confiscation of wealth. Yet as rich as the rich are and as numerous as they have become, even if all their wealth was removed and used for some dubious purpose, such as paying down the deficit, the sum involved, would do little to alter the national economy. The rich are rich — but they are not that rich.
Soaking the rich would, however, make some disgruntled people happy while irritating the wealthy. But is it worth the political furor and the return of the class warfare that such a remedy would set off? Or provoking the invention of ingenious tax avoidance schemes to frustrate the will of the Internal Revenue Service? Probably not — which may be why no one much is advocating confiscation.
What about taking a larger proportion of the rich’s money? Income tax is already somewhat progressive. Yet since the low-tax rhetoric of Ronald Reagan and the success of Arthur Laffer in peddling his famous curve — showing that more tax revenue can be raised if top rates are kept lower — the egalitarian aims of taxation are rarely mentioned. The main function of tax policy for the last 30 years has been to maximize growth in the economy — not set right inequities in society.
The British social democrat Anthony Crosland upset his more socialist colleagues when, in his 1956 book, The Future of Socialism, he argued that the old class war and envy that had fuelled much of the Socialismmovement’s appeal, was out of date. Instead of trying to claw back the disparities in wealth that had arisen over time, the reliability of economic growth meant that there was an alternative. Leave the wealthy alone and concentrate instead on distributing equitably the new wealth that came from growth. Voila! Socialism without tears.
Of course, things did not turn out that way. But if Piketty’s warnings are to be heeded about the damage to society of giving all the wealth to the same small number of people, something has to change if we are to avoid ugly, confrontational politics.
In the United States and Britain, the rich take all the spoils, while long-suffering workers sees no improvement in their wages. The rich get richer while the middle class gets squeezed. Eventually those who have not been invited to the party get mad. Then they exact revenge.
Defusing the fury around remuneration and taxation is going to take more than a Marie Antoinette “Let them eat cake” moment of giving everyone cake. As we have seen from the angry Tea Party and Occupy protest movements, there is a widespread belief that the system is fixed against the ordinary person in favor of the entitled rich. Piketty came along just at the right time, as anger is growing over disparity in incomes and as politicians are looking for the 2016 campaign theme.
PHOTO: Thomas Piketty, French economist behind Socialist party candidate Francois Hollande’s plan to tax all income over one million euros ($1.3 million) per year at 75 percent, poses in his office in Paris April 11, 2012. REUTERS/Charles Platiau