Piketty, Capitalism, and Progressive Taxation

One of the most important graphs in The Golden Calf is taken from Wilkinson and Pickett (The Spirit Level, 2009) and shows the widening gap between the richest and poorest in America in income, between 1975 and 2004. It’s the second half of my life. The first part of my life, beginning in 1949, was the “good news” part, when the economy worked well, and a worker with one job could buy a home and raise a family and send kids to college. This was followed by the “bad news,” economism or neoliberalism, especially under Reagan starting in 1980, when income stagnated for the lower and middle classes and virtually all the new wealth was snapped up by the top few percent. By this picture, economism was a bizarre development, and one was hard pressed to explain why such a thing should have occurred.

Thomas Piketty, Professor at the Paris School of Economics, has now cast considerable new light on these developments (Capital in the Twenty-First Century, trans. Arthur Goldhammer, Cambridge: Belknap Press of Harvard University Press, 2014). As he points out, until modern computers, economics tended to be light on facts. It’s only within the past couple of decades that the available data have been recorded and investigated, to allow those familiar with them a reasonable peek at the actual history. And history, in fact, is what economics should be concerned about; Piketty takes a dim view of American neoclassical economics and favors a collaborative view of the economist as one of the social sciences.

Piketty offers data on capital and income between 1800 and the present for Britain and France, and going back to the late 1800s for the United States and other major countries. He focuses a good deal of the basic equation, r > g, meaning that the rate of return on capital virtually always exceeds the growth rate of the economy; the former tends to be 3-5 percent and the latter runs from less than 1 percent to 1.5 percent. Piketty notes that this is basic to the whole idea of civilization—it allows people to be engaged in something besides pure subsistence.

When Piketty graphs the history of the relationship between the after-tax rate of return to capital and the growth rate of world output, as best as is known from the year 0 to the present, capital return always exceeds the growth rate except at one point—the years 1913-2012. So the data that informed my standard way of thinking between 1949 and 1975-80 turns out to be wildly out of sync with the norm.

Piketty describes what he considers most important, capital/income ratio, roughly as follows. For Europe, inequality was very pronounced, until the shocks of the twentieth century, in the years 1914-1945. Then income inequality rose again. The major change was that before the twentieth century, there were a small number of rich people who had almost all the wealth, and the vast majority of laborers who had virtually none of it. Now there is a middle class which collectively holds a significant amount of wealth, one-quarter to one-third of the total; while the extreme upper class, especially the top 1 percent, now holds around 60 percent of the wealth.

The United States presents a different picture. The middle class was establishing itself all along. However, during the Gilded Age, income inequality rose in America as well. It then decreased during the world wars and depression, but America was spared the extreme trials of Europe. Since 1975, income inequality has risen even higher in the U.S. than in Europe.

Piketty talks then of the future of the remainder of the twenty-first century, and finds increasing income inequality to be an unstable factor, so he is hopeful that something can be done about it. His favorite is a progressive tax on capital. He favors a modest plan that would produce maybe 2 percent of GDP, but argues that the capital tax is more important than the amount raised, since it carries an important message. In particular, for it to work at all, it would require that data be gathered in a way that it is not currently, and particularly that international tax havens be opened to scrutiny. On Piketty’s plan, everyone would know everyone else’s wealth, throughout the world. He admits that this is a nearly-utopian goal and will require many stages of development.

Piketty speaks of the future as if everything will be smooth and there will be no more “shocks” equivalent to the World Wars. He admits that he cannot predict what would happen if shocks supervene.

Returning to my own views, it’s discouraging to find that the time that one had thought of as the halcyon days when everything was most fair and reasonable (the era 1945-1980 roughly) was a brief, highly atypical time period. It is, by contrast, encouraging to find that progressive taxation can so effectively reverse the worst of the trends. The only problem will be gaining the political will to succeed in such a mission in the US. Piketty’s own guess is, “Without a radical shock, it seems fairly likely that the current [state of affairs in the US] will persist for quite some time. The egalitarian pioneer ideal has faded into oblivion, and the New World may be on the verge of becoming the Old Europe of the twenty-first century’s globalized economy. [514]”