Uh, what's a Piketty?"
"I didn't know we got to one."
"And if we did, why can't we stop there?"
Piketty is a French economist. First name Thomas. If you've heard of wealth and income inequality, in the academic sense, not in the viscerally outraged sense, you are hearing echoes of his endeavors. Whenever I've tried to research the subject almost everything I've found came from him (often co-authored with Emmanuel Saez of Berkeley).
His new book, Capital in the Twenty-First Century, is selling so fast that you can't get a copy. A hot book in economics? Yes, it happens every 50 years or so. It's something of a tome, 575 pages, plus 80 pages of footnotes. Piketty collected 200 years worth of data from multiple countries, much of it difficult to find, some of it even more to difficult to evaluate, and never put together. So many numbers were crunched, it was so overwhelmingly documented, that it forced economists to do something they never do: accept material that was fact based.
Changing how economics is practiced, even to a small degree, is not an unconscious by-product. It's part of Piketty's intent. He has almost as much contempt for his profession—at least its American legions—as they deserve. He writes that the discipline "has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research." Because historical research is the only way to find out how real economies actually function. Formulas derived from imagined economies in simplistic pseudo-worlds assembled from virtual Legos can only describe how short plastic people with only three moving parts will behave. The real purpose of all those abstruse equations is ego-centric, to give themselves "the appearance of scientificity." They should give up "their absurd claim to greater scientific legitimacy, despite the fact that they know almost nothing about anything."
Piketty proposes one formula of his own: r>g. If "r," the rate of return on capital, is greater than economic growth, "g," then wealth inequality must increase. For example, if investments are returning 4 percent, a modest amount, and the growth rate is 3 percent, then investors—capital—must be acquiring a larger share of the whole.
The historical facts are that the rate of return on capital is greater than the growth of the economy except when interrupted by random, but very large events, like crashes, successful revolutions, and world wars.
Only people with capital to start with have capital to invest. This process tends be cumulative, like compound interest, each increase producing more capital to invest. So wealth normally concentrates producing class societies with hereditary wealth. The United States has escaped that—to some degree—but Piketty predicts that if the current trends are left interrupted we will develop an aristocracy of wealth by birth like those in Europe, even as the countries of the EU become more egalitarian.
If you read or watch American media, you know that executive compensation has exploded.
Especially at the very top. Actually, only at the very top. The income share of the 90th to 99th percentile has been flat for the last 25 years. All the increases have been to the last 1 percent, and especially to the 1/10th, and even more to the 1/100th of the 1 percent.
No one seems to quite know why. That is, no economists and no one in the media. The true believers are its market based. An accurate reflection of value. But that's absurd on the face of it since CEOs who lead their companies into bankruptcy still receive bonuses in the tens of millions of dollars. Piketty points out—and by then—page 51—everyone understands that everything he says is backed by the statistics, that "the US economy was much more innovative in 1950-1970," when executive compensation was in the sensible range, than after the lid came off, "in 1990-2010, to judge by the fact that productivity growth was nearly twice as high in the former period as in the latter."
The answer should be obvious. Imagine a top marginal rate of 90 percent. Not every dollar of a high earner was taxed at that rate, the bottom layers were taxed the same as a street sweepers. But everything after the equivalent, roughly, of a million took a big hit. If a CEO making a million asked for a second million, that meant giving the taxman $900,000 just so he could make an extra $100,000. If that didn't make the CEO hesitate, it would certainly make his board of directors scream. But obvious isn't enough. And human behavior doesn't exist in economics. Piketty, however, has the data. This allows him to not only grasp the obvious with a firm hand, it allows him to speak of the squirmy thing: the "two phenomena are perfectly correlated: the countries with the largest decreases in their top tax rates are also the countries where the top earners' share of national income has increased the most...conversely, the countries that didn't reduce their top tax rates very much saw much more moderate increases."
The one serious proposal that Piketty makes for trying to find balance and slow down the growth in inequality is a world wide tax on wealth.
So Piketty sounds very sensible. Very well documented. Plus he's witty and well read, and he writes with clarity and simplicity.
So why go beyond Piketty? And where?
Power.
Yes, income inequality followed tax cuts. But tax cuts were created by intellectual power. Bought and paid for. To justify and legitimize them. Even when the results went against the facts.
Part of the increase in income inequality was reinvested in more intellectual and political power to bring additional policy changes which would result in even more income and wealth inequality. Like compound interest, that process, wealth to buy political power, to increase wealth, would feed itself and it continues to feed itself.
There is no stopping point.
The super-wealthy, and perhaps even more, the people who serve the rich, will continue to fight for bigger and bigger shares of the pie. There is no point where they will say, "We have enough. We have too much. Let's cut back. Let's spread the wealth. And the power." Some individuals, like Warren Buffett, may say it. But not as a class, not as an institutional force.
Piketty offers the facts. And much of the theory. But if anything is going to change, it requires power. Where will that come from?
