A Watershed Book in Economic Thinking

Posted by Bob Lord

I don't know whether to wait until Thomas Pikkety's new book, Capital in the Twenty-First Century, comes out in English in March or brush up on my French so I can read it now. According to this review by Thomas Edsall in today's NY Times, Capitalism vs. Democracy, Pikkety's book has the potential to be a game changer in economic thinking on inequality. 

I sure hope so, because based on Edsall's review Pikkety has shone a light on some inconvenient truths about capitalism, inequality and taxation.

I'll get to the substance after the jump, but here's how Branco Milanovic of the World Bank described the book:

I am hesitant to call Thomas Piketty’s new book Capital in the 21st Century one of the best books in economics written in the past several decades. Not that I do not believe it is, but I am careful because of the inflation of positive book reviews and because contemporaries are often poor judges of what may ultimately prove to be influential. With these two caveats, let me state that we are in the presence of one of the watershed books in economic thinking.

According to another review, Pikkety's book defies left and right orthodoxy by arguing that worsening inequality is an inevitable outcome of free market capitalism."

The centerpiece of Edsall's argument appears to be based on the relationship between the return on capital and the rate of economic growth:

If the rate of return on capital remains permanently above the rate of growth of the economy – this is Piketty’s key inequality relationship,” Milanovic writes in his review, it “generates a changing functional distribution of income in favor of capital and, if capital incomes are more concentrated than incomes from labor (a rather uncontroversial fact), personal income distribution will also get more unequal — which indeed is what we have witnessed in the past 30 years.”

The remedy (I love this part because it validates what I've been saying for years) is to increase taxes on wealth:

The only way to halt this process, he argues, is to impose a global progressive tax on wealth – global in order to prevent (among other things) the transfer of assets to countries without such levies. A global tax, in this scheme, would restrict the concentration of wealth and limit the income flowing to capital.

Piketty would impose an annual graduated tax on stocks and bonds, property and other assets that are customarily not taxed until they are sold. He leaves open the rate and formula for distributing revenues.

In other words, we need to tax those at the top at a rate sufficient to reduce their after-tax, after-living expense, rate of return to no more than our rate of growth of aggregate wealth. 

The outlook, according to Pikkety, is bleak:

His prognosis is extremely bleak. Without what he acknowledges is a politically unrealistic global wealth tax, he sees the United States and the developed world on a path toward a degree of inequality that will reach levels likely to cause severe social disruption.

Those of you who follow my posts know that I would say the same thing this way: "If we jam too much income and too much wealth into the top 1%, at some point the bottom 90% will explode."

But I may not be on the same page as Pikkety here. I don't view the likelihood of social disruption as a bleak outlook, but rather as a hopeful one. I'm reminded of the title of a recent Chris Hedges post: "Let's get this class war started." Yes, class wars can be messy, but think of it like having a house with a pipe leaking underneath it. In order for the situation to improve, it has to get worse temporarily while the excavation and plumbing work is being done. So it is with America (and the world). In order to get to a better place, we're going to have to live through some disruption. 

One response to “A Watershed Book in Economic Thinking

  1. Well of course returns to capital are greater than the average growth of the economy. Capital is the only place rewarded these days. Human capital is brutally penalized by your way of thinking, you and your heroes tax the shit out of it.

    You talk about taxing the 1%, but you really tax the small business people who create all the jobs.

    Obama’s tax increase did not even touch Buffett, Buffett has had his taxes reduced as one of the many insiders of the Obama administration.

    You ought to be concerned, we now have three years without any increase in government revenues in the United States. All these tax increases have yielded nothing. Contrary to the thinking of the cultural trap that you live in, rigorous research now shows that the supply side effects of the Reagan tax reductions were enormous. Despite the enormous damage done by the HW Bush, Clinton and now Obama, we still have just a whisper of hope in C Corporations. You are now out to smash that.