Category Archives: Inequality

Piketty’s Important Contribution

When French economist Thomas Piketty’s Capital in the Twenty-First Century hit English-language bookshelves last spring, it initiated a new stage in the fight against the extreme income and wealth inequality that defines both the contemporary global economy generally and the U.S. economy in particular. Arguably not since Karl Marx’s Das Kapital was popularized over a hundred years ago, has a book critical of capitalism, as the currently reigning economic system is somewhat problematically called, so shaken up the economics establishment and garnered significant coverage in the mainstream press. Finally, critics of contemporary economic injustice can point to a renowned scholarly work that expertly articulates some of their concerns in a way that elites take seriously. Billionaire philanthropist, and noted compassionate capitalist, Bill Gates concurred with Piketty, on his personal blog.

“I agree with his most important conclusions, and I hope his work will draw more smart people into the study of wealth and income inequality — because the more we understand about the causes and cures, the better,” Gates writes.

It’s not that all of the ideas advanced in Piketty’s almost 700-page tomb are all that groundbreaking in and of themselves, importantly various individuals and movements have been making similar claims about the nature and problems of economic inequality and capitalism for centuries. Rather, it is the meticulous detail and relentless incontrovertibility of Piketty’s data driven claims that have global plutocrats and their apologists and sycophants in Western economics sweating. Echoing Marx, Piketty argues that the natural tendency of capitalism is toward significant and destabilizing levels of economic inequality. Uniquely, Piketty utilizes historical tax records along with myriad other data, as opposed to the esoteric models and theorems which dominate the contemporary economics field, to show that under normal circumstances, capitalist economies are usually characterized by slow economic growth (high un and underemployment, stagnant and low wages, low social mobility etc.) and high rates of return on capital assets (stocks, bonds, real estate, patents, etc.). This disparity between labor and capital (income from work vs. income from ownership) and the economic inequality that results are inherent and normal, though highly undesirable, features of capitalism.

Most problematically, Piketty shows that highly concentrated stockpiles of wealth derived from capital assets and, significantly, inheritances are self-perpetuating and tend to accumulate regardless of the rate of general economic growth. It would be one thing if huge concentrations of wealth among the capitalist class yielded proportional economic growth (and resulting jobs, wages and social mobility for the working class) through reinvestment, but, as Piketty illustrates, this is not and has not historically been the case. In fact, he shows that the opposite is true, with most super wealthy individuals and families, absent the occasional and ultimately often disastrous public policy induced economic bubble, tending to hoard their resources conservatively rather than reinvesting it in an economically or socially useful way. In short, capitalism, as the name suggests, structurally and disproportionately privileges capitalists over laborers to an ultimately counterproductive extent. Furthermore, gross and unwarranted disparities between contemporary managerial and worker compensation, advantaging the bosses, have only exacerbated these natural inequalities further Piketty says. Who can forget the cruel joke of multimillion dollar bonuses being awarded to the same financial CEOs that knowingly crashed the global economy in the late 2000s and put millions out of work? As things stand, the living standards of the working class in the United States particularly will likely continue to erode absent some significant and dislocating shock to the economic system. Importantly, Piketty points out the evident dangers that this radical and growing economic inequality poses to democracy, given the disproportionate political resources of the wealthy, and to the vital national myth in the U.S. that one’s willingness to work hard, more than birth or any other factor, determines his or her lot in American capitalism.

Capital explains that the only period during which capitalism appeared to be significantly benefiting anybody other than capitalists was in the mid-20th century (1940s-1970s), after a series of economic shocks, two World Wars and a global depression foremost among them, devastated the capital assets of the wealthy. The economic reconstruction and subsequent expansion that defined this period were largely driven by Keynesian state intervention and investment (the Marshall Plan, GI Bill/Social Security and other socialist programs, a Cold War military buildup, etc.), taking the place of capitalists still reeling from the devastation of the early 20th century. The post-WWII general economic growth, along with a vitally important parallel spike in labor organizing and unionization, brought about unprecedentedly strong wages, employment rates and social mobility and gave birth to the so-called “middle-class.” Unfortunately, various trends, globalization and financialization foremost among them, coupled with a rebound of the capitalist class’s societal dominance (exemplified by the Reagan and Thatcher political counter-revolutions of the 1980s) have since undone many of the gains made by the working class in that period and are restoring pre-1930s level economic inequality.

Piketty is short on solutions regarding how to address this problem. Rather than seriously reforming (possibly through government policies aimed at facilitating the growth of worker cooperative enterprises) or totally uprooting the capitalist system (an admittedly daunting and potentially very painful process, at least in the short-term), Piketty advocates increased taxation, specifically an 80% tax on incomes over $500,000 in the U.S., which would be more in line with mid-20th century rates. Additionally, he stresses that in order to counteract the advent of foreign tax shelters and other shadowy financial manipulations and institutions designed to hide the gargantuan fortunes of the international super rich, governments throughout the world should create a global wealth registry and tax in order to repatriate and reinvest some of those stagnant resources in their countries of origin. Given the political dominance of the capitalist class and the realities of geopolitical rivalries between different governments however, these state driven efforts would likely be difficult to implement and enforce to say the least. Still, the conduct of the activist governments of the mid-20th century do present a moderately successful precedent for state invention aimed at correcting capitalist excess.

What is clear is that many establishment economists and elements of the political right are profoundly alarmed by Piketty’s work. The American Enterprise Institute’s James Pethokoukis warned his compatriots that Capital would need to be refuted, or else it “[would] spread among the clerisy and reshape the political economic landscape on which all future policy battles will be waged.” A subsequent hit job by the Financial Times superficially criticizing elements of the data used in Capital (which Piketty made public here: https://www.quandl.com/PIKETTY) last May, failed utterly. The right has remained largely and tellingly silent since.

Source(s): 1) Thomas Piketty “Capital in the 21st Century,” [First Edition] (Cambridge, U.S.: Harvard University Press, 2014).
2) Bill Gates “Why Inequality Matters” Gatesnotes (October 14, 2014): accessed October 23, 2014 http://www.gatesnotes.com/Books/Why-Inequality-Matters-Capital-in-21st-Century-Review
3) James Pethokoukis “the New Marxism” the National Review (March 24, 2014): accessed October 23, 2014 http://www.nationalreview.com/article/374009/new-marxism-james-pethokoukis
4) Ryan Grim “Thomas Piketty On The Financial Times: ‘This Particular Debate Is Over'” HuffingtonPost (June 2, 2014): accessed October 23, 2014 http://www.huffingtonpost.com/2014/06/02/thomas-piketty-financial-times_n_5429255.html

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the Political Dimension of Income Inequality

Despite record levels of productivity among American workers (as well as increases in their work hours, the introduction of women into the labor force and a steadily rising cost of living), income gains among the ultra-rich have vastly outpaced those among the merely affluent, working-class and poor in the past thirty odd years. This reality stands in marked contrast to the social mobility and economic trends that characterized the immediate post-WWII decades, in which American income growth was relatively rapid and remarkably egalitarian. This unequal reality is the result of a multitude of factors: globalization, financialization, technological innovation, the demise of private sector unions, the abandonment of labor by a significant segment of the Democratic Party, etc.

However, in Unequal Democracy, Larry Bartels argues that an important factor concerning income inequality lay in government policy choices, specifically the differences in politics and priorities between Democratic and Republican administrations. Controlling for alternative variables, Bartels demonstrates, among other things, that under Republican presidential administrations, real income growth for the lower and middle class has both consistently lagged well behind the income growth rate for the rich and been significantly lower than the income gains for those groups under Democratic presidential administrations. Furthermore, Bartels strikingly shows, again controlling for alternative variables, that while continuous Democratic political control would have produced an essentially constant level of income inequality over the past three decades, complete Republican political dominance during this same period would have brought about even worse income inequality than the U.S. has now. Based on this research, Bartels ultimately argues that income inequality is a distinctly, if not totally, partisan issue. Given the fact that post-Keynsian neoliberal ideology, first broadly popularized in the United States by Republican president Ronald Reagan (though later embraced by leading “New” Democrats like Bill Clinton) has generally dominated government policy for the past 30 odd years, it should come as a surprise to no one that the U.S.’s economic growth has been so grossly uneven as of late.

Still, it’s troubling that Republicans keep getting elected despite the fact that they consistently deliver worse economic outcomes for most Americans than their Democratic counterparts. In seeking to understand Republicans’ continued political success, Bartels explores two factors: class and values. In the case of the former factor, Bartels challenges the conventional wisdom that class, as a political classification, has lost its utility in America. On the contrary, he argues that economic issues remain centrally important to constituents, especially those voters at the losing end of the “free market.” In the case of values, Bartels explains that while American elites have generally become more conservative in recent decades, the effect of this change hasn’t significantly trickled down to the values of the working-class and poor. The most politically pertinent “value” afflicting the minds of voters seems to be racism, with voters in the Solid South consistently electorally favoring candidates who either explicitly or subtly denigrate causes that are perceived to be unfairly helping minorities, specifically blacks (i.e. anti-welfare, anti-handout etc.). These candidates are generally Republican.

Income inequality is a vitally important issue. The central theme of “the American Story” is one of opportunity for all and social mobility among those who work hard. Though the truth of this theme has always been rightly and hotly debated (even in the comparatively egalitarian period from the 1940s to the early 1970s), it is vital to American elites that the U.S.’s general population continue to view this notion as true. If a republican state capitalist society (like the U.S.)’s citizenry begin to view their respective economic classes as rigid permanent stations from which they largely have no hope of advancing, then the justification for the perpetuation of that society’s economic system becomes endangered. In the more immediate sense, the depressed wages, eroding social mobility, and lowered living standards that characterize current economic trends yield low consumer demand, which in turn retards growth and worsens general economic prospects even further.

Source: Larry Bartels, Unequal Democracy: the Political Economy of the New Gilded Age (Princetown, New Jersey: Princetown University Press, 2008).

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