Dialogue: Eleven (so Far) Worthwhile Reviews of and Reflections on Thomas Piketty’s “Capital in the Twenty-First Century”: Wednesday Focus: March 26, 2014

  1. Ryan Avent
  2. Doug Henwood
  3. Edward Lambert
  4. Dean Baker
  5. Kathleen Geier
  6. John Cassidy
  7. Paul Krugman
  8. Ed Kilgore
  9. Jacob S. Hacker and Paul Pierson
  10. Lawrence Summers
  11. Tim Noah
  12. Heather Boushey (and Me) on Thomas Piketty: Tuesday Focus: March 11, 2014

Ed Kilgore: Against the Meritocratic Theory of Inequality: “Geier and Krugman agree that one of Picketty’s most important findings

is that inherited wealth is rapidly re-assuming its traditional role as the preeminent source of economic power…. Krugman…

[T]he great tax-cut push of the Bush years was mainly about reducing taxes on unearned income. And when Republicans retook one house of Congress, they promptly came up with a plan — Representative Paul Ryan’s “road map” — calling for the elimination of taxes on interest, dividends, capital gains and estates. Under this plan, someone living solely off inherited wealth would have owed no federal taxes at all.

After years of a bipartisan focus on the appropriate range of tax rates on earned income, this broader focus on public policy treatment of all sources of income—and with it a conservative ideology that to an extraordinary extent values capital over labor as a contributor to economic growth—is truly essential… this position should become increasingly untenable when “merit” is associated with birth privilege, “talent” with power, and “hard work” with success as its own justification.

Paul Krugman: Wealth Over Work: “‘Capital in the Twenty-First Century’,

the magnum opus of the French economist Thomas Piketty, will be the most important economics book of the year…. He… makes a powerful case that we’re on the way back to “patrimonial capitalism,” in which the commanding heights of the economy are dominated not just by wealth, but also by inherited wealth, in which birth matters more than effort and talent…. Six of the 10 wealthiest Americans are already heirs rather than self-made entrepreneurs…. America’s nascent oligarchy may not yet be fully formed — but one of our two main political parties already seems committed to defending the oligarchy’s interests…. Today’s G.O.P. favors the interests of the rich over those of ordinary families…. It’s generally understood that George W. Bush did all he could to cut taxes on the very affluent…. It’s less well understood that the biggest breaks went not to people paid high salaries but to coupon-clippers and heirs… the great tax-cut push of the Bush years was mainly about reducing taxes on unearned income….

In 1979 the top 1 percent of households accounted for 17 percent of business income; by 2007 the same group was getting 43 percent of business income, and 75 percent of capital gains. Yet this small elite gets all of the G.O.P.’s love, and most of its policy attention. Why is this happening? Well, bear in mind that both Koch brothers are numbered among the 10 wealthiest Americans, and so are four Walmart heirs. Great wealth buys great political influence…. The people inside the bubble have a lot of power, which they wield on behalf of their patrons. And the drift toward oligarchy continues.

John Cassidy: Is Surging Inequality Endemic to Capitalism?: “The question is what’s driving the upward trend [in inequality].

Piketty didn’t think that economists’ standard explanations… paid enough attention to capital accumulation—the process of saving, investing, and building wealth…. Piketty believes that the rise in inequality can’t be understood independently of politics…. In the nineteen-fifties, the average American chief executive was paid about twenty times as much as the typical employee of his firm. These days… the pay ratio… is more than two hundred to one…. Eventually, Piketty says, we could see the reëmergence of a world familiar to nineteenth-century Europeans; he cites the novels of Austen and Balzac….

What are the “forces of divergence”?… During periods of modest economic growth… income tends to shift from labor to capital. Because of enmeshed economic, social, and political pressures, Piketty fears “levels of inequality never before seen.”… Anybody who reads the newspaper will be aware that, in the United States, the “one per cent” is taking an ever-larger slice of the economic pie. But did you know that the share of the top income percentile is bigger than it was in South Africa in the nineteen-sixties and about the same as it is in Colombia, another deeply divided society, today? In terms of income generated by work, the level of inequality in the United States is “probably higher than in any other society at any time in the past, anywhere in the world,” Piketty writes. Some people claim that the takeoff at the very top reflects the emergence of a new class of “superstars”…. Piketty rejects this account. The main factor, he insists, is that major companies are giving their top executives outlandish pay packages. His research shows that “supermanagers,” rather than “superstars”….

Piketty takes some well-aimed shots at economists who seek to obfuscate this reality. “In studying the eighteenth and nineteenth centuries it is possible to think that the evolution of prices and wages, or incomes and wealth, obeys an autonomous economic logic having little or nothing to do with the logic of politics or culture,” he writes. “When one studies the twentieth century, however, such an illusion falls apart immediately. A quick glance at the curves describing income and wealth inequality or the capital/income ratio is enough to show that politics is ubiquitous and that economic and political changes are inextricably intertwined and must be studied together.”…

In the United States, the very idea of a new wealth tax looks like a nonstarter politically, as would the notion of raising the top rate of income tax to eighty per cent. That’s not a knock on Piketty, though. The proper role of public intellectuals is to question accepted dogmas, conceive of new methods of analysis, and expand the terms of public debate. “Capital in the Twenty-first Century” does all these things. As with any such grand prognostication, some of it may not withstand the test of time. But Piketty has written a book that nobody interested in a defining issue of our era can afford to ignore.

Kathleen Geier: Taking on the Heiristocracy: “Today the concentration of wealth has soared to levels that have not been seen in over a century….

In recent decades it is those with incomes at the very top—the top 1 percent and, even more, the top 0.1 percent—where the gains have been truly spectacular…. From his analysis he’s derived several important lessons, none of them particularly comforting.

The first of these is that… there is no “natural” tendency of inequality to wane in advanced capitalist societies…. The decline in inequality that began between the wars and continued for decades afterward was a historical anomaly that is unlikely to repeat itself—something that many American liberals, still mired in New Deal and Great Society nostalgia, need to hear…. Piketty’s second major lesson is that… growth will not save us… [the] high rates of economic growth we saw in advanced economies in the twentieth century are very likely a thing of the past…. Piketty’s model yields predictions that Europe and America will experience rates of inequality and wealth concentration that will not only match but exceed their nineteenth-century peaks. This dystopic scenario is deeply disturbing, but it doesn’t have to be our destiny. Piketty notes that “the history of income and wealth is always deeply political, chaotic, and unpredictable.”

This brings us to Piketty’s third major lesson, which is that, happily, there is, in theory at least, a solution… taxes… a steeply progressive income tax and a global tax on wealth…. America’s twenty-first-century inequality crisis is, if anything, even more daunting and complex than the one we experienced a century ago. But as Piketty reminds us, the solutions to this problem are political, and they lie within our grasp. Should Americans choose to deploy those solutions, not only would we be doing the right thing, we’d be living up to our deepest traditions and most cherished ideals.

Dean Baker: Capital in the 21 Century: Still Mired in the 19th: “Thomas Piketty… is a bold attempt to pick up where Marx left off….

While there is much that is useful in this lengthy and well-written book… it owes too much to the master, and not in a good way…. Based on his analysis of capitalism’s past, Piketty has a grim picture of the future… growing inequality as wealth distribution is hugely unequal and there is little reason to believe that the market will somehow reverse this…. [But] there are many aspects to the dynamics that have led to the redistribution to profit and high earners in the last three decades that are likely to change in the not too distant future.

The top of my list is the loss of China as a source of extremely low cost labor…. A very large share, perhaps a majority, of corporate profit hinges on rules and regulations that could in principle be altered. My favorite example is drug patents…. Is there a law of capitalism preventing us from instituting financial transaction taxes… or breaking up too big to fail banks?… Is it really implausible to believe that shareholders will ever be able to organize themselves to the point where they can do something like index CEO stock options to the performance of other companies in the industry?… Capitalism is far more dynamic and flexible than the way Piketty presents it in this book. Given that we will likely be stuck with it long into the future, that is good news.

Edward Lambert: Krugman starts talking about labor share… Have hope middle class: “Thomas Piketty… focuses on the difference between r, the rate of return on assets, and g, the overall rate of economic growth.

When r is greater than g, wealth will accumulate…. When r is less than g, capital’s [relative] wealth falls and labor’s [relative] wealth rises…. Piketty points to a period from 1913 to 2012, when… r was less than g…. Now Piketty says that… the global labor force and technological progress is slowing down…. Krugman asks the greatest question of all…. ‘How much of the decline in r relative to g in the 20th century reflected fast growth, and how much reflected policies that either taxed or in effect confiscated inherited wealth?’… Let’s give credit where credit is due. The period from 1913 to 2012 when the middle class surged was forged in large respect by Beatrice Webb…. Krugman is realizing something that was understood by Beatrice Webb long ago.

Doug Henwood: “It was once believed… that vast disparities in wealth were features of youthful capitalism that had been left behind now that the thing was reaching maturity….

Simon Kuznets… the historical course of inequality… looked like an upside-down U…. Kuznets’s curve fit nicely with the actual experiences of the rich economies in what the French call the Trente Glorieuses, the “thirty glorious years” between 1945 and 1975… the process of relative equalization went on for long enough that it felt like Kuznets was on to something….

Much of Capital in the Twenty-First Century is devoted to outlining the contours of the value of that capital stock…. For Britain and France, the total value of the capital stock—owned, as is almost always the case, largely by the 1 percent (whether aristocrats or members of the bourgeoisie, whether it’s France in 1780 or the United States in 2014)—was about seven times national income from 1700 until around 1910…. With two world wars and a depression, the capital stock fell to about three times national income…. It began to recover around 1950, but was inhibited by extremely high tax rates in the first postwar decades. As of 2010, the capital stock had recovered to between five and six times national income in Britain and France…. The trajectory for the United States is much less dramatic….

America was a relatively egalitarian place (for white [male] people) in the nineteenth and early twentieth centuries…. The liberation of the slaves after the Civil War was probably the greatest expropriation of capital in history…. After that, though, America largely lost its expropriating nerve…. It was politically easier for America to institute the income tax in 1913…. That, and endless waves of immigration, which continuously upset the economic hierarchy, kept the United States more egalitarian than Europe into the 1970s. From that point on… the United States became the affluent world’s undisputed inequality champ… also more unequal than lots of “emerging” countries, such as China and India….

Something has changed within that 1 percent: While it was once dominated by a population of rentiers, coupon clippers who barely worked if at all, it is now dominated, especially in the United States, by a group of star CEOs and financiers who flatter themselves that they’re being paid for their extraordinary talents…. Yes, we’ve seen the creation of a large number of new fortunes over the last few decades, a change from wealth’s dark days of the mid-twentieth century. Bill Gates is the son of a well-off lawyer who was nowhere near a billionaire; Mark Zuckerberg sprang from the loins of a dentist and a psychiatrist. They are the very picture of modern new wealth. But despite those new fortunes, inheritance remains very important. David Rockefeller, worth $2.8 billion at the age of ninety-eight, is number 193 on the Forbes 400. Overall, Piketty concludes, it’s likely that half or more of the wealth of the upper orders originates in inheritance….

I’ve long suspected that a major force for the repeal of the estate tax in the United States has been that the billionaires of the neoliberal age—the tech and finance moguls, some famous, some barely known—have been thinking about their legacy. The scions of the second Gilded Age want to see their grandchildren on the Forbes 400…. The political salience of the “death tax” is a reflection of a cadre of fortunes of a sort that was long out of fashion….

The major frustration of the book is political. Piketty clearly shows that short of depression and war, the only possible way to tame the beast of endless concentration is concerted political action. The high upper-bracket tax rates of the immediate postwar decades couldn’t have happened without serious fears among elites—fresh memories of the Depression, threats from strong domestic unions, competition on a global scale with the USSR, which, for all its problems, was living proof that an alternative economic system was possible…. Those things waned…. All these trends have contributed to the concentration of capital over the last thirty years…. None of these… will be reversed spontaneously. Nor will they be altered through “democratic deliberation”….

Political action cannot be factored out of that process just because we happen to have lived through the Cold War’s unmourned collapse…. Serious trouble—demonstrations, strikes, insurgent political movements—is what it will take to derail capitalism’s inevitable tendency toward concentration. Short of that, it looks like we’ll be continuing our journey along the road to a new serfdom.

Steve Randy Waldmann: “The story I was told in my impressionable youth was this: Karl Marx had been a sharp analyst, but he was a terrible futurist….

Marx thought that capitalists were trapped in an unstable dynamic of capital accumulation from which they benefited, on the one hand, but which led inevitably to collapse and from which they could not, as a class, escape…. Marx had underestimated the ingenuity and flexibility of capitalist societies, and particularly of the United States during the New Deal. Government intervened to solve Marx’s collective action problem, enabling capitalists secure their enlightened self-interest by keeping a distribution of prosperity sufficiently broad that the predicted collapse could be avoided…. To my father, American capitalism’s adaptability and ingenuity had proved Marx definitively wrong, in the best possible way….

I really did giggle when I realized that an argument I thought of as conventional wisdom about how America proved Marx wrong sounded, perhaps because my audience was of a different generation, vaguely Marxist. I’m not taking issue at all with the substance of Yglesias’ post, which I think is smart and quite right. Health care costs are millions of people’s livelihood, and inefficient health care costs are a big part of that. Much of how modern economies survive is by protecting information problems and barriers to competition that sustain overpayments. This broadens the wealth distribution while permitting recipients the fiction that flows of purchasing power involve no transfers (“welfare”), only proud, self-reliant income….

It is not those who advocate, but those who prevent, stabilizing transfers of purchasing power, who are the true Marxists. These self-styled capitalists do not espouse Marx’s theories, but they do something much worse: They perform them. They behave in precisely the way that Marx expected capitalists to behave. They cripple the American system’s greatest strength — its ingenuity, flexibility, adaptability. They prevent the sort of collective action through which earlier generations proved that capitalism could made be consonant with decent, stable, and broadly prosperous societies. In doing so, they risk proving Marx right.

Ryan Avent: Book clubs: Reading “Capital”: Chapter 1: “The definition of capital itself,

which [Piketty] treats as equivalent to wealth, and which he considers to be sources of value that can be traded (so “human capital” doesn’t count)…. He then defines… β… the ratio of capital in an economy to national income… a measure of the importance of capital in a society… α = r * β… is basically an accounting identity that defines capital’s share of income (α) as the rate of return on capital multiplied by the capital stock….

: Chapter 2: One of Capital’s primary themes is that economic states we conventionally view as the norm are in fact historical abberations… the natural tendancy of economies to become more equal as they mature is a myth, built on the unusually compressed distributions of incomes and wealth that prevailed in the middle of the last century…. The middle of the last century was unusual in its growth rates as well as in the distribution of income…. Over the last 300 years, economic growth has been roughly half attributable to growth in population and half attributable to growth in productivity…. Population growth rates soared from 1700 to the middle of last century, when global population growth peaked at an annual rate of 1.9%. But population growth rates are now falling and are expected to return to very low, pre-industrial rates by the end of this century. Similarly, the rate of growth of per capital income also appears to be near what is likely to be a peak…. Taking the two trends together an interesting picture emerges. In the long centuries leading up to Industrial Revolution total economic growth averaged no more than 0.2% per year. But global growth rates soared to an average of as much as 4% per year over the past 60 years. Yet a subtle deceleration has begun, which will ultimately bring global growth back to something like 1.2% by the end of the century….

At a growth rate of 1.2% each generation enjoys economic output about 50% larger than the previous, and a century leads to a three-fold increase in output. That is not nothing. Over the course of a millenium the resulting change is unimaginably significant. But at human timescales the permanence of society—its rigidity—is in many ways more similar to that of the pre-industrial era than the relatively recent past…. But is that right?… We’ll move on to Mr Piketty’s evidence next week.

Jacob S. Hacker and Paul Pierson: A Tocqueville for Today: “Thomas Piketty has a message that could not be more different:

Unless we act, inequality will grow much worse, eventually making a mockery of our democratic institutions. With wealth more and more concentrated, countries racing to cut taxes on capital, and inheritance coming to rival entrepreneurship as a source of riches, a new patrimonial elite may prove as inevitable as Tocqueville once believed democratic equality was…. Piketty’s startling numbers show that the share of national income coming from capital—once comfortingly believed to be stable—is on the rise…. Piketty’s powerful intellectual move is to place the subject of American income inequality in a broader historical and cross-national context…. Since the resurgence of income inequality, concerned observers have comforted themselves with the notion that holdings of wealth—while far more unequally distributed than income—are not amassing at the top as quickly as incomes are. If we look forward, however, that reassuring notion appears suspect…. Inequality is becoming a “wicked” problem like climate change—one in which a solution must not only overcome powerful entrenched interests in individual countries but must be global in scope to be effective….

It is capital taxation, and ultimately global capital taxation, that Piketty sees as the eventual solution…. A global capital tax—modest, progressive, based on transparency—could reinforce the fraying link between economic standing and individual contributions toward vital collective activities. Moreover, halting progress in this direction has already taken place…. Piketty suggests that the pressures for change will eventually prove overwhelming. Either ever-richer capitalists will tear one another apart in the race for diminishing returns, or the rest of society will rise up and impose a fairer framework. For a book that insists on the primacy of politics, however, Piketty has relatively little to say about how—with organized labor weakened, moneyed interests strengthened, and anti-government forces emboldened—the kind of political movement necessary for a fairer future will emerge. (It was war, after all, not universal suffrage, that ultimately tamed inequality in the 20th century.)

Lawrence Summers: America risks becoming a Downton Abbey economy: “A generation ago it could reasonably have been asserted that the overall growth rate of the economy

was the main influence on the growth in middle-class incomes and progress in reducing poverty. This is no longer… plausible…. The US may well be on the way to becoming a Downton Abbey economy… these issues will be with us long after… cyclical conditions… normalise and budget deficits have… been addressed…. Barack Obama is right to be concerned. Those who condemn him for “tearing down the wealthy” and engaging in un-American populism are, to put it politely, lacking in historical perspective….

The challenge is knowing what to do. If income could be redistributed without damping economic growth, there would be a compelling case for reducing incomes at the top and transferring the proceeds to those in the middle and at the bottom…. It is certainly true that there has been a dramatic increase in the number of highly paid people in finance… an increase in the value of assets under management…. Closing loopholes that only the wealthy can enjoy would enable taxes to be cut elsewhere…. It is ironic that those who profess the most enthusiasm for market forces are least enthusiastic about curbing tax benefits for the wealthy. Sooner or later inequality will have to be addressed. Much better that it be done by letting free markets operate and then working to improve the result.

Tim Noah: The Dead Are Wealthier Than the Living: Capital in the 21st Century: “To belong to the… gentry of the 18th and 19th centuries…

to possess “books or musical instruments or jewelry or ball gowns”—you needed at least 20 to 30 times the income of the average person, and the most lucrative professions paid only half that. You needed capital, typically in the form of land. And you needed a lot of it—much more than could typically be amassed in the course of one lifetime. Consequently, “society” (i.e., the rich) consisted almost entirely of rentiers living off inherited wealth…. This “patrimonial capitalism,” as Piketty calls it, was dealt a mortal blow a hundred years ago with the outbreak of World War I…. [But] Piketty says patrimonial capitalism is coming back…. The return on capital (r) almost always exceeds economic growth (g)…. Why, then, is it news to contemporary readers that r > g? Because for most of the 20th century that wasn’t true…. That happy outcome, Piketty argues, was mainly because of the turmoil that began during the summer of 1914 and didn’t end until the summer of 1945…. The big driver of income inequality, Piketty says, isn’t labor income. It’s capital…. Like most public-policy books, Capital is more satisfying in its diagnoses than in its prescriptions.