Thomas Piketty, a young French economist, has laid out a most challenging and insightful look at the current disparity between rich and poor. When CAPITAL in Twenty-First Century, was translated and published by Harvard just a few weeks ago, it immediately zoomed to the top of America’s best-seller lists. Not even Amazon could keep it in stock. While it has been a runaway best seller, not that many purchasers have actually read it. It is almost 700 pages of very hard going, complete with a plethora of charts and graphs. I have managed to make it through the whole book, have looked at a dozen solid reviews and listened to an outstanding economist detail it. With each encounter my head has kept spinning.
While in no way do I claim to be literate about the “dismal science” called economics, there are a few of Piketty’s conclusions that have riveted my attention. So here is a reading of Piketty by a Bayer of very limited knowledge of economics.
- Since we began recording our observation of economic trends, it has been clear that the distance between rich and poor wildly fluctuates. Sometimes there are moves toward greater divergence in which the economic distance between the haves and the have nots grows, and sometimes there is a convergence in which the distance between rich and poor shrinks, and there is a more even distribution of wealth. Currently in the United States the divergence is significant and continues to grow exponentially. Why this is currently true lies at the heart of Piketty’s thesis.
- So what might make for an increased convergence in which everyone shares in a general prosperity? JFK was fond of remarking that, “a rising tide lifts all boats”—and that’s the core of our traditional trickle down economic theory and practice. But consider how this might work in a city with a thriving economy. Everybody is working and making increasingly good wages. Labor unions have secured solid benefits and compensation packages for their workers, which puts more money in their pockets. The minimum wage is substantial enough to support a family, without needing to rely on government subsidies. As a result, wage earners spend that money in purchasing stuff in local establishments. The stores do well, as do those who make what consumers buy. Manufactures prosper, and if the economy grows by 3% or 4%, everybody gets an increased slice of that larger pie. All boats do rise.
- But consider what happens when the growth of the economy is slow, one percent or lower, as is currently the case. Wages stagnate, consumer spending is thwarted and the community suffers. But at the same time those in the top levels of wealth do well—in fact they do very well! And this is what is currently going on in America. While the economy is almost flat, the stock market last year gained over 20%.
- How does this happen? Piketty suggests that substantial wealth does not come from the growth of the economy, but from the much higher return on investments brought about by a low tax rate on capital gains and almost tax-free inheritance. So when the return on investments is much larger than the rate of economic growth the distance between these two economic engines causes wealth to flow upward, not downward, thus increasing the divergence between the very rich and the rest of the population. Clearly WORK DOES NOT MAKE MONEY, MONEY MAKES MONEY! It you want to be very well off, be well off to start with, and invest the bulk of what you have accumulated. Or you may get rich by landing a position where you and your friends set exorbitantly high levels of compensation for each other. Or you may simply inherit wealth.
Piketty’s analysis of why the rich are growing richer and the rest of the population is not showing financial improvement is more plausible than his solution to the inequity. He suggests a worldwide tax on wealth, not income. Certainly in the present political environment that is not going to happen in the USA. To get the world’s nations to agree on that approach is even more remote.
So are we stuck with the growing divergence between the very rich and the rest of us? I suppose we are until the rest of us realize that the only way out is a radical change in America’s political landscape.