Capital in the Twenty-First Century

Thomas Piketty's Capital in the Twenty-First Century spent 20 weeks on the New York Times bestseller list this year - quite a feat for a 600-plus page work from a French economics professor. Analyzing international economic data from 1700 to the present, Piketty determines the reasons for the growing wealth and income inequality that the world has been seeing for the past several decades and suggests solutions. Piketty finds, unsurprisingly. that there is no inherent self-corrective market mechanism that can turn this around - a rising tide will not lift all boats.

The main argument from Piketty's exhaustive analysis of the data goes something like this. The inequality in wealth and income that we are seeing now has been consistent throughout history until the eve of the First World War. The movement towards equality that we saw in the mid-twentieth century was an anomaly produced by the shocks of two world wars and a depression and the government responses to these crises. In rich nations, the portion of national income coming from capital relative to the portion coming from labor has been growing steadily since the 1970's. This results from several factors: the "elasticity of substitution" between labor and capital (that is, it is "always possible...to find new and useful things to do with capital" in a modern industrialized society), an increased mobility of capital (e.g., investing abroad as nations compete for capital investments), an increase in capital's bargaining power vis-a-vis labor, and a slower growth rate. The average return on capital is greater than the growth rate in national income. Capital thus accumulates and concentrates in the hands of the wealthiest, the primary owners of capital. In the rich nations, the capital/income ratio is now approaching the levels seen before the First World War.

Piketty concludes that "there is no reason capital's share [will] decrease over the very long run." The principal lesson Piketty draws from his analysis of the capital/income ratio is that "there is no natural force that inevitably reduces the importance of capital and of income flowing from ownership of capital over the course of history." Rather political forces have been central to any corrective action. "Progress toward economic and technological rationality [does not inherently lead] toward democratic and meritocratic rationality. The primary reason for this is [that]...technology, like the market, has neither limits nor morality."

The story on income inequality is more nuanced. While the portion of national income of the 1% has been increasing since the 1970's in the "Anglo-Saxon" nations due to the rise of what Piketty calls the highly compensated "supermanager", there has been barely any increase in income inequality in the rich nations of continental Europe and Japan with their stronger social programs. In the US, the share in labor income⁽¹⁾ of the top 1% is now approaching 18%; in Britain, 15%. The share of the top 1% in the rich nations of continental Europe and Japan varies from about 7% in Sweden to about 11% in Germany.

One of Piketty's underlying assumptions is that significant wealth and income inequality is "potentially threatening to democratic societies and to the values of social justice on which they are based."  He doesn't specify exactly why this should be so but here are my thoughts - some warning flags, if you will, that capitalism has gone awry in the 21st century:

• The inequality is so great that basic needs are not provided for a portion of the population
• Wages are so low that a family must endure poverty even when the wage-earner is working full-time
• Accumulated wealth is used to drown out the voices of the majority, to distort the truth, and to influence laws to maintain its advantage at the expense of the common good

Just a brief look at recent headlines are enough to convince one that our standing as a just and democratic society is endangered :

• In 2012, 49 million Americans were in food-insecure households and 46.5 million were living in poverty. Prior to passage of the Affordable Care Act, nearly 50 million Americans were without health insurance. The massive misinformation campaign on the Affordable Care Act has helped keep this a political issue - one that can ultimately deny millions affordable access to health care.

• 

  At the funeral of Maria Fernandes
  Photo credit: Mel Evans/Associated Press

  The poverty level income for a family of four is $23,850. The minimum wage would need to be $12 per hour for a wage earner to keep his or her family out of poverty. The Federal minimum wage, last adjusted in 2009, is just $7.25/hour. Thirty-two-year old Maria Fernandes was working "three jobs, at three Dunkin’ Donuts stores in northern New Jersey, shuttling from Newark to Linden to Harrison and back."  Last Friday, she died while napping in her car - overcome by gasoline fumes from a tipped over can in the back of her SUV. [NYTimes, September 28]
• The Supreme Court's  Citizens United and McCutcheon decisions effectively granted corporations and individuals unlimited ability to spend money influencing elections.  If these decisions weren't enough, we got word last week that the well-funded conservative group Americans for Prosperity sent out incorrect voter registration information to hundreds of North Carolina voters and one cat. North Carolina passed one of the worst voter suppression laws in the country and these changes make it essential that information sent to voters is correct. Among the erroneous information sent out on the "official application form" were contradictory final registration dates, contradictory information on where to send the forms, and the wrong zip code for the Board of Elections.

From Capital in the 21st Century

Inequality also increases financial instability.  Pikkety notes that the share of the top 10% in US national income peaked twice in the past hundred years - "once in 1928 (on the eve of the crash of 1929) and again in 2007 (on the eve of the crash of 2008)."  In his view, "there is absolutely no doubt that the increase of inequality in the United States contributed to the nation's financial instability. The reason is simple: one consequence of  of increasing inequality was virtual stagnation of the purchasing power of lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since...banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms."

So what's the solution to wealth and income inequality and its associated ills and risks?  Piketty proposes to regulate capitalism with a global, progressive, annual tax on capital. "The goal is first to stop the indefinite increase of inequality of wealth, and second to impose effective regulation on the financial and banking system in order to avoid crises.  To promote these two ends, the capital tax must first promote democratic and financial transparency: there should be clarity about who owns what assets around the world."  Goodbye, tax havens and secret bank accounts; hello, international sharing of bank data.   Piketty provides an example - a blueprint for a European wealth tax. Given the very high level of private wealth in Europe today, "a progressive annual tax on wealth at modest rates would bring in significant revenues."  If applied to all the member states of the European Union, a "wealth tax of 0 percent on fortunes below 1 million euros, 1 percent between 1 and 5 million euros, and 2 percent above 5 million euros" would "affect about 2.5 percent of the population and bring in revenues equivalent to 2 percent of Europe's GDP."

Idealistic?  Utopian? Perhaps or, as Piketty, referring to the euro, would have it: "no more so than attempting to create a stateless currency,"  His analysis provides a data-based look at the direction capitalism is taking and what might be done to control it so that the interests of all, the common good, may be served. 

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Note 1: Labor income is that portion of income due to wages and compensation. It does not include the income from capital. The shares of the top 1% in total income from both capital and labor are greater than the figures given.

Five Nuggets from Capital in the Twenty First Century

The book is loaded with interesting facts and insights.  Here are a few:

"...if the rate of population growth observed from 1700 to 2012 --- 0.8 percent per year --- were to continue for the next three centuries, the world's population would be on the order of 70 billion in 2300."

"In regard to average return...the annual rental value of housing, which accounts for half of total national wealth, is generally 3-4 percent of the value of the property."

"The most striking fact is...that in all these societies, half of the population own virtually nothing: the poorest 50 percent invariably own less than 10 percent of the national wealth, and generally less than 5 percent."

"...inflation is largely a twentieth-century phenomenon.  Before that, up to World War I, inflation was zero or close to it."

"There are two main ways to finance [a government's] expenses: taxes and debt.  In general, taxation is by far preferable to debt in terms of justice and efficiency...[Debt] financing is in the interest of those who have the means to lend to the government.  From the standpoint of the general interest, it is normally preferable to tax the wealthy rather than borrow from them."