Economics, Pethokoukis, U.S. Economy

How to respond to Thomas Piketty’s inequality alarmism

Thomas Piketty, Emmanuel Saez

Thomas Piketty, Emmanuel Saez

As with physicist Stephen Hawking’s “A Brief History of Time,” economist Thomas Piketty’s 700-page “Capital in the Twenty-First Centuryis a bestseller destined to have a steep purchased-to-read ratio. For many on the left, it will be enough to simply know that Piketty’s grand theory of capitalism affirms their preexisting worldview: capitalism drives inequality ever-higher, superrich CEOs don’t deserve their fat paychecks, massive taxes on income and wealth are necessary to avoid an inegalitarian death spiral. For many on the right, it will be enough to simply know that Piketty is a French inequality researcher  who teaches at the Paris School of Economics. Let the eye-rolling commence.

But Piketty is a first-rate scholar whose magnum opus is well worth reading, whatever your ideological inclination. His thesis is straightforward. At its center are observations and forecasts about the return on capital, economic growth, and the relationship between the two. Some economists, such as Paul Krugman and Martin Wolf, think Piketty’s probably got the story right. Others, including AEI’s Kevin Hassett, Tyler Cowen, and Joshua Hendrickson, take the other side of the trade.

Yet even if Piketty is wrong, there is reason to believe technology and globalization might sharply increase immobility, as well as boost income and wealth inequality–and  lead to long-term wage stagnation for the vast majority of workers. The good news here is that many of the most realistic responses — even Piketty thinks his own end-game policy agenda is utopian — are intrinsically good ones. Since slow economic growth worsens inequality, we should want to pursue policies that might boost birthrates (tax relief for parents) and innovation (remove regulatory barriers to entry).

Indeed, Piketty has said as much. If capital ownership is becoming too concentrated, then we should try to broaden it (universal savings accounts) and turn more workers into owners. Cowen highlights “deregulating urban development and loosening zoning laws, which would encourage more housing construction and make it easier and cheaper to live in cities such as San Francisco and, yes, Paris.” And, of course, both primary and secondary education need a strong dose of disruptive innovation to meet the changing needs of students and workers.

If policymakers start giving such ideas greater thought, then Piketty’s book, right or wrong, will have performed an immensely valuable service.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

13 thoughts on “How to respond to Thomas Piketty’s inequality alarmism

  1. “As with physicist Stephen Hawking’s “A Brief History of Time,” economist Thomas Piketty’s 700-page “Capital in the Twenty-First Century” is a bestseller destined to have a steep purchased-to-read ratio”

    Apparently, Mr. Pethokoukis won’t even bother with the “purchase” part to start with. Pure knee jerking fear.

  2. The only “security” from the ACA is for the Health INSURANCE industry. Yes, the words say everyone will benefit. I can provide anecdotal evidence to the contrary.
    Third party pay has caused the escalation of healthcare DELIVERY costs and created the perceived need for a third party payer. The largest third party payer is government. ACA is the solution to a government caused problem that will require an additional government solution.

  3. “But Piketty is a first-rate scholar whose magnum opus is well worth reading, whatever your ideological inclination. His thesis is straightforward. At its center are observations and forecasts about the return on capital, economic growth, and the relationship between the two. Some economists, such as Paul Krugman and Martin Wolf, think Piketty’s probably got the story right. Others, including AEI’s Kevin Hassett, Tyler Cowen, and Joshua Hendrickson, take the other side of the trade.”
    Obviously, reading the first sentence is enough for you on any subject or article.
    Typical knee jerk-wad.

  4. Something that I think needs to be addressed in this debate is the fact that in 99% of the time, those with high incomes are in that position only did so because they were able to convince other people with money to give them some. Derek Jeter doesn’t get to print his own money, he gets $20 million a year only because the Yankees thought it was in their interest to do so. Entrepreneurs only get rich if people with money think highly enough of what the entrepreneur is doing to give him money (either for the product or service he’s selling, or for a piece of the business).

    In other words, income inequality is the result of millions of people deciding what they want to do with the money they have. Nobody forces them to buy IPads from Apple, they could buy a tablet from one of the dozens of other suppliers. Nobody forces them to go see the Tom Cruise movie for which he receives a good chunk of the gross, they could spend their money seeing another movie or doing something else.

    To criticize income inequality (which is a result) is to criticize millions of people for their choices. Complaining about income inequality is about as undemocratic as one can get.

    • Except when Wall Street invents financial instruments that they themselves can not value, yet sell these to investors, that’s fraud. We were promised that, with deregulation, Wall Street would protect investments because the market is self correcting. Wall Street bankers were the experts.

      Didn’t quite turn out that way.

      • steve is still correct. Those investors didn’t have to spend their money and obviously they weren’t poor to begin with otherwise they wouldn’t have money.

        Plus there was no “deregulation” of Wall Street, what are you talking about?

        Anyway, how do YOU know what is appropriate “regulation” of Wall Street?

        • The appropriate regulation for Wall Street would be for at-risk capital investment to be walled off from banking. Then we wouldn’t care if a bunch of suits blew up their company and took a bunch of investors with them–provided that the investments were not misrepresented. If fraud is committed then you throw them in jail. The losers pay, not the freaking taxpayer.

    • 99 oercent of the time? Not even close. Yes, Steve Jobs made a lot of money and earned it. Yes, Derek Jeter is worth his salary to the Yankees. In each case, the value derived from abilities they have (had) that are almost unique in the world.

      The top 1 percent of taxpayers number about 1.5 million. What’s chances that 1.485 million of them possess abilities that are also unique in the world?

      Researchers looking at the top 0.1 percent, or about 140k returns, reached this conclusion:

      “We find that executives, managers, supervisors, and financial professionals account for about 60 percent of the top 0.1 percent of income earners in recent years, and can account for 70 percent of the increase in the share of national income going to the top 0.1 percent of the income
      distribution between 1979 and 2005.”

      Few entrepreneurs. Some Jeter-class superstars. Mostly desk jockeys earning very fat bonuses or nosebleed sales commissions. http://web.williams.edu/Economics/wp/BakijaColeHeimJobsIncomeGrowthTopEarners.pdf

      There’s no way of knowing if said bonuses and commissions were justifiable, although I must confess that my experience with corporate America has my eyebrows up by an inch or so.

      Of course crony capitalism is a fine way to snag a bonus. You may not like the government mandate to blend ethanol into gasoline mandate, but former ADM CEO G. Allen Andreas took home $14 mil in 2006. How’s that for value?

      • Your examples actually support my argument, not yours.

        Desk jockeys don’t get to write their own paycheck, they only get paid if they’re able to convince the person with money (in these cases, their bosses, who are acting on behalf of the owners of the business) that they’re worth the money, and bosses as a rule don’t overpay their employees.

        The same holds for salesmen. They only get commissions if they’re able to convince someone else with money (i.e., the customer) to give some of that money to the salesman’s company. And the percentage of the sale that they get in commission isn’t an amount they determine, rather it is determined by those above them, who like bosses everywhere, aren’t in business to pay their employees more than they’re worth. (if there’s a standard complaint, it’s that people feel they’re underpaid, not overpaid).

        Some minority get their money through fraud or cronyism, but to use the rotten few to indict the many is intellectual shallowness.

        • You said the top 1 percent arrive there through the decisions of millions of consumers. I say horse pucky. At ADM, Andreas’ pay was decided by four fellow CEOs sitting as the compensation committee of the board of directors. Interlocking directorships are one of the evils afflicting corporate America. The major one is the get-rich-quick incentive of stock options. Andreas cashed out his stock options in 2006 and left ADM to deal with the prospect of life after the ethanol mandate Stock options are endemic, rather than the rotten few.
          .The parallel in the financial world is the hot investment product du jour. After Wall St types sold SBS* securities and real estate types sold spec properties that blew up in their clients’ faces Allen Greenspan wondered aloud, in front of a congressional committee, why executives would commit acts so inimical to shareholders’ interests. Poor Alan: Stuck in a relationship world (i.e. you have to go back the next day) when the money is to be made in the transactional world. (i.e. I screwed you thoroughly. Goodbye.)
          In short, if the people handing you money number in the millions and if they are still happy a year later, your argument holds. Alas, it fails two ways.
          * SBS sh*t-based securities.

          • If you don’t like the decision of the compensation committee, as an owner you can elect new directors — or sell your shares and invest them in places more to your liking. If you’re not an owner it’s none of your business.

            BTW, whether someone is happy with a transaction a year later is irrelevant. I guarantee you that precisely half the people trading ADM today will be happy with the transaction a year from now. The other half will not. But today they are both quite satisfied . Millions of people will buy lottery tickets this week that they will be unhappy with next week. Why would they do that?

  5. The share of GDP of the rich has grown a little. The share of GDP taken by government (including regulation costs) has grown exponentially. So what is to blame for inequality, when the more inequality is attacked by government, the worse it gets?

    In any case the bigger and more more important problems are jobs and growth. Who provides more of those – big government or the wealthy?

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