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ОглавлениеAmerican Capitalism and the ‘Inequality Crisis’
Just as the Great Depression launched an expansion of government powers and programs, and the financial crisis of 2008 led to calls for another New Deal, liberals and progressives over the past five decades have announced a variety of other “crises” as reasons to raise taxes, adopt expensive government programs, impose new regulations on business, or, perhaps, to increase their own influence. In the 1960s they gave us the “poverty crisis” and the “urban crisis,” followed in the 1970s and 1980s by the “environmental crisis,” the “energy crisis,” and the “homeless crisis.” More recently we have had the “health-care crisis” and a civilization-threatening “global warming crisis,” now rebaptized as a “climate crisis.” Some progressives have found it useful to turn multifaceted problems into crises in order to stampede the voters into supporting policies they might otherwise (quite sensibly) reject.
Today, the issue of the hour is the “inequality crisis,” another complex subject that is being seized upon in some quarters as an opportunity to raise taxes, attack “the rich,” and discredit policies that gave us three decades of prosperity, booming real estate and stock markets, and an expanding global economy. In recent years, journalists and academics have been turning out books and manifestos bearing such titles as The New Gilded Age; The Killing Fields of Inequality; The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It; and The Price of Inequality: How Today’s Divided Society Endangers Our Future—to list just a few of the many dozens on the subject. The common message of these books is not subtle: “the rich” have manipulated the political system to lay claim to wealth they have not earned and do not deserve, and they have done so at the expense of everyone else.
In the past, those who wrote about inequality focused on poverty and the challenge of elevating the poor into the working and middle classes. No more. Today they are preoccupied with “the rich” and with schemes to redistribute their wealth downward through the population, as if it were possible to raise the living standards of the bottom “99 percent” by raising taxes on the top “1 percent.” Many of the new egalitarians—professors at Ivy League universities, well-paid journalists, or heirs to family wealth—are themselves materially comfortable by any reasonable standard. Their complaints about “the rich” or “the 1 percent” call to mind Samuel Johnson’s barbed comment about the reformers of his day: “Sir,” he said, “your levelers wish to level down as far as themselves; but they cannot bear leveling up to themselves.” Judging by recent polls, the wider public has not bought into this new crisis. In essence, members of the top 2 or 3 percent of the income distribution are waging class warfare against the top 1 percent while everyone else looks on from a distance, apparently feeling that the new class struggle has little to do with their own circumstances.
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The controversy over inequality gained more fuel in 2014 with the publication of Thomas Piketty’s Capital in the Twenty-First Century,a a dense and data-filled work of economic history that makes the case against inequality far more extensively and exhaustively than any that has appeared heretofore. The book quickly climbed to the top of the bestseller lists and remained there for several weeks. All the attention quickly turned Piketty, a scholarly-looking professor at the Paris School of Economics, into something of a literary celebrity and made his treatise a rallying point for those favoring income redistribution and higher taxes on “the rich.”
The New York Times called Piketty “the newest version of a now-familiar specimen: the overnight intellectual sensation whose stardom reflects the fashions and feelings of the moment.” Paul Krugman, in a review essay in the New York Review of Books, called the book “magnificent” and wrote that “it will change both the way we think about society and the way we do economics.” Martin Wolf of the Financial Times described it as “extraordinarily important,” while a reviewer for the Economist suggested that Piketty’s book is likely to change the way we understand the past two centuries of economic history. The Nation called it “the most important study of inequality in over fifty years.” Not since the 1950s and 1960s when John Kenneth Galbraith published The Affluent Society and The New Industrial State has an economist written a book that has garnered so much public attention and critical praise.
Liberals and progressives have hailed Capital in the Twenty-First Century as the indictment of free-market capitalism they have been waiting decades to hear. The market revolutions of the last three decades have placed them on defense in public debates over taxation, regulation, and inequality, and Piketty’s book provides them with intellectual ammunition to fight back. It documents their belief that inequalities of income and wealth have grown rapidly in recent decades in the United States and across the industrial world, and it portrays our own time as a new “gilded age” of concentrated wealth and out-of-control capitalism. It suggests that things are getting worse for nearly everyone, save for a narrow slice of the population that lives off exploding returns to capital. It pointedly supports the progressive agenda of redistributive taxation.
Some reviewers have compared Capital in the Twenty-First Century to Karl Marx’s Das Kapital, both for its similarity in title and for its updated analysis of the historical dynamics of the capitalist system. Though Piketty deliberately chose his title to promote the association with Marx’s tome, he is not a Marxist or a socialist, as he reminds the reader throughout the book. He does not endorse collective ownership of the means of production, historical materialism, class struggle, the labor theory of value, or the inevitability of revolution. He readily acknowledges that communism and socialism are failed systems. He wants to reform capitalism, not destroy it.
At the same time, he shares Marx’s assumption that returns to capital are the dynamic force in modern economies, and like Marx he claims that such returns lead ineluctably to concentrations of wealth in fewer and fewer hands. For Piketty, as for Marx, capitalism is all about “capital,” and not much more. Along the same lines, he also argues that there is an intrinsic conflict between capital and labor in market systems so that higher returns to capital must come at the expense of wages and salaries. This, in his view, is the central problem of the capitalist process: returns to capital grow more rapidly than returns to labor. Rather like Marx in this respect, he advances an interpretation of market systems that revolves around just a few factors: the differential returns to capital and labor, and the distribution of wealth and income through the population.
Though he borrows some ideas from Marx, Piketty writes more from the perspective of a modern progressive or social democrat. His book, written in French but translated into English, bears many features of that ideological perspective, particularly in its focus on the distribution rather than the creation of wealth, in its emphasis on progressive taxation as the solution to the inequality problem, and in the confidence it expresses that governments can manage modern economies in the interests of a more equal distribution of incomes. Piketty is worried mainly about equality and economic security, much less so about freedom, innovation, and economic growth.
The popularity of his book is another sign that established ideas never really die but go in and out of fashion with changing circumstances. Liberals, progressives, and social democrats were shocked by the comeback of free-market ideas in the 1980s after they assumed those ideas had been buried once and for all by the Great Depression. In a similar vein, free-market and “small government” advocates are now surprised by the return of social-democratic doctrines that they assumed had been refuted by the “stagflation” of the 1970s and the success of low-tax policies in the 1980s and 1990s. Piketty’s book has garnered so much attention because it is the best statement we have had in some time of the redistributionist point of view.
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For all the attention and praise it has received, the book is a flawed production in at least three important respects. First, it mischaracterizes the past three or four decades as a time of false rather than real prosperity, and it distorts the overall history of American and European capitalism by judging it in terms of the single criterion of equality versus inequality. Second, it misunderstands the sources of the “new inequality.” Third, the solutions it proposes will make matters worse for everyone—the wealthy, the middle class, and the poor alike. The broader problem with the book is that it advances a narrow understanding of the market system, singling out returns to capital as its central feature and ignoring the really important factors that account for its success over a period of two and a half centuries.
Piketty addresses an old question dating back to the nineteenth century: Does the capitalist process tend over time to produce more equality or more inequality in incomes and wealth?
The consensus view throughout the nineteenth century was that rising inequality was an inevitable byproduct of the capitalist system. In the United States, Thomas Jefferson tried to preserve an agricultural society for as long as possible in the belief that the industrial system would destroy the promise of equality upon which the new nation was based. In Great Britain early in the nineteenth century, David Ricardo argued that because agricultural land was scarce and finite, landowners would inevitably claim larger shares of national wealth at the expense of laborers and factory owners. Later, as the industrial process gained steam, Marx argued that competition among capitalists would lead to ownership of capital in the form of factories and machinery becoming concentrated in fewer and fewer hands, while workers continued to be paid subsistence wages. Marx did not foresee that productivity-enhancing innovations, perhaps together with the unionization of workers, would cause wages to rise and thereby allow workers to enjoy more of the fruits of capitalism.
Perspectives on the inequality issue changed in the twentieth century due to rising incomes for workers, continued improvements in worker productivity, the expansion of the service sector and the welfare state, and the general prosperity of the postwar era. In addition, the Great Depression and two world wars tended to wipe out the accumulated capital that had sustained the lifestyles of the upper classes. In the 1950s, Simon Kuznets, a prominent American economist, showed that wealth and income disparities leveled out in the United States between 1913 and 1952. On the basis of his research, he proposed the so-called “Kuznets Curve” to illustrate his conclusion that inequalities naturally increased in the early phases of the industrial process but then declined as the process matured, as workers relocated from farms to cities, and as “human capital” replaced physical capital as a source of income and wealth. His thesis suggested that modern capitalism would gradually produce a middle-class society in which incomes did not vary greatly from the mean. This optimistic outlook was nicely expressed in John F. Kennedy’s oft-quoted remark that “a rising tide lifts all boats.”
From the perspective of 2014, Piketty makes the case that Marx was far closer to being right than Kuznets. In his view, Kuznets was simply looking at data from a short period of history and made the error of extrapolating his findings into the future. Piketty argues that capitalism, left to its own devices, creates a situation in which returns to capital grow more rapidly than returns to labor and the overall growth in the economy.
This is Piketty’s central point, which he takes to be a basic descriptive theorem of the capitalist order. He tries to show that when returns to capital exceed growth in the economy for many decades or generations, wealth and income accrue disproportionately to owners of capital, and capital assets gradually claim larger shares of national wealth, generally at the expense of labor. This, he maintains, is something close to an “iron law” of the capitalist order.
He estimates on the basis of his research that since 1970 the market value of capital assets has grown steadily in relation to national income in all major European and North American economies. In the United States, for example, the ratio increased from almost 4:1 in 1970 to nearly 5:1 today, in Great Britain from 4:1 to about 6:1, and in France from 4:1 to 7:1. Measured from a different angle, income from capital also grew throughout this period as a share of national income. From 1980 to the present, income from capital grew in the United States from 20 to 25 percent of the national total, in Great Britain from 18 to nearly 30 percent, and in France from 18 to about 25 percent. These changes weigh heavily in Piketty’s narrative, which stresses the outsized role that capital has seized in recent decades in relation to labor income.
There is nothing original or radical in the proposition that returns to capital generally exceed economic growth. Economists and investors regard it as a truism, at least over the long run. For example, the long-term returns on the U.S. stock market are said to be around 7 percent per annum (minus taxes and inflation) while real growth in the overall economy has been closer to 3 percent. This is generally thought to be a good thing, since returns to capital encourage investment, and this in turn drives innovation, productivity, and economic growth.
But it does not follow that returns to capital, even if they are greater than overall growth in incomes, must be concentrated in a few hands instead of being distributed widely in pension funds, retirement accounts, college and university endowments, individual savings, dividends, and the like. Nor is it true that higher returns to capital must come at the expense of labor, since growing productivity advances the standard of living for everyone; workers benefit along with everyone else when their savings or pensions grow with increasing returns to capital. The low and still falling interest rates of recent decades suggest that returns for at least some forms of capital are similarly falling. There is also a natural check on the concentration of capital: owners of capital die sooner or later, at which time their assets are disbursed through estate taxes, charitable gifts, and bequests to heirs.
Why, then, has capital grown in recent decades as a share of national income and in relation to labor income? The answer is to some extent embedded in Piketty’s definition of “capital.” He defines “capital” in a broad way to include not only inputs into the production process, like factories, equipment, and machinery, but also stocks, bonds, personal bank deposits, university and foundation endowments, and residential real estate—all assets that are subject to substantial year-to-year fluctuations in market value. In his measure of “capital,” then, Piketty is undoubtedly incorporating the explosion in asset prices that has occurred since the early 1980s, especially in stocks and to a lesser degree in real estate as well.
Many reviewers of Capital in the Twenty-First Century have slighted Piketty’s larger themes of the “iron law” of capitalism, the increasing returns to capital, and the competition between labor and capital for shares of national income. Instead, every major review of the book dwells at length on its documentation of rising inequality and its call for new and higher taxes on the wealthy. Piketty sees inequality as an inevitable byproduct of modern capitalism, and substantially higher taxes as the only means of remedying it.
He has assembled a wealth of data that allow him to trace the distribution of wealth and incomes in the United States and Western Europe from late in the nineteenth century to the present day. His analysis yields a series of U-shaped charts showing that the shares of wealth and income claimed by the top 1 percent or 10 percent of households peaked between 1910 and 1930, then declined and stabilized during the middle decades of the century, and then began to rise again after 1980.
In the United States in the decades before the Great Depression, the top 1 percent received around 18 percent of total income and owned about 45 percent of total wealth. Those figures fell to around 10 percent (share of income) and 30 percent (share of wealth) between 1930 and 1980, at which point these shares started to grow again. As of 2010, the top 1 percent in the United States received nearly 18 percent of total incomes and owned about 35 percent of the total wealth. The pattern is similar for the top 10 percent of the income and wealth distributions. Before the Great Depression, from 1910 to 1930, this group claimed about 45 percent of national income and between 80 percent of the wealth; between 1930 and 1980, those shares fell to roughly 30 percent (income) and 65 percent (wealth); and from 1980 to 2010 their shares increased again to between 40 and 50 percent (income) and 70 percent (wealth). Piketty also shows that the super-rich, the top one-tenth of 1 percent of the income distribution (about 100,000 households in 2010), increased their share of national income from about 2 percent in 1980 to nearly 8 percent in 2010. The patterns are similar in the other Anglo-Saxon countries—Great Britain, Canada, and Australia—but very different in continental Europe, where the wealthiest groups have not been able to reclaim the shares of income and wealth that they enjoyed before World War I.
There is little mystery as to the sources of the U-shaped curves in income and wealth distribution in the United States and the flatter curves in continental Europe. In Europe in particular, the two great wars of the first half of the twentieth century, combined with effects of the Great Depression, wiped out capital assets to an unprecedented degree, while progressive taxes enacted during and after World War II made it difficult for the wealthiest groups to accumulate capital at the same rates as before. In the United States, the Depression wiped out owners of stocks, and high marginal income tax rates (as high as 91 percent in the 1940s and 1950s) similarly made it difficult for “the rich” to accumulate capital. Beginning in the 1980s, as rates were reduced on incomes and capital gains, especially in the United States and Great Britain, those old patterns began to reappear.
Piketty highlights a new factor in wealth distribution since the 1980s: the dramatic rise in salaries for “supermanagers,” which he defines as “top executives of large firms who have managed to obtain extremely high and historically unprecedented compensation packages for their labor.” This group also includes highly compensated presidents and senior executives of major colleges, universities, private foundations, and charitable institutions, who often earn well in excess of $500,000 per year. Surprisingly, then, “the rich” today are likely to be salaried executives and managers, rather than the “coupon clippers” of a century ago who lived off returns from stocks, bonds, and real estate. “The 1 percent,” in other words, are people who work for a living.
Piketty doubts that these supermanagers earn their generous salaries on the basis of merit or contributions to business profits. He also rejects the possibility that these salaries are in any way linked to the rapidly growing stock markets of recent decades. He points instead to cozy and self-serving relationships that executives establish with their boards of directors. In a sense, he suggests, they are in a position to set their own salaries as members of a “club” alongside wealthy directors and trustees.
To alleviate the growing inequality problem, Piketty advocates a return to the old regime of much higher marginal tax rates in the United States and Europe. He thinks that marginal rates in the United States could be increased to 80 percent (from 39.5 percent today) on the very rich and to 60 percent on those with incomes between $200,000 and $500,000 per year without reducing their productive efforts in any substantial way. Such taxes would hit the so-called supermanagers who earn incomes from high salaries, though it would not touch the owners of capital who take but a small fraction of their holdings in annual income.
As a remedy for this problem, Piketty advocates a global “wealth tax” on the super-rich, levied against assets in stocks, bonds, and real estate. He acknowledges that such a tax has little chance of being imposed globally, though he hopes that at some point it might be applied in the European Union. Several European countries—Germany, Finland, and Sweden among them—had a wealth tax in the past but have discontinued it. France currently has a wealth tax that tops out at a rate of 1.5 percent on assets in excess of ten million euros (or about $14 million). The United States has never had such a tax, and in fact it may not be allowed under the Constitution (which authorizes taxes on incomes).
Wealth taxes are notoriously difficult to collect, and they encourage capital flight, hiding of assets, and disputes over pricing of assets. They require individuals to sell assets to pay taxes, thereby causing asset values to fall. Piketty thinks that a capital tax would have to be global in scope to guard against capital flight and the hiding of assets in foreign accounts. It would also necessitate a new international banking regime under which major banks would be required to disclose account information to national treasuries. Under this scheme, a sliding-scale tax would be imposed, beginning at 1 percent on modest fortunes (roughly between $1.5 and $7 million) and perhaps reaching as high as 10 percent on fortunes in excess of $1 billion. Wealthy individuals like Bill Gates and Warren Buffett, with total assets in excess of $70 billion each, might have to pay as much as $7 billion annually in national wealth taxes. In the United States, with household wealth currently at around $80 trillion, such a tax, levied even at low rates of 1 or 2 percent, might yield as much as $500 billion annually. The purpose of the tax, it should be stressed, is to reduce inequality, not to spend the new revenues on beneficial public purposes.
Piketty implies that reductions in taxes over the past three decades have allowed “the rich” to accumulate money while avoiding their fair share of taxes. This is not the case at all, at least not in the United States. As income taxes and capital gains taxes were reduced in the United States beginning in the 1980s, the share of federal taxes paid by “the rich” steadily went up. From 1980 to 2010, as the top 1 percent increased their share of before-tax income from 9 to 15 percent, their share of the individual income tax soared from 17 to 39 percent of the total paid. Their share of total federal taxes more than doubled during a period when the highest marginal tax rate was cut in half, from 70 to 35.5 percent. The wealthy, in short, are already paying more than their fair share of taxes, and the growth in their wealth and incomes has had nothing to do with tax avoidance or deflecting the tax burden onto the middle class.
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Piketty’s estimates of wealth and income shares over the decades are probably as reliable and accurate as he or anyone else could make them, but even so they are estimates based on imperfect and inexact data often interpolated or extrapolated from entries in government records. This is especially true of his information on wealth, since governments have long maintained records on incomes (to collect taxes on incomes) but not on individual wealth. Following the publication of his book, many analysts challenged the accuracy of his data on the distribution of wealth in Great Britain and the United States. It will take some time to sort out these criticisms as other researchers attempt to replicate his analysis and as Piketty himself replies to his critics.
Even where Piketty’s numbers may be accurate, they can still lead to faulty conclusions. As some critics have pointed out, he uses statistics on national income as denominators for his calculations of shares of income claimed by various groups of the population, but these figures exclude transfers from government such as Social Security payments, food stamps, rent supplements, and the like, which constitute a growing portion of incomes for many middle- and working-class people. If those transfers were included in the calculations, then the shares of income claimed by the top 1 percent or the top 10 percent would undoubtedly decline, and the shares of other groups would correspondingly increase.
Leaving these controversies aside, and accepting Piketty’s data as valid for the time being, there are nevertheless good reasons to question his basic conclusions about capitalism in the twentieth century. He claims that inequality has increased since 1980, especially in the United States and Great Britain, that this kind of inequality is built into the nature of capitalism, and that it has been exacerbated by new tax policies that have cut the levies on high incomes and great wealth. These claims are greatly exaggerated.
