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by Marc Jampole From the Autumn, 2014 issue of Jewish Currents Discussed in this essay: Capital in the Twenty-First Century by Thomas Piketty, translated from the French by Arthur Goldhammer. Belknap Press, 2014, 696 pages. A FEW YEARS BACK, when government debt trumped all other macroeconomic concerns in the news media, a fairly shoddy economic study called This Time Is Different: Eight Centuries of Financial Folly, by economists Carmen M. Reinhart and Kenneth Rogoff, caught the attention of the news media because it concluded that countries with public debt greater than 90 percent of gross domestic product suffered measurably slower economic growth. Politicians and journalists throughout the world used this “new discovery” to bolster assertions that governments everywhere had to reduce debt instead of pumping money into the economy to create jobs. The problem was that Reinhart and Rogoff miscalculated in a number of places and even made counting errors. With their bad math corrected, no real correlation was found between levels of debt and economic growth. The Occupy movement next grabbed the attention of the media, which began to devote significant time and space to the growing inequality of wealth and income in the United States and worldwide. That set the stage for Thomas Piketty’s left-leaning Capital in the Twenty-First Century to become the “hot book” of our day, a cause célèbre or bête noir, depending on the political views of whoever is commenting. Summing up years of research by Piketty, a professor at the Paris School of Economics, and his frequent collaborator, UC-Berkeley economics professor Emmanuel Saez, Capital in the Twenty-First Century presents a detailed history of how wealth and income have shifted in the developed world since 1800, and documents the dramatic increase in inequality of wealth and income over the past thirty-five years. Most significantly for the book’s notoriety, Piketty proposes a grand theory of inequality that proposes that in all but high-growth economies, wealth inequality will naturally increase because the return on capital tends always to exceed the rate of economic growth. FOR A TECHNICAL WORK JAM-PACKED with economic theory, Capital in the Twenty-First Century has sold a tremendous number of copies. Left-leaning pundits and economists have supported Piketty’s research and findings while often disagreeing with his proposal on how to decrease wealth inequality throughout the world. The right and mainstream have had fits trying to disprove Piketty’s findings. Most of their criticism crumbles under routine inspection. Daniel Shuchman and critics in The Economist, for example, have stated that Piketty’s analysis ignores ways in which wealth and income trickle down, such as through non-profit funding of community activities. These writers merely demonstrate that they haven’t read the book cover to cover, since Piketty addresses these issues extensively. Tyler Cowan in Foreign Affairs and Martin Feldstein in the Wall Street Journal atomize wealth in a feeble attempt to prove that it doesn’t tend to concentrate. Each of these authors looks at wealthy individuals, pointing out that old fortunes like the Rockefellers’ and Astors’ get diluted over time. If they had instead looked at the wealthy as a class, they would see that Piketty is right to conclude that inequality has increased, even if the monogrammed initials on the cufflinks and bracelets have changed. Feldstein and the Financial Times claim to have found errors in the data, but Piketty has refuted every one of their objections, in most cases by pointing out that the writer had not read the footnotes or charts that accounted for what they were calling mistakes. Unlike the dubious premise about debt and economic growth put forth by Reinhart and Rogoff, Piketty’s overall theory stands up to scrutiny. WHEN BOTH SUPPORTERS AND DETRACTORS of Capital in the Twenty-First Century compare it to Karl Marx’s Capital, however, they demonstrate a lack of familiarity with Marx’s 1867 tome. Piketty neither recreates nor transforms Marx, who made a detailed, step-by-step analysis of capital, its origin, its uses, and its relationship to labor. Piketty devotes 577 pages (in a very easy-to-read translation by Arthur Goldhammer) to one sole aspect of capital: its tendency to accumulate in fewer and fewer hands. Marx postulated that labor creates all surplus value from the exchange of money for a commodity. By contrast, Piketty accepts at the very beginning that both capital and labor contribute to the production and delivery of goods and services and focuses exclusively on the distribution of wealth and income. Marx slowly and carefully constructed an overarching economic theory, whereas Piketty tells a history. The grand outline of Piketty’s narrative is simple: At the beginning of the 19th century, there was a great inequality of wealth in Europe, but not in the U.S. American wealth began to concentrate during the Gilded Age of the late 19th century, when on both sides of the Atlantic Ocean manufacturing assets and financial instruments began to complement and then replace land as the primary types of capital. Unlike Marx, Piketty considers land a type of capital. Piketty depicts the two World Wars as a kind of suicide of capital that led to the social welfare programs in Europe and the U.S. The height of wealth equality in both came during the high-growth decades after World War II, which the last thirty years of low growth have reversed, until inequality of wealth in the U.S. has now reached historic proportions. The growth of a middle class that owns property, “the patrimonial middle class,” was the principal structural transformation in the distribution of wealth in developed countries in the 20th century, says Piketty. In 1900-1910, the middle class was almost as poor as the poor, while the top 10 percent owned 90 percent of all wealth (and the top 1 percent owned 50 percent of all wealth). Today, the middle class, which Piketty defines as the middle 40 percent of income and wealth, does much better than the poor, which he defines as the bottom 50 percent. PIKETTY SEEKS TO UNDERSTAND this history by reducing it to an equation, r>g, where r is the rate of return on capital and g is the growth rate of economic output. The premise of the equation — and of Piketty’s entire system — is that the rate of return on capital is virtually always greater than the growth in economic output. Over time, owners of capital tend to take more of the pie, leaving less for everyone else. During high-growth eras, r>g does not matter, since a rising tide tends to lift all boats. But as he demonstrates, most of recorded history has seen very low rates of economic growth. It was almost nonexistent before the 1700s, if we take account of population growth, and was a meager 1 percent from about 1800 to the end of World War II. Comparison of the upper decile (top 10 percent) and upper centile (top 1 percent) to everyone else reveals many insights about wealth inequality. For example, Piketty finds that one of the main reasons wealth inequality shrank so much in Europe between 1914-1945 was because the top centile continued to live a lifestyle requiring eighty to one hundred times the average income, even though the war, inflation and higher taxes were eating into their income and capital. The result: their heirs inherited smaller fortunes. The concentration of wealth in Europe never recovered from the shocks of 1914-1945, in which the upper decile’s share of wealth fell from 90 percent to 60-70 percent; it’s now 65 percent. In the U.S., inequality of wealth was small in 1800, increased dramatically during the 19th century century, saw a less steep decline in 1914-’45, and has soared since then to 70 percent for the top decile and 35 percent for the top centile. Piketty finds two worldwide trends driving the slide towards greater wealth inequality since 1970: 1. Privatization of government wealth, which accounted for 10-25 percent of the increase in private worth in the eight leading Western economies and created oligarchs in all of the countries once part of the Eastern Bloc. 2. The preference of Western countries to borrow from and pay interest to the wealthy rather than funding government programs and war expenditures by raising taxes. SOME HAVE ARGUED THAT OUR MERITOCRACY EXPLAINS much of the growing inequality of income over the past forty-odd years, as those who add more value to the community and economy make significantly more money. While a believer in meritocracy, Piketty nonetheless concludes that “marginal productivity” (by which he means workers who are more highly skilled) explains only some of the growing wage inequality, not most of it. He proposes that “social norms” determine how much people make at various occupations and shape income inequality, and he does not buy into the myth promoted by both liberals and conservatives that the best way to increase workers’ share of wealth is to make them more productive through education. Most wage inequality, he says, results from decisions made by those who control the distribution of wealth and income, and since the Reagan presidency they have tended to give themselves more and their employees less. Piketty traces a transfer since 1970 of 15 percent of national income from the poorest 90 percent to the top decile, with the richest centile getting 60 percent of all income gain between 1977 and 2007 — resulting in a distribution of income in the U.S. today as unequal as at any time in recorded history He calls the U.S. a “hypermeritocratic society,” but also expresses doubt that the society is truly a meritocracy. Like many progressives, he wonders whether the highest earners — mostly corporate heads, but also investment bankers, hedge fund managers, and elite athletes and entertainers — deserve such a large portion of the booty. As he points out, executive pay did not skyrocket until marginal tax rates came down; the increase had nothing to do with the productivity of the executives. Piketty further believes that the increase in inequality created the 2008 financial crisis: One consequence of greater inequality of income was a decrease in purchasing power in the middle and lower classes, he observes, which made it more likely that these households would take on debt. Unscrupulous banks took advantage by writing loans that fueled an unsustainable housing debt bubble. Capital in the Twenty-First Century predicts a grim future if nothing is done to counteract growing inequality. Piketty conceives of a world in a not-too-distant time in which every country is run by an oligarchy of billionaires. Throughout his book, Piketty entertains and educates us with gee-whiz facts and observations that explode many of the common myths we hear in the mainstream news media about the superiority of the unregulated free market, U.S. exceptionalism, and the nature of economic growth. Here are some of the many pearls of wisdom that Piketty shares: • Wealth inequality within single generations is much greater than inequality between generations, although older people tend to have more money. In other words, intergenerational warfare has not replaced class warfare, as some pundits have proclaimed. • The share of income of the highest centile is the same in developing countries as in rich countries. The highest share of income given to the top 1 percent is, of course, in the United States. So much for our bashing of oligarchs in other countries. • In all known societies of all eras, the least wealthy half of the society has always owned virtually nothing. • Before the French Revolution, the Catholic Church owned 7-8 percent of wealth of France, compared to the 6-7 percent of American wealth owned by nonprofit organizations today. WHILE THE BOOK IS A DELIGHT to read and has many important insights, it is not without its faults. For one thing, Piketty says that r>g is a natural law, meaning it is not a theoretical construct but a law that describes an inevitable economic process. There are two problems with this assertion. For one thing, Piketty’s history begins only in 1800; the obvious question is whether his rule applies before the Industrial Revolution. Is it possible that social breakdowns such as the French Revolution, the fall of the Tang and Song dynasties, and the decline of the Roman Empire came about because the rich had finally taken too much from the economy, i.e., r>g produced such a great disparity of wealth that the economy fell apart or people rebelled? Did catastrophic events such as the Black Plague or the Little Ice Age of the 17th century create instant resets that ameliorated wealth inequality? Barbara Tuchman reports in A Distant Mirror that after the Black Plague, the price of labor in Europe soared to a record high (still not surpassed in world history) because of a shortage of workers. All of this predates Piketty’s history and goes undiscussed. A more significant flaw in Piketty’s postulation of a natural law is that it attributes growing inequality to blind forces inherent in capitalism and market economies. But the increase in inequality between 1970 and the present day ensued as a direct result of specific actions by groups of human beings. These actions included: shifting the tax burden away from the wealthy and placing it on the poor and middle class; union-busting policies by governments; allowing the minimum wage to lag behind inflation; privatization of government services and wealth throughout most of the world; lowering taxes while cutting government spending on education, retirement and social-welfare programs; and funding wars not through taxation, but through debt held primarily by the wealthy. Real people — most of them in the pay of the wealthy and corporations — enacted these policies. They were not the result of some natural force, except the natural tendency of humans to think only of their own short-term interests and not in the long-term interests of the community. Most quibbles about Capital in the Twenty-First Century are criticisms of Piketty’s unrealistic solution for reversing the trend to ever-greater inequality of wealth and income throughout the world. He proposes a worldwide annual tax on extreme wealth by all governments, plus a very steep, progressive worldwide income tax on top of current income taxes. Based on his analysis of past income tax rates, Piketty proposes that we could implement a marginal rate of 70 percent on income above $500,000 or a $1 million. The government would transfer this wealth back to the poor and middle class with government programs. Piketty says that unless all nations of the world agree to these taxes, the wealthy will transfer their income and wealth to those that don’t agree to the plan. It is, however, pie-in-the-sky thinking to imagine that all the countries in the world will get together and suddenly decide to play Robin Hood. It might be more realistic to take the same kind of gradualist approach that the wealthy have taken since the mid-1970s to take a greater share of the wealth-and-income pie. The 90 percent could grab back a little at a time by gradually changing policies in the industrialized world. For example, former Secretary of Labor Robert Reich proposed ten incremental changes we can make in the United States in a recent article by Robert Reich in The Nation (“10 Practical Steps to Reverse Growing Inequality”), including raising the minimum wage to $15 an hour, unionizing low-wage workers, making the tax on Social Security and Medicare progressive, raising the estate tax, and eliminating big money from politics. I also believe Piketty is wrong to view the diminishment of economic inequality as a primary goal of society, as wrong as those who propose freedom from government regulation as a goal. To my mind, we would be far better off if we instead based the constraints we put on the “free market” on the idea that all human beings deserve a minimum standard of living, which includes free health care and education, a living wage, a safe work place, an unpolluted environment, and a comfortable retirement. Certainly, ensuring that we all enjoy these economic basics will require us to raise taxes on the wealthy. Where else will we get the funds to do it? But to hold shrinking inequality as a goal in and of itself doesn’t directly address the myriad problems we face. Martin Feldstein is right in his criticism of Capital in the Twenty-First Century when he says that the problem is not inequality but the persistence of poverty. Of course, as a defender of the interests of the ultra-wealthy, the solutions that Feldstein proposes will only lead to greater wealth and income inequality. Despite its few flaws, Capital in the Twenty-First Century is a formative and groundbreaking work that will be studied and cited by economists and will direct the political discourse in democratic countries for decades to come. Marc Jampole, a member of our editorial board, is the author of Music from Words (Bellday Books, 2007), a poetry collection. He is a public relations executive and former television news reporter who blogs regularly for Jewish Currents and at his blog, OpEdge.