Thursday, June 19, 2014

Thomas Piketty: Capital in the 21st century

Piketty has caused an international panic. The camps are predictable: he has been criticized vehemently by the Right, including the London Financial Times and the Wall Street Journal, and he is being defended by progressives, for example by Paul Krugman. Clearly, Piketty is a threat to the plutocracy. But as you will see, I agree with Krugman that Piketty is fundamentally correct.

Thomas Piketty is the author of the voluminous 'Capital in the 21st Century', a book on economics and the growing inequality between the rich and the poor. This unassuming professor, who looks more like a schoolboy than a formidable economist, has taken the world by storm. His book contains an incredible collection of historical data that shows that the extreme concentration of wealth that was so typical of the 19th century, the Belle Epoque (1871-1914) is coming back in full force to haunt us in the 21st century.

Piketty's goal is to make economics understandable to the average person and I think he has succeeded. He also gives a clear political message; it is everyone's business to think about 'the economy'. There is no line between economics and the influence it has on the politics of a country. They are one and the same.

Throughout the book he refers to literature. Balzac, Dickens, Bronte. What defines the characters in these authors' stories are their social and economic standing. A Tale of Two Cities, David Copperfield, Hector Malot's 'Sans Famille', all masterpieces of social commentary. The terrible conditions of the poor in 'A Tale of Two Cities' are not a result of Dickens' imagination, they describe the incredible inequality between the rich and the poor during that period.

Wealth concentration and inequality are again reaching unprecedented heights, bringing back the nightmarish images that we all thought were a thing of the past. We are back in a world where the bottom half of the world population only has 2% of the share of the world’s wealth. 2%! Children are still starving, maybe not in the poor houses of Charles Dickens' time, but they do live in cars, in shelters, they die of hunger and malnutrition. Entire continents are malnourished as in the 'failed states' that abound in Africa. According to a recent report by Oxfam, the richest eighty-five people in the world—the likes of Bill Gates, Warren Buffett, and Carlos Slim—own more wealth than the 3.5 billion people who make up the poorest half of the world’s population.

Contrary to what most people believe, Capitalism does not have a built-in safeguard against the growth of unsustainable inequality, and this will ultimately undermine Democracy. It is Capitalism's inevitable tendency to steadily concentrate wealth, and only rapid growth (in technology, a rising population or government intervention), can keep capitalist economies in check.

Piketty describes this with a simple formula. He expresses this as 'r > g'. When 'r' (the rate of return on capital) is greater than 'g' (the rate of economic growth), wealth begins to accumulate in the hands of capital owners and it is removed from the hands of the people who are dependent on growth for their income. Not only does this cause unacceptable levels of economic inequality, but it undermines democracy, because influence can be bought and it creates political inequality as well.

Now we have the added problem of what Piketty calls the ‘supermanagers’, executives that get paid exorbitant salaries. This makes America stand at the top of the list. It is hard to believe that in a country that prides itself on being the land of opportunity, there has been such an about face over the past 30 years. It is now what 'Old Europe' used to be, an elitist, unequal and unfair society. This is why Piketty suggests raising the marginal tax to a pre-Reagan rate, say 80%, so that these self-determined salaries would automatically be kept in check.

Capital had accumulated in the hands of the few at the top, but the world wars cut that ratio in half. After World War II, the ratio of capital to income remained low due to spectacular economic growth and a very high marginal tax rate.

During the “Trente Glorieuses,” or “Glorious Thirty” years, the years that I grew up in, there was a large affluent middle class. Big cars, big refrigerators, stay home moms, the era depicted in the TV series Madmen. But since the 1970s, capital and wealth have been trending steadily back. And this accumulation of capital, says Piketty, will eventually recreate Belle Époque–style inequality unless something is done to stop it.

There will come a time when the majority of people will rebel against a system that does not work for them. If Capitalism doesn't work for the majority, what's the point of it? A revolution style solution? Piketty suggests something more civilized and probably more effective: a progressive wealth tax.

People whose fortunes are smaller than a million would not pay the annual wealth tax. A fortune between 1 and 5 million would require an annual 1% wealth tax, fortunes larger than 5 million would be taxed 2% and so on. This would force financial transparency, create a record of where all the money is kept and help improve 'the social state' by creating revenue. How can we plan for the future, improve our planet and ultimately safeguard our survival, when we have no idea of what we can work with?

Although this utopian idea would not be a terrible financial burden on the super-wealthy, it is unlikely that it will happen any time soon, especially now that extreme wealth and political power have morphed into each other, Piketty at least has opened the door for us to think about ways of preventing the inequality train from derailing our society.

The most useful aspect of Piketty’s book is its historical context, which allows us to compare. Wait a few decades and we will see our current inequality rise and match or even surpass 19th Century inequality. It is idiotic that our tax system allows the wealthiest members of our society to pay the least in taxes. Liliane Bettencourt, founder and owner of L’Oreal cosmetics, and presumably the richest woman in the world, is worth $30 billion. Fortunes that size yield at least 10% return, so that means that she cashes in $3 billion a year. She declares an income of $5 million, which is one thousandth of her net worth. I am too flabbergasted to figure out which tax bracket she falls under.

Piketty is convinced that public policy can make a huge difference in preventing Capitalism from hijacking Democracy. His solution can only work if it is implemented globally, otherwise our friends in the 1% will just find another country to hoard their wealth. One country doing the right thing will result in Capital flowing somewhere else. This can only work if everyone is on board by implementing a global wealth tax and if every country agrees to financial transparency. leave comment here