- Hardcover: 160 pages
- Publisher: Harvard University Press; Translation edition (29 September 2015)
- Language: English
- ISBN-10: 0674504801
- ISBN-13: 978-0674504806
- Product Dimensions: 14.6 x 2.5 x 21 cm
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The Economics of Inequality Hardcover – 29 Sep 2015
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Translated into English for the first time, it offers an exceptionally clear, cogent, and coherent discussion of economic inequality.--Richard N. Cooper"Foreign Affairs" (11/01/2015) Even a brief guide to basic concepts in Piketty's field of study can remind you, at every turn, that something profound is going on within the global economic system. The data, especially the data from recent decades, does not conceal the tale...Avarice and plunder play no part in the language of economics, but they too are causes and consequences of the phenomena Piketty describes. In some respects, his work is an assault on the kind of cult thinking that these days passes for economic and political analysis.--Ian Bell"Glasgow Herald" (07/25/2015) Piketty's The Economics of Inequality, which acts as a primer, provides a useful starting point for a wide audience.--Tom Healy"Irish Times" (09/05/2015) Piketty's The Economics of Inequality is an excellent book and a great companion to Capital. This book is a remarkable mix of extensive data, attention to theory, and concern for policy.--Axel Gosseries, Fund for Scientific Research (FRS-FNRS) and University of Louvain (UCL)
About the Author
Thomas Piketty is Professor at the Paris School of Economics and at the École des Hautes Études en Sciences Sociales (EHESS).
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Piketty admits that there is no "single reason" for wealth and income-growth inequality. But he does point to a "primary factor," which is a nation's fiscal and tax policies. As many economists have noted, American wealth and income-growth inequality has been worsening since the enactment of "supply side" tax and fiscal policies in the early 1980s. As Piketty and his researcher's note from FED data, the period 1950 to 1980 exhibited a far healthier socioeconomic balance, both in class-wealth and class-income-growth.
By the mid-70's, the "99%-class" had amassed roughly 75% of all U.S. wealth. But today, the 99%-class owns less than 55% of all U.S. wealth. Where did all that wealth go? It trickled UP into the hands a few ultra-wealthy families and trusts (much of it into dark, tax-free offshore accounts, which Piketty estimates between $30T and $50T). Piketty notes that it's not just a profound shift in class-wealth percentages, but in real dollars, as well. In 1978, the average net worth of families in the bottom fifty per cent was $29,000. in 1989, net worth had fallen to $22,000. Today, the average 50%-class net worth is $11,000 (these figures are adjusted for inflation.) At the very top, of course, things have been very different. In 1989, the average net worth of families in the top 5% was $3.6 million. By 2013, it was $6.8 million.
In 1978, the bottom 50%-class owned 7% of all U.S. wealth (reasonably healthy). Today, the bottom 50%-class owns just 1% of all U.S. wealth (that’s NOT a typo). This is the real tragedy – the slow impoverishing of America as a result of poor fiscal policy planning and adaptation. Some argue that net wealth has moved dramatically upward because of external events beyond our control, such as Chinese manufacturing, automation, etc… Piketty points out that such “economic externalities” should be compensated by healthy fiscal policy. Strong, well-designed fiscal policy adapts to all externalities, and keeps all socioeconomic classes in healthy proportion. But since the enactment of Reaganomics, we have done the opposite, and it is killing our national socioeconomic balance.
I would point out that Reagan's budget director, David Stockman, now admits that supply side theory was “poisonous” for the American middle-class. He now calls it "crony fascism" and warns that we are headed for a socioeconomic breakdown if we continue on current trend. We're bankrupting our middle class, and at the core of this corruption is a literal handful of ultra-wealthy interests in control of government fiscal policy lawmaking, via SuperPAC cronyism, K Street revolving doors, Citizen United corruptions (money as speech), bogus "think tanks," and backwards campaign financing laws. Piketty reminds us that gross inequality is not a partisan issue. It is simply a small cadre of ultra-concentrated power and greed aligned against the common good.
Piketty notes that the USA is not alone in its growing economic imbalance. Nations like Switzerland have also become greatly imbalanced, due to similar supply-side fiscal policies. He notes that, once one country starts down the supply-side path, other nations tend to follow, otherwise they risk losing their ultra-wealthy citizens to countries whose "high-earner" tax rates are significantly lower. Piketty calls this “tax competition.”
Piketty, as a free-market capitalist, agrees that the top 1% class requires a disproportionate amount of wealth to capitalize new businesses, assure market liquidity, and so forth. Piketty, along with most other progressive economists, peg a “healthy ratio” of 1% to 99% wealth at around 15%. It’s noted that conservative economists would put that ratio closer to 25%, maybe 30%. The problem is that our 1% class now owns 45% of all U.S. wealth, and climbing year over year, while our 0.1%-class is now paying increasingly regressive tax rates (while everyone else pays progressively). It’s noted that we’re now at the same level of socioeconomic inequality last seen in 1928, and trending towards 1933 levels, brought about largely by similar "Harding-Coolidge" supply-side tax and fiscal policies we tried in the Roaring 20s.
He points to a number of alternative fiscal solutions, including wealth tax, etc.., but admits that going back to a 1950-1980-style progressive policy will be difficult (tax competition, etc.). However, if we don’t return to a fair fiscal and tax system that better balances ALL classes, we will continue to cripple the engine that drives GDP growth, which is our broad middle-class. So he leaves us with a choice, and it is up to those people who understand the issues to drive policy change, or face the eventual social, national, and international consequences.
"It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion." - Adam Smith (the father of modern capitalism)
Piketty quickly introduces the reader to Rawls' "Maxamin" social justice theory, the idea that policies should aim to maximize the minimum opportunity available to everyone. In order to satisfy this goal, he offers two broad policy categories: direct redistribution (wage/price/industrial policies) vs. fiscal redistribution (tax and transfer). His aim is to separate the policies that pull economies from Pareto efficiency (pure redistribution), and those that push economies toward Pareto efficiency. Thus, while Marxist political theory is always in the background, political ends are not necessarily placed ahead of economic ends.
A constant theme throughout the book involves the role of prices. Are they allocative or simply distributive (between capital owners and laborers)? Supporters of the allocative role of prices note that if the price of labor is lower relative to capital, labor-intensive firms will expand more than capital-intensive firms given the relative cheapness of labor...and vice-versa. Supporters of the distributive role of prices believe that the aggregate workforce is a fixed function of the capital stock, focusing on bargaining power of the laborer relative to the capital owner in wage setting.
As long as capital-labor substitution is possible, fiscal redistribution allows for capital income to be shifted to labor without the negative effects on the cost of labor/level of employment that generally accompany direct redistribution (i.e. increasing minimum wage and benefits). In this case, fiscal redistribution does not have an allocative impact on prices, though it may impact saving/capital accumulation. If the elasticity of capital-labor substitution is >1, a 1% increase in wages will result in a >1% decrease in employment. Labor's share of income would fall in this scenario. If <1, direct redistribution may be better. If =0, then prices are arguably purely distributive and not allocative. If the elasticity of capital-labor substitution were to truly equal 0, Marxism would be supported in that the capital owner need not exist. The existing stock of capital must simply be matched to an appropriate workforce and a certain amount of output directed to its maintenance and increase over time (although Piketty acknowledges that this still doesn't fully address the price system's ability to direct production).
Regarding the impact of fiscal redistribution on saving/capital accumulation, one must look to the elasticity of the supply of capital. Empirically, the elasticity of the supply of capital is close to zero for individual households, implying that a 1% reduction in the return on capital does not translate into a similar reduction in savings. It actually suggests people save more to achieve desired future income, despite increased attractiveness of current consumption. This applies to interest rate levels as well, in that higher rates may actually lead to less saving since desired future income can be achieved without giving up as much current consumption. For firms, however, even if the elasticity of the capital supply is low, on an international stage firms can shift capital to low-tax regimes, potentially causing domestic unemployment.
In the context of bargaining power, Piketty discusses the battle between the monopoly power of unions and the monopsony power of employers. Monopsony power comes from firm-specific human capital and limitations on geographical mobility. If an employer is in fact a monopsony, fiscal redistribution would simply allow employers to lower wages, negating positive effects. He talks about low wage opportunities disappearing (underemployment and lower participation rates) starting in the '70s, offering explanations like incarceration. He also notes increased inequality since 1970 may be due to skill-based technological change, where new technology places a premium on previously untapped skills. However, more broadly, he notes that the standard of living was roughly 10 times higher in 1990 than in 1870, undeniably due to increases in the productivity of labor.
Piketty highlights that, due to the inter-temporal nature of credit markets, issues such as adverse selection, moral hazard, lack of borrowing credit data, concentrated ownership, and political risks may impede international capital flows, slowing convergence between poor and rich countries. He says that credit rationing as a solution has often failed for lack of direction on how to allocate, and that granting land and capital (redistribution) has been more successful. Additionally, Piketty attacks the "Kuznets inequality curve," which says that inequality is high when countries are in the early stages of development but then converge thereafter, for the lack of any natural mechanism to support it.
Regarding education, Piketty states that compulsory education should have large effects on human capital, but more funding/resources may not impact generational mobility if family well-being is a benchmark for individual success. In other words, if inequality is sourced at the family level, throwing more money at education may be in vain.
Towards the end, Piketty touches on Keynesian stimulus, saying tax and spend may be useful for redistribution but as stimulus it's on shaky theoretical grounds. He seems to acknowledge and accept the "stickiness" of wages and prices, but rejects the paradox of thrift, stating that purchasing power is nearly always consumed or invested in some way. Thus it doesn't matter if the wealthy are investing or the poor are spending, tax and spend doesn't logically provide stimulus. However, he points out that the makeup of consumption (i.e. the industries stimulated) may matter, but notes that stimulus tends to be short term. For deficit stimulus, he notes that the return on capital may increase as the stock of public debt grows (presumably from a crowding-out-type effect), potentially resulting in undesirable upward redistribution.
Overall, particularly in the first half of the book, Piketty creates an easy to follow flow from theory to empiricism and back. The step-wise process is reader friendly and is helpful for understanding how external effects of policy ripple from one area to another. I really appreciate the fact that he often restated free-market arguments in full, committing serious time to ensuring the reader understands both sides of the discussion...an intellectually honest strategy that my have been lost a little in Capital.