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Capitalism vs. Democracy Publication info: New York Times (Online) , New York: New York Times Company. Jan 28, 2014.

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ABSTRACT (ENGLISH) Is deepening inequality inevitable? The case for a global wealth tax. FULL TEXT Thomas Piketty’s new book, “Capital in the Twenty-First Century,” described by one French newspaper as a “a

political and theoretical bulldozer,” defies left and right orthodoxy by arguing that worsening inequality is an

inevitable outcome of free market capitalism.

Piketty, a professor at the Paris School of Economics, does not stop there. He contends that capitalism’s inherent

dynamic propels powerful forces that threaten democratic societies.

Capitalism, according to Piketty, confronts both modern and modernizing countries with a dilemma: entrepreneurs

become increasingly dominant over those who own only their own labor. In Piketty’s view, while emerging

economies can defeat this logic in the near term, in the long run, “when pay setters set their own pay, there’s no

limit,” unless “confiscatory tax rates” are imposed.

Piketty’s book —published four months ago in France and due out in English this March —suggests that traditional

liberal government policies on spending, taxation and regulation will fail to diminish inequality. Piketty has also

delivered and posted a series of lectures in French and English outlining his argument.

Conservative readers will find that Piketty’s book disputes the view that the free market, liberated from the

distorting effects of government intervention, “distributes,” as Milton Friedman famously put it, “the fruits of

economic progress among all people. That’s the secret of the enormous improvements in the conditions of the

working person over the past two centuries.”

Piketty proposes instead that the rise in inequality reflects markets working precisely as they should: “This has

nothing to do with a market imperfection: the more perfect the capital market, the higher” the rate of return on

capital is in comparison to the rate of growth of the economy. The higher this ratio is, the greater inequality is.

In a 20-page review for the June issue of the Journal of Economic Literature that has already caused a stir, Branko

Milanovic, an economist in the World Bank’s research department, declared:

“I am hesitant to call Thomas Piketty’s new book Capital in the 21st Century one of the best books in economics

written in the past several decades. Not that I do not believe it is, but I am careful because of the inflation of

positive book reviews and because contemporaries are often poor judges of what may ultimately prove to be

influential. With these two caveats, let me state that we are in the presence of one of the watershed books in

economic thinking.”

There are a number of key arguments in Piketty’s book. One is that the six-decade period of growing equality in

western nations –starting roughly with the onset of World War I and extending into the early 1970s –was unique

and highly unlikely to be repeated. That period, Piketty suggests, represented an exception to the more deeply

rooted pattern of growing inequality.

According to Piketty, those halcyon six decades were the result of two world wars and the Great Depression. The

owners of capital –those at the top of the pyramid of wealth and income –absorbed a series of devastating blows.

These included the loss of credibility and authority as markets crashed; physical destruction of capital throughout

Europe in both World War I and World War II; the raising of tax rates, especially on high incomes, to finance the

wars; high rates of inflation that eroded the assets of creditors; the nationalization of major industries in both

England and France; and the appropriation of industries and property in post-colonial countries.

At the same time, the Great Depression produced the New Deal coalition in the United States, which empowered an

insurgent labor movement. The postwar period saw huge gains in growth and productivity, the benefits of which

were shared with workers who had strong backing from the trade union movement and from the dominant

Democratic Party. Widespread support for liberal social and economic policy was so strong that even a Republican

president who won easily twice, Dwight D. Eisenhower, recognized that an assault on the New Deal would be futile.

In Eisenhower’s words, “Should any political party attempt to abolish Social Security, unemployment insurance,

and eliminate labor laws and farm programs, you would not hear from that party again in our political history.”

The six decades between 1914 and 1973 stand out from the past and future, according to Piketty, because the rate

of economic growth exceeded the after-tax rate of return on capital. Since then, the rate of growth of the economy

has declined, while the return on capital is rising to its pre-World War I levels.

“If the rate of return on capital remains permanently above the rate of growth of the economy –this is Piketty’s key

inequality relationship,” Milanovic writes in his review, it “generates a changing functional distribution of income in

favor of capital and, if capital incomes are more concentrated than incomes from labor (a rather uncontroversial

fact), personal income distribution will also get more unequal —which indeed is what we have witnessed in the

past 30 years.”

Piketty has produced the chart at Figure 1 to illustrate his larger point.

The only way to halt this process, he argues, is to impose a global progressive tax on wealth –global in order to

prevent (among other things) the transfer of assets to countries without such levies. A global tax, in this scheme,

would restrict the concentration of wealth and limit the income flowing to capital.

Piketty would impose an annual graduated tax on stocks and bonds, property and other assets that are

customarily not taxed until they are sold. He leaves open the rate and formula for distributing revenues.

The Piketty diagnosis helps explain the recent drop in the share of national income going to labor (see Figure 2)

and a parallel increase in the share going to capital.

Piketty’s analysis also sheds light on the worldwide growth in the number of the unemployed. The International

Labor Organization, an agency of the United Nations, reported recently that the number of unemployed grew by 5

million from 2012 to 2013, reaching nearly 202 million by the end of last year. It is projected to grow to 215 million

by 2018.

Piketty’s wealth tax solution runs directly counter to the principles of contemporary American conservatives who

advocate antithetical public policies: cutting top rates and eliminating the estate tax. It would also run counter to

the interests of those countries that have purposefully legislated low tax rates in order to attract investment. The

very infeasibility of establishing a global wealth tax serves to reinforce Piketty’s argument concerning the

inevitability of increasing inequality.

Some liberals are none too happy with Piketty, either.

Dean Baker, one of the founders of the Center for Economic and Policy Research, wrote me in an email that he

believes that Piketty “is far too pessimistic.” Baker contends that there are a host of far less ambitious actions that

might help to ameliorate inequality:

“Is it really implausible that we would ever see any sort of tax on finance in the U.S., either the financial

transactions tax that I would favor or the financial activities tax advocated by the I.M.F.?”

Baker also noted that “much of our capital is tied up in intellectual property” and that reform of patent laws could

serve both to limit the value of drug and other patents and simultaneously lower consumer costs.

Lawrence Mishel, the president of the Economic Policy Institute, responded to my email asking for his take on

Piketty:

“We’d take the perspective that this phenomenon is related to the suppression of wage growth so that policies

which generate broad-based wage growth are an antidote. The political economy is such that the political power to

enact those taxes also requires a mobilized citizenry and institutional power, such as a robust labor movement.”

Daron Acemoglu, a more centrist economist at MIT, praised Piketty’s careful acquisition of data, as well as his

emphasis on the economic forces and political conflicts over distribution that shape inequality. In an email,

Acemoglu went on to say:

“Part of his interpretation I do not share. Piketty argues that there is a natural tendency for high inequality in

‘capitalist’ economies (the term capitalist is not my favorite) and that certain unusual events (world wars, the Great

Depression and policy responses thereto) temporarily reduced inequality. Then both earnings inequality and

inequality between capital and labor have been reverting back to their ‘normal’ levels. I don’t think that the data

allow us to reach this conclusion. All we see is this pattern of fall and rise, but so many other things are going on. It

is consistent with what Piketty says, but it is also consistent with certain technological changes and

discontinuities (or globalization) having created a surge in inequality which will then stabilize or even reverse in the

next several decades. It is also consistent with the dynamics of political power changing and this being a major

contributor to the rise in inequality in advanced economies. We may be seeing parts of several different trends

underpinned by several different major shocks rather than the mean-reverting dynamics following the shocks that

Piketty singles out.”

There is, however, significant liberal applause for Piketty.

Richard Freeman, an economist at Harvard who specializes in inequality, unions and employment patterns, wrote

me by email:

“I am in 100 percent agreement with Piketty and would add that much of labor inequality comes because high

earners got paid through stock options and capital ownership.”

Freeman and two colleagues, Joseph Blasi and Douglas Kruse, professors at the School of Labor and Management

Relations at Rutgers, contend in their 2013 book, “The Citizen’s Share: Putting Ownership Back into Democracy,”

that they have an alternative to a global wealth tax. They argue that:

“The way forward is to reform the structure of American business so that workers can supplement their wages

with significant capital ownership stakes and meaningful capital income and profit shares.”

In other words, let’s turn everyone into a capitalist.

Piketty does not treat worker ownership as a solution, and he is generally dismissive of small-bore reforms, arguing

that they will have only modest effects on economic growth worldwide, which he believes is very likely to be stuck

at 1 to 1.5 percent through the rest of this century.

Piketty joins a number of scholars raising significant questions about how the global economic system will deal

with such phenomena as robotics, the hollowing out of the job market, outsourcing and global competition.

His prognosis is extremely bleak. Without what he acknowledges is a politically unrealistic global wealth tax, he

sees the United States and the developed world on a path toward a degree of inequality that will reach levels likely

to cause severe social disruption.

Final judgment on Piketty’s work will come with time –a problem in and of itself, because if he is right, inequality

will worsen, making it all the more difficult to take preemptive action. DETAILS

Subject: Tax rates; Income distribution; Books; Politics; Economic growth; World War I;

Capitalism; Inequality; Democracy; Economic models; New Deal

Location: United States--US France

People: Piketty, Thomas

Identifier / keyword: Income Inequality United States Politics and Government Piketty, Thomas Economic

Conditions and Trends Capitalism (Theory and Philosophy) Capital in the Twenty-

First Century (Book) Books and Literature

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Publication title: New York Times (Online); New York

Publication year: 2014

Publication date: Jan 28, 2014

Section: opinion

Publisher: New York Times Company

Place of publication: New York

Country of publication: United States, New York

Publication subject: General Interest Periodicals--United States

Source type: Blogs, Podcasts, &Websites

Language of publication: English

Document type: News

ProQuest document ID: 2213867546

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