In the Nation's Interest

Inequality Debate Stoked By New Book

For this week’s blog, we return to a subject CED has covered in the recent past -- income inequality.  To introduce myself, I am CED’s new Vice President and Director of Economic Studies, and I will be meeting with you in this space from time to time.

Inequality Debate Stoked by New Book

Over the last few weeks, on top of the New York Times bestseller list sits a dense, 700 page economics tome, entitled Capital in the 21st Century. Written by a French professor, Thomas Piketty, the book argues that income inequality in the United States (and other developed countries) is steadily rising, and it offers a wealth of interesting statistics to support this central notion.

The subject matter -- and a number of the author’s suggestions for rectifying what he views as a likely societal problem – has attracted a media firestorm, with pundits from all sides of the political spectrum weighing in. The book also provides a possible scientific foundation for a Democratic Party emphasis on “income inequality” as a midterm campaign issue; and, thus, it has attracted opponents who otherwise might assert the position is empty rhetoric.  Indeed, the head of the Administration’s Council of Economic Advisers, Jason Furman, has given two speeches on the book in the last two weeks, including one at CED’s Spring Policy Conference.

Is the United States Heading for Third World Inequality?

In a rush to comment, it appears that many pundits  scanned the book, rather than plowed through its multiple tables and charts.  I bought a copy several weeks ago, have almost finished it, and point out that it is a tough slog for even a dedicated reader.

When I first heard about the work, the reviewers’ comments harkened me back to my days of business travel to Mexico and Brazil, the economies of which are well known for their stark divisions of wealth. A tiny minority controls the vast majority of private assets in most Latin American countries, and this small group tends to have a disproportionate amount of influence on government and business. Upward social movement for most of the population is compromised by many obstacles.   Was Piketty claiming that the United States was heading for such disparity?

Well, from my reading, he hasn’t made that point. Clearly, the United States is a long way off from such a situation, but his research identifies a trend.

By way of illustration,  top 10% of U.S. households received 48% of total income (labor plus investment income) in 2010 versus 38% in 1980. That statistic’s previous peak was 45% in 1930, and hit a low of 33% in 1970. The movement is similar in Western Europe, but with smaller variation. Note that the following 2010 table is pretax data, and excludes government transfers and other supports.
 

                                             Total Labor and Capital Income Shares (2010)

  Western Europe U.S.
The Top 10% 35% 48%
The Bottom 50% 25% 20%

 

The imbalance in capital ownership of assets, like real estate, stocks and bonds, is more pronounced. Note that the data exclude ownership of future social security and/or pension payments.

                                                         Capital Ownership Shares (2010)

  Western Europe U.S.
The Top 10% 60% 70%
The Bottom 50% 5% 5%


 

Self-Correcting Mechanism for What Might be a Trend?

Assuming Piketty’s analysis is valid, and there is no self-correcting counter-weight to growing inequality, U.S.- style capitalism might be in for a rough ride.  Unchecked, the forces promoting inequality could lead to a plutocracy in 30 years, with a concentration of wealth and influence unseen since America’s Gilded Age.  Such divisions could have the potential to foster mean social unrest on a wide scale, unless the rising tide lifts all boats, not just yachts.

The Gilded Age (roughly 1870-1900) had rapid economic growth, as America opened up the West, industrialization took hold, and productive new inventions were devised. Nevertheless, the wealth differences and monopolistic actions of the “robber barons” of that time caused problems and general resentments. The United States saw similar complaints echoed by the Occupy Wall Street movement, just a few years ago, even though the US economy generates a level of material comfort for its citizens envied by many nations.  

Interestingly, when Piketty looks at the French experience (where his data is reasonably complete),  he notes that earlier inequality reversed, in part, due to World Wars (where wages compressed)  and the Great Depression (where the financial market collapse crippled fortunes of the top 1%, and brought its wealth somewhat  closer to the median).  Are there counterweights to what some allege are seriously divisive forces? Economic growth, post-World War II, brought at least a sense of opportunity and fair outcomes. Piketty’s conclusion that this was a temporary anomaly is one of the most disappointing takeaways of the book. 

Causality Difficult to Pinpoint

The voluminous statistics on income and wealth inequality, however, don’t point to definitive sources of causality – in other words, what in today’s economic system is behind the inequality trend?

• Is the trend to be short lived – the result of temporary changes that balance on their own?
• Is inequality in the DNA of capitalism; and, thus, whatever moderation experienced in past decades was an aberration?
• Or, are there adverse government policies or malevolent hidden forces at work?  

No one has put forward a sure-fire answer to any of these three questions.

Without a comprehensive cure  for this fundamental issue, Piketty suggests attacking its symptoms  -- by imposing more  taxes on the high-income group, with the government  then providing more support to low- income earners.  He argues that the top managers of large firms (many of which are publicly traded) are being over-compensated, which thus contributes to inequality. The question of fair taxes and appropriate government support has been in the public discourse for many years, and the reasonable compensation of executives at listed corporations has been the fodder of many articles, including a front page report in the May 13, 2014 Wall Street Journal.
 

Business Response Has Been Muted

Many free-market commentators publicly decry (and many business people privately consider) higher tax proposals as attacks on capitalism, and stifling to innovation and entrepreneurship. Meanwhile, critics of the current economic system sometimes ignore its track record of generating a quality standard of living in many nations (including the United States) even if the system lacks perfection.

The response of the business community to the book, and to the larger income inequality debate, has been muted. A few high-profile financiers have waded into the fray, such as Carl Icahn, Leon Cooperman and Ken Langone, with limited impact.

In any case, both the sharp attention dedicated to the book, and the faint afterglow of the Occupy Wall Street movement, suggests that the U.S.- style market economy needs eloquent defenders, backed up by well researched facts and polished media strategies.

CED, as part of its Sustainable Capitalism Project, intends to explore inequality in depth and present commonsense proposals.

Jeff Hooke

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