Thomas Piketty is an expert on income inequality. He and Emmanuel Saez have produced some of the best work measuring its explosive growth.
Piketty has just published a massive new book on the subject called “Capital in the Twenty-First Century.” A New York Times review of it by Eduardo Porter begins as follows:
What if inequality were to continue growing years or decades into the future? Say the richest 1 percent of the population amassed a quarter of the nation’s income, up from about a fifth today. What about half?
To believe Thomas Piketty of the Paris School of Economics, this future is not just possible. It is likely. . . .
His most startling news is that the belief that inequality will eventually stabilize and subside on its own, a long-held tenet of free market capitalism, is wrong. Rather, the economic forces concentrating more and more wealth into the hands of the fortunate few are almost sure to prevail for a very long time.
Piketty’s pessimistic view is based on his argument that income generated from capital normally grows faster than the economy or income from wages. This means that the private owners of capital benefit disproportionately from growth, which makes it easier for them to increase their asset holdings and by extension future income. And, since wealth and income translate into political power, we face a self-reinforcing dynamic leading to ever growing inequality.
Porter provides some charts taken from Piketty’s work illustrating the rise in private wealth as a share of national income and the growth in inequality in several countries.
Eric Toussaint, a Belgian political economist and president of the Committee for the Abolition of Third World Debt, has a longer more substantial review of the book, in which he shares the following table from Piketty.
The unequal ownership of capital in Europe and the United States
|Share of different groups in the total amount of wealth||Europe 2010||United States 2010|
|(richest 1% alone)||25%||35%|
|The poorest 50%||5%||5%|
One thing that jumps out of this work is that a serious wealth tax is capable of generating substantial funds that could be used to support public services.
Piketty’s work also suggests that embracing a system based on maximizing the returns to private owners of capital is a mistake for the great majority of working people.
A recent study by the investment bank Credit Suisse provides more evidence for this conclusion. As Michael Burke explains,
the study . . . shows that long-term growth rates of GDP in selected industrialized economies are negatively correlated with financial returns to shareholders.
That is, the best returns for shareholders are from countries where GDP growth has been slowest, and vice versa. Where growth has been strongest, shareholder returns are weakest. . . .
The negative correlation does not prove negative causality. But it does support the theory which suggests that the interests of shareholders are contrary to the interests of economic growth and the well-being of the population.
Here is a chart taken from the study which highlights the negative correlation found by the Credit Suisse researchers.
All this information is worth keeping in mind the next time business and political leaders tell us that the key to our well-being is boosting business confidence, the market, or private returns on investment.