Robert Samuelson April 20, 2014

Thomas Piketty has taken America’s liberal establishment by storm.Piketty is a French economist who has written a lengthy (577 pages)study, “Capital in the Twenty-First Century,” intended to provide a powerful intellectual justification for attacking the super-rich. Surprisingly, “Capital” hit No. 16 on the New York Times’ best-seller list for hardcover nonfiction books — a considerable feat for an academic treatise that, though clearly written, is no page-turner.

Agree or disagree with his views, Piketty’s project represents aprodigious research achievement. With other economists, he hasconstructed statistics tracing the distribution of income and wealth for many major countries back to the 1800s. The most obvious conclusionfrom the data is common-sensical: Even relatively egalitarian societieshave huge disparities in economic fortune.

Piketty presentsScandinavian countries in the 1970s and ’80s as examples of “lowinequality.” Still, the richest 10 percent commanded about 25 percent of national income and the poorest 50 percent got only 30 percent; the“middle class” — the 40 percent below the top 10 percent — received 45percent of income. These days, the distribution in the United States isfar more unequal. In 2010, the top 10 percent received about 50 percentof national income, and the bottom 50 percent got 20 percent; the middle 40 percent got 30 percent. European nations are typically in between,with the top 10 percent taking 35 percent of income.

What Pikettyalso shows is that in the last 30 years, inequality has exploded almosteverywhere, especially in the United States and the United Kingdom. This finding disproves the so-called Kuznets Curve. In 1954, Americaneconomist Simon Kuznets (1901-85) argued that income inequality would fall as societies modernized.Workers would move from low-paid farm jobs to better-paid industrialjobs. Gaps would narrow.

This seemed to have happened in theUnited States. From the 1920s to the 1950s, the income share of therichest 10 percent fell from around 50 percent to about 35 percent. Butnow it’s rebounded to the late 1920s’ level. This stunning fact,published previously in academic journals, helped make inequality a bigpolitical issue. (The U.S. figures were jointly developed by Piketty and economist Emmanuel Saez of the University of California at Berkeley.Note that these incomes are before taxes and government transfers, suchas Social Security and unemployment insurance. After-tax andafter-transfer incomes, including fringe benefits, are less unequal.)

There’s no consensus as to why economic inequality has increased. Someeconomists emphasize big rewards for workers with high skill levels(investment bankers, doctors, lawyers, business managers) and specialtalents (actors, athletes). Piketty argues that an American class of“supermanagers” (top corporate officials) has arisen, with their pay set artificially high by friendly compensation committees composed of other top corporate officers. The arrangement reeks of self-dealing, he says.

All income ultimately derives from either labor or capital.Labor includes wages, salaries and fringe benefits; capital covers thereturns from stocks, bonds, real estate, businesses and other assets.Piketty fears that capital will gain relentlessly at the expense oflabor. It’s simple arithmetic, he argues. Historical returns on capital, after inflation, have averaged 4 percent to 5 percent annually.Meanwhile, the world economy’s total income — slowed by small population and productivity gains — will grow only 1 percent to 3 percentannually, he believes. If capital income grows faster than total income, its share must increase.

Worse, he says, capital income is moreconcentrated than labor income. In the United States, the top 10 percent own about 70 percent of the capital, mainly stocks, bonds and realestate. To prevent inherited fortunes from dominating advancedsocieties, Piketty would raise the top income tax rate to roughly 80percent on incomes above $500,000 or $1 million; he would also taxaccumulated wealth.

Though Piketty is an economist, his book isessentially a work of political science. He objects to extreme economicinequality because it offends democracy: Too much power is conferred ontoo few. His economic analysis sometimes seems skewed to fit hispolitical agenda.

Take his tax increases. He doubts that theywould hurt economic growth. This seems questionable. Incentives mustmatter, at least slightly. Or consider his predicted slowdown in theworld economy. This seems possible, but if it happens, capital ownerswould likely suffer lower returns. As for the power of the super-rich,they hardly control most democracies. In the United States, where about 70 percent of federal spending goes to the poor and middle class, the richest 1 percent pay nearly a quarter of federal taxes.

Still, the present concentration of income and wealthinstinctively feels excessive. It understandably stirs resentment. We’dbe better off if the rich were less so and other Americans were more so. But it’s doubtful that political action to force this transformationwould be similarly beneficial. Class warfare is bruising; today, itwould degrade the confidence needed for a stronger recovery.

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