French Economist Thomas Piketty, author of the best-selling “Capital in the Twenty-First Century,” came to Washington DC today for a series of discussions with other economists and the public. The book itself, whose author has made enormous contributions over the past 15 years analyzing the distribution of income and wealth, is very rich in historical and data-driven economic analysis and has been widely reviewed. It could very well become one of the most influential books on economics in decades. This is not a review but rather a brief commentary on some of the extraordinarily interesting discussion – not often seen in “This Town” – that Piketty’s visit inspired.
One of Piketty’s main concerns is the increasing concentration of wealth that has characterized the past few decades, in the United States and other developed economies. He describes this phenomenon in great detail but also abstractly and usefully as r > g; in other words, the more that the rate of return on capital exceeds the rate of growth of the economy, the more wealth is concentrated at the top. Piketty noted a number of times, in response to questions, that he sees – as do many Americans – the main problem with inequality reaching what he called “extreme” levels is that it makes it “impossible to have proper functioning of democratic institutions.” His principal proposal for reversing this trend is a progressive tax on wealth.
At the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, my colleague Dean Baker strongly agreed with Piketty’s proposal to tax wealth, but argued for a “Plan B,” among other reasons because Plan A may prove to be politically difficult or impossible for some time to come. Baker’s proposals were interesting in that they were designed to lower “r” while at the same time raising “g.” He went through several sectors of the economy where there are large “economic rents” that can be captured through taxation or other reforms, while at the same time increasing the overall efficiency of the economy and therefore the growth of output. The financial sector is obviously target number one, where even a small financial transactions tax could capture tens of billions of dollars of annual revenue while reducing wasteful and even harmful trading (Baker referred to Michael Lewis’ “Flash Boys” as a prime example). Then there are patents, where we in the U.S. pay $380 billion per year for drugs whose price is composed of something like 80 or 90 percent monopoly rents – about 2 percent of GDP lifted from the non-super-rich; plus the impediments to the advancement of medical science and actual harm to human health, as pharmaceutical companies hide their data, lie about their results, and promote the use of patented drugs for inappropriate purposes. (As one critic of the pharmaceutical industry put it, there are a lot more healthy people than sick people out there, so if you are a pharmaceutical company with a patented drug, you want to get some of those healthy people into your market).
Then there are the “too-big-to-fail subsidies” which the IMF recently estimated as 20 percent of after-tax corporate profits in the euro zone. Baker also briefly discussed anti-trust policy, corporate access to resources (such as airplane space at airports) that could be auctioned, and privatization of services such as health care that are more efficiently delivered in the public sector as examples of places where “r” could be reduced as “g” is increased.
Piketty’s response was interesting: first, he agreed with Baker that all these policy recommendations would be good for the world. But, looking at the history of returns to capital, he argued that these are not greatly affected by the overall state of competitiveness of the economy. I do not find this convincing. As Piketty well knows and even demonstrates, the mechanisms, dynamics, and legal basis of returns to capital evolve over time, as do the feasibility of alternatives to any set of current arrangements. When we have 40 percent of corporate profits going to financial sector, and “intellectual property” capturing a growing share of returns at the same time that technology is increasingly making much of consumption available at zero marginal cost, there is a lot of room for slowing or reversing the upward redistribution of income by going after rents. As Baker noted, we are talking about something like 30 -50 percent of after tax corporate profits – a big chunk of “r” and so much the more important if it increases g.
All this is not to detract from Piketty’s great work or his recommendation of a progressive tax on net wealth, which as he pointed out could even reduce the property tax burden on middle-class homeowners, who on average are paying property taxes on homes where their wealth (net of mortgage debt) is very small. Piketty also easily rebutted the arguments of conservative economist Kevin Hassett, who asserted that the Gini coefficient on consumption had not changed all that much, and that the increase in transfer payments had compensated for the upward redistribution of income in recent decades. As Piketty pointed out, Hassett’s data on income distribution, which is self-reported, misses a lot of the income of the highest income groups; even the tax data that Piketty uses is really a lower bound, and Hassett’s is far below that. A rare laugh erupted in the audience when Piketty noted, in French-accented English, that the consumption data of the upper income groups did not include “their consumption of politicians.” Which is of course Piketty’s main reason for focusing so much on wealth in his book. And Baker added that most of the income transfers in the U.S. come from the middle classes, (e.g. Social Security and Medicare) not from the rich.
A note on the morning discussion at the Economic Policy Institute, sponsored by the new Washington Center for Equitable Growth: Nobel prize winning economist Robert Solow (full disclosure: a CEPR advisory board member) was on the panel and made a point of what he called “the endogeneity of (economic) growth. “ In other words, that it is not necessarily determined by factors outside the economy itself. Now, one of the great things about Piketty’s book is that it shows, as he noted today, that there is nothing that would prevent or adjust the divergence between r and g over time that concentrates wealth; we are not looking at a market failure here. However, economic policy can be a very important variable for a long period of time. For example, there was a huge slowdown in per-capita GDP growth in the vast majority of low-and-middle-income countries between 1980-2000, as compared to the prior twenty years, especially if the measure is taken by comparing countries starting at similar levels of per capita GDP in 1960 and 1980. In the 2000’s there was a rebound, to a large extent because one of the few countries that pursued a non-neoliberal policy path – China – became the world’s largest economy and helped pull many developing countries up. In the high income world, the European economy has been drastically (negatively) affected since 2009 by harmful macroeconomic policy, led by the Troika (the European Central Bank, European Commission, and IMF).
And this is looking at per capita GDP, which is what matters for living standards but – as Piketty emphasizes – the slowdown in population growth lowers g, and therefore increases the concentration of wealth. Here is my last disagreement with Piketty: he described the slowdown in population growth as “frightening” because of its impact on wealth distribution. But it is also – especially in the high-income countries -- one of the most important changes that is necessary to avert global climate disaster. And it also has a positive effect on living standards and income distribution: all other things equal, lower population (and labor force) growth increases the bargaining power of labor, and in any particular country, it increases the potential for everyone to have higher living standards with given levels of productivity growth.
All that said, Piketty’s book is a masterpiece and everyone should read it.