The Tyler Group: French economist

Thomas Pikettys grim view of the wealth

gap


French economist Thomas Pikettys new book challenges the belief that free markets will
automatically produce extensive prosperity.

Thomas Piketty, the French economist who was one of those who popularised the idea of a
privileged 1 per cent, rings this alarm in his new book: The US economy has started to
decay according to the ways of aristocratic Europe of the 19th century. Diligent work will
be of less importance while inherited wealth will become more desirable. The wealth of the
few will undermine the foundations of democracy.

Capital in the 21st Century has captured great interest as US political leaders argue
whether increasing income gap is an issue that needs action.

The 700-page volume has been celebrated as one of the most important economic opuses
in recent years, citing data from the past three hundred year to prove that the wealthy are
hoarding more of an economys income than before and that prevailing regulations will
mean that it will only grow.

People who support this idea cite the book as evidence that the wealth disparity must be
reduced. Critics, however, reject the idea as being that of a left-wing ideologue.

Last week, Pikettys book climbed to the top of Amazons bestsellers.

Unearthing information from 300 years of economic data, tax records, 19th-century novels
and modern TV programmes, Piketty questions the assumption that free markets
automatically produce extensive wealth.

On the contrary, he believes that the rich will become richer and everyone else will have
almost zero chance of catching up.

Investments in bonds, stocks, land and buildings the capital referred to in his title
invariably grow more rapidly than the incomes of the masses. By its fundamental nature,
capitalism generates inequality and can undermine the stability of democracies, Piketty
argues.

Economists used to view the thirty years after WW II as evidence of capitalisms capacity to
create and distribute wealth. Piketty argues that the era was a historical eccentricity
produced by two world wars and the Great Depression decimating the wealth of the old
establishment. Piketty believes higher taxes on wealth can control the spread of inequality.
Moreover, he thinks that college education for more people will sharpen their skills
through and could help reduce the effect of inegalitarian spiral.


During an interview with The Associated Press, Piketty, 42, talked on the dangerous
illusion of the meritocracy, and his suggested solutions for controlling inequality.


Here is an edited summary of the interview:

What is the effect of a growing wealth disparity?

The major concern for me is actually the efficient functioning of our democratic
institutions. It simply does not work well with an excessive form of oligarchy where 90 per
cent of the wealth is owned by an extremely small class of people. The democratic model
has always been seen to function within a moderate level of inequality. I believe one main
reason why electoral democracy thrived in 19th-century America better than 19th-century
Europe is because you had greater distribution of wealth in America.

Your research reveals that profits on investments capital increase more rapidly
than wages and economic growth. But many people are of the persuasion that
greater inequality can help generate more growth.

When inequality reaches an extreme, it completely stifles growth. There was extreme
inequality in the 19th-century and growth was markedly minimal. Because the rate of
growth of productivity was only 1 to 1.5 per cent annually [in 19th-century Europe], and it
was below the rate of return to wealth, which averaged from 4 to 5 per cent, leading to
huge inequality of wealth. We need to realize that innovation and growth alone are not
sufficient to reduce the effects of the wealth gap.


Are we on the path back to the Gilded Age?

No one can really be sure. The main point of the book is that we are inside a pilotless plane.
We must find a natural procedure or method that can assure us that we will find ourselves
landing on a safe, acceptable level.


Would the impact of wealth inequality matter if wages for the middle class were still
increasing?

There are two great forces that are pressing on the middle class from both sides. One is the
increase of the compensation for the highest executives, which means that the share of
wages going to the middle and lower class is diminishing. That has been particularly true in
the United States. The other force prevailing is that the share of a nations income going to
the workers tends to decrease when the share going to capital is growing.


You consider meritocracy a dangerous illusion. That runs opposite the view of
many people who believe the US economy works.

Our modern democratic model is founded on the assumption that inequalities will be due
to merit more than pure luck or inheritance. In some cases, meritocratic arguments are
utilized by the winners of the game to justify the value of unhampered inequality. I do not
believe we can find any sound justification for giving people more than 100 times the
regular wage in order to produce highly-efficient managers.


People in Europe and the US have a nostalgic view of the post-WWII era. We
experienced expanding national prosperity that benefited the majority of people.
Can we still get back to that?

It was in reality a transitory period because of the very exceptional conditions. Growth was
considerably high, partly because of post-war reconstruction and population growth, as a
rule, had been extremely large in the 20th century. This is certainly not an option for
policymakers. The other main reason I think we should not be nostalgic is that one of the
reasons the inequalities were lower in the 1950s and 1960s is that the world wars
decimated some of the inherited capital that was the cause of the previous inequality.


Why do you think a wealth tax would dampen the destabilising effect of growing
inequality?

Instead of imposing a flat tax on real estate assets, you would impose a progressive tax on
personal net worth. You would minimize the property tax for those who are striving to
begin creating wealth.


Every American politician believes education is the solution to inequality and
immobility. Can more education provide the answer?

Ultimately, education is the most potent levelling force in terms of wealth distribution.
However, it is not sufficient. We need education as well as taxation.


How did watching US television programmes such as House, Bones, The West Wing
and Damages assist you in writing this book?

They contain stories that show us how you can get rich, get poor, and so on. The heroes of
the shows are mostly holders of PhDs. They comprise the model of skill-based inequality
[The TV series are] like novels in the 19th-century. They can portray in an extreme manner
a type of deep justification or profound satire of the structure of inequality in our societies.


Critics accuse you being motivated by a political goal.

This book contains historical facts. It is up to people what they want to do with it. It has
four parts and the last part deals with policy implications For me, this is one of the least
crucial parts. If you do not agree with these 100 pages, that is perfectly fine with me. The
main objective of the first 500 pages is to assist readers and decision-makers to come up
with their own conclusions.

Prior to the production and publication of the research findings done by Piketty and his
fellow researchers, economists depended on less precise parameters of inequality.

For instance, there is the Gini index, from Corrado Gini, an Italian statistician who initiated
the concept in 1912.

The index measures income distribution using a scale of 0 to 1. Level zero signifies a
condition where everyone has the same income. On the other extreme, Level 1 means that
all income goes to a single person.

The Census Bureau declares the United States possesses a Gini index of 0.48, up from 0.40
in 1967. But without the tax data introduced by Piketty and others, it would be more
difficult to assess what that change connotes.

At face-value, the minimal growth hides exactly how much money has accrued at the top
0.01 per cent.