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No Brasil, um Assessor de 3º nível de um Deputado, que também tem esse título para justificar seus ganhos, mas que não passa de um "aspone" ou mero estafeta de correspondências, ganha mais que um Cientista-pesquisador da Fundação Instituto Oswaldo Cruz, com muitos anos de formado, que dedica o seu tempo e a sua vida, buscando curas e vacinas para salvar vidas.

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 Sem teto nos Estados Unidos 

A grande novidade no debate sobre a desigualdade na semana que passou foi a publicação do monumental livro de Thomas Piketty a respeito do tema,  “O Capital no Século XXI”. Eu falei a respeito do livro na minha resenha para o The Washington Monthly; você também pode ler três resenhas no The American Prospect, assim como a crítica de Jean Baker no Huffignton Post. Paul Krugman discute alguns dos pontos técnicos do livro aqui.

 

16/03/2014 - Carta Maior 

Em defesa da imaginação política utópica

A grande novidade no debate sobre a desigualdade é a publicação do monumental livro de Thomas Piketty, O Capital no Século XXI.


Este livro está fazendo muito barulho, por excelentes razões. Comecemos com seu aparato técnico. Piketty, economista francês, reuniu uma base de dados formidável sobre riqueza e renda de várias nações que, em alguns casos, chega a antes do Século XIX. Isso lhe permitiu conduzir uma análise muito mais rigorosa e sistemática da história da desigualdade do que a geração anterior de pesquisadores.

O que também é estimulante no livro é a sua ambição e seriedade moral. Que se lhe reconheça o mérito: este cara escreveu nada menos um livro de 700 páginas, nas quais oferece uma grande teoria da dinâmica da desigualdade e da acumulação de capital, historicamente lastreada. Ao fazê-lo, ele recuperou um projeto que a maioria dos outros economistas abandonou há muito. Desde a “Curva de Kuznets”, de Simon Kuznets, nos anos 50 do século passado, não se tem um economista mainstream com uma investigação tão completa sobre a desigualdade.

Certamente, Piketty é mais responsável do que qualquer economista vivo pelo retorno da questão da distribuição de volta ao domínio que pertence: o centro da análise econômica. Esta é a pesquisa de Piketty e de seus colegas, como Emmanuel Saez, que primeiro demonstrou a profundidade e o alcance do problema da desigualdade econômica. Eles também identificaram o fato crucial de que a desigualdade em espiral é dirigida, sobretudo, por 1% dos mais ricos, na distribuição de renda. De acordo com os dados mais recentes de Piketty, nos EUA, os 10%  mais ricos recebiam mais de um quinto de toda a riqueza. A desigualdade de renda neste país alcançou o maior nível dos últimos 100 anos.

É o caso lembrar que, durante a mesma década, enquanto a desigualdade continuava a aumentar, o livro econômico best-seller, de autoria de um jovem e aclamado economista premiado, orgulhosamente se dedicava a tópicos tão espetaculares e chamativos quanto trapaceiros, típicos de lutadores de sumô. Bem, este é o professor de economia estadunidense que se tem disponível por aqui.

Este O Capital trata de um tema cuja urgência é parte do que o torna tão bem vindo. E a lucidez incomum da escrita de Piketty torna-o tão acessível ao leitor externo – sem o jargão acadêmico horroroso, impenetrável – é especialmente admirável.

O mais impressionante de tudo, no entanto, é a poderosa análise de Piketty. O argumento do livro, em resumo, é este: sabe o período de declínio da desigualdade que experimentamos ao longo do século XX, que alguns de nós consideraram que duraria para sempre? Bem, ocorre que esse período foi, na verdade, uma exceção maior na história, e não uma norma.

Foi uma exceção porque a Grande Depressão e as duas guerras mundiais irromperam a ordem natural das coisas, criaram a necessidade do aumento de tributos, destruíram (na Europa) muito do capital físico, e deram espaço para a criação e o equilíbrio de um mercado de trabalho e de instituições políticas democráticas e, na deliciosa frase cunhada por John Maynard Keynes, “eutanasiaram a classe rentista”. Isso levou a um período estendido em que a taxa de crescimento econômico excedeu a de retorno de capital. Mas esse período não existe mais e estamos retornando rapidamente aos níveis de desigualdade que não eram vistos desde o século XIX. Dada a improbabilidade de altas taxas de crescimento econômico voltarem, estamos condenados a uma desigualdade em espiral – a não ser que façamos algo a respeito.

O “algo” que devemos fazer, de acordo com Piketty, está ligado à taxação da riqueza global, uma ideia que ele admite ser “utópica”. Ele também tem a ver com um aumento acentuado nas taxas marginais de imposto de renda dos que ganham muito, que eu discuto aqui.

Alguns liberais conhecidos que leram o livro não estão apaixonados por ele. Eles o acham muito determinista, acreditam que a visão de Piketty é sombria demais. Mas, a não ser que você acredite que o crescimento às taxas antigas voltará – algo que até economistas tradicionais como Larry Summers vem pondo, afinal, em dúvida –, o argumento de Piketty é difícil de refutar.

Também é verdade que há aspectos importantes da desigualdade econômica que esse livro não aborda. Se você quiser entender a política econômica da desigualdade – como nosso sistema político permitiu a ascensão dos 1% - eu recomendo vivamente o livro de Jacob Hacker e Paul Pierson: Winner Take-All Politics [algo como: o vencedor leva vantagem em todas as políticas]. E se você quiser entender o efeito da desigualdade em nossos corpos e almas, então o livro de Göran Thersbon, The Killing Fields of Inequality [Os Campos Mortais da Desigualdade] é o livro para você.

Piketty vai além ao traçar a história da desigualdade econômica e ao analisar suas causas.Nesta resenha, Dean Baker tem um ponto excelente: que os impostos sobre a riqueza e a renda não são a única maneira de golpear os 1%. Ele menciona as correções ou ajustes propiciados por governos, como o enfraquecimento da legislação de patentes, em detrimento do interesse das megacorporações, a regulamentação dos monopólios de telecomunicação e rede a cabo e a instituição de tributos sobre transações financeiras, tudo isso também poderia ajudar a pôr rédeas na elite rentista. Essas reformas certamente ajudariam, e seriam muitíssimo mais realistas, do ponto de vista político, do que a taxação sobre a riqueza global, de Piketty. Mas nenhuma dessas medidas tem o potencial transformador daquele proposto por Piketty.

De acordo com ele, se ações políticas razoavelmente dramáticas não forem tomadas para reverter a desigualdade, teremos um sombrio e desigual futuro. Ele torna isso claro. As intervenções políticas que ele julga necessárias – uma taxa sobre a riqueza global, taxas marginais de imposto de renda que excedam 80% - vem sendo desprezadas por alguns. “É muito impraticável!”. Mas, como Adolph Reed e outros têm argumentado ultimamente, já passou há muito o tempo da esquerda americana começar a abraçar a utopia. Se não o fizermos, podemos bem estar nos condenando a um destino distópico.

Tradução: Louise Antônia León

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March/ April/ May 2014Taking on the Heiristocracy

History shows that growth alone won’t stop vast economic inequality.

 

By Kathleen Geier

Capital in the Twenty-first Century
by Thomas Piketty
translated by Arthur Goldhammer
Belknap Press, 696 pp.

In his annual address, the president of the American Economic Association, Irving Fisher, sounded the alarm about the issue he described as “the great peril today”—the “striking inequality of capital,” which, he argued, was “perverting” American democracy. It was “distressing,” he said, that wages were “actually decreasing while profits have been increasing.” “Something like two-thirds of our people have no capital,” said Fisher, while “the major part of our capital is owned by less than 2 percent of the population.” Moreover, “half of our national income is received by one-fourth of our population.”

In the year 2014, the theme of Irving Fisher’s address is resonant—which is why you may be surprised to learn that he gave it in 1919. Fisher, moreover, was a mainstream economist, very much in the neoclassical tradition. Milton Friedman called him “the greatest economist the United States has ever produced.” Today, the overriding concern of most mainstream American economists is what it has been for decades: economic efficiency. Questions of equity, on the other hand, have fallen by the wayside. But as Fisher’s address vividly demonstrates, concerns about distribution were once seen as vitally important.

In his important new book, Capital in the Twenty-first Century, French economist Thomas Piketty asserts that one of his chief goals is “putting the distributional question back at the heart of economic analysis.” As he notes, today the concentration of wealth has soared to levels that have not been seen in over a century. In recent years, the issue of economic inequality has moved out of the seminar rooms to become an issue of broad public concern. We’ve heard it in the rallying cry of the Occupy movement—“We are the 99 percent!”—and in Pope Francis’s thundering denunciations of capitalist excess and “trickle-down” economics. We’ve seen it in the surprising electoral success of economic populists like Elizabeth Warren and Bill de Blasio. Late last year, President Barack Obama gave a speech devoted to the subject, and the Democratic Party is pushing economic inequality as its major campaign theme for the 2014 midterm elections.

Inequality is on the political map, all right, and without question, the economist most responsible for putting it there is Thomas Piketty. Beginning in 2003, Piketty, along with his colleague and frequent coauthor Emmanuel Saez, published a series of ground-breaking studies documenting the dizzying rise of income inequality in the United States. Piketty’s innovation in this empirical work was his use of tax returns, rather than household surveys, to measure inequality. Tax returns give a more accurate picture of inequality than household surveys, which frequently fail to capture what is going on at the top of the income distribution. Partly this is because of nonresponse bias (rich people are far less likely to participate in such surveys) and partly it is due to the practice of “top-coding,” which caps the reported top incomes at a maximum value and thus prevents the exact amounts from being disclosed.

Piketty and Saez have demonstrated that while groups at the top of the income distribution have increasingly reaped disproportionately large economic rewards, in recent decades it is those with incomes at the very top—the top 1 percent and, even more, the top 0.1 percent—where the gains have been truly spectacular. And when Piketty and his colleagues examined inequality in other rich countries, the pattern held: since the 1970s, inequality has risen sharply in every developed economy, with the gains concentrated among the richest 1 percent. Saez’s most recent report found that in 2012, the top 1 percent of U.S. earners took in over a fifth of all income—among the highest levels ever recorded since the enactment of the income tax in 1913.

In Capital in the Twenty-first Century, Piketty sums up his research, tracing the history and pattern of economic inequality across a number of countries from the eighteenth century to the present, analyzing its causes, and evaluating some policy fixes. Spanning nearly 700 densely packed pages, it’s a big book in more than one sense of the word. Clearly written, ambitious in scope, rooted in economics but drawing on insights from related fields like history and sociology, Piketty’s Capital resembles nothing so much as an old-fashioned work of political economy by the likes of Adam Smith, David Ricardo, Karl Marx, or John Maynard Keynes. But what is particularly exciting about this book is that, due to advances in technology, Piketty is able to draw on data that not only spans a substantially longer historical time frame, but is also necessarily more complete and consistent than the records earlier theorists were forced to rely on. As a result, his analysis is significantly more comprehensive than those of his predecessors—and easily as persuasive.

Another of Piketty’s strengths is his enthusiastically interdisciplinary approach. One of the pleasures of this book is the way Piketty draws on sources as varied as the classic economic theorists, the great nineteenth-century social novelists like Jane Austen and Honoré de Balzac, recent research by historians and sociologists, and popular movies and TV shows like Titanic and Mad Men. He prefers the richness of these sources to the sterile mathematical models that are prevalent in contemporary academic work in economics. Indeed, he is scathing about much contemporary work in the economics field, condemning its “childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences.”

Capital is a consistently engrossing read, encompassing topics including the stunning comeback that inherited wealth has made in today’s advanced economies, the dubiousness of the economic theory that a worker’s wage is equal to his or her marginal productivity, the moral insidiousness of meritocratic justifications of inequality, and more. But the book’s major strength lies in Piketty’s ability to see the big picture. His original and rigorously well-documented insights into the deep structures of capitalism show us how the dynamics of capital accumulation have played out historically over the past three centuries, and how they’re likely to develop in the century to come. From his analysis he’s derived several important lessons, none of them particularly comforting.

The first of these is that, contrary to widely held economic theories, there is no “natural” tendency of inequality to wane in advanced capitalist societies. In the 1950s, economist Simon Kuznets famously argued that in advanced economies, inequality looks like an inverted U curve, with inequality increasing during the early stages of industrialization, then decreasing as economic development spurs growth that benefits all. But as Piketty demonstrates, Kuznets’s inequality theory was based on fatally incomplete data—he only dealt with one country (the United States), from the years 1913 to 1948.

Economic inequality in the U.S. and Europe experienced a precipitous decline between World War I and World War II, but the causes were hardly natural. Inequality fell due to a series of shocks that included the physical destruction in Europe left by two massive wars, the bankruptcies of the Great Depression, and, he says, “above all” to “new public policies”—policies that included rent control, nationalizations, steeply progressive income taxes, and “the inflation-induced euthanasia of the rentier class that lived on public debt.”

The decline in inequality that began between the wars and continued for decades afterward was a historical anomaly that is unlikely to repeat itself—something that many American liberals, still mired in New Deal and Great Society nostalgia, need to hear. Left to its own devices, capital begets capital, wealth becomes increasingly concentrated, and inequality spirals. Piketty warns us that “[t]he consequences for the long-term dynamics of wealth distribution are potentially terrifying, especially when one adds that the return on capital varies directly with the size of the initial stake, and that the divergence in the wealth distribution is occurring on a global scale.”

Piketty’s second major lesson is that, contrary to the fervent hopes of advocates ranging from supply-side economics’ true believers to many left-leaning economists, growth will not save us. As Piketty explains, economic growth does indeed tend to decrease economic inequality. Demographic growth, which is one component of economic growth, tends to decrease the influence of inherited wealth. For example, if families are larger, the average inheritance per child will be smaller, everything else being equal. In addition, high-growth economies tend to increase social mobility, because they provide greater opportunities for those whose parents weren’t part of the old economic elite. During the late 1990s—the last period of sustained, relatively high growth we saw in the U.S.—workers experienced a nearly full employment economy, which increased wages and caused inequality to decline, albeit only slightly and temporarily. But Piketty argues that the sustained, high rates of economic growth we saw in advanced economies in the twentieth century are very likely a thing of the past. He emphasizes that “there is no historical example of a country at the world technological frontier whose [inflation-adjusted] growth in per capita output exceeded 1.5 percent over a lengthy period of time” (one hundred years or so).

Piketty’s central insight is that inequality is an increasing function of the gap between r, the net rate of return on capital, and g, the rate of economic growth. Throughout most of history, the rate of return on capital has been durably and significantly higher than the rate of economic growth, and this trend is likely to continue, particularly given the likelihood of slower growth rates in advanced economies. The ratio of capital to income—as good a measure as any of the influence of wealth in society—peaked at about 700 percent in Europe in the nineteenth century, then plummeted to between 200 and 300 percent in the 1950s and ’60s. Currently it hovers around 600 percent and shows every sign of returning to its nineteenth-century peak. Indeed, plugging highly plausible assumptions into Piketty’s model yields predictions that Europe and America will experience rates of inequality and wealth concentration that will not only match but exceed their nineteenth-century peaks.

This dystopic scenario is deeply disturbing, but it doesn’t have to be our destiny. Piketty notes that “the history of income and wealth is always deeply political, chaotic, and unpredictable.” This brings us to Piketty’s third major lesson, which is that, happily, there is, in theory at least, a solution to the problem of soaring economic inequality, and a surprisingly simple one at that: taxes. Specifically, Piketty advocates a steeply progressive income tax and a global tax on wealth. He estimates that the optimal top marginal income tax rate is approximately 80 percent. Such a rate, he says, “not only would not reduce the growth of the U.S. economy but would in fact distribute the fruits of growth more widely while imposing reasonable limits on economically useless (or even harmful) behavior.”

Piketty’s proposed global tax on wealth would be progressive, annual, and applicable to all forms of capital, from real estate to financial and business assets. He advocates that the tax be based on bank information that is automatically shared, a move that would enable governments to manage banking crises more efficiently and would also promote financial transparency. Even a modest wealth tax could bring in significant revenue, and it would minimize the “substantial risk that the top centile’s share of global wealth will continue to grow indefinitely.”

Piketty admits that such a tax is “utopian.” International cooperation would be a formidable challenge, particularly given our globalized banking system with its vast panoply of seductive tax havens for the 1 percent. But precisely since our economy is now global, solutions to economic problems need to be global as well. More fundamentally, Piketty lacks a theory of politics that tells a persuasive story about how such changes might come about in the real world. In the twentieth century, it took the economic shocks of two world wars and the Great Depression to compel governments to adopt aggressively redistributionist tax policies. Absent such traumas, and given the declining power of institutions like labor unions that built support for such measures, what would make governments adopt such far-reaching reforms today?

Even in social-democratic Europe, many governments, including the party that Piketty supports, the French Socialists, are strongly supporting lower taxes and fiscal austerity. In the U.S., while Democrats have adopted economic inequality as a major campaign theme, in substance their anti-inequality political agenda is, sadly, less than meets the eye. It appears to consist mainly of supporting a long-overdue increase in the minimum wage, a modest expansion of food stamp benefits, and, perhaps, tax cuts for lower-middle-class families. Yes, last year Congress implemented far tougher financial reforms than expected. But among most mainstream Democrats, there appears to be little appetite for enacting policies that would seriously upset Wall Street or challenge the entrenched power of the 1 percent. No one is talking about returning to an 80 percent marginal tax rate.

So are we doomed to a dystopic future after all—a Hunger Games-like society where a tiny but powerful elite lives in luxury and splendor while the masses toil and starve? Hardly. As Piketty argues, history suggests that the levels of inequality we are approaching tend to be politically unsustainable. As Piketty notes, there is an odd yet widely accepted idea that the U.S. is significantly more inegalitarian than Europe because we like it this way. Certainly, many U.S. conservatives appear highly invested in persuading their fellow Americans—and perhaps themselves—that this is the case. But recent opinion polls tell a rather different story.

Moreover, as Piketty rightly emphasizes, equality is our American birthright. We Americans are, after all, a proudly democratic people whose signature achievement—ridding ourselves of kings, queens, and a titled aristocracy—marked a revolutionary step forward in human progress. In the early years of the American republic, the U.S. truly was a more egalitarian society than Europe—
Piketty’s historical data confirms this. During the Gilded Age of the late nineteenth century, when economic inequality soared and wealthy elites began to exercise unprecedented power over our society and our political system, many Americans—even free market economists like Irving Fisher—expressed alarm.

The inequality crisis America faced in the early twentieth century was a profoundly serious one, but in the end we rose to the challenge. After all, as Piketty points out, America is the country that, after World War I, literally invented “confiscatory” taxes—the type of progressive tax that is designed not so much to yield revenue but to “put an end to” large incomes and estates, because they are regarded as “socially unacceptable and economically unproductive.” Even an ardent apostle for capitalism like Fisher felt that the best solution to the early-twentieth-century inequality problem was a steeply progressive tax on the largest estates—with a rate that could climb as high as 100 percent for an estate that was more than three generations old. America’s twenty-first-century inequality crisis is, if anything, even more daunting and complex than the one we experienced a century ago. But as Piketty reminds us, the solutions to this problem are political, and they lie within our grasp. Should Americans choose to deploy those solutions, not only would we be doing the right thing, we’d be living up to our deepest traditions and most cherished ideals.

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Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee

Piketty’s Triumph

Three expert takes on Capital in the Twenty-First Century, French economist Thomas Piketty's data-driven magnum opus on inequality.

Jacob Hacker, Paul Pierson, Heather Boushey, Branko Milanovic

In the 1990s, two young French economists then affiliated with the Massachusetts Institute of Technology, Thomas Piketty and Emmanuel Saez, began the first rigorous effort to gather facts on income inequality in developed countries going back decades. In the wake of the 2007 financial crash, fundamental questions about the economy that had long been ignored again garnered attention. Piketty and Saez’s research stood ready with data showing that elites in developed countries had, in recent years, grown far wealthier relative to the general population than most economists had suspected. By the past decade, according to Piketty and Saez, inequality had returned to levels nearing those of the early 20th century.

Last fall, Piketty published his magnum opus, Capital in the Twenty-First Century, in France. The book seeks to model the history, recent trends, and back-to-the-19th-century future of capitalism. The American Prospect asked experts and scholars in the field of inequality to weigh in on Piketty’s argument and potential impact for policymaking on our shores.

Jacob S. Hacker, director of the Institution for Social and Policy Studies and Stanley B. Resor Professor of Political Science at Yale, and Paul Pierson, the John Gross Professor of Political Science at the University of California at Berkeley, are the co-authors most recently of Winner-Take-All Politics: How Washington Made the Rich Richer and Turned Its Back on the Middle Class. Heather Boushey is the executive director and chief economist at the Washington Center for Equitable Growth. Branko Milanovic is a visiting presidential professor at the Graduate Center, City University of New York, a visiting senior scholar at the Luxembourg Income Study Center, and the author of The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality.

A Tocqueville for Today

By Jacob S. Hacker and Paul Pierson

When Alexis de Tocqueville visited America in the early 1830s, the aspect of the new republic that most stimulated him was its remarkable social equality. “America, then, exhibits in her social state an extraordinary phenomenon,” Tocqueville marveled. “Men are there seen on a greater equality in point of fortune and intellect … than in any other country of the world, or in any age of which history has preserved the remembrance.”


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To Tocqueville, who largely ignored the grim exception of the South, America’s progress toward greater equality was inevitable, the expansion of its democratic spirit unstoppable. Europe, he believed, would soon follow America’s lead. He was right—sort of. Democracy was on the rise, but so too was inequality. Only with the 20th century’s Great Depression, two terrible wars, and the creation of the modern welfare state did concentrations of economic advantage in rich democracies start to dissipate and the fruits of rapid growth begin to accrue generously to ordinary workers.

Now another Frenchman with a panoramic vista—and far more precise evidence—wants us to think anew about the progress of equality and democracy. Though an heir to Tocqueville’s tradition of analytic history, Thomas Piketty has a message that could not be more different: Unless we act, inequality will grow much worse, eventually making a mockery of our democratic institutions. With wealth more and more concentrated, countries racing to cut taxes on capital, and inheritance coming to rival entrepreneurship as a source of riches, a new patrimonial elite may prove as inevitable as Tocqueville once believed democratic equality was.

This forecast is based not on speculation but on facts assembled through prodigious research. Piketty’s startling numbers show that the share of national income coming from capital—once comfortingly believed to be stable—is on the rise. Private wealth has reached new highs relative to national income and is approaching levels of concentration not seen since before 1929.

Piketty’s powerful intellectual move is to place the subject of American income inequality in a broader historical and cross-national context. The forces most responsible for our egalitarian past, Piketty reminds us, were rapid growth—both of the population and of the economy overall. France never had the former, which is why it had a true “rentier” class of propertied aristocrats in the early 20th century when the United States was still a land of small-scale owners and the newly rich. Yet economic growth remains the biggest factor: When the economy expands modestly from year to year, returns on capital generally exceed the advance of labor income, and fortunes of the already rich grow while the rest of society falls behind.

Since the resurgence of income inequality, concerned observers have comforted themselves with the notion that holdings of wealth—while far more unequally distributed than income—are not amassing at the top as quickly as incomes are. If we look forward, however, that reassuring notion appears suspect. Some of the great fortunes made in the new gilded age will fund philanthropy or frivolity. Most, however, will be funneled back into capital investment or passed on to heirs. Piketty notes that the returns of such investments are invariably largest for those with the greatest wealth—the Matthew effect is another force for increasing concentration. Meanwhile, inheritances are returning as a major source of advantage for the already advantaged. As rising income inequality passes down through a narrowing demographic pyramid, we can expect wealth bequests to become an increasingly important source of inherited privilege.

iketty is rightly pessimistic about an immediate response. The influence of the wealthy on democratic politics and on how we think about merit and reward presents formidable obstacles. Fierce international competition for the rich and their dollars leads Piketty to believe that without a serious countermovement, capital taxation will trend toward zero. Inequality is becoming a “wicked” problem like climate change—one in which a solution must not only overcome powerful entrenched interests in individual countries but must be global in scope to be effective.

Nonetheless, it is capital taxation, and ultimately global capital taxation, that Piketty sees as the eventual solution. Taxing only consumption and labor income violates the notion that citizens should finance the commonwealth on the basis of their ability to pay. A global capital tax—modest, progressive, based on transparency—could reinforce the fraying link between economic standing and individual contributions toward vital collective activities. Moreover, halting progress in this direction has already taken place, as rich countries seek—without great success so far—to crack down on the tax havens and corporate financial engineering that increasingly make taxes voluntary for the superrich. Because wealth is still so concentrated in advanced industrial nations, agreements that covered citizens of and transactions within Europe and North America would go a long way toward bringing these activities into the open. A modest tax on the largest fortunes might also encourage more productive uses of capital, gradually taxing away big estates with small returns.

Piketty suggests that the pressures for change will eventually prove overwhelming. Either ever-richer capitalists will tear one another apart in the race for diminishing returns, or the rest of society will rise up and impose a fairer framework. For a book that insists on the primacy of politics, however, Piketty has relatively little to say about how—with organized labor weakened, moneyed interests strengthened, and anti-government forces emboldened—the kind of political movement necessary for a fairer future will emerge. (It was war, after all, not universal suffrage, that ultimately tamed inequality in the 20th century.) Yet perhaps with this magisterial book, the troubling realities Piketty unearths will become more visible and the rationalizations of the privileged that sustain them less dominant. Like Tocqueville, Piketty has given us a new image of ourselves. This time, it’s one we should resist, not welcome.

Inequality is becoming a “wicked” problem like climate change—one in which a solution must not only overcome powerful entrenched interests in individual countries but must be global in scope to be effective.

Against U.S. Economic Clichés

By Heather Boushey

Capital in the Twenty-First Century is written in the tradition of great economic texts. Where John Maynard Keynes wrote The General Theory of Employment, Interest and Money in reaction to the “classical economists” and Karl Marx wrote Das Kapital in reaction to the “bourgeois economists,” Thomas Piketty writes in reaction to the “U.S. economists.” Like his predecessors, he does not mince words. After taking a professorship at MIT at 22, he moved back to Paris at 25, in 1995, because “I did not find the work of U.S. economists very convincing.” Piketty’s method is an explicit critique of academics “too often preoccupied with petty mathematical problems of interest only to themselves.” While mathematical tools are critical to the modern economics profession, Piketty is right to call on all social scientists, including economists, to “start with fundamental questions and try to answer them.”

Piketty asks two fundamental questions in his new book: “What do we really know about how wealth and income have evolved since the eighteenth century, what lessons can we derive from that knowledge for the century now under way?” Piketty and his colleagues have spent recent years putting together a World Top Incomes Database, their detailed investigation into income in countries around the globe, spanning several decades. In some cases—France and the United Kingdom—he also relies on facts about the accumulation of wealth going back centuries. As he puts it, “It is by patiently establishing facts and patterns and then comparing different countries that we can hope to identify the mechanisms at work and gain a clearer idea of the future.”

Informed by this historical, cross-country data, Piketty evaluates—and rejects—a number of generally accepted conclusions in economic thought, while being careful to note the limitations of inevitably “imperfect and incomplete” sources. The main finding of his investigation is that capital still matters. The data show a recent resurgence in developed countries of the importance of capital income relative to national income, back to levels last seen before World War I. In Piketty’s analysis, without rapid economic growth—which he argues is highly unlikely now that population growth is slowing—returns from investment will continue to grow faster than output. Inheritances and income inequality will keep rising, possibly to levels higher than ever seen.

Among other conclusions, the data lead Piketty to describe the popular argument that we live in an era where our talents and capabilities matter most as “mindless optimism.” The data also lead him to reject the idea that wage inequality has grown as technological change increased the demand for higher-skilled, college-educated workers.

Instead, Piketty’s evidence suggests it is the rise of what he calls the “supermanager” among the top 1 percent since 1980 that is driving the rise in earnings inequality. It is here that Piketty takes his sharpest swipe at economists. In his discussion of the thriving top decile, he points out that “among the members of these upper income groups are U.S. academic economists, many of whom believe that the economy of the United States is working fairly well and, in particular, that it rewards talent and merit accurately and precisely. This is a very comprehensible human reaction.”Piketty agrees that in the long run, investments in education are an important component of any plan to reduce labor-market inequalities and improve productivity. But on their own they’re not sufficient.

This book is significant for its findings, as well as for how Piketty arrives at them. It’s easy—and fun—to argue about ideas. It is much more difficult to argue about facts. Facts are what Piketty gives us, while pressing the reader to engage in the journey of sorting through their implications.

Piketty agrees that in the long run, investments in education are an important component of any plan to reduce labor-market inequalities and improve productivity.

Must We Return to “Pre-tamed” Capitalism?

By Branko Milanovic

Thomas Piketty’s Capital in the Twenty-First Century is a monumental book that will influence economic analysis (and perhaps policymaking) in the years to come. In the way it is written and the importance of the questions it asks, it is a book the classic authors of economics could have written if they lived today and had access to the vast empirical material Piketty and his colleagues collected.

Piketty’s key message is both simple and, once understood, almost self-evident. Under capitalism, if the rate of return on private wealth (defined to include physical and financial capital, land, and housing) exceeds the rate of growth of the economy, the share of capital income in the net product will increase. If most of that increase in capital income is reinvested, the capital-to-income ratio will rise. This will further increase the share of capital income in the net output. The percentage of people who do not need to work in order to earn their living (the rentiers) will go up. The distribution of personal income will become even more unequal.

The story elegantly combines theories of growth, functional distribution of income (between capital and labor), and income inequality between individuals. It aims to provide nothing less than the description of a capitalist economy.

Two questions can be asked: Why didn’t this model hold during the period of “the golden age” of capitalism (between approximately 1945 and 1975), when functional income distribution was stable and income inequality declined? Why does it matter for the 21st century? The answer to the first question is that the “short 20th century” was special. The physical destruction associated with two world wars led to a significant destruction of the advanced world’s capital stock. In addition, the advent of the welfare state, motivated by the Great Depression and strong socialist movements, imposed a need to heavily tax capital. The 20th century was thus different from the 19th. Through the action of wars and social movements, capitalism appeared to most social scientists to have been “tamed.” Piketty argues that this view turns out to have been wrong. The fundamental nature of capitalism was not altered—the external circumstances were different.

Why does Piketty’s model herald the return of “patrimonial capitalism” (the term he introduces to mean that an important part of the upper class receives income from property) in the 21st century? The reasons are the reverse of the ones that drove developments during the short 20th century. The period of prosperity after the end of World War II saw the rebuilding of large fortunes (owned, of course, by different people today); the capital-to-output ratio in advanced countries gradually rose back to the higher levels of prewar years. The Reagan-Thatcher revolutions of the 1980s reduced the taxation of capital, and of high incomes in general, and further increased the share of capital in net output. If this process continues, the return to features of 19th--century capitalism is inevitable.

The return is all the more likely since the rate of growth—at the technological frontier where most rich countries operate today, that rate is equal to the sum of “pure” technological progress and population growth—is decreasing. Once the convergence of Europe and Asia to U.S.-like levels of income is achieved, the rate of growth cannot exceed more than, say, 2.5 percent per annum (a combination of about 1.5 percent in technological progress and 1 percent in population growth). Piketty writes: “Decreased growth—especially demographic growth—is thus responsible for capital’s comeback.” If the rate of return on private wealth is higher than 2.5 percent, then the 19th-century-like effects of “pre-tamed” capitalism will reappear.

Through the action of wars and social movements, capitalism appeared to most social scientists to have been “tamed.” Piketty argues that this view turns out to have been wrong.

Or will they? There are significant differences between the 19th century and ours that Piketty does not fully acknowledge, although he mentions them. First, it is not obvious that the rate of return on private wealth will remain high enough to sustain Piketty’s prediction. Even if we look at the admittedly transitory situation of today, the rate of return is stuck barely above zero percent, less than the rate of growth of the rich world’s economies. The tendency toward a decreasing rate of return, possibly lower than the rate of growth, cannot be ruled out.

Second, the role of labor incomes has changed since the 19th century. As Piketty acknowledges (he writes about it in both this and earlier works), extraordinarily high labor incomes play a larger role in society today than in the past, even if they concern mostly the richest 1 percent through 5 percent of income recipients—not the top 0.1 percent, where “capital is still king.” A dose of “meritocracy” has been introduced into the distribution. The overlap between being rich and owning capital so evident in the 19th century will be less prominent in the 21st.

Third—the convergence of China, and even more that of India, and even more that of Africa—may take a century or longer to complete. As long as the convergence is still ongoing, global growth will be higher than the steady-state rate of 2.5 percent due to the faster growth rate of “infra technological frontier” countries such as China, India, Nigeria, and Indonesia. This is an aspect of the problem that Piketty neglects. The former Third World might end up playing the same role in the 21st century that Europe, Japan, South Korea, and others played in the past 50 years—maintaining upward global growth as they were catching up with the United States.

So these are possible problems with Piketty’s analysis. But if we take it at its face value, what are the remedies he suggests? A global tax on capital—needed to curb the tendency of advanced capitalism to generate a skewed distribution of income in favor of property holders. The high taxation of capital, and of inheritance in particular, is not something new, as Piketty amply demonstrates. It is technically feasible since information on the ownership of most assets, from housing to stock shares, is available. (Piketty, by the way, provides lots of specific information on how the tax could be implemented.  He also gives some notional rates: no tax on capital below almost 1.4 million dollars, 1 percent on capital between 1.4 million and 6.8 million dollars, and 2 percent on capital above 6.8 million dollars.) For such a global tax to be effective, however, a huge amount of coordination would be required among the leading countries—a task to whose challenges Piketty is not oblivious. Implementation by one or two countries, even the most important economies, could lead to capital flight. The main offshore tax havens would also have to cooperate, although they would lose hugely lucrative business. But an agreement across the Organisation for Economic Co-operation and Development on the uniform taxation of wealth, however farfetched it might seem today, should be put on the table. This is, in Piketty’s view, the only way to “regulate capitalism” and make both capitalism and democracy sustainable in the long run.

In a short review, it is impossible to do even partial justice to the wealth of information, data, analysis, and discussion contained in this book of almost 700 pages. Piketty has returned economics to the classical roots where it seeks to understand  the “laws of motion” of capitalism. He has re-emphasized the distinction between “unearned” and “earned” income that had been tucked away for so long under misleading terminologies of “human capital,” “economic agents,” and “factors of production.” Labor and capital—those who have to work for a living and those who live from property—people in flesh—are squarely back in economics via this great book.

Capital in the 21 Century: Still Mired in the 19th

03/09/2014

Thomas Piketty's new book on the history and future of capitalism (Harvard University Press) is a bold attempt to pick up where Marx left off and correct what he got wrong. While there is much that is useful in this lengthy and well-written book (Piketty and his translator Arthur Goldhammer can fight over credit), it owes too much to the master, and not in a good way.

For backdrop, economists and social scientists in general have a huge debt to Piketty. His work with Emmanuel Saez has advanced enormously our understanding of income distribution at top end. The World Top Income Database that they constructed along with Facundo Alvaredo and Anthony Atkinson is an enormously important source of data that economists are just beginning to analyze. This book is a further contribution in providing a wealth of information about historical trends in income distribution and returns to capital over large parts of the world.

Piketty begins his book by dissing the unnecessary complexity of economics. While the theoretical excursions of the last four decades have been an effective employment program for economists, they have done little to advance our understanding of the economy. The book itself is laid out in a way that makes it easy for the non-expert to understand, with the mathematics kept to a bare minimum.

Based on his analysis of capitalism's past, Piketty has a grim picture of the future. The story is that slowing growth will lead to a rise in the ratio of capital to income, which we have already seen throughout the world with the rise in stock and house prices. This is turn will imply growing inequality as wealth distribution is hugely unequal and there is little reason to believe that the market will somehow reverse this inequality. Piketty's remedy is higher income taxes on the rich and wealth taxes, solutions that he acknowledges do not seem to have good political prospects right now.

While the book presents this story with the sort of the determinism that many have seen in Marx's theory of the falling rate of profit, there are serious grounds for challenging Piketty's vision of the future. First, there are many aspects to the dynamics that have led to the redistribution to profit and high earners in the last three decades that are likely to change in the not too distant future.

The top of my list is the loss of China as a source of extremely low cost labor. According to the International Labor Organization, real wages in China tripled in the decade from 2002-2012. While these data are not very accurate, there is little doubt that wages in China are rising rapidly. While Chinese wages still have a long way to go before they are on a par with wages in the United States or Europe, its huge cost advantage is rapidly disappearing. Manufacturers can look for other low-wage havens, but there are no other Chinas out there. The loss of extreme low wage havens is likely to enhance the bargaining power of large segments of the workforce.

However, perhaps a more fundamental objection to Pikettys' grim future is the fact that a very large share, perhaps a majority, of corporate profit hinges on rules and regulations that could in principle be altered. My favorite example is drug patents. This industry accounts for more than $340 billion a year in sales (@ 2 percent of GDP and 15 percent of all corporate profits). The source of its profits is government granted patent monopolies.

Suppose the government weakened patent rights or allowed low-cost generics from India to enter the country, profits and presumably the value of corporate stock in the sector would crumble. Is there a fundamental law of capital that prevents this from happening? The same could be said about the patents that provide the basis for enormously profitable tech companies like Apple. Are we pre-destined never to take steps to weaken these laws which lead to enormous corruption and economic waste?

Another big profit sector is cable and telecommunications where we seem to have unlearned the lesson from intro-econ that monopolies are supposed to be regulated to prevent them from gouging consumers. Obviously the monopolists won't like to see their profits eroded, but allowing near monopolies to operate without regulation does seem like an aspect of capitalism that can be altered in the future as it was in the past.

The financial sector has gone from accounting for less than 10 percent of corporate profits in the 1960s to over 20 percent in recent years. Is there a law of capitalism preventing us from instituting financial transaction taxes like the UK has had on stock trades for more than three centuries or breaking up too big to fail banks?

Piketty is not just pessimistic when it comes to profit shares. He also tells us there is little hope that improved corporate governance will put a lid on CEO pay. Is it really implausible to believe that shareholders will ever be able to organize themselves to the point where they can do something like index CEO stock options to the performance of other companies in the industry? This means the CEO of Exxon doesn't get incredibly rich by virtue of the fact that oil prices rose. Is it a law of capitalism that shareholders will forever throw money in the toilet by giving unearned bonanzas to CEOs?

These and other areas might be viewed as important institutional details that get short-shrift in the book. To take another example, in an analysis of returns on university endowments Piketty attributes the extraordinary returns to the endowments of Harvard, Princeton, and Yale to the fact that they could afford top quality financial advisers. This is another source of inequality for Piketty; the rich can buy good financial advice, while the average person has to rely on their brother-in-law.

Harvard, Princeton and Yale undoubtedly have sophisticated financial advisers, but many equally sophisticated advisers don't consistently produce above market returns. An alternative explanation is insider trading. The graduates of these institutions undoubtedly could prove their alma maters with plenty of useful investment tips. I have no idea if such insider trading takes place, or if so whether it is a major factor explaining above average returns, but it would provide an alternative and more easily remedied fix for this particular source of inequality. A few years in jail for some prominent perps would do much to curtail the practice.

Rather than continuing in this vein, I will just take one item that provides an extraordinary example of the book's lack of attentiveness to institutional detail. In questioning his contribution to advancing technology, Piketty asks: "Did Bill [Gates] invent the computer or just the mouse?" Of course the mouse was first popularized by Apple, Microsoft's rival. It's a trivial issue, but it displays the lack of interest in the specifics of the institutional structure that is crucial for constructing a more egalitarian path going forward.

In the past, progressive change advanced by getting some segment of capitalists to side with progressives against retrograde sectors. In the current context this likely means getting large segments of the business community to beat up on financial capital. This may be happening in the euro zone countries where there is considerable support for a financial speculation tax - although the industry is fighting hard.

In terms of drug patents, India's generic drug industry is a natural ally for progressives everywhere who care both about public health and want to stop the upward redistribution to drug barons. In the United States, public options for both health care insurance and retirement savings accounts could be a boon not only to workers who use them, but also small businesses who lose valued workers to larger employers who offer better benefits.

The list of options could be extended considerably, but the point is that capitalism is far more dynamic and flexible than the way Piketty presents it in this book. Given that we will likely be stuck with it long into the future, that is good news

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