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Piketty's book on capitalism presents policy challenge

MARKETWATCH 6:31 AM ET 04/23/14


WASHINGTON (MarketWatch) -- American progressives continue to celebrate Thomas Piketty's new book on capitalism, which says that under present trends the inequality in society will grow inexorably with negative implications for growth and prosperity.

The French economist's analysis of trends over three centuries in "Capital in the Twenty-First Century" leads him to predict that wealth in the U.S. and other developed countries will continue to grow more concentrated, increasing its share of new wealth, eventually producing a rentier society like that in Europe in the 19th century.

Not sure what a "rentier society" is? Imagine Downton Abbey with 99% of us living downstairs.

Even in Downton Abbey, of course, society begins a transition in the wake of World War I to a greater distribution of wealth. In fact, Piketty's book posits, it is the destruction of capital in the two world wars, and the hyperinflation and depression in the first half of the 20th century that turned capitalism into an engine of widespread prosperity in the period 1950-80.

Rebuilding in the wake of war spurred growth rates to levels well above the return on capital, creating a wave of prosperity that truly lifted all boats.

But this is not the way capitalism normally works, Piketty claims, and not the way it is working in the current century. We have returned to the historical pattern where the return on capital exceeds the rate of growth, leading to that increasing concentration of wealth, to the detriment of growth and widespread prosperity.

Wow. This is what we have all been sensing. Now we know.

But there is a hitch. Piketty's solution, which he defended as the only effective solution in some recent appearances in Washington, is a progressive tax on wealth.

Oops. That sounds pretty un-American. Piketty, of course, even though he has lived and taught in the U.S., is French.

Economist John Schmitt bemoaned this week on the website of the progressive Center for Economic and Policy Research that he doesn't know many people "of any political stripe who think that such a policy stands much of a chance of happening any time soon."

In short, it seems Piketty has diagnosed the disease besetting the global economy, but has pronounced it virtually incurable.

Schmitt relates how Piketty, in book presentations at the Economic Policy Institute and the Urban Institute in Washington, described other efforts to reduce the return on capital or boost growth as all very worthy but ultimately only "complements" to the solution that gets at the core of the problem -- namely, the global progressive wealth tax that he proposes. Watch a video of the EPI event.

Such a tax is not as pie-in-the-sky as it sounds. Piketty points out that most Western countries already have a wealth tax in the form the property taxes, a significant source of government income.

He suggests keeping the revenue from property taxes the same, but shifting the tax to net wealth and making it more progressive. As it is now, a property owner pays the same amount of tax whether he has a large mortgage and an equity of 20%, or if he owns the property outright. Piketty's plan would charge the property owner with a mortgage only on the equity -- the net wealth -- and charge the outright owner a higher percentage on the entire value of the property.

While this idea might appeal to those with mortgages, it is still very unlikely to become law anywhere in this country with the increasing influence of the monied class in our politics.

Given the choice of a highly improbable progressive wealth tax and highly undesirable repeat of the cataclysmic events of the 20th century, Schmitt concludes we'll just have to soldier on and target those complementary but insufficient policies to reduce the return on capital -- like increased unionization, higher minimum wage, better patent laws, more efficient health care, and so on.

There is, of course, a third alternative, which most would consider as unlikely in this country as a progressive wealth tax -- and that is the alternative that emerged in the wake of another radical analysis of capitalism, the revolutions inspired by the works of Karl Marx.

We are presumably far from evolving into a society where the rule of the few is as oppressive as it was in czarist Russia, even if Piketty is correct in his prediction that we are moving in that direction.

But Nobel economist Paul Krugman is surely right when he says of Piketty's book in The New York Review of Books that " This is a book that will change both the way we think about society and the way we do economics."

Hopefully, that changed view will enable us to adopt policies that at least slow down this drive toward greater inequality and eventually, in a more enlightened generation, successfully transform capitalism permanently into a source of prosperity for all.

Also see these must-reads on MarketWatch:

To fight inequality, tax the rich more

Inequality may encourage vote for Democrats

-Darrell Delamaide; 415-439-6400; [e-mail]

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04-23-140631ET
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