If you haven’t heard anything about Thomas Picketty’s book “Capital in the 21st Century,” it may be time to look it up (go ahead, the Economist has a four-paragraph summary if you are short on time). “Capital” uses newly compiled data to track the evolution of wealth inequality since the industrial revolution. The analysis shows that wealth is increasingly concentrated among an elite few, and that Europe and the United States may be returning to a structure in which the economy is dominated by inherited wealth. Picketty’s conclusions have attracted an incredible amount of both positive and negative attention – as Paul Krugman commented, “we’ll never talk about wealth and inequality in the same way.”
For those of us who may not have gotten around to actually reading Piketty’s 700-page book yet, a recent panel discussion with professors from Duke University’s Sanford School of Public Policy provided an opportunity to gain insight on the book. Professors Mac McCorkle, Robert Korstad, and William Darity, Jr. offered commentary on the book given their respective specialties. Here are a few key takeaways from the lecture:
The Rise of Inequality
For a data and economic theory-heavy book, “Capital in the 21st Century” has become remarkably main-stream. As Professor McCorkle noted, its popularity can be at least partially attributed to the book’s ability to provide force and foundation to the inequality issues most recently popularized by the Occupy Movement and critics of the “1%.” One of the greatest contributions of the book is Piketty’s compilation of historical wealth and inequality data, which has provided tangible evidence of the rise in global inequality over time.
McCorkle also noted that “Capital” has a clear and memorable take away. Piketty’s main conclusion is captured by the expression r>g, where r is the rate of return on capital and g is the growth rate of the economy. Picketty concludes that when the rate of return on capital exceeds the growth rate, wealth concentration increases, leading to greater inequality and economic instability.
Sources of Inequality
The panelists cited two interconnected sources of rising inequality in the United States: the increased prevalence of super-salaries (e.g. top businessmen, entertainers, athletes) and the decline of labor union participation. Many argue that the ability of a select number of very wealthy individuals to influence policymaking undermines the democratic process. Sanford Professor Nick Carnes—not present on the panel—makes a similar point in his new book, “White Collar Government,” which discusses how legislators’ socioeconomic background impacts policymaking. The book illustrates how the disproportionate representation of wealthy professionals in the U.S. government skews policymaking towards outcomes that favor the upper class.
Professor Korstad also noted that the decline in labor union participation has inversely tracked the increase in inequality since the 1970s. In line with Piketty’s theory, Korstad explained that as the power of labor unions has diminished, an increasing proportion of productivity gains have flowed to managers of capital rather than lower level employees. This trend has widened the gap between top and lower tier workers, further exacerbating inequality.
Across the panelists (and audience members), one of the primary critiques of the book is that it offers a fairly gloomy outlook for the world economy. If Piketty’s theories hold, inequality will continue to increase for the foreseeable future with little hope for improvement. His only policy solution – a global tax on the super-wealthy – seems highly improbable, and he provides little guidance as to how revenue from such a tax could be used to reduce inequality. Professor Darity was the only panelist to offer a concrete alternative: a guaranteed job program for U.S. citizens. Darity noted that if designed correctly, a guaranteed job program could be primarily funded from the budgets of existing public welfare programs that would no longer be necessary.