The Future of Inequality

Thomas Piketty Quantifies Our New Gilded Age

According to the French economist Thomas Piketty, income inequality in the United States is now “probably higher than in any other society at any time in the past, anywhere in the world.” The concentration of U.S. capital, as opposed to income, is not as great as in pre–World War I Great Britain—the world of the first season of Downton Abbey—but taking income and capital together, the United States is now about as unequal as Belle Époque Europe. Indeed, according to Piketty’s data, we now take the laurels as the most inegalitarian nation in the world, and on current trends may soon become the most inegalitarian nation in history—this from a country that invented progressive income and wealth taxation and whose founding documents are a celebration of the common citizen.

In America, Piketty is best known for partnering with Berkeley’s Emmanuel Saez to produce annual reports on the eye-popping income shares of the top-tier U.S. earners. He has devoted his career to studying the metamorphosis of wealth and capital over the past couple of centuries, and has now synthesized his research in an important book, Capital in the Twenty-First Century (Harvard), which paints a compelling, and scary, picture of the deep forces driving toward ever greater inequality in the modern world.

Piketty’s historical focus adds power to his analysis of the trend toward greater financial inequality today. Through much of history, extreme inequality was the normal condition. In Jane Austen’s England, the stock of capital (land, tools, livestock, houses, and anything else that could produce income) was between six and seven times annual national income, and its ownership was extremely concentrated. By the time of the first Downton Abbey episodes, the top 10 percent of British households held about 90 percent of all wealth, with 50 to 60 percent controlled by just the top 1 percent of households.

Between Austen’s day and that of Downton Abbey, the nature of capital changed quite dramatically, with land declining in importance relative to industrial capital. But returns were remarkably consistent—over the very long term, capital returned about 5 percent annually. In both France and England, the wealthy grew accustomed to speaking of their annual returns rather than their wealth. Austen’s Mr. Darcy was known to dispose of ₤10,000 a year, so Mrs. Bennett knew immediately that he had an estate worth an eyebrow-raising ₤200,000. Balzac’s characters spoke in much the same terms, automatically multiplying income by twenty to estimate someone’s fortune.

Although the data in the rest of Europe are not as complete as in England and France, that basic distributional profile seems to have obtained in all the advanced countries. Over the course of the nineteenth century, annual world economic growth was about 1.5 percent, although there was almost no inflation. Since populations were increasing, per capita growth was substantially lower. The stock of capital, however, was typically six to seven times bigger than annual national income. Almost all of that capital was held by the richest citizens, and earned steady 4 to 5 percent returns. Those returns, on such a large bolus of wealth, combined with slow economic growth, virtually guaranteed that the rich could only get richer, while the laboring classes were steadily immiserated. Marx got that part right.

For much of the nineteenth century, the United States was different. It was growing faster than almost anywhere else, and as a young country, its richest families did not yet command fortunes on the scale of the English and French grandees. Still, inequality of both wealth and income grew rapidly after the Civil War, and by the eve of World War I, the richest tenth of Americans controlled about 80 percent of capital, and the richest 1 percent controlled about 45 percent, not yet at the European norm but on a converging track. Still, the United States was considerably more egalitarian than France or England. Rapid economic growth and innovations like universal education ensured that labor was not falling hopelessly behind. In the last quarter of the nineteenth century, the ratio of capital to national income in the United States was only about four to one, and it took until the end of the 1920s to reach five to one.

The one-two-three punch of World War I, the Great Depression, and World War II destroyed the old regimes everywhere, along with much of their physical and human capital. In the wake of the Second World War, discredited oligarchies were swept away by socialist and other left-of-center parties. Confiscatory taxes were imposed on wealth, on estates, and on high incomes. Industrial and financial corporations were subjected to stringent regulation, while newly empowered unions gained fairer splits of business revenues.

The results were dramatic. The ratio of capital holdings to national income dropped from just under seven to one in both Britain and France to less than three to one, a tidal change. In the United States the change was more modest, from five to one to just under four to one, with the difference explained in part by the much greater physical destruction in Europe. As reconstruction got underway, very rapid growth further tilted the field toward labor. In 1950s France, high growth allowed workers to increase their share of the national income at the expense of the capitalists—a first in the record of post-Revolution France. The French still refer to the postwar era as the Trente Glorieuses, or the “Thirty Glorious” years.

It was also a golden age in America. For thirty years after the war, U.S. incomes moved in proportional lockstep: all five income quintiles enjoyed approximately the same rate of income increases, with a small advantage in the lower quintiles. Economists like Simon Kuznets and Robert Solow showed that balanced growth was a central tendency of the American economy. Barring catastrophe, the pattern of equitable division of the economic pie would continue indefinitely. And in America, more than in Europe, individuals of ability and grit could readily move up the quintiles—or move down if they didn’t have the right stuff.

Then came the Thatcher-Reagan revolution. (Piketty speculates that both the United States and England, which still viewed itself as a world hyperpower, were shaken by the rapid modernization on the European continent and in Japan.) Whatever the reason, for two decades they moved in lockstep to strip away the postwar reforms that had reined in the power of the wealthy. Taxes on upper-bracket incomes, investment returns, and estates were drastically reduced. Financial regulations were gutted, and leverage soared.

Especially in the United States, ballooning executive pay drove the vast expansion in the wealth of the top 1 percent. Business spokespeople, of course, claim that the pay is merit-based. But there is no clear statistical relationship between pay levels and performance, and corporate pay outside the United States is typically far lower, without apparent negative consequences. France, Germany, and Japan have managed decent economic performance—although each has had its ups and downs, just as the United States has—while staying much closer to their postwar income distribution profiles.

Piketty proposes a number of reforms—most particularly a graduated annual tax on capital. Even an apparently low top rate, like 5 percent, would be highly progressive since the stock of capital is so much bigger than annual national income, and the same capital would be subjected to taxation each year. Realistically, there is no chance of such reforms, if only because the very rich so thoroughly outgun reformers in Washington, and because Congress itself is becoming a rich man’s club.

But perhaps we can take heart from the experience of Jane Austen’s England. The “rotten borough” system gave the stagnant land-owning class near-complete dominance of the British political system. It took a century, but a persistent reform movement steadily whittled away at the power of the great lords, until it was relatively inconsequential. One hopes that we can do better than that.

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The rising income and wealth inequality in the U.S. should concern all of us. But the causes of the gaps must be understood if we are to arrive at correct solutions. In the U.S., there is a high correlaton between low income (and low or negative net worth) and low literacy skills--even among high school graduates. In several surveys over recent decades, 23 percent of American adults were found to have low literacy skills--low enough to disqualify them the military and from most civilian jobs other than the most menial. Our compassion should lead us to correct the root cause of this problem, in order to afford far more of our citizens the many benefits that accrue with literacy skills. In fact, we sould be embracing radical approaches to providing literacy skills to current students and adults who, for whatever reason, did not achieve such skills while in school. Changing the tax code will dioes nothing to accomplish that. Let's get to the root causes of America's literacy problem, and solve it. 

Thanks to Charles Morris for the summation of Piketty's findings and recommendations.  And to J. Dunn for the emphasis on literacy.  But higher taxes won't help?  On the contrary, without including tax reform in the measures to help the declining portion of wealth going to the lower -income 90%, Piketty's prognostication will remain regrettably on target.  There is a strong "trickle-up" trend built into the prevailing wealth system.  Just this month, "OECD 2014" has come out with an analysis and recommendations that include several ways to alter taxes beside the unlikely 5% annual assessment on capital.  Take a look at www.oecd.org/social/inequality.htm!

I think you are on to something here, but caution against monocausal presumptions and against presumption of unidirectional relationship between variables.

I'm 61 years old, have experienced significant downward social mobility in the past decade or so, and for eight years now have lived in a neighborhood peopled by the likes of your illiterates.  I spend a great deal of time observing and listening, and see daily the reality of your insights.  Lack of skills leads to withdrawal from economic life, indeed from a wider range of social life.

But I've sensed something I believe to be deeper.  There is a real, felt sense, however unarticulatde, of not belonging in the economy, indeed in our society, that undercuts the desire, the motivation necessary for the attainment of skills.  And here Piketty's analysis is apt as an expansion - indeed, as a corrective, I believe - of your insight.

Sure, we need to get at root causes.  But I think you jump too quickly to the conclusion that you've reached the root.  I think you're actually dealing with the base of the stem just as it emerges above ground.  Piketty is touching upon what goes on underground.

Long ago, Ivan Illich explored the consequences of universal schooling.  His concern was not with the upper reaches of developed societies, but with poorer populations, both in their native 'underdeveloped' lands and as immigrants.  He concluded that universal schooling creates a new social class, the dropout.  Because a consequence of 'dropping out' of school is a 'dropping out' of wider patterns of social exchange, including economic.

These are my neighbors, in this neighborhood that doesn't much matter to anyone.  Skills such as you suggest are needed in order to belong, and to get along.  But a prior sense that you belong is pretty key to undergirding the attainment of those skills.

You're welcome to set up a literacy shop on my corner, like good liberal missionaries have long done.  Without reversal of some of the trends Piketty analyzes, though, I suspect that our cohorts of dropouts will continue to grow, your valiant effots at  tutoring notwithstanding.

"... we now take the laurels as the most inegalitarian nation in the world, and on current trends may soon become the most inegalitarian nation in history—this from a country that invented progressive income and wealth taxation and whose founding documents are a celebration of the common citizen."

 

Question: what if the price of being the greatest, most prosperous, most free nation the world has ever seen is: inequality of wealth and income.

 

In other words, other civilizations might have been, or might now be, "more equal" at the cost of being less free.

 

I'll take U.S.

 

Our founding documents are not a celebration of the common citizen. That would be discrimination. They are a celebration of each and every individual citizen, period, aka "individual rights." This includes those citizens who make and keep a lot of money, and who did not steal to get it.

 

Lastly: the progressive income tax and other such schemes, especially the abandonment of the gold standard, fiat money controlled by government, and deficit spending to finance 'caring' by government, are the major CAUSE of out-of-natural wealth accumulation. 

Given that the rise in inequality, wealth and income, has been top 5% (really top 1%) gaining with the bottom 95% stagnating and declining, it is hard to argue that low literacy skills of 23% of Adults is a major factor.  It is like saying that, since there were 23% Adults with bad swimming skills on the Titanic, this had something to do with the high loss of life when it hit an iceberg.  Being a bad swimmer just meant that they drown a few minutes before those who could swim well.  Behind Dunn's analysis is the theory that incomes reflect productivity, and that the poor need to make better choices if they do not want to be poor.  If the poor just studied harder we wouldn't have a rise in inequality Dunn seems to imply.  While individual actions matter, the major changes in structural factors, most importantly the rise of money manager capitalism, with criminal enterprises (big banks and wall street firms) changing the rules so that they can capture wealth.                                                                                   

Our founding documents (and fathers) created a system to protect the wealth of citizens who did steal much of their wealth, natural resources stolen from the Natives and then stealing people from Africa and forcing them to work for no pay, thus stealing the value of their hard work.  I would argue that the hostility towards the Federal government, especially in the south, goes back to the federal government freeing the slaves, thus taking away the property of slave holders.  States rights has always been about keeping minorities and the poor in their place, as Mr Bundy has made perfectly clear.

Rising incomes (or wealth) among the top 1% does not of necessity cause the falling fortunes of the 16% now living in poverty in the U.S. Nor will a five percent tax on the capital of the 1% cure poverty. It will, to be sure, remove the wealth of the 1%, in approximately 20 years. Senator Huey Long proposed just such a redistribution in 1935, in the midst of the Great Depression. The Senator was at least honest enough to mention, in his speech, that there would have to be periodic (he proposed every seven years) new redistributions, since people would continue to make their own decisions about using their newly acquired wealth. Not everyone would make the wisest decisions about spending, investiing, etc. So, by the end of one year, surely by the end of six years, there would again be poor people, needing a new redistribution. A few questions:

1. Just how hard do you suppose the former "one percenters" will work, save and invest when they know that under the proposed Piketty plan the fruits of their work will be taken away at the rate of 5% per year? 

2. Just how carefully will people save, invest, use that redistributed wealth of which they are the beneficiary, when they know they can get a new distribution every few years?

I believe, as Pius VI wrote in Populorum Progressio (No. 35) that, "When someone learns to read and write, he is equipped to do a job and to shoulder a profession, to develop self-confidence and realize that he can progress along with others...literacy is the first and most basic tool of personal enrichement and social integration; and it is society's most valuable tool for furthering development and economic progress." And i believe what Nelson Mandella said, "Education is the most powerful weapon which you can use to change the world." And I know, from William Bradford's account of Plymouth Plantation, that a society built on the premise of all working for the common good and with no chance of improving one's own fortune by hard work, economy, thrift, etc., will end up in collective starvation, as did the Pilgrims until they allocated plots that each settler could plant and harvest for his own family's benefit. I think it was Margaret Thatcher who observed that the undoing of socialists is that eventually they run out of other people's money. If redistribution really is at the heart of Piketty's plan, then I don't have to bother reading the book. Thanks for the review.

What about deficit spending on wars?  

There has just been published how much annual income  a small group  hedge fund managers made last year.=  $25 billion. They pay income tax of  20%  called carried interest.. Last year it was 15%         A good plumber pays 15-20% more than that percentage . .. and hedge fund managers have such extensive tax free expense accounts they pay a lot less than the listed annual income ... it maybe just 15%... Forget the illirerate not knowing something , even the graduate degree people don't have a clue about and why there is a 'carried interest' scam.

If we could get the hedge funds guys [and they are all guys] paying 30-39% just like the plumbers, would the right wing still call this income distribution?   I bet $10 not one hedge guy ever served in uniform...  

I guess my $ 10 bucks is safe as the top four have  no military service.and I got bored checking.

but  Griffin declared war on Leob though....so I guess  tough talk is cheap..   

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About the Author

Charles R. Morris, a Commonweal columnist, is the author of The Two Trillion Dollar Meltdown (Public Affairs), among other books, and is a fellow at the Century Foundation.