Thursday, January 30, 2014

Why Income Inequality Is Inevitable Under Our Current Form Of Capitalism

Thomas Piketty, a prominent professor from the Paris School of Economics, just published a book, which will be released in the US in March, that an economist from the world bank just reviewed.  He cautiously concluded that Capital In The 21st Century will be one of the watershed books in economic history. 

Piketty's book is extensively documented with data and analysis which leads him to conclude that worsening inequality is inevitable.  His conclusion is based upon a relatively simple ratio.  He argues that when the rate of return on capital exceeds the rate of economic growth, inequality will worsen.  This is because capital incomes are much more concentrated than labor incomes.  This is exactly what has happened since 1973.  In the six decades prior to 1973 capital suffered several substantial shocks.  During much of that period the economy also grew faster than the return on capital and there was much less growth in inequality.  The blows to capital are well known.  We had two world wars; we had the great depression;  industries and property were appropriated in the post-colonial period and taxes were raised to fund the wars and to rebuild devastated industrial capital.  There was also a loss of credibility and authority.  For example, the New Deal in the US led to the introduction of social safety net programs, and labor organizations were strengthened.

Piketty makes a further point that will not make conservatives happy.  They believe that free markets will produce economic growth and distribute the benefits from growth to everyone.  They have been working hard since 1973 to reduce the role of government in the economy and to undue much of what had been done during the New Deal.  Piketty reaches a different conclusion.  He argues that the growth in inequality would be even greater if market forces were allowed to operate with greater freedom.  In the long run pay setters set their own pay.  They also are being compensated with capital rather than cash.  For example, Jamie Dimon, the CEO of JP Morgan, was just awarded a $20 million package for 2013.  His salary was $1.5 million and his restricted stock options amounted to $18.5 million. His board consists primarily of CEO's from other firms who had similar paydays in 2013.

Piketty reaches another conclusion that makes liberals unhappy.  He argues that the only remedy for the problem of growing income inequality is a global tax on wealth.  It must be global in order to prevent wealthy individuals from avoiding taxes through tax haven countries.  Since there would be little support for such a tax in rich countries, or in tax haven countries, that will not happen.  Therefore, inequality will continue to grow and social unrest and the weakening democratic forces is also inevitable.  Liberals argue that there are alternatives to the politically impossible tax on wealth.  Piketty does not believe that any of these small bore changes will have the necessary impact.

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