Tuesday, March 11, 2014

Mark Thoma Argues That Inequality is Not Inevitable In Capitalism

Mark Thoma praises capitalism for its ability to provide consumers with products and services that they desire at low cost.  He makes the usual argument about the unequal distribution of income by stating that some inequality is necessary as incentive system, but that we may have reached a tipping point, for example, in which the difference between $9 million and $10 million is not much of an incentive.  He also describes some of the costs of rising inequality.

His solution to the problem of rising income inequality is a defense of the the social welfare programs that redistribute income.  He describes it as an insurance system.  Some people get lucky and do not require insurance benefits, their premium payments are used to provide benefits for those who are unlucky.  In other words, social welfare programs are a form of insurance in which the lucky help to defray the costs that impact the unlucky.  Capitalism with social insurance programs is the best of all possible worlds. 

He mentions Thomas Piketty's new book Capitalism in the 21st Century which makes a very different argument about rising inequality, that Thoma apparently fails to recognize.  Piketty claims that rising inequality is inevitable unless substantial changes are made to our political economy.  Piketty focuses his attention on the concentration of capital which grows much faster than wage income.  When the return on capital is 5-6 times the growth rate of income we reach a tipping point in which inequality accelerates.  We reached that point prior to the 19th century, and many Western countries are approaching that point.  The risk is that we return to a political economy in which "rents" from capital, which accrue to a small minority, are the primary source of inequality.  Our social insurance programs provide no solution for that problem.  Piketty challenges the economics profession to address the real problem of rising income inequality instead of wasting its time building abstract models of an economy that fail to recognize the relationship between wealth concentration and inequality.  His book describes some of the difficult changes that are becoming necessary if we want to preserve our democratic system in an economy which does not recognize national borders.

Frankly, I am terrible disappointed that Mark Thoma and Paul Krugman have paid such little attention to the problems raised by Thomas Piketty. 

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