It’s certainly an ill century of mass destruction and economic upheaval that blows no one any good. In the buzz-generating (at least on the left) new book Capital in the Twenty-First Century, économiste célèbre Thomas Piketty, of the Paris School of Economics, argues that two world wars and a depression did have one upside: Those systemic shocks momentarily reversed capitalism’s inherent drive toward increasing inequality in Western economies, including the United States. Physical capital was destroyed, businesses nationalized, and taxes raised to previously unheard-of levels.
In short, the wealthy and the near-wealthy really took it on the chin. The top 10 percent in the U.S. went from grabbing 45–50 percent of national income in the 1910s and 1920s to 30–35 percent by the end of the 1940s. And the share of national income claimed by owners of capital (including property, machinery, financial assets, and patents) versus labor fell to historically low levels.
The next generation was an age, as Democrats like to put it, of “shared prosperity.” A rising tide lifted all boats about the same amount. But by the 1980s, capital, much like Tolkien’s phantasmal villain, Sauron, “began to reconstitute itself,” according to Piketty. Taxes were cut, industry was deregulated. American inequality is now back to where it was before global war and depression — and probably headed higher, as Piketty sees things. According to Piketty, if we don’t have another global conflagration or collapse, we’ll enter an “endless egalitarian inegalitarian spiral” of ever-greater wealth concentration, right out of the pages of Karl Marx’s Das Kapital. Unless, of course, to save democracy, all advanced economies adopt a global wealth tax on the net worth of capitalism’s financial elite. All fortunes of the superrich would be detailed and registered, with sanctions levied against international tax havens.
Thanks to Piketty, the Left is now having a Galaxy Quest moment. All that stuff their Marxist economics professors taught them about the “inherent contradictions” of capitalism and about history’s being on the side of the planners — all the theories that the apparent victory of market capitalism in the last decades of the 20th century seemed to invalidate — well, it’s all true after all. In their progressive hearts, they always knew it, knew it, knew it! The era of big government is back! Let the redistribution commence!
But the neo-Marxists might want to contain their enthusiasm. At the heart of the Piketty thesis is the forecast that the age of fast economic growth is over. U.S. per capita GDP growth between the start of the Reagan Revolution and the Great Recession was 2.3 percent. Piketty believes future growth will occur at only half that rate, maybe less — and only if we devise new energy sources to replace hydrocarbons.
Like noted techno-pessimist Robert Gordon of Northwestern University, Piketty sees slowing population growth and anemic productivity gains as growth killers. As a result, capital income will greatly exceed the rate of economic growth. And when wealth grows faster than output, inequality grows more extreme. That’s the theory, at least.
But faster economic growth is an antidote. New wealth makes old wealth less important and influential. The dynamic innovation that drives faster growth creates new opportunities for workers, as long as education keeps up. And it matters less that wealth concentrates increasingly at the high end, among the 1 percent, if faster growth results in rising incomes for everybody else. Even if inequality in the Unites States has returned to levels last seen in the 1920s, the average American is many times wealthier than he was back then. Unfortunately, Piketty’s anti-inequality agenda, including wealth taxes and top tax rates of 80 percent, could make slow growth a self-fulfilling prophecy. Piketty seems untroubled by this possibility. Nor does he explore solutions to turn more workers into capital owners. It’s the part about innovation and economic growth that really undermined Marx’s prediction of a capitalist apocalypse. And it may also undermine the prediction of his would-be successor.
— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.