Unequal to the Task
From the May 5, 2014, issue of National Review.

Thomas Piketty


In the mid 1950s, Simon Kuznets published historical data on the distribution of income in the United States, covering a 35-year period beginning in 1913. This was the first time any such statistics had been compiled for analysis, and they showed a sharp reduction in inequality over that period. In subsequent work, Kuznets argued that income inequality is likely to increase when countries begin to industrialize and experience economic growth, but that eventually the trend in income inequality begins to reverse. This bell-shaped relationship between economic growth and inequality became known as the Kuznets curve, and it broadly represented evidence that economic growth would ultimately and automatically solve problems of income inequality.

In his new book, Capital in the Twenty-First Century, Thomas Piketty compiles data on income inequality across countries and across much longer time horizons than Kuznets did. For some countries, he presents centuries of data. What Piketty finds is that while Kuznets was correct about income inequality for the period he examined, the implications of the Kuznets curve do not hold. Using the share of income earned by the top 10 percent of income earners as his measure of inequality, Piketty shows that income inequality declined beginning in the late 1930s and early 1940s, but began rising again in the late 1970s and early 1980s. This pattern of inequality is not confined to one particular country, but rather is broadly apparent across developed countries over the course of the 20th century.

Piketty notes that the rise in income inequality is also coincident with a rise in the capital-to-income ratio (i.e., the ratio of the stock of capital to total income) over the same period, and argues that the two phenomena are related in a precise way: When the rate of return on capital rises faster than the rate of economic growth, income from capital rises more than total income. As a result, the share of income that goes to owners of capital rises at the expense of the share of income that is going to wage earners. Piketty supports this claim by presenting evidence that the capital share of income has been rising for the past few decades. As the capital share of income rises, wealth and inheritance become a substantially more important source of income relative to wage income.

Overall, this presents a bleak vision of the future. According to Piketty’s view, if the capital-to-income ratio continues to rise, we are likely to continue to see rising income inequality and an ever-greater importance of inheritance and wealth. Nevertheless, lost in the midst of the volume of historical evidence is any notion of what is optimal. Certainly the presence of perpetually increasing income inequality is undesirable, but just how much inequality is too much inequality? What will be the result, and what does it imply for policy?

While there are places in the book where Piketty gives hypothetical benchmarks of potentially desirable allocations, these benchmarks are entirely arbitrary. His theoretical framework is ill-equipped to determine the optimal level of inequality, and one could argue that it is similarly ill-equipped to make predictions about the future. The reason for this is that what Piketty presents as a theory is really an accounting identity: His conclusions simply follow from the definition of the capital share of income. When the rate of return on capital rises faster than economic growth, the numerator (the capital stock) rises more than the denominator (total income). This implies that capital income is rising faster than total income.

Nonetheless, Piketty uses this theory to make predictions, arguing that growth is likely to be lower in the near future than it has been in the recent past and that this is likely to exacerbate the increase in the capital share of income. However, one is left to wonder what happens to the rate of return on capital when the growth rate of the economy changes. Perhaps, as Piketty assumes, the rate of return on capital can be held constant. Nonetheless, it would be preferable to understand the dynamics by which the growth rate of the economy and the rate of return on capital are determined in equilibrium, given how important they are to Piketty’s framework and predictions.

Piketty believes that the increasing importance of inheritance is problematic. He suggests that a greater reliance on inheritance is inconsistent with free, democratic, and meritocratic societies. But does this mean that all inheritance should be eliminated? If not, what types of policies should be enacted to curb an excess dependence of income on inheritance? Piketty says that the best tool to “avoid an endless inegalitarian spiral and to control the worrisome dynamics of global capital concentration” is a global tax on capital. This would be a progressive tax, in that it would tax larger fortunes more heavily than smaller ones.


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