The Corner

What’s Wrong with Piketty’s Answer To Inequality

A lot has been written about the new book by Thomas Piketty on income inequality. Let’s leave aside the question of whether inequality is really growing out of control as he claims it is, or the idea that the main reason inequality has increased is that the return to capital has been greater than the general growth in the economy (that’s the “r > g“).

I have an issue with his prescription that all that’s really needed is a global wealth tax (meant to destroy some wealth at the top) to lower the rate of return on capital as a means of controlling income inequality. But if everyone recognizes that people who own wealth are in a better position than those who don’t, and that this advantage is cumulative over time, why not try to increase access to capital for more people, especially for those in the bottom, rather than try to hammer the ones at the top?

For instance, while I don’t necessarily endorse all these policies, here are a few ways to improve access to capital for middle- and lower-income Americans:

  • Encourage more employers to offer 401(k)-style retirement plans to their employees
  • Encourage 401(k) automatic enrollment
  • Expand the saver’s credit
  • Reform Social Security to make it a system of real savings for every Americans (as suggested here)
  • Change the deduction for tax-deferred savings into a capped tax credit so that lower-income Americans can take advantage of the tax benefits of savings
  • Encourage more of the unbanked into banking (for instance, some have suggested allowing the Postal Service to partner with traditional banks to offer banking for lower-income unbanked Americans; others, like Jim Epstein at Reason, have suggested other ways to serve the unbanked, such as eliminating price controls and allowing banks to run lotteries.)

Again, I am not endorsing all of these, and I’m sure that there are many more ways to help middle- and lower-income Americans have access to capital and increase savings. Moreover, obviously having access to better-paying jobs (that doesn’t mean increasing the minimum wage) and increasing income mobility at the bottom would go a long way to helping with this problem too. How to do that? Getting rid of occupational-licensing laws and allowing low-income kids to get out of the dismal public schools by giving them school vouchers would also be important first steps. 

The bottom line: If capital is leading to inequality, then we should devote public policy to finding ways to remove the barriers to capital formation and saving that affect lower-income families, provide better targeted incentives for them to save and invest (not increase their level of personal debt), rather than distracting ourselves with trying to reduce the rate of return on capital, which will only hurt everyone. 

This won’t be easy, and it won’t appeal the soak-the-rich advocates. But it would have an actual positive impact on middle- and lower-income people in a way just destroying rich people’s wealth wouldn’t.


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