Capital in the Twenty-First Century: Thomas Piketty’s data-driven magnum opus on inequality

Jacob S. Hacker and Paul Pierson write: When Alexis de Tocqueville visited America in the early 1830s, the aspect of the new republic that most stimulated him was its remarkable social equality. “America, then, exhibits in her social state an extraordinary phenomenon,” Tocqueville marveled. “Men are there seen on a greater equality in point of fortune and intellect … than in any other country of the world, or in any age of which history has preserved the remembrance.”

To Tocqueville, who largely ignored the grim exception of the South, America’s progress toward greater equality was inevitable, the expansion of its democratic spirit unstoppable. Europe, he believed, would soon follow America’s lead. He was right—sort of. Democracy was on the rise, but so too was inequality. Only with the 20th century’s Great Depression, two terrible wars, and the creation of the modern welfare state did concentrations of economic advantage in rich democracies start to dissipate and the fruits of rapid growth begin to accrue generously to ordinary workers.

Now another Frenchman with a panoramic vista — and far more precise evidence — wants us to think anew about the progress of equality and democracy. Though an heir to Tocqueville’s tradition of analytic history, Thomas Piketty has a message that could not be more different: Unless we act, inequality will grow much worse, eventually making a mockery of our democratic institutions. With wealth more and more concentrated, countries racing to cut taxes on capital, and inheritance coming to rival entrepreneurship as a source of riches, a new patrimonial elite may prove as inevitable as Tocqueville once believed democratic equality was.

This forecast is based not on speculation but on facts assembled through prodigious research. Piketty’s startling numbers show that the share of national income coming from capital — once comfortingly believed to be stable — is on the rise. Private wealth has reached new highs relative to national income and is approaching levels of concentration not seen since before 1929. [Continue reading…]

John Cassidy writes: Piketty believes that the rise in inequality can’t be understood independently of politics. For his new book, he chose a title evoking Marx, but he doesn’t think that capitalism is doomed, or that ever-rising inequality is inevitable. There are circumstances, he concedes, in which incomes can converge and the living standards of the masses can increase steadily — as happened in the so-called Golden Age, from 1945 to 1973. But Piketty argues that this state of affairs, which many of us regard as normal, may well have been a historical exception. The “forces of divergence can at any point regain the upper hand, as seems to be happening now, at the beginning of the twenty-first century,” he writes. And, if current trends continue, “the consequences for the long-term dynamics of the wealth distribution are potentially terrifying.”

In the nineteen-fifties, the average American chief executive was paid about twenty times as much as the typical employee of his firm. These days, at Fortune 500 companies, the pay ratio between the corner office and the shop floor is more than two hundred to one, and many C.E.O.s do even better. In 2011, Apple’s Tim Cook received three hundred and seventy-eight million dollars in salary, stock, and other benefits, which was sixty-two hundred and fifty-eight times the wage of an average Apple employee. A typical worker at Walmart earns less than twenty-five thousand dollars a year; Michael Duke, the retailer’s former chief executive, was paid more than twenty-three million dollars in 2012. The trend is evident everywhere. According to a recent report by Oxfam, the richest eighty-five people in the world — the likes of Bill Gates, Warren Buffett, and Carlos Slim — own more wealth than the roughly 3.5 billion people who make up the poorest half of the world’s population.

Eventually, Piketty says, we could see the reëmergence of a world familiar to nineteenth-century Europeans; he cites the novels of Austen and Balzac. In this “patrimonial society,” a small group of wealthy rentiers lives lavishly on the fruits of its inherited wealth, and the rest struggle to keep up. For the United States, in particular, this would be a cruel and ironic fate. “The egalitarian pioneer ideal has faded into oblivion,” Piketty writes, “and the New World may be on the verge of becoming the Old Europe of the twenty-first century’s globalized economy.”

What are the “forces of divergence” that produce enormous riches for some and leave the majority scrabbling to make a decent living? Piketty is clear that there are different factors behind stagnation in the middle and riches at the top. But, during periods of modest economic growth, such as the one that many advanced economies have experienced in recent decades, income tends to shift from labor to capital. Because of enmeshed economic, social, and political pressures, Piketty fears “levels of inequality never before seen.”

To back up his arguments, he provides a trove of data. He and Saez pioneered the construction of simple charts showing the shares of over-all income received by the richest ten per cent, the richest one per cent, and, even, the richest 0.1 per cent. When the data are presented in this way, Piketty notes, it is easy for people to “grasp their position in the contemporary hierarchy (always a useful exercise, particularly when one belongs to the upper centiles of the distribution and tends to forget it, as is often the case with economists).” Anybody who reads the newspaper will be aware that, in the United States, the “one per cent” is taking an ever-larger slice of the economic pie. But did you know that the share of the top income percentile is bigger than it was in South Africa in the nineteen-sixties and about the same as it is in Colombia, another deeply divided society, today? In terms of income generated by work, the level of inequality in the United States is “probably higher than in any other society at any time in the past, anywhere in the world,” Piketty writes. [Continue reading…]

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