May 12, 2014

May 12, 2014 | Commentary on Economy, Inequality, Taxes

Thomas Piketty’s “Capital in the 21st Century” and the Inequality Debate

Thomas Piketty’s “Capital in the 21st Century” is a smash on the Amazon bestsellers list. It is all the rage in DC and other corridors of influence.

Why all the buzz? Because Dr. Piketty, economics professor at the Paris School of Economics, has amassed a novel set of data on income and wealth inequality stretching back hundreds of years using tax returns from the U.K., France, and the U.S.

Referencing such data, Piketty argues that wealth inequality grows continually in capitalist economies because the return to capital outpaces economic growth. In other words, capitalists will always do better than workers no matter how strongly the economy grows.

Given today’s political debate on inequality in the U.S., this finding was certain to gain interest here.

But Piketty’s findings are by no means definitive, and many have shown his argument doesn’t hold up if you change some of his basic assumptions.

Kevin Hassett of the American Enterprise Institute, for instance, ably explained how for Piketty’s argument to hold, the trade-off of capital for labor would have to be much higher than economic research has found.

Given the new and interesting data Piketty compiled, and the surprising theory he extrapolated from it, “Capital” should be generating similar enlightening debate on the many other complexities relating to inequality.

Instead, some are using it simplistically as irrefutable proof they were right all along.

Case in point: Paul Krugman. He claims conservatives are in a panic over the book because it “demolishes that most cherished of conservative myths, the insistence that we’re living in a meritocracy in which great wealth is earned and deserved.”

He concludes by saying conservative opposition to the book’s inferences and conclusions shows that the Right is “out of ideas.”

Wait a minute. Piketty shows who is out of ideas?

The Parisian economist’s recommended “cure” for ever-rising wealth inequality is to levy a global wealth tax and steeply progressive income tax rates. In other words, the exact policy agenda liberals, including Krugman, have been advocating for over 100 years.  

Krugman does not consider the possibility that conservatives object to Piketty’s preferred policy remedy because they believe it would have disastrous effects on poor and middle class families.

There is, after all, good reason to believe a wealth tax and a more steeply progressive income tax would suppress economic growth and shut off opportunity for families down the income scale, doing far more harm than good.

Nor does he consider that, even if you accept Piketty’s argument that the return to capital will always be greater than economic growth, there are ways other than enacting the first chapter in the Liberal Policy Playbook of dealing with rising inequality.

The most obvious alternative is to make it easier for people and families at lower income levels to accumulate capital so they, too, can enjoy its return. This of course would require making it easier to save and invest through tax reform, something in which the left has shown little interest.

The other glaring omission from the debate so far has been dreadfully slow economy of the Obama years. President Obama shifted to growing inequality as his preferred policy platform after it was clear the economy wasn’t going to return to robust growth under his stewardship.

Inequality always has more salience with the public when the size of the economic pie is stagnating and we are arguing over the size of our respective slices. It matters less to most when the pie is growing and everyone is doing better.

Figuring out how we can lift the economy out of its now 6-year-long rut should be the paramount goal of those concerned with rising inequality.

The debate over inequality isn’t going away anytime soon, since liberals have taken President Obama’s lead and chosen it as their policy battleground leading up to 2016.

When going up against a familiar opponent, it’s always comforting to know which play they’re going to call. When it comes to inequality, liberals will call the same play in 2016 they called for in 1916.

Conservatives know what’s coming. They should have a superior defense ready for deployment.

 - Curtis Dubay is a research fellow specializing in tax policy in The Heritage Foundation’s Roe Institute for Economic Policy Studies.

About the Author

Curtis S. Dubay Research Fellow, Tax and Economic Policy
Thomas A. Roe Institute for Economic Policy Studies

Originally appeared in The National Interest