by T. R. Reid
Economists had been tracking the imbalance of wealth in the United States and other advanced democracies for several years; indeed, Thomas Piketty was one of the pioneers of this line of research. Inequality as a political issue caught the public’s attention in the summer of 2011, when a ragtag group of protesters in New York City set up tents in a small park not far from the financial district and declared themselves the “Occupy Wall Street” movement. “We Are the 99%,” their banner read; the protesters loudly declared that 99% of Americans were getting the shaft because of the economic and political clout of the richest 1%. Almost overnight, similar encampments with similar banners sprang up in city parks around the country and overseas; by mid-October, the Washington Post tallied more than nine hundred Occupy gatherings in eighty different nations. The protesters generally agreed on what they were complaining about: big business got large government bailouts after the global recession, while ordinary citizens lost their jobs, their homes, and their savings. But the various groups never settled on what they wanted to do about it. There were few if any specific demands for action from the Occupiers. As the urban campers began to leave their muddy tent cities in the cold of winter, it was hard to identify any policy change spurred by this occupation.
And yet the Occupy movement did make a lasting contribution to American political discourse. The notion stuck that the country was divided between a filthy rich 1% and everybody else. Politicians from left to right—from the Democratic senator Elizabeth Warren to the Republican presidential candidate Donald Trump—declared that the American economic system is “rigged” to benefit the rich at the expense of the rest. In the 2012 election, Democrats never missed a chance to remind the voters that the Republican presidential nominee, Mitt Romney, was a certified 1-percenter, with bank accounts in Switzerland and the Cayman Islands. Even some of the superrich deplored the increasingly lopsided distribution of wealth. “Too much of the GDP of the country has gone to too few of the people,” warned Lloyd Blankfein, the CEO of Goldman Sachs, whose net worth, about $450 million, put him in the top one-tenth of the 1%. “If you grow the pie, but too few people enjoy the benefits of it, the fruit, then you’ll have an unstable society.”2
In December 2013, the president of the United States addressed the issue and declared it the most pressing problem facing the nation, “a fundamental threat to the American Dream.”
“I believe this is the defining challenge of our time,” Barack Obama said. “We face . . . a dangerous and growing inequality and lack of upward mobility that has jeopardized middle-class America’s basic bargain—that if you work hard, you have a chance to get ahead.” In recent decades, the president went on, that “basic bargain” had begun to fray.
As a trickle-down ideology became more prominent, taxes were slashed for the wealthiest, while investments in things that make us all richer, like schools and infrastructure, were allowed to wither. And the result is an economy that’s become profoundly unequal, and families that are more insecure.
In fact, this trend towards growing inequality is not unique to America’s market economy. Across the developed world, inequality has increased. But this increasing inequality is most pronounced in our country, and it challenges the very essence of who we are as a people. Understand, we’ve never begrudged success in America. . . . In fact, we’ve often accepted more income inequality than many other nations for one big reason—because we were convinced that America is a place where even if you’re born with nothing, with a little hard work you can improve your own situation over time and build something better to leave your kids.
The problem is that, alongside increased inequality, we’ve seen diminished levels of upward mobility in recent years. A child born in the top 20 percent has about a 2-in-3 chance of staying at or near the top. A child born into the bottom 20 percent has a less than 1-in-20 shot at making it to the top. The idea that so many children are born into poverty in the wealthiest nation on Earth is heartbreaking enough. But the idea that a child may never be able to escape that poverty because she lacks a decent education or health care, or a community that views her future as their own, that should offend all of us and it should compel us to action.3
Obama’s concern was echoed by repeated pronouncements from the most respected man in the world, Pope Francis. In his 2013 apostolic exhortation, Evangelii gaudium, for example, the pontiff argued passionately that tolerating the inequality of income and wealth was both unholy and dangerous.
“Just as the commandment ‘Thou shalt not kill’ sets a clear limit in order to safeguard the value of human life, today we also have to say ‘thou shalt not’ to an economy of exclusion and inequality,” the pope wrote. “How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality.”
There are people, of course, who disagree with the president and the pope, arguing that inequality is a boon to society at large. “The great growth of fortunes in recent decades is not a sinister development,” wrote the business historian John Steele Gordon in the Wall Street Journal. “All our lives have been enriched and enhanced” by the products we buy from billionaires. In the Times of London, the Conservative Party parliamentarian Matt Ridley called on his colleagues to “start spreading the good news on inequality.” The good news, he said, is that everybody is getting better off; it just happens at different rates. “Any increase in wealth inequality or pre-tax income inequality in Britain or America is caused by the rich getting disproportionately richer, not by the poor getting poorer.”4
With all the talk of inequality, some of the 1% began moaning out loud about the focus on their wealth, giving birth to a curious new American species: the whining billionaire. “From the Occupy movement to the demonization of the rich . . . I perceive a rising tide of hatred of the successful one percent,” the Silicon Valley magnate Tom Perkins wrote in an open letter. “I would call attention to the parallels of fascist Nazi Germany in its war on its ‘one percent,’ namely its Jews, to the progressive war on the American one percent, namely the ‘rich.’”5 The Nazi parallel was taken up by the investment banker Stephen Schwarzman, who was unhappy with proposals to reduce inequality by ending a lucrative tax break for his industry. “It’s a war,” Schwarzman was quoted as saying. “It’s like when Hitler invaded Poland in 1939.”6
There have always been differences between the rich and the poor. But today, the most striking gap is between the very rich and everybody else. In the United States, the median household income has been about the same—about $55,000—since the start of the century. But the top earners have seen big increases in income since 2000; as of 2015, the top 1% of American families had income of $405,000. To make the top one-tenth of 1% took income of $1.9 million.
Using the standard international measure of inequality, President Obama was basically correct when he said that among the advanced democracies the imbalance is “most pronounced” in the United States. The customary gauge of economic inequality is called the Gini coefficient, named for the Italian economist who thought it up. In the Gini rankings, a nation where everybody had the same amount of wealth and the same income would get a Gini score of 0; a country where one person took in all the income, and nobody else earned a cent, would get a score of 1. That is, the lower the Gini number, the smaller the gap between that nation’s rich and poor. Generally, the world’s poor countries—where a few families control the wealth, and tens of millions live in squalor—have high Gini coefficients. Nations like Lesotho, Botswana, Honduras, and Haiti have Gini numbers near 0.6, making them the least economically equal societies on the planet. Among the rich countries, the democracies of western Europe tend to score around 0.3; the world champions at economic equality include Sweden, Denmark, and Norway, where high wages for working people and high taxes o
n the rich bring the Gini index down to about 0.25.
The United States had a Gini coefficient in 2014 of 0.4—the worst rating among rich countries. Among the thirty-four members of the OECD, the club of industrialized democracies, only Mexico and Chile ranked higher than the United States on the inequality scale.
As these facts became more widely known, inequality emerged as a matter of broad concern among Americans, the stuff of kitchen-table and watercooler conversations all over the country. In New York, Washington, Cambridge, and Palo Alto, every self-respecting think tank—right, left, center, or far out—held erudite seminars on the issue. Magazines did cover stories; cable channels produced special reports. People began describing the United States as a “winner take all” society. A nation that had long cherished the belief that anybody can make it big began to mock that very idea. In 1960, John F. Kennedy had famously said that economic growth would benefit everybody: “A rising tide lifts all boats.” Half a century later, the joke was that “a rising tide lifts all yachts,” because only those with multimillion-dollar pleasure craft of their own were riding the economic wave.
Widespread concern over this trend was the reason Piketty’s heavy economics tome became a number one bestseller in the United States. Still, it was not exactly beach reading. Because you, gentle reader, have been kind enough to read this book, I will repay the favor by providing a summary of the professor’s argument, thus saving you the $40 price of the book and the hours required to read it.
Capital in the Twenty-First Century is actually more like three books than one. First, it’s a history of the rich/poor divide, based on three centuries of wealth and income data that Piketty and his colleagues gathered from the United States, the U.K., France, and Sweden. Piketty relies heavily on mathematical models and statistical tables, but he thoughtfully spares his readers all that stuff, sticking it in a “technical appendix” on the Internet. In the book, he draws lessons from literature. He studies “the nature of wealth” as described in the nineteenth-century social-climbing novels of Jane Austen and Honoré de Balzac, where the economic classes were essentially set in concrete and the only way to move up in the world was to inherit from Uncle Moneybags or to marry well. This social dynamic explains the famous opening line of Austen’s Pride and Prejudice: “It is a truth universally acknowledged, that a single man in possession of a good fortune, must be in want of a wife.”
The historical data show that inequality of wealth in the United States and Europe grew sharply toward the end of the nineteenth century, the so-called Gilded Age, and into the first two decades of the twentieth. Then, because of policy innovations (like the income tax), the Great Depression, and the leveling effect of world wars, the gap between the rich and ordinary working people grew smaller through much of the twentieth century. By the 1970s, the wealth disparity was the smallest it had been for a hundred years. But inequality began to grow again in the 1980s and has continued to do so into the twenty-first century, particularly in the United States. By 2012, the top 1% of American households took 22.5% of the nation’s total income—the highest share since 1928.
Piketty then says the renewed growth of inequality in recent decades is due partly to “the explosion of wage inequality in the United States (and to a lesser extent Britain and Canada) after 1970.” It became the norm for the top brass in American corporations to be paid annual salaries and bonuses that would have been deemed embarrassing, indeed disgraceful, in the past. In the 1950s, the CEO of an American industrial or retail company was paid about twenty times as much as the average worker at the firm, and those CEOs were considered “rich.” Today, the boss is routinely paid two hundred, four hundred, six hundred times as much as her typical employee and is “superrich.” In recent years, the Walmart CEO has earned about $25 million annually; that’s a thousand times what an hourly clerk on the retail floor will make in the same year. The CEO of the Chipotle restaurant chain, Steve Ells, was paid $13.8 million for 2015, about seven hundred times as much as a cashier in his stores.
This “explosion” in compensation often has little to do with performance, Piketty notes. For the year 2014, Yahoo’s CEO, Marissa Mayer, was paid more than $42 million, even though the company’s sales and profits fell every year under her leadership. Chipotle’s sales and profits plummeted in 2015 due to food poisoning problems at several outlets, but its CEO still collected that $14 million.
But developments in the private sector, Piketty says, are not the only cause of the burgeoning financial imbalance. A key contributor to inequality, he says, is government policy. When governments decide to bail out big banks while millions lose their homes to foreclosure action by the same banks, the policy exacerbates the problem of inequality. Such policies transfer wealth from middle-class homeowners to upper-bracket bankers and their shareholders—not through private markets, but because of decisions by governments. Similarly, tax policies that give generous breaks to the wealthiest—like that $7,500 giveaway to people who can buy a $105,000 car—exacerbate the trend toward concentration of wealth in a lucky few. When the national tax code says that money earned from trading securities will be taxed at a much lower rate than money earned from working at a job, the tax law itself is adding to inequality. This is not surprising, Piketty says, because the government officials who approve corporate bailouts and write the tax laws are often beholden to the financial elites for political contributions.
But the major reason for growing inequality, Piketty argues, is that rich people today make most of their money not from wages but from capital investments—stocks, bonds, commodity trades, real estate, patents, and so on. And earnings from capital (that is, from financial transactions) are growing faster than earnings from labor (that is, from working at a job). That is, you can make some money cooking hamburgers or serving hamburgers, but you won’t make as much as a guy who buys and sells the stock in a hamburger chain.
In other words, Piketty says, “the rich get richer” has become a fundamental law of economics, especially in the United States. Because our Supreme Court has defined donating money as a form of political speech, economic clout in the United States turns quickly into political clout. Rich political donors can get the politicians whom they finance to champion tax and regulatory policies that increase the wealth of the wealthy. The “forces of divergence,” in Piketty’s phrase, are stronger than any influences that might reduce inequality. Piketty maintains that the notion of a nation where all are basically equal is dying; as the book states it, “The egalitarian pioneer ideal has faded into oblivion.” And if current patterns of inequality in income and wealth continue for a few decades, “the consequences for the long-term dynamics of the wealth distribution are potentially terrifying.”
But Piketty offers a series of solutions. The basic answer, he says, is tax. He proposes significantly heavier taxes on the rich. This would reduce their wealth, and the revenues could be used for education, jobs, or handouts to increase the wealth of everybody else. The income tax burden, he says, should fall more heavily on those who make their money on financial dealing; he says the U.S. system, in which the tax on capital gains is much lower than the tax on wages and salaries, is simply upside-down and thus counterproductive for dealing with the growth of inequality.
Income taxes on the rich, he says—both on their salaries and on their capital gains—should be substantially higher than they are now. How high? “According to our estimates, the optimal top tax rate in the developed countries is probably above 80 percent.” That’s a tax rate more than double what the highest earners pay today in the United States. If this 80% top marginal rate were applied to earnings over $500,000, Piketty says, the tax regime would help to even out inequality without stunting economic growth.
Beyond the income tax, though, Piketty proposes a tax on wealth. It would work like the property tax that most American homeowners pay already. For the property tax, the county sends around an assessor to appraise the value o
f your house, and the tax due is some percentage of the appraised value. In a wealth tax regime, the assessor appraises not just your house but all your wealth—your cars, your boat, your jewelry, your bank accounts, your investment portfolio, the art on your walls, your vacation home, and the Persian rug on the floor of your vacation home. If the total wealth exceeds a certain amount, you pay a tax on the whole thing. If the assessor finds that all the money and stuff you own is worth a total of $5 million, and the wealth tax rate is 2%, you’d have to fork over $100,000 in wealth tax. And the assessor will come around next year to bill you again.
One obvious problem with a national wealth tax is that wealthy people can, and do, switch nations to avoid the tax. You can’t move your city mansion or your mountain condo to a different state, but a rich person facing a $100,000 tax bill each year might well pack up his art, rugs, and jewelry and move to a country that doesn’t tax wealth. Piketty has a solution: make the wealth tax a global tax. That is, all countries should agree to a standard tax on wealth so that a zillionaire can’t cut his tax bill by moving across the border. Being a fairly down-to-earth economist, Piketty freely admits that this “global wealth tax” is not a realistic possibility at the moment. He holds out hope, though, that the member nations of the European Union might agree on a continent-wide wealth tax, and maybe the idea would spread from there.
It’s hardly surprising that Thomas Piketty would propose taxing the rich as the primary solution to the problem of inequality. Piketty is French, and France is the world champion at soaking the rich through taxes. In the United States and other rich democracies, those who worry about inequality routinely argue for higher tax rates on the upper brackets and other changes designed to reduce the gap between the rich and the rest. In his “defining challenge of our time” speech, Barack Obama called for tax reforms and invoked the concept of BBLR—getting rid of tax breaks for the wealthy in order to broaden the taxable base and thus lower rates. “And by broadening the base,” the president said, “we can actually lower rates to encourage more companies to hire here and use some of the money we save to create good jobs rebuilding our roads and our bridges and our airports, and all the infrastructure our businesses need.”
