Economic Inequality

“Forces of Divergence” by John Cassidy. The New Yorker, 3/31/2014

economic-inequalityThomas Piketty is all over the media lately. He is a French economist who  last year published a book “Capital in the Twenty-first Century” dealing with the ballooning world-wide economic inequality. Piketty taught economics at MIT when only 22 and now teaches at the Paris School of Economics. I understand his book is full of math, charts, and tables that overwhelmingly proves the growing inequality, and this New Yorker article is a review of that book. Economic books are like having an insurance agent parked on your living room couch, so I was glad to read just this review.

I have to admit I had to overcome two prejudices before becoming concerned about economic inequality. The first was a resentment towards the maintenance guys at the labs where I worked who made as much money as me, could easily slough off for a good part of the day, and, as licensed plumbers and electricians, could moonlight on the weekends by working for employees like me who hadn’t a clue how to keep our homes in repair. My second prejudice is the realization that everyone cannot live at my standard without destroying the world. The world cannot support everyone driving their own car, yet how can I deny anyone else what I enjoy?  If they cannot step up, I will have to step down.

The 85 richest men in the world own more wealth than the roughly 3.5 billion people who make up the poorest half of the world’s population. In the 1950s, the average American chief executive was paid about 20x the salary of the typical employee of that company. Today, it is 200x. Just last week, Dan Hesse, CEO of Sprint, collected $49 million for the year, although to be fair, most of that was because of a spike in the stock price not likely to be repeated.  But how can he possibly spend that much?

The bright side is that he doesn’t.  The super-rich can only spend a small portion on themselves.  Most they put into hedge funds, mutual funds, and even bank accounts where it supports economic growth throughout society.  You need the super-rich for a vibrant, growing economy.

We are reverting to Europe’s patrimonial society of the 19th-century, like the Crawleys of Downton Abby before they emerged into the 20th century. The level of inequality in the United States is “probably higher than in any other society at any time in the past,” even more than in South Africa in the 1960s.

This is not a political debate between conservatives and liberals.  It is simply the question Is this the world we want?  How did we get here?  Can it be changed?

Some say the inequality comes from outsized benefits awarded to media-generated superstars, such as Kobe Bryant, Oprah Winfrey, and Cole Hamels. But Piketty’s research shows 70% of the richest 0.1% are super-executives, not superstars. Rising income inequality is largely a corporate phenomenon.

Unfortunately, the equality that we became used to for the past one hundred years may have been a quirk, and we are just returning to normalcy. Piketty points out what now seems obvious: when the rate of return on capital exceeds the growth of GDP (wages rarely grow faster than GDP), those who own the stocks and bonds will thrive while inflation-adjusted wages stagnate.   Between 2010 and 2012, 95% of the wealth flowed into the pockets of the top 1% as capital gains rose.

The reverse is also true. If GDP growth exceeds the rate of return of capital, salaries will rise more than capital gains, and that is what happened during most of the 20th century, thanks to two world wars. The rebuilding of Europe required enormous growth of GDP which, in addition, was financed by taxes levied on the rich. Hence the pressures we see on the capital-rich Crawleys of Downton Abby. Roosevelt taxed incomes over $1 million at 90%. Earn $1 over that and you get to keep a dime. But those days that seemed so permanent are coming to an end.

The New Yorker reviewer adds the effects of globalization, possible only with recent advances in cheap transportation. Globalization holds down wages while pushing up the profitability of capital, widening the wealth gap from both ends.

The obvious solution is to tax the rich, but that is not going to happen. When Roosevelt raised the marginal tax rate to 90%, tax revenues did not budge. The axiom became “High taxes do not get paid.” If someone has to pay several million in taxes, it makes sense for them to pay a lawyer several hundred thousand to figure a way to avoid that payment. The independent lawyers proved to be far smarter than the elected officials.  Plus, the increasingly high cost of political campaigns and the high contributions they required opened the door to hidden loopholes for those making the donations.

The new thought is to tax assets rather than income, much like a property tax.  Own a $50 million portfolio and it will be taxed this year, next year, and every year.  Soon, even the most hard-hearted will think of giving it away, at least until they meet with their lawyers.

But this, too, is unlikely.  In any form of government, dictatorship, communistic, or democratic, those with the money make the rules.


About Roger Walck

My reasons for writing this blog are spelled out in the posting of 10/1/2012, Montaigne's Essays. They are probably not what you think.
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