Plutonomy and Its Consequences

 The term plutonomy is used here to describe a situation where wealth as been so highly concentrated that many of the characteristics of the general economy are determined largely by decisions made by the extremely wealthy rather than by the much more numerous but average income people.  Thomas Piketty, in his book Capital and Ideology, has provided plenty of data we can peruse and analysis we can consider in discussing this notion.

Piketty likes to illustrate economic inequality by assessing how much of national income or wealth is held by the top fraction in the particular category.  This figure provides the wealth possessed by the top 10% (top decile) of the wealthy over the period from 1900 to 2015.

The following figure provides the same data for the top 1% (top centile).

The twentieth century, in the years before World War I, began with the Western Economies in an extremely inegalitarian state.  That situation arose in a time when taxation was low and usually regressive, allowing for wealth to be accumulated with few limitations.  Early in the twentieth century demands on nations for funds initiated a move toward more aggressive taxation.  Two world wars and the Great Depression generated highly progressive taxation.  After World War II, the European countries would use their high tax rates to provide desperately needed social services.  We in the United States like to refer to taxing the wealthy as a redistribution mechanism, as if we take their money and give it to someone else.  Actually, what the Europeans did was take that money and provide social services that previously had to be purchased individually.  Families with children who began to receive childcare, healthcare, education, and pensions at little if any cost in return for their taxes lived much better under this social insurance system, allowing for a dramatic increase in the size of the middle class in that era.  The social system also provided economic floors for the poor and disadvantaged that kept them out of abject poverty.

The United States followed a different path.  It was less unequal initially, something we proudly recall, but we would set in motion policies that would separate us from our European cousins and send us back up toward nineteenth century levels of inequality.  Our effort at providing social insurance mostly involved depression-era New Deal programs of the 1930s.  The decline in inequality stops around 1950 when we become more focused on military spending and begin assuming our healthy economy will provide all the benefits we will need.  Also, at that time began the long, gradual elimination of progressive taxation in our country.  The result was little postwar growth in the middle class compared to Europe (Piketty characterizes the middle class as the 50-90% income bin).  Medicare, Medicaid, and Johnson’s Great Society programs would be the extent of social welfare advances until Obama’s healthcare legislation.  Around 1980, inequality would again begin an inexorable climb.

Piketty’s evaluation of economic and social history concludes that the simplest way to contain the growth of wealth is by progressive taxation (some combination of taxes on income, wealth, and inheritance), and the most efficient way to raise wages for the poorest part of the population is by legislating an appropriate minimum wage.  He provides an extraordinary chart describing the evolution of progressivity in our system of taxation—one we should all commit to memory.

What is shown here is total taxation.  That includes federal income tax which has some degree of progressivity, and payroll, state, and local taxes, many of which are regressive.  Regressive taxes have increased over the years while tax rates for the wealthy have fallen dramatically.  The net result is that there is little difference between the effective tax rate of the wealthiest and the least wealthy.

We have already observed that a consequence of this taxation history is that the fraction of wealth owned by the richest has been increasing.  It is often argued that this is only fair because the richest among us use their wealth to invest in new job-producing enterprises.  If that were the case, one would expect to see some evidence of an economic benefit to society from all of this accumulated wealth.  Once again Piketty provides some relevant data.

In the United States the increase in tax rates on the wealthy in the 1910-1950 period did nothing to decrease growth.  It would be the current period from 1990 to 2020 when progressivity of taxation was greatly diminished that is associated with slow growth.  The next figure illustrates this in another fashion by comparing income inequality with growth.  Growth in inequality is associated with low economic growth.

A plutonomy is characterized by low economic growth as money is extracted from lower income people and transferred to upper income people.  The wealthy spend very little in the economy in which most reside.  They focus on luxury items that only they can afford and direct much of their funds to gambling in financial markets, neither of which contributes much to useful economic activity. 

Piketty provides the following figure to illustrate this transfer of wealth upward over the last 50 years.  He includes similar data for France.

 The data demonstrates that the United States is unique in the degree to which inequality has evolved.  We are highly unequal because we have explicitly chosen policies that would produce that result.  Piketty’s purpose in writing his book is to make clear that societies and their economies result from choices that are made, and there are many paths to a satisfactory society.  France has been able to do a better job of containing wealth growth and maintaining the income fraction possessed by the lower income population than the United States.  It did that with a high level of taxation but little in the way of progressivity.  France also managed to provide low-cost universal childcare, healthcare, education, and pensions; and let’s not forget shorter work weeks and those delightful six weeks of paid vacation each year while maintaining productivity levels at least as high as those of the United States.  There are many factors involved and thus many decisions to be made.  Consider that the United States was one of the leaders in establishing a significant minimum wage.  France eventually came around and provided a minimum that grew as inflation drove up the cost of living.  Meanwhile, we in the United States meekly acquiesced to the unsupported assumption that raising wages by fiat would cause harm and a loss of jobs.

Clearly the elimination of high marginal income tax rates for the wealthy has contributed greatly to the concentration of wealth.  That observation should not pass without recognizing that lowering tax rates for high incomes provides perverse incentives.  Company CEOs can become moderately wealthy in a high tax system, but gain little from making decisions to further maximize their personal wealth.  In a low tax system, they can spend their time trying to maximize their personal income and be richly rewarded for all sorts of aberrant behaviors.

As the concentration of wealth in the United States approaches or exceeds the highest level in our history, it is worth considering what the political consequences of such a state entail.  The wealth that accumulated by the beginning of the twentieth century occurred under regimes in which taxes were low and generally regressive.  Voting rights and possession of property were highly connected, meaning the wealthy often produced the policies that ensured their wealth would continue to grow.  In our current environment, a similar situation is in play, albeit, indirectly.  Today, money provides political allegiance through campaign contributions to would-be legislators.  This does not have to be the way in which things are done.

We do not have to accept what is such a burden to us now.  Piketty devotes almost 1100 pages of evaluation of historical social and economic systems to justify some rather simple conclusions.

“Inequality is neither economic nor technological; it is ideological and political.  This is no doubt the most striking conclusion to emerge from the historical approach I take in this book.  In other words, the market and competition, profits and wages, capital and debt, skilled and unskilled workers, natives and aliens, tax havens and competitiveness—none of these things exist as such.  All are social and historical constructs, which depend entirely on the legal, fiscal, educational, and political systems that people choose to adopt and the conceptual definitions they choose to work with.  These choices are shaped by each society’s conception of social justice and economic fairness and by the relative political and ideological power of contending groups and discourses.  Importantly, this relative power is not exclusively material; it is also intellectual and ideological.  In other words, ideas and ideologies count in history.  They enable us to imagine new worlds and different types of society.  Many paths are possible.”

The ideological rut we have descended into where economic might determines political might was never an efficient mode for either social or economic vitality no matter what stage in history it existed.

“From this historical analysis one important conclusion emerges: what made economic development and human progress possible was the struggle for equality and education and not the sanctification of property, stability, or inequality.  The hyper-inegalitarian narrative that took hold after 1980 was in part a product of history, most notably the failure of communism.  But it was also the fruit of ignorance and of disciplinary division in the academy.  The excesses of identity politics and fatalist resignation that plague us today are in large part consequences of that narrative’s success.”

If one wishes to change the dominant ideology, one must come up with an alternative.  That proposal must be argued, analyzed, optimized, and eventually sold to a significant fraction of the voting population.  The voters can overcome the influences of wealth if they act in unison, and they strike when the time is right.  There is a political adage: “Don’t waste a crisis.”  When the situation makes clear that the status quo no longer works, then the opportunity for significant changes has arisen.

“Historical change takes place when evolving ideas confront the logic of events: neither has much effect without the other.”

Covid-19 has presented just such an opportunity to introduce fixes for the many defects in our society and our economy.  But have we performed the ideological homework necessary to sell anything significant to the voting public?  It is not obvious.  Fortunately, or unfortunately, we still have time.