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.
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