Why We’re in a New Gilded Age
By Paul Krugman
The New York Review of Books, May 8, 2014
Review of “Capital in the Twenty-First Century”
By Thomas Piketty, translated from the French by Arthur Goldhammer
Belknap Press/Harvard University Press, 685 pp., $39.95
Thomas Piketty, professor at the Paris School of Economics, isn’t a household name, although that may change with the English-language publication of his magnificent, sweeping meditation on inequality, Capital in the Twenty-First Century. Yet his influence runs deep. It has become a commonplace to say that we are living in a second Gilded Age — or, as Piketty likes to put it, a second Belle Époque — defined by the incredible rise of the “one percent.” But it has only become a commonplace thanks to Piketty’s work.
The big idea of Capital in the Twenty-First Century is that we haven’t just gone back to nineteenth-century levels of income inequality, we’re also on a path back to “patrimonial capitalism,” in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties.
This is a book that will change both the way we think about society and the way we do economics.
Capital in the Twenty-First Century is, as I hope I’ve made clear, an awesome work. At a time when the concentration of wealth and income in the hands of a few has resurfaced as a central political issue, Piketty doesn’t just offer invaluable documentation of what is happening, with unmatched historical depth. He also offers what amounts to a unified field theory of inequality, one that integrates economic growth, the distribution of income between capital and labor, and the distribution of wealth and income among individuals into a single frame.
The current generation of the very rich in America may consist largely of executives rather than rentiers, people who live off accumulated capital, but these executives have heirs. And America two decades from now could be a rentier-dominated society even more unequal than Belle Époque Europe.
But this doesn’t have to happen.
At times, Piketty almost seems to offer a deterministic view of history, in which everything flows from the rates of population growth and technological progress. In reality, however, Capital in the Twenty-First Century makes it clear that public policy can make an enormous difference, that even if the underlying economic conditions point toward extreme inequality, what Piketty calls “a drift toward oligarchy” can be halted and even reversed if the body politic so chooses.
The key point is that when we make the crucial comparison between the rate of return on wealth and the rate of economic growth, what matters is the after-tax return on wealth. So progressive taxation — in particular taxation of wealth and inheritance — can be a powerful force limiting inequality. Indeed, Piketty concludes his masterwork with a plea for just such a form of taxation. Unfortunately, the history covered in his own book does not encourage optimism.
Piketty ends Capital in the Twenty-First Century with a call to arms — a call, in particular, for wealth taxes, global if possible, to restrain the growing power of inherited wealth. It’s easy to be cynical about the prospects for anything of the kind. But surely Piketty’s masterly diagnosis of where we are and where we’re heading makes such a thing considerably more likely. So Capital in the Twenty-First Century is an extremely important book on all fronts. Piketty has transformed our economic discourse; we’ll never talk about wealth and inequality the same way we used to.
http://www.nybooks.com/articles/archives/2014/may/08/thomas-piketty-new-gilded-age/
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Comment:
By Don McCanne, MD
Hopefully the excerpts above from Paul Krugman’s review of Thomas Piketty’s “Capital in the Twenty-First Century” will entice you to read Krugman’s full review, and then that will entice you to read Piketty’s full book. If you do so, you’ll understand why Krugman says, “we’ll never talk about wealth and inequality the same way we used to.”
Although a book on capital would seem to be off the topic of health care, Piketty provides us with the background to understand why we can’t seem to get health care financing right here in the United States, though he doesn’t discuss it specifically.
We do use progressive tax policies to partially fund health care through general revenues, but we also burden wage earners with the cost of health plans partially financed through regressive tax expenditures – the tax deductibility of employer-sponsored plans paid by employees through forgone wage increases.
Whereas median household income in the United States is now about $50,000, the cost of health care for the typical family of four is now about $22,000 (Milliman Medical Index). These numbers no longer compute, but they tend to be lost in the fragmented, dysfunctional way in which we finance health care. They cry out for reform.
There are two general approaches – on spending and on revenues – that seem to be imperative. One would be to reduce the wasteful spending in health care that occurs from our profound administrative excesses, our high prices, and the maldistribution of our resources due to a lack of adequate public oversight. A single payer system would redirect our resources to much better use.
The other approach that we need – as the disconnect between income and health costs demonstrates – would be to fund the single payer system through much better defined progressive taxes. Piketty’s treatise shows us that we really don’t have any other alternative. And since we already spend such a large portion of our GDP on health care, a progressively financed single payer system would provide a significant step in the visionary direction that Piketty has laid out for us.