Irresistable Inequality: The Relentless Widening in the Disparity of Wealth
The free market is not going to solve the problem of wealth disparity. Some will claim, immediately, that the use of the word 'problem' is evidence of inherent bias. Class warfare is usually the charge.
These partisans insist that current trends in the aggregation of wealth are part of the natural order. Money is flowing to those who deserve, and not to those who do not.
That they have lobbied long and hard to write laws and regulatory regimes and tax policies to establish and then keep it that way seems beside the point to those of this mindset.
The issue, then let us call it, is - as the following article explains - that the income inequality we now see is not only not going to end, but that the forces set in train are only going to make it more inevitable in the future.
As a society this does, indeed, present problems because it represents a change from which a few appear to benefit at the expense of the many. As an economy, it matters because it is unsustainable. Consumers can not continue to support what has been, for almost three quarters of a century, a consumer economy if they can not afford to consume.
So something will have to be done. Education is simply not powerful enough - and takes too long - to have a near term impact. And even if it were truly a solution, no one in a position of power seems willing to invest in something like that which benefits the many at the potential expense of the few. There is little or no chance that fiscal policy - taxes - can be raised given the ferocity of the opposition that prospect generates.
The only question, then, is what will cause the the unsustainable to collapse. JL
Eduardo Porter comments in the New York Times:
What if inequality were to continue growing years or decades into the future?
Say the richest 1 percent of the population amassed a quarter of the nation’s
income, up from
about a fifth today. What about half?
To believe Thomas Piketty of the Paris School
of Economics, this future is not just possible. It is likely.
In his bracing “Capital in the Twenty-First
Century,” Professor Piketty provides a fresh and
sweeping analysis of the world’s economic history that puts into question many
of our core beliefs about the organization of market economies.
His most startling news is that the belief
that inequality will eventually stabilize and subside on its own, a long-held
tenet of free market capitalism, is wrong. Rather, the economic forces
concentrating more and more wealth into the hands of the fortunate few are
almost sure to prevail for a very long time.
It is possible to slow, or even reverse, the
trend, if political leaders like President Obama, who proposed that income
inequality was the “defining challenge of our time,” really push.
“Political action can make this go in the
other direction,” Professor Piketty told me. But he also adds that history does
not offer much hope that political action will, in fact, turn the tide:
“Universal suffrage and democratic institutions have not been enough to make the
system react.”
Professor Piketty’s description of inexorably
rising inequality probably fits many Americans’ intuitive understanding of how
the world works today. But it cuts hard against the grain of economic orthodoxy
that prevailed throughout the second half of the 20th century and still holds
sway today. It was shaped during the early years of the Cold War by the
Belorussian-born American economist Simon Kuznets.
Painstakingly assembling data from tax
returns, Mr. Kuznets estimated that between 1913, when the income tax was first
introduced in the United States, and shortly after the end of World War II in
1948, the slice of the nation’s income absorbed by the richest 10 percent of
Americans declined sharply, to about a third, from a little under half.
Irresistible Inequality
The concentration of income and wealth is deepening
around the world, driven by more than rising paychecks for top American
financiers and chief executives. Returns to invested capital are outstripping
economic growth across advanced countries, directing a growing share of economic
rewards into the hands of the wealthy.
Share of total income of the richest 10 percent
UNITED STATES
BRITAIN
GERMANY
FRANCE
SWEDEN
50
%
40
30
20
10
0
1900
2010
1900
2010
1900
2010
1900
2010
1900
2010
Value of private capital as a percentage of national
income
WORLDWIDE, 1870 – 2100
SELECTED COUNTRIES, 1970 – 2010
700
%
600
%
France
600
500
Britain
500
United States
400
400
300
PROJECTED
300
Germany
200
200
World War II
100
World War I
100
0
0
1870
1900
1950
2000
2050
2100
1970
’75
’80
’85
’90
’95
’00
’05
’10
In his presidential address at
the annual meeting of the American Economic Association in Detroit in 1954, he
sketched out what came to be known as inequality’s “Kuznets curve”: “Widening in
the early phases of economic growth when the transition from the preindustrial
to the industrial civilization was most rapid; becoming stabilized for a while;
and then narrowing in the later phases.”
Mr. Kuznets’s conclusion provided a huge moral
lift to capitalism as the United States faced off with the Soviet Union. It
suggested that the market economy could distribute its fruits equitably, without
any heavy-handed intervention of the state.
And it more or less put an end to economists’
interest in the topic. Economic theorists assumed that in a balanced economy,
wages and profits rose at the same pace and turned their attention to the ups
and downs of the business cycle.
The deep concern about the distribution of
income and wealth that inspired 19th-century thinkers like David Ricardo and
Karl Marx was attributed to a misunderstanding of the dynamics of growth
leavened with the natural pessimism that would come from living in a time of
enormous wealth and deep squalor, an era that gave us “Les Misérables” and
“Oliver Twist.”
Today, of course, it’s far from obvious that
the 19th-century pessimists were entirely wrong.
Glancing back across history from the
present-day United States, it looks as if Kuznets’s curve swerved way off
target. Wages have been depressed for years. Profits account for the largest
share of national income since the 1930s. The richest 10 percent of Americans
take a larger slice of the economic pie than they did in 1913, at the peak of
the Gilded Age.
This is not solely an American phenomenon.
Across many other developed nations, the distribution of economic rewards in the
21st century is taking on decidedly 19th-century features.
In “Capital in the Twenty-First Century,”
Professor Piketty offers a general theory of capitalism that returns
distribution to the center of the analysis. Branko Milanovic, an expert on the
global distribution of income at the City University of New York’s Graduate
Center, called it “one of the
watershed books in economic thinking.”
Like Kuznets’s analysis, Mr. Piketty’s is
based on data. He just has much more: centuries’ worth, from dozens of
countries. He distills from them a simple historical regularity. The rate of
return to capital — understood broadly to include machinery, land, financial
instruments, housing and everything else — is usually higher than economic
growth.
This was particularly true before the
Industrial Revolution, when economies didn’t really grow, but it prevailed even
after economic growth took off in the 19th century.
This means that the income from wealth usually
grows faster than wages. As returns from capital are reinvested, inherited
wealth will grow faster than the economy, concentrating more and more into the
hands of few. This will go on until capital owners decide to consume most of
their income and stop reinvesting as much.
Kuznets’s misleading curve is easy to
understand in this light. He used data from one exceptional period in history,
when a depression, two world wars and high inflation destroyed a large chunk of
the world’s capital stock. Combined with fast growth after World War II and high
taxes on the rich, this flattened the distribution of income until the
1970s.
But this exceptional period long ago ran its
course.
During the Gilded Age — a period of enormous
concentration of income and wealth — the stock of the world’s privately held
capital amounted to some five years’ worth of global income, by Professor
Piketty’s estimate. By 1950, it had fallen to below three, but by 2010, it was
back at four. And by the end of this century, Mr. Piketty projects, it will
amount to almost seven.
Americans will argue that this description
does not fit the United States. Wealth here is largely earned, not inherited, we
say. The American rich are “creators,” like Bill Gates of Microsoft or Lloyd
Blankfein of Goldman Sachs, rewarded for their economic contributions to
society.
Mr. Piketty doubts that the enormous
remuneration of top executives and financiers in the United States — enhanced by
the decline of top income tax rates since the 1980s — really reflects their
contributions. What’s more, he points out, inherited inequality has been lower
in the United States mainly because its population has grown so fast — from
three million at the time of independence to 300 million today — driving a vast
economic expansion.
But this population boom will not repeat
itself. The share of national income absorbed by corporate profits, a major
component of capital’s share, is already rising sharply.
If anything, this means future inequality in
the United States will be driven by two forces. A growing share of national
income will go to the owners of capital. Of the remaining labor income, a
growing share will also go to the top executives and highly compensated stars at
the pinnacle of the earnings scale.
Is there a politically feasible antidote?
Professor Piketty notes that the standard recipe — education for all — is no
match against the powerful forces driving inherited wealth ever higher.
Taxes are, of course, the most feasible
counterweight. Progressive wealth taxes could reduce the after-tax return to
capital so that it equaled the rate of economic growth.
But politically, “the fiscal institutions to
redistribute incomes in a balanced and equitable way have been badly damaged,”
Professor Piketty told me.
The holders of wealth, hardly a powerless
bunch, will oppose any such move, even if that’s what is needed to preserve
capitalism against the populist impulses of those left behind.
Professor Piketty offers early-20th-century
France as an example. “France was a democracy and yet the system did not respond
to an incredible concentration of wealth and an incredible level of inequality,”
he said. “The elites just refused to see it. They kept claiming that the free
market was going to solve everything.”
As a Partner and Co-Founder of Predictiv and PredictivAsia, Jon specializes in management performance and organizational effectiveness for both domestic and international clients. He is an editor and author whose works include Invisible Advantage: How Intangilbles are Driving Business Performance. Learn more...
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