Piketty's paranoia and the real story behind income inequality

Piketty's paranoia and the real story behind income inequality

In case you don’t keep up with the thrilling world of economics, the name to know right now is Thomas Piketty. He is the French economist that recently published a study of income inequality that covers Europe and the U.S. over the past 300 years: Capital in the Twenty-First Century.  Among other things, he found that income inequality is currently on the rise in advanced economies. That doesn’t sound very notable because it isn’t. His real notoriety came from his suggestion that income inequality is caused by capitalism itself and has only one viable solution. Although he admits this solution is impractical, he claims it is necessary. He wants to tax wealth out of existence, globally.

Piketty’s theory is that the rate of return on “capital” (investment) tends to be higher than the rate of overall economic growth in a capitalist economy. (Another way to think of this is that investors tend to accumulate wealth at a faster rate than workers.) Piketty believes this dynamic will eventually create a small, ultra-wealthy elite class. These elites will overpower democratic institutions and take control of their countries as oligarchs. According to Piketty, the only reason democracy hasn’t been snuffed out already is because we have been at war frequently enough to foil our would-be oligarchs. Apparently war involves both of the possible antidotes to income inequality – the wealth-reducing phenomena of high taxation and “capital destruction” (physical ruin of buildings, machinery, etc.). Obviously Piketty wouldn’t ask us to go around demolishing the homes and businesses of anyone who becomes too wealthy. His conclusion is that taxation is the only viable mechanism for reducing wealth. He proposes a pair of globally-administered taxes: an 80% tax on all income above $500,000, plus a 10% tax on accumulated wealth. In other words, he wants make wealth hard to get, and impossible to keep. (To his credit, he notes that these tremendous taxes would not boost government revenues because they would cause so many high-earning people to stop working.)

Piketty might sound like a madman, but some remarkably prominent people have voiced support for him. These include high-profile American economists Paul Krugman and Robert Shiller. Other Americans have openly adopted his newborn theory as canon. News correspondent Ryan Cooper has declared, “Either we'll have a new birth of reformed capitalism, with [Piketty’s] preferred progressive wealth tax and other institutions, or we'll have wealth concentration on such a colossal scale that it will threaten the democratic order”.  Surprisingly, this fanatic support hasn’t encountered very staunch opposition.

Krugman has gloated that, “the right seems unable to mount any kind of substantive counterattack to Mr. Piketty’s thesis”.  He is largely correct (although it isn’t just “the right” that is having a hard time swallowing Piketty’s proposal). The Financial Times strongly challenged Piketty’s data, but his defense was considered adequate. Lawrence Summers objected to his theory by pointing to multiple forces that would put an upper limit on income inequality, but this didn’t stop the argument. So the counterattacks have come, but they have been on Piketty’s data and theory. They have not come on his weakest ground; in the swamp of his dystopian prophesy, which reeks of false choices and paranoid conspiracy.

Piketty’s vision of the future doesn’t fit with experience, morality or common sense. The U.S. has historically been the most capitalist of the major economies, so Piketty’s theory predicts it should have the most severe income inequality. Yet the U.S. is famous for its strong democracy and robust middle class. Piketty’s theory predicts that the wealthiest Americans should be inheritors of “old money” fortunes, but the opposite is true. As of 2007, more than six of every ten American children born into wealthy families were not wealthy in their adulthood.  The wealthiest Americans tend to be self-made, like Bill Gates, Warren Buffett, Larry Ellison, Mark Zuckerberg, Larry Page, Sergey Brin and Jeff Bezos.  History aside, taxing people arbitrarily is unethical, and doing it because you presume they have designs to topple democracy is ludicrous. Bill Gates is a clever man, but not Machiavelli reincarnated. Finally, you must consider that Piketty’s wealth-destroying “solution” would provoke a massive worldwide depression, and probably a great deal of violence and war. Yet he still has the nerve to claim his objective is to preserve human happiness.

Even if you feel Piketty’s theory might have some merit, wouldn't you still prefer an explanation for income inequality that isn't radical and contradictory? A better explanation for today’s rising income inequality involves the powerful confluence of globalization and failing public education systems.

The United States and Europe are at the top of a global business food chain that is rapidly broadening. The educated and experienced people in these “knowledge economies” are positioned to take advantage of this globalization. Their knowledge and skills are in high demand and their incomes are increasing. Programmers are building software that is being used around the globe. Financial experts have secured unprecedented access to foreign markets. Consultants are being hired in Singapore, Australia, Chile, and Poland. These people aren’t elites – they are the members of the middle class who have adapted to a changing economy.

The story is often inverted for people without the right education and experience. They are facing trends like automation and outsourcing. There is downward pressure on their incomes. They aren’t qualified for the job opportunities of a knowledge economy, which positions them to be steamrolled by globalization. What is the difference between these people, and the ones who are succeeding? Education. The people who are enjoying the benefits of globalization have consistently sought education outside of our public school systems.

We rely on our public school systems to provide our children with useful knowledge and skills. Instead, our children consistently emerge from public schooling without even basic competencies. Americans are particularly under-educated. In 2013, “Seventy-four percent of [high school senior] students scored below the grade-appropriate level in math… In reading, just 38 percent of seniors scored at or above grade level”.  Our economy is desperate for people who can use spreadsheet applications, draft budgets, forecast demand, review contracts, create financial models, administer databases and program web applications. Yet public schools are producing people who can’t even read adequately. This is nothing new. Our national assessment test scores were “not significantly different” in 2012 than they were in 1971.  The difference is that forty years ago you could get away with not taking your education seriously. Globalization has changed that, and we need to adapt accordingly.

The most successful graduates today are the ones who did not rely on the public education system. They may have gone to public school but their employable skills were earned elsewhere. They were self-taught, or found private schools with competitive programs, or sought job training. They took it upon themselves to acquire the knowledge they needed in our evolving economy. If they had relied on public schools, they would be struggling as well.

Our public schools are trapped in the formulaic classroom-based curricula of yesteryear. They are producing graduates of globally miserable quality. They are not being held accountable for their consistently abysmal results, so they aren’t changing. Other nations continue to become better-educated while we stagnate with poor results. Our public education system is perhaps our nation’s single greatest failure. We have no excuse not to change it.

Globalization is a force for good, but it requires adaptation. The need to compete is one of those. No nation can rest on its laurels forever, much less when the rest of the world is working so hard to catch up. Globalization is also a much more reasonable explanation for rising income inequality than a fatal flaw in the economic system the West has been using for centuries.

America shouldn’t be trying to tax wealth out of existence on the basis of an extremist theory that makes no practical sense. Western civilization is not some lucky accident. It is the product of sound principles. The American way has worked tremendously well for hundreds of years, and it is the opposite of Piketty’s. It is civilized where his is brutish. Rather than working to bring the top down, Americans work to bring the bottom up.

Let’s put Piketty’s book on the shelf to gather the dust it deserves. We have an education system to re-think and a global economy to succeed in.