If, as Summers and others argue, labor and capital aren’t very good substitutes—meaning additional dollars invested require new workers to make the investment profitable—then over time, as capital grows faster than the labor force, the return on new investment will fall pretty sharply, either because you can’t get workers to operate your machines or you have to pay them higher wages to get them to work for you. On the other hand, if it’s relatively easy to substitute capital for labor—imagine staffing your fast-food restaurants with hamburger-cooking machines and order-taking computers that never take a break and don’t demand raises or health insurance—then additional investments may be made at a high rate of return. Berkeley’s DeLong explains Piketty’s future in a single word: “Robots!”
OK, but how many of them will we buy? How fast capital accumulates also depends on the behavior of the capitalists. Do they take their extra income and reinvest it in more income-producing capital? Or do they invest it in extravagant vacations, designer clothes, and rapidly depreciating yachts? Piketty assumes that the savings rate will stay steady; this is not necessarily the most obvious assumption. Even investments in robots are not infinitely productive, which you can see by looking at your own house. The dishwasher saves you hours of work every week; your washer-dryer saves a whole day, which is what it took your great-grandmother to wash everyone’s clothes. Buying a Roomba might save you an hour vacuuming every Saturday morning, and a machine to clean windows saves time only on a scale of months or years. So it is with industrial robots: Over time, each additional machine is apt to create less and less value relative to its cost. So maybe you put the money into a nicer vacation instead or give it away.
This might not hold for the giant fortunes that Piketty worries are accumulating. Even if Bill Gates decided to devote every waking hour to sybaritic enjoyment, his money would quite probably pile up faster than he could spend it. On the other hand, Gates and Warren Buffett have committed to give a huge portion of their fortunes to charity. Spreading inheritances across large families will dissipate large fortunes, although less quickly as life spans lengthen. In countries with low birthrates, Piketty’s capital accumulation could be dramatically sped up by demographics, as one child inherits from four grandparents.
Piketty’s work suggests that this era was an historical anomaly, and he predicts that capital will dominate the future as it did before the wars. But predicting the future can be hard work. Imagine an ancestral Thomas Piketty sitting down in 1913 to write Capital in the Twentieth Century. Such a book would probably have shown a continuation of long-term trends, with a tiny European elite deriving most of their outsize income from investments or land. He would probably predict that capital income, which had recently been rising in Britain and France after a 30-year decline, would continue to soar. In other words, his major prediction would have likely been totally wrong.
By extension, any policy changes he suggested would also be wrong. This section of the book, and especially Piketty’s proposal of a global tax on wealth to prevent the accumulation of massive fortunes, is almost universally viewed as the weakest. “I suspect he doesn’t take that seriously himself,” Rogoff says of the wealth tax. “First of all, it’s next to impossible to implement. The EU can’t even implement one.” Another question is what he plans to do with the money thus raised. Inequality between countries remains much larger than inequality within countries, and it is hard to imagine certain transfers. “Does he mean to have a wealth tax on the French middle class and send the money to Africa?” asks Rogoff. It’s safe to assume this is not what most of the book’s purchasers have in mind.
DeLong, who’s been one of the book’s staunchest defenders, agrees this is the weakest section of Piketty’s opus. “There are many things we could do,” he says. Trying to corral a couple of hundred nations into a massive cooperative tax scheme is only one, and probably not the most practical. Wealth taxes were adopted by a lot of countries in the 20th century; most abandoned them, because the rich people kept moving abroad and taking their capital with them. That’s why Piketty has proposed making his wealth tax global. As Rogoff points out, however, this substitutes one political economy problem for the even larger difficulty of getting every last nation on the earth to agree to impose it.
Even if we assume Piketty’s prediction is correct, that economic forces favoring capital will cause it to accumulate and concentrate in the hands of a hereditary superelite, and even if we assume his remedies would work, that leaves one big question to debate: Is this really the most important issue facing the world, “the defining challenge of our time”?
The most remarkable thing about Piketty’s book is that it owes its popularity to U.S. audiences. When Capital in the Twenty-First Century was published in France last year, it sat quietly on the shelves. Only after it became an American bestseller did French consumers start snapping it up. This might seem only natural; the U.S., after all, is where income inequality is extreme. But Piketty’s book is primarily about wealth inequality. Income can create wealth, though if that happens, it will be far in the future. And right now, as the book shows, wealth inequality is far less pronounced in the U.S. than in Europe. The dramatic U curve in European wealth is practically flat in America, where the capital-to-income ratio in 2010 was lower than it had been in 1870—or 2000.
Illustration by Neal Fox
They’re not wrong that something is happening in the U.S. While people do hate the idea of a landed gentry with huge trust funds—think of the 1 Percent owning more than a third of all wealth—that’s not actually what’s driving the troubling trends. A society that used to offer broad security, stability, and opportunity to the top 75 percent of households is now increasingly divided into an educated elite and a low-skilled workforce for whom work is uncertain and not very well paying. This doesn’t just make it harder to sustain the iconic single-family home on a nice lot; it makes it harder to form stable families and communities. Among people without a college diploma, life looks more and more like it did for the welfare-dependent underclass in the 1980s: exploding levels of single parenthood with multiple partners and low levels of participation in civic groups such as churches and bowling leagues. People living in this environment are more financially and emotionally vulnerable; children are more likely to drop out of school and the labor force.
Among the educated, marriage is great, healthier than ever. But looking at the chaos at the bottom, and forced to compete with the superrich for college slots and houses in good school districts, many, even among the well educated, are terrified they won’t be able to assure their children a place in the middle class—especially since their own jobs, while more secure than the loading dock work at Walmart (WMT), are more vulnerable to layoffs than they used to be. All this is made scarier still by the rising cost of health care and college tuition.
Of course, this is partially a story about capital: Robots actually have replaced a lot of jobs and will replace more in the future. From computers that take your order at McDonald’s (MCD) to search software that can replace dozens of lawyers and paralegals in the lawsuit discovery process, capital is becoming a better substitute for many forms of labor—and the people who did that labor are having trouble finding replacement jobs that will pay them as well as their old ones did.
This is also a story about globalization. The rise of China has added a billion people to the global workforce, most of them willing to work for much less than an American autoworker. Immigration has brought low-wage competition for construction workers and landscapers. The Internet and the emergence of robust global markets have increased the returns available to people at the very top. Everything from consumer electronics to movies are sold in a single world market, which means the winners get paid more than ever. The losers can no longer survive by finding a smaller pond, as the global marketplace has blown away local niches.
While global markets make capital more valuable, they also destroy a lot of capital; just ask the people who owned the factories now rusting along half the highways in the Midwest. Trade and immigration are massive transfers not necessarily from labor to capital, but from labor to labor: rich world workers to poor ones. As a result, global inequality has fallen, even as inequality within countries has risen.
“If you took the whole world as a country, you’d be pretty excited about what has happened over the last 30 years,” says Rogoff. Of course, if you’re a steelworker in Ohio, that’s cold comfort.
Piketty’s proposal for higher taxes, including a wealth tax, might stop wealth from accumulating in quite such dramatic piles. What it can’t do is roll back the automation and globalization processes that have so many people so terrified; at best, it would slow the pace. We could use the proceeds of a wealth tax to ease some of the pain, but even in countries with a generous social safety net, long-term unemployment is miserable.
Judging from the reviews and the reaction and commentary, most readers are probably not looking to tease out these sorts of complications. They are interested in the book’s broad sweep, in Piketty’s evidence that they are right to feel something is wrong. Many are probably less interested in the book than what people are saying about it. That’s one legacy the book’s author can count on. Whatever the public verdict on his data, whatever future economists say about his theory and predictions, Piketty has touched off the most vigorous public conversation about inequality since Occupy Wall Street—only this time it’s a conversation about data and economics, rather than the wealth of certain bankers and the propriety of camping in the streets. That’s a lot of progress to come from one man.
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