Q&A: A French economist's grim view of wealth gap

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Associated Press

Posted on April 23, 2014 at 10:04 AM

Updated Wednesday, Apr 23 at 10:06 AM

NEW YORK (AP) — If you'd like to live in Downton Abbey, the good news is that our economy has entered a second Gilded Age of opulence and elegance.

The bad news is that you'll likely end up among the vast majority stuck sweating in the kitchen.

In a new book, Thomas Piketty, the French economist who helped popularize the notion of a privileged 1 percent, sounds a grim warning: The U.S. economy has begun to decay into the aristocratic Europe of the 19th century. Hard work will matter less, inherited wealth more. The fortunes of the few will unsettle the foundations of democracy.

The research Piketty showcases in his book, "Capital in the 21st Century," has set the economics field ablaze. Supporters cite his work as proof that the wealth gap must be narrowed. Critics dismiss him as a left-wing ideologue.

Digging through 300 years of economic data, tax records, 19th century novels and modern TV shows, Piketty challenges the assumption that free markets automatically deliver widespread prosperity. Instead, he writes, the rich will get richer, and everyone else will find it nearly impossible to catch up.

Investments in stocks, bonds, land and buildings — the "capital" in his title — almost always grow faster than people's wages. By its nature, capitalism fuels inequality and can destabilize democracies, Piketty argues.

Economists once viewed the three decades after World War II as proof of capitalism's ability to build and share wealth. Piketty counters that the period was a historical outlier, a result of two world wars and the Great Depression leveling the fortunes of the old establishment.

In 2012, the top 1 percent of U.S. households received 22.5 percent of the nation's income, the most since 1928. Piketty thinks higher taxes on wealth can curb inequality's spread. He also thinks that sending more people to college and sharpening their skills through training could help slow the "inegalitarian spiral."

In an interview with The Associated Press, Piketty, 42, held forth on the "dangerous illusion" of the meritocracy, why China is unfairly blamed for flat U.S. wages and his fix for limiting inequality.

Here are excerpts of the interview, edited for length and clarity:

Q: What is the impact of a growing wealth gap?

A: The main problem to me is really the proper working of our democratic institutions. It's just not compatible with an extreme sort of oligarchy where 90 percent of the wealth belongs to a very tiny group. The democratic ideal has always been related to a moderate level of inequality. I think one big reason why electoral democracy flourished in 19th century America better than 19th century Europe is because you had more equal distribution of wealth in America.

Q: Your research shows that profits on investments — capital — increase faster than wages and economic growth. But a lot of people think greater inequality can help fuel stronger growth.

A: When inequality gets to an extreme, it is completely useless for growth. You had extreme inequality in the 19th century, and growth was not particularly large.

Because the growth rate of productivity was 1 to 1.5 percent per year (in 19th century Europe), and it was much less than the rate of return to wealth, which on average was 4 to 5 percent, the consequence was huge inequality of wealth. It's important to realize that innovation and growth in itself are not sufficient to moderate inequality of wealth.

Q: Are we automatically on a course that leads us back to the Gilded Age?

A: Nobody knows. The main message of the book is that there is no pilot in the plane. There is no natural process that guarantees that this is going to stop at an acceptable level.

Q: Would inequality matter if wages were still growing for the middle class?

A: There are two big forces that are squeezing the middle class. One is the rise of the very top executive compensation, which implies that the share of labor income going to the middle and lower class is shrinking. That has been quite spectacular in the U.S. The other force we see is that the share of a country's income going to labor tends to decline when the share that goes to capital is rising.

Q: You call meritocracy a "dangerous illusion." That goes against how a lot people think the U.S. economy works.

A: Our modern democratic ideal is based on the hope that inequalities will be based on merit more than inheritance or luck. Sometimes, meritocratic arguments are used by the winners of the game to justify the role of unlimited inequality. I don't think there is any serious evidence that we need to be paying people more than 100 times the average wage in order to get high-performing managers.

Q: People in Europe and the United States have a nostalgic view of the post-World War II period. We saw growing national prosperity that benefited everyone. Is it possible to get back to that?

A: It was really a transitory period due to very exceptional circumstances. Growth was extremely high, partly because of post-war reconstruction. Also, growth was exceptionally high because population growth as a rule had been extremely large in the 20th century. This isn't really an option for policymakers. The other reason I think we should not be nostalgic is that part of the reason the inequalities were lower in the '50s and '60s is that the wars destroyed some of the inherited capital that were the sources of earlier inequality.

Q: Why do you think a wealth tax would address the destabilizing force of rising inequality?

A: Instead of having a flat tax on real estate property, you would have a progressive tax on individual net worth. You would reduce the property tax for the people who are trying to start accumulating wealth.

Q: Every American politician says education is the answer to inequality and immobility. Is more education the answer?

A: This is the most powerful equalizing force in the long run. But it's not enough. You need both education and taxation.

Q: How did watching U.S. TV shows like "House," ''Bones," ''West Wing" and "Damages" help you with this book?

A: They tell us stories about how you can get rich, get poor, etc. The people who are heroes of the series, many of them have Ph.Ds. They represent the model of skill-based inequality. ... (The shows are) like novels in the 19th century. They're able to show in an extreme way a kind of deep justification or deep criticism of the inequality structure.

Q: Your critics see you as pushing a political agenda about class divide.

A: This is a book about historical facts. People can do what they want to do with it. The book has four parts, and Part No. 4 is about policy implications. ... To me, this isn't the most important part. If you disagree with these 100 pages, that's fine. The whole purpose of the first 500 pages is to help people to make their own conclusions.

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