Picking Up Piketty

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There looks to be more inequality in our future . . . .”—By Sanford Rose

Dolors & Sense

By Sanford Rose

Thomas Piketty's, "Capital in the Twenty-First Century."
Thomas Piketty’s “Capital in the Twenty-First Century.”

Sanford Rose

KISSIMMEE Florida—(Weekly Hubris)—6/2/2014—Everyone’s doing it–picking up Thomas Piketty’s chef d’oeuvre, Capital in the Twenty-First Century.

The Right is doing it to criticize. It’s picking on Piketty.

The Left is doing it to celebrate the book’s egalitarian leanings.

It’s dancing the Piketty polka.

The Center is doing it because it is a grand opus, crammed with insights as well as fascinating detail.

Here is a pick of Piketty:

The chunk of national income that accrues to the wealthy is a function of the return on capital multiplied by the amount of capital needed to produce, say, a year’s income–the capital-output ratio.

In turn, that ratio is a function of the rate at which people save divided by the growth rate of the economy.

If the return on capital equals 5 percent and it takes capital equal to six years of income to produce annual output, then capital’s share of national income sums to 30 percent.

Obviously, that share will tend to grow over time if the capital-output ratio increases without, at the same time, reducing the rate of return on capital.

To be sure, as capital becomes more abundant, its rate of return should decrease. But if that capital is readily substitutable for labor that is becoming scarcer and thus more expensive, the tendency for its rate of return to decline can be effectively blunted. 

However, should the return drop below the growth rate of output, the owners of capital would receive relatively lower shares of incremental output than other economic actors, principally labor– a circumstance that would, of course, crimp savings and reduce the share of capital in total income.

Historically, the return on capital has varied between 4 percent and 6 percent, which was considerably above the typical economic growth rate of around 1.5 percent.

The capital return cratered during the 1914-1945 period because of war, depression, inflation, and the introduction of high (at times almost confiscatory) progressive taxation.

Since the 1970s, the capital return has recovered, while the economic growth rate, which was quite elevated for Europe and the USA in the 1945-1975 period, has tumbled.

So the share of income accruing to the wealthy has rebounded.

It is likely to increase even more in the future.

That’s because economic growth in the rich countries will continue to be hobbled by sluggishly growing populations and labor forces.

It is therefore unlikely that, given existing economic and tax policies, the return on capital will fall below this shrunken rate of economic advance, which means that the saving-growth ratio (the capital-output ratio) will rise inexorably.

In other words, whatever is likely to happen to the rate of growth of income going to the wealthy, the amount or volume of that income is apt to increase by so much that their share of total income will rise. (Put more technically, the capital-output ratio is likely to rise proportionally more than the rate of return falls.)

There looks to be more inequality in our future unless we can simultaneously rev up growth and restore the tax environment of the 1940s.

Some on the Right argue that this hope is oxymoronic: tax capital that heavily, they say, and you curb growth.

Piketty will have none of this. He argues not only for sharply increased taxes on income, but also for a progressive annual tax on wealth.

He points out that the USA actually grew faster when tax rates were higher. Perhaps the only effect of the lower tax rates of the past thirty years has been to increase the incentive of “supermanagers” (top corporate executives and CEOs) to bargain for outsize compensation packages.

That bargaining has been notably successful: the share of the top one-tenth of one percent of income earners in total income rose from about 2 percent in 1980 to nearly 8 percent today.

Sanford Rose, of New Jersey and Florida, served as Associate Editor of Fortune Magazine from 1968 till 1972; Vice President of Chase Manhattan Bank in 1972; Senior Editor of Fortune between 1972 and 1979; and Associate Editor, Financial Editor and Senior Columnist of American Banker newspaper between 1979 and 1991. From 1991 till 2001, Rose worked as a consultant in the banking industry and a professional ghost writer in the field of finance. He has also taught as an adjunct professor of banking at Columbia University and an adjunct instructor of economics at New York University. He states that he left gainful employment in 2001 to concentrate on gain-less investing. (A lifelong photo-phobe, Rose also claims that the head shot accompanying his Weekly Hubris columns is not his own, but belongs, instead, to a skilled woodworker residing in South Carolina.)


  • Elizabeth Boleman-Herring

    I so wish I were a member the group for whom these economic realities comprise “good news.” But I also thank you for parsing Piketty for those of us for whom the pickin’s are slim. :-)

  • S. Rose

    In an era when economists write more and more about less and less, Piketty is the exception. He has written a book in the tradition of Adam Smith, David Ricardo, and J.M. Keynes. His work has been described as “the book of the decade.”
    S. Rose