Sunday, May 11, 2014

Piketty: Inequality and Its Concentration

After discussing capital and income, and the share of capital income and labor income under modern capitalism Thomas Piketty now dives into the third part of Capital in the Twenty-First Century. He investigates The Structure of Inequality.  Piketty will show that, after recovering from the shocks of the world wars, the developed world has returned to the low-growth, high inequality society of the late 19th century.

In this third part of his narrative Piketty will show that the low inequalities of the mid 20th century issued from the world wars "and the public policies that followed from them," that the rise in inequality since the 1970s and 1980s again suggests "that institutional and political differences played a role."  He will also show the "rising importance of inherited wealth versus income from labor" in the 21st century.

But first a three part definition of the inequality that he will investigate:
  1. Inequality in income from labor
  2. Inequality in the ownership of capital and its income
  3. Inequality in the interaction between labor and capital income
To dramatize the lesson to come, Piketty retails the convict "Vautrin's Lesson" to the penniless young noble Rastignac in Balzac's Père Goriot, published in 1835.  You wanna get ahead? says Vautrin. Forget getting ahead in your career; it's too hard and requires too much toadying and compromising. Marry a rich young heiress and kill anyone in the way.

So any young man on the make back then had to make a choice between work and inheritance.  But has anything changed since the early 19th century?  Has the importance of labor income vs. capital income improved since then?  And if it did, what happened and can it be reversed?

In discussing these inequalities, what mechanisms are at work?  For labor it would include supply and demand for skills, the education system, and rules and regulation of the labor market.  For capital it would include savings and investment behavior, gifting and inheritance, operation of the real-estate and financial markets.  Notice that Piketty will not include the effects of welfare state income redistribution, at least not yet.

Inequality in capital is always and everywhere much bigger that inequality in income, and this is not explained by life-cycle needs of saving against fluctuations in labor income or against retirement.  It is explained "mainly by the importance of inherited wealth and its cumulative effects".  Piketty shows three tables showing shares of income across four income classes: the 1%, the next 9%, the middle 40% and bottom 50%.  The top 10% in the US gets 35% of labor income against 20% in Scandinavia. The top 10% in the US gets 70% of capital income against 50% in Scandinavia.

But there is an upside to this: the creation of the "Patrimonial Middle Class" in the 20th century.  A century ago the middle class owned about 5% of the wealth; today it ranges from 25% in the US to 40% in Scandinavia.  But since labor income is about two-thirds of total income, the total income inequality picture isn't much different from the labor income inequality.

Piketty ends with a riff on whether "those at the bottom will accept the situation permanently."  It's not merely a question of the "repressive apparatus" but more important the "apparatus of justification."  The current justification, of course, is that the high labor earners sort of deserve it.  Instead of the "hyperpatrimonial society" of the 19th century we now have a "hypermeritocratic society" of "superstars" or "supermanagers."  The question is to what extent labor income inequality in the US really follows a "meritocratic logic".

Piketty also wants to tell us that he doesn't want to use the common measure of inequality, the GINI coefficient, because it's really not up to the task.  And most official reports on inequality decorously hide the incomes of the very rich behind a discreet veil.  Piketty's method puts more flesh and blood on the skeleton of inequality.

Introduction

Part One: Income and Capital

Income and Output

Growth

Part Two: The Dynamics of the Capital/Income Ratio

Changes in Capital

New World Capital and Slavery

Capital/income Ratio in the Long Run

Capital's Share of Income

Part Three: The Structure of Inequality

Inequality and Its Concentration

Two Worlds: France and the US

Inequality of Labor Income

Inequality of Capital Ownership

Merit and Inheritance in the Long Run

Global Inequality of Wealth in the 21st Century

Part Four: Regulating Capital in the Twenty-First Century

A Social State for the 21st Century

Rethinking the Progressive Income Tax

A Global Tax on Capital

The Question of the Public Debt

Conclusion

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