The Economics of Inequality

Piketty's other books tend to run 500 pages or more (~700 pages for "Capital in the 21st Century"), tomes that require a significant time commitment to get through. In "The Economics of Inequality", Piketty boils down the data to about 140 pages (plus endnotes), and explains the causes of economic inequality. This book blew my mind, because Piketty showed clearly the problem in America is *not* the billionaires. The diverging wages between average college grads (particularly tech trained ones) and folks with a high school degree and no special skills over the last 50 years is the problem. In 1970, the wages of the top of the middle 80% of full-time workers were about 3.4X higher than full-time workers at the bottom. Today that ratio is 4.8X. In Sweden today, the ratio is 2.4X. Economic inequality in America is caused by lower wage full-time being paid dramatically less than higher wage full-time workers. The pay of full-time fast food workers vs. software engineers, not the wealth of the 99% vs. the 1%, is the cause of economic inequality in America. But don't believe me. Read "The Economics of Inequality" for yourself.

Having read Capital prior to The Economics of Inequality, I expected empiricism to come first and theory second. However, I was pleasantly surprised to find a more palatable balance of the two. Piketty's goal is to determine whether or not "social justice" policies can be justified using economic reasoning, and if so what is the best policy mix. Piketty quickly introduces the reader to Rawls' "Maxamin" social justice theory, the idea that policies should aim to maximize the minimum opportunity available to everyone. In order to satisfy this goal, he offers two broad policy categories: direct redistribution (wage/price/industrial policies) vs. fiscal redistribution (tax and transfer). His aim is to separate the policies that pull economies from Pareto efficiency (pure redistribution), and those that push economies toward Pareto efficiency. Thus, while Marxist political theory is always in the background, political ends are not necessarily placed ahead of economic ends. A constant theme throughout the book involves the role of prices. Are they allocative or simply distributive (between capital owners and laborers)? Supporters of the allocative role of prices note that if the price of labor is lower relative to capital, labor-intensive firms will expand more than capital-intensive firms given the relative cheapness of labor...and vice-versa. Supporters of the distributive role of prices believe that the aggregate workforce is a fixed function of the capital stock, focusing on bargaining power of the laborer relative to the capital owner in wage setting. As long as capital-labor substitution is possible, fiscal redistribution allows for capital income to be shifted to labor without the negative effects on the cost of labor/level of employment that generally accompany direct redistribution (i.e. increasing minimum wage and benefits). In this case, fiscal redistribution does not have an allocative impact on prices, though it may impact saving/capital accumulation. If the elasticity of capital-labor substitution is >1, a 1% increase in wages will result in a >1% decrease in employment. Labor's share of income would fall in this scenario. If <1, direct redistribution may be better. If =0, then prices are arguably purely distributive and not allocative. If the elasticity of capital-labor substitution were to truly equal 0, Marxism would be supported in that the capital owner need not exist. The existing stock of capital must simply be matched to an appropriate workforce and a certain amount of output directed to its maintenance and increase over time (although Piketty acknowledges that this still doesn't fully address the price system's ability to direct production). Regarding the impact of fiscal redistribution on saving/capital accumulation, one must look to the elasticity of the supply of capital. Empirically, the elasticity of the supply of capital is close to zero for individual households, implying that a 1% reduction in the return on capital does not translate into a similar reduction in savings. It actually suggests people save more to achieve desired future income, despite increased attractiveness of current consumption. This applies to interest rate levels as well, in that higher rates may actually lead to less saving since desired future income can be achieved without giving up as much current consumption. For firms, however, even if the elasticity of the capital supply is low, on an international stage firms can shift capital to low-tax regimes, potentially causing domestic unemployment. In the context of bargaining power, Piketty discusses the battle between the monopoly power of unions and the monopsony power of employers. Monopsony power comes from firm-specific human capital and limitations on geographical mobility. If an employer is in fact a monopsony, fiscal redistribution would simply allow employers to lower wages, negating positive effects. He talks about low wage opportunities disappearing (underemployment and lower participation rates) starting in the '70s, offering explanations like incarceration. He also notes increased inequality since 1970 may be due to skill-based technological change, where new technology places a premium on previously untapped skills. However, more broadly, he notes that the standard of living was roughly 10 times higher in 1990 than in 1870, undeniably due to increases in the productivity of labor. Piketty highlights that, due to the inter-temporal nature of credit markets, issues such as adverse selection, moral hazard, lack of borrowing credit data, concentrated ownership, and political risks may impede international capital flows, slowing convergence between poor and rich countries. He says that credit rationing as a solution has often failed for lack of direction on how to allocate, and that granting land and capital (redistribution) has been more successful. Additionally, Piketty attacks the "Kuznets inequality curve," which says that inequality is high when countries are in the early stages of development but then converge thereafter, for the lack of any natural mechanism to support it. Regarding education, Piketty states that compulsory education should have large effects on human capital, but more funding/resources may not impact generational mobility if family well-being is a benchmark for individual success. In other words, if inequality is sourced at the family level, throwing more money at education may be in vain. Towards the end, Piketty touches on Keynesian stimulus, saying tax and spend may be useful for redistribution but as stimulus it's on shaky theoretical grounds. He seems to acknowledge and accept the "stickiness" of wages and prices, but rejects the paradox of thrift, stating that purchasing power is nearly always consumed or invested in some way. Thus it doesn't matter if the wealthy are investing or the poor are spending, tax and spend doesn't logically provide stimulus. However, he points out that the makeup of consumption (i.e. the industries stimulated) may matter, but notes that stimulus tends to be short term. For deficit stimulus, he notes that the return on capital may increase as the stock of public debt grows (presumably from a crowding-out-type effect), potentially resulting in undesirable upward redistribution. Overall, particularly in the first half of the book, Piketty creates an easy to follow flow from theory to empiricism and back. The step-wise process is reader friendly and is helpful for understanding how external effects of policy ripple from one area to another. I really appreciate the fact that he often restated free-market arguments in full, committing serious time to ensuring the reader understands both sides of the discussion...an intellectually honest strategy that my have been lost a little in Capital.

Thomas Picketty, as an author, make reading enjoyable. As a scholar, he has an uncanny ability to process large amounts of data, interpret and expand theoretical explanations, and turn complex ideas and problems into understandable written works.

Lots of statistics make a compelling case. Upper marginal tax bracket in USA was about 83% for fifty years, 1930 - 1980. It is half that now. In that past we could pay for education for all in public schools, with classes in the arts and trades shop classes) . The public Colleges and Universities were quite affordable then. The State and Federal government had enough money from taxes to pay for it. Today little money from government to support education, so the burden falls on students paying high tuition and debt Haven't finished yet.

Pickety's concept was quite revolutional for the Japanese old generations experienced second world war. In prewar days, Japan was a retarded industrially developing countries in asia, after starting its socio-economical revolution in 1868. Comparing its starting period with 1789 of french revolution, there were so many didfferences in distribution of the income and properties, resulting in the more drastic inequalities in Japan than those in France.

Although Thomas Piketty's book is entitled "The Economics of Inequality" there is no economic argument to show how inequality gets into the capitalist economy or to identify some fault in capitalism to account for it. It is simply assumed to exist. Nor does his analysis of the problem, if that is what it really is, offer any advice as to what to do about it other than to continue what we are presently doing to put in place safety-nets to take care of the less fortunate, the aged, the unemployed, the unemployable, the ill and the maimed, out of the public purse. Piketty goes straight to the problem of what he calls, in English translation, the "capital/ labour split", that is, between the profits on capital and the wages of labour earned on every investment. He implies that there is a single income from investment made of the sum of the profits earned and the wages earned in its operation and that the solution to the problem of inequality of incomes between capital and labour is to adjust the ratio of profits to wages to direct a greater share to labour. The main methods are by direct re-distribution by increasing the minimum wages or by fiscal re-distribution by varying the tax rates. My problem with Piketty's model of a single income to be shared two ways is that industry produces two separate and distinct incomes, namely, the wages of the workers which are already decided and begin to flow from the commencement of production and the dividends on the capital invested which cannot even begin to be calculated until production is complete. Profits on capital are far from arbitrary but are determined, at the existing levels of wages and the labour productivity of the machines, by the actual level of output. Profits are thus proportional to labour costs, with a different constant of proportionality or coefficient applying at every level of production. Yet, strangely, one section heading is "Are capitalists necessary", a la Marx? You only have to look at the poverty in the under-developed countries, where capitalism does not yet exist, to answer that question. On page 28 he writes that "without any governmental redistribution, the capital/labour split will depend on the negotiating power of the unions and the ability of employers to appropriate (Marx again?) a portion of the product: in short on the relative powers of the capitalists and the workers". I would not have though these long-discredited theories did much to support his arguments. Piketty also refers to things like "capital/labour substitution, which implies that employers can switch back and forth between manual production and machine production. But as machines are only used when their labour productivity is greater than 1.00 this would hardly be a way to run a business. Unfortunately, there seems to be few references to modern economic knowledge, such as the way profits are generated and even the nature of capitalism or the origin of surplus value. I found it necessary to read this book very closely to follow the argument, but all-in-all I found this book on a very important subject very disappointing

I am not an economist, but I am very much interested in understanding the coming and going of economic policies and activities that can change our collective life so dramatically, as it did for example the financial crisis in 2008. I read previously Capital in the XXI century, and this one is more easy reading than the other one. Is a book showing facts of life, statistics of how the world get divided in the ones who have and the ones who don't, which is the majority. He doesn't need to tell the consequences of this divide, because nowadays it is there for all to see: food stamps, queues for food once a day almost in every country of this planet. Though, he conveys a message of urgency on the need of structural universal changes in policies. This is a kind of book that should be a "must read" for anyone who wants to have a ground for political discussion.

Great