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Business News (more headlines) 05-16-2014

French Economist Thomas Piketty's Grim View Of The Wealth Gap

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Website: http://tylergroupservices.net/
Thomas Piketty, the French economist who was one of those who popularised the idea of a privileged 1 per cent, rings this alarm in his new book: The US economy has started to decay according to the ways of aristocratic Europe of the 19th century. Diligent work will be of less importance while inherited wealth will become more desirable. The wealth of the few will undermine the foundations of democracy.

Capital in the 21st Century has captured great interest as US political leaders argue whether increasing income gap is an issue that needs action.

The 700-page volume has been celebrated as one of the most important economic opuses in recent years, citing data from the past three hundred year to prove that the wealthy are hoarding more of an economy’s income than before and that prevailing regulations will mean that it will only grow.
People who support this idea cite the book as evidence that the wealth disparity must be reduced. Critics, however, reject the idea as being that of a left-wing ideologue.

Last week, Piketty’s book climbed to the top of Amazon’s bestsellers.
Unearthing information from 300 years of economic data, tax records, 19th-century novels and modern TV programmes, Piketty questions the assumption that free markets automatically produce extensive wealth.
On the contrary, he believes that the rich will become richer and everyone else will have almost zero chance of catching up.
Investments in bonds, stocks, land and buildings -- the “capital” referred to in his title – invariably grow more rapidly than the incomes of the masses. By its fundamental nature, capitalism generates inequality and can undermine the stability of democracies, Piketty argues.
Economists used to view the thirty years after WW II as evidence of capitalism’s capacity to create and distribute wealth. Piketty argues that the era was a historical eccentricity produced by two world wars and the Great Depression decimating the wealth of the old establishment. Piketty believes higher taxes on wealth can control the spread of inequality. Moreover, he thinks that college education for more people will sharpen their skills through and could help reduce the effect of “inegalitarian spiral.”

During an interview with The Associated Press, Piketty, 42, talked on the “dangerous illusion” of the meritocracy, and his suggested solutions for controlling inequality.
Here is an edited summary of the interview:

What is the effect of a growing wealth disparity?
The major concern for me is actually the efficient functioning of our democratic institutions. It simply does not work well with an excessive form of oligarchy where 90 per cent of the wealth is owned by an extremely small class of people. The democratic model has always been seen to function within a moderate level of inequality. I believe one main reason why electoral democracy thrived in 19th-century America better than 19th-century Europe is because you had greater distribution of wealth in America.

Your research reveals that profits on investments – capital – increase more rapidly than wages and economic growth. But many people are of the persuasion that greater inequality can help generate more growth.
When inequality reaches an extreme, it completely stifles growth. There was extreme inequality in the 19th-century and growth was markedly minimal. Because the rate of growth of productivity was only 1 to 1.5 per cent annually [in 19th-century Europe], and it was below the rate of return to wealth, which averaged from 4 to 5 per cent, leading to huge inequality of wealth. We need to realize that innovation and growth alone are not sufficient to reduce the effects of the wealth gap.

Are we on the path back to the Gilded Age?
No one can really be sure. The main point of the book is that we are inside a pilotless plane. We must find a natural procedure or method that can assure us that we will find ourselves landing on a safe, acceptable level.

Would the impact of wealth inequality matter if wages for the middle class were still increasing?
There are two great forces that are pressing on the middle class from both sides. One is the increase of the compensation for the highest executives, which means that the share of wages going to the middle and lower class is diminishing. That has been particularly true in the United States. The other force prevailing is that the share of a nation’s income going to the workers tends to decrease when the share going to capital is growing.

You consider meritocracy a “dangerous illusion.” That runs opposite the view of many people who believe the US economy works.
Our modern democratic model is founded on the assumption that inequalities will be due to merit more than pure luck or inheritance. In some cases, meritocratic arguments are utilized by the winners of the game to justify the value of unhampered inequality. I do not believe we can find any sound justification for giving people more than 100 times the regular wage in order to produce highly-efficient managers.

People in Europe and the US have a nostalgic view of the post-WWII era. We experienced expanding national prosperity that benefited the majority of people. Can we still get back to that?
It was in reality a transitory period because of the very exceptional conditions. Growth was considerably high, partly because of post-war reconstruction and population growth, as a rule, had been extremely large in the 20th century. This is certainly not an option for policymakers. The other main reason I think we should not be nostalgic is that one of the reasons the inequalities were lower in the 1950s and 1960s is that the world wars decimated some of the inherited capital that was the cause of the previous inequality.

Why do you think a wealth tax would dampen the destabilising effect of growing inequality?
Instead of imposing a flat tax on real estate assets, you would impose a progressive tax on personal net worth. You would minimize the property tax for those who are striving to begin creating wealth.
Every American politician believes education is the solution to inequality and immobility. Can more education provide the answer?
Ultimately, education is the most potent levelling force in terms of wealth distribution. However, it is not sufficient. We need education as well as taxation.
How did watching US television programmes such as House, Bones, The West Wing and Damages assist you in writing this book?
They contain stories that show us how you can get rich, get poor, and so on. The heroes of the shows are mostly holders of PhDs. They comprise the model of skill-based inequality ... [The TV series are] like novels in the 19th-century. They can portray in an extreme manner a type of deep justification or profound satire of the structure of inequality in our societies.
Critics accuse you being motivated by a political goal.
This book contains historical facts. It is up to people what they want to do with it. It has four parts and the last part deals with policy implications ... For me, this is one of the least crucial parts. If you do not agree with these 100 pages, that is perfectly fine with me. The main objective of the first 500 pages is to assist readers and decision-makers to come up with their own conclusions.

Prior to the production and publication of the research findings done by Piketty and his fellow researchers, economists depended on less precise parameters of inequality.
For instance, there is the Gini index, from Corrado Gini, an Italian statistician who initiated the concept in 1912.

The index measures income distribution using a scale of 0 to 1. Level zero signifies a condition where everyone has the same income. On the other extreme, Level 1 means that all income goes to a single person.
The Census Bureau declares the United States possesses a Gini index of 0.48, up from 0.40 in 1967. But without the tax data introduced by Piketty and others, it would be more difficult to assess what that change connotes.
At face-value, the minimal growth hides exactly how much money has accrued at the top 0.01 per cent.

Thomas Piketty, the French economist who was one of those who popularised the idea of a privileged 1 per cent, rings this alarm in his new book: The US economy has started to decay according to the ways of aristocratic Europe of the 19th century. Diligent work will be of less importance while inherited wealth will become more desirable. The wealth of the few will undermine the foundations of democracy.

Capital in the 21st Century has captured great interest as US political leaders argue whether increasing income gap is an issue that needs action.

The 700-page volume has been celebrated as one of the most important economic opuses in recent years, citing data from the past three hundred year to prove that the wealthy are hoarding more of an economy’s income than before and that prevailing regulations will mean that it will only grow.

People who support this idea cite the book as evidence that the wealth disparity must be reduced. Critics, however, reject the idea as being that of a left-wing ideologue.

Last week, Piketty’s book climbed to the top of Amazon’s bestsellers.

Unearthing information from 300 years of economic data, tax records, 19th-century novels and modern TV programmes, Piketty questions the assumption that free markets automatically produce extensive wealth.
On the contrary, he believes that the rich will become richer and everyone else will have almost zero chance of catching up.

Investments in bonds, stocks, land and buildings -- the “capital” referred to in his title – invariably grow more rapidly than the incomes of the masses. By its fundamental nature, capitalism generates inequality and can undermine the stability of democracies, Piketty argues.

Economists used to view the thirty years after WW II as evidence of capitalism’s capacity to create and distribute wealth. Piketty argues that the era was a historical eccentricity produced by two world wars and the Great Depression decimating the wealth of the old establishment. Piketty believes higher taxes on wealth can control the spread of inequality. Moreover, he thinks that college education for more people will sharpen their skills through and could help reduce the effect of “inegalitarian spiral.”

During an interview with The Associated Press, Piketty, 42, talked on the “dangerous illusion” of the meritocracy, and his suggested solutions for controlling inequality.

Here is an edited summary of the interview:

What is the effect of a growing wealth disparity?

The major concern for me is actually the efficient functioning of our democratic institutions. It simply does not work well with an excessive form of oligarchy where 90 per cent of the wealth is owned by an extremely small class of people. The democratic model has always been seen to function within a moderate level of inequality. I believe one main reason why electoral democracy thrived in 19th-century America better than 19th-century Europe is because you had greater distribution of wealth in America.

Your research reveals that profits on investments – capital – increase more rapidly than wages and economic growth. But many people are of the persuasion that greater inequality can help generate more growth.

When inequality reaches an extreme, it completely stifles growth. There was extreme inequality in the 19th-century and growth was markedly minimal. Because the rate of growth of productivity was only 1 to 1.5 per cent annually [in 19th-century Europe], and it was below the rate of return to wealth, which averaged from 4 to 5 per cent, leading to huge inequality of wealth. We need to realize that innovation and growth alone are not sufficient to reduce the effects of the wealth gap.

Are we on the path back to the Gilded Age?

No one can really be sure. The main point of the book is that we are inside a pilotless plane. We must find a natural procedure or method that can assure us that we will find ourselves landing on a safe, acceptable level.

Would the impact of wealth inequality matter if wages for the middle class were still increasing?
There are two great forces that are pressing on the middle class from both sides. One is the increase of the compensation for the highest executives, which means that the share of wages going to the middle and lower class is diminishing. That has been particularly true in the United States. The other force prevailing is that the share of a nation’s income going to the workers tends to decrease when the share going to capital is growing.

You consider meritocracy a “dangerous illusion.” That runs opposite the view of many people who believe the US economy works.

Our modern democratic model is founded on the assumption that inequalities will be due to merit more than pure luck or inheritance. In some cases, meritocratic arguments are utilized by the winners of the game to justify the value of unhampered inequality. I do not believe we can find any sound justification for giving people more than 100 times the regular wage in order to produce highly-efficient managers.

People in Europe and the US have a nostalgic view of the post-WWII era. We experienced expanding national prosperity that benefited the majority of people. Can we still get back to that?
It was in reality a transitory period because of the very exceptional conditions. Growth was considerably high, partly because of post-war reconstruction and population growth, as a rule, had been extremely large in the 20th century. This is certainly not an option for policymakers. The other main reason I think we should not be nostalgic is that one of the reasons the inequalities were lower in the 1950s and 1960s is that the world wars decimated some of the inherited capital that was the cause of the previous inequality.

Why do you think a wealth tax would dampen the destabilising effect of growing inequality?
Instead of imposing a flat tax on real estate assets, you would impose a progressive tax on personal net worth. You would minimize the property tax for those who are striving to begin creating wealth.

Every American politician believes education is the solution to inequality and immobility. Can more education provide the answer?

Ultimately, education is the most potent levelling force in terms of wealth distribution. However, it is not sufficient. We need education as well as taxation.

How did watching US television programmes such as House, Bones, The West Wing and Damages assist you in writing this book?

They contain stories that show us how you can get rich, get poor, and so on. The heroes of the shows are mostly holders of PhDs. They comprise the model of skill-based inequality ... [The TV series are] like novels in the 19th-century. They can portray in an extreme manner a type of deep justification or profound satire of the structure of inequality in our societies.

Critics accuse you being motivated by a political goal.

This book contains historical facts. It is up to people what they want to do with it. It has four parts and the last part deals with policy implications ... For me, this is one of the least crucial parts. If you do not agree with these 100 pages, that is perfectly fine with me. The main objective of the first 500 pages is to assist readers and decision-makers to come up with their own conclusions.

Prior to the production and publication of the research findings done by Piketty and his fellow researchers, economists depended on less precise parameters of inequality.

For instance, there is the Gini index, from Corrado Gini, an Italian statistician who initiated the concept in 1912.

The index measures income distribution using a scale of 0 to 1. Level zero signifies a condition where everyone has the same income. On the other extreme, Level 1 means that all income goes to a single person.

The Census Bureau declares the United States possesses a Gini index of 0.48, up from 0.40 in 1967. But without the tax data introduced by Piketty and others, it would be more difficult to assess what that change connotes.

At face-value, the minimal growth hides exactly how much money has accrued at the top 0.01 per cent.

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