No more great expectations for Americans
I flew to Washington, D.C., on Friday to bid farewell to my friend Esther. Rather than try to pass the time with blockbusters, I decided to read what some have called the most important book on the United States since Alexis de Tocqueville’s “Democracy in America.”
This one was written by a Frenchman as well. Thomas Piketty is a brilliant economist who, like most of the best and the brightest in the field, came to the U.S. to pursue an academic career. But he then did the unexpected by leaving his position at MIT and returning to France. “Capital in the Twenty-First Century” was first published in French last year, but it became a sensation when the English translation came out in March.
The main argument in the book is quite simple: The ratio of wealth to income has been rising in developed countries. Without policy measures, this trend will continue, as wealth is likely to continue to grow faster than income. The result would be a return to the 19th century, when fortunes were inherited rather than earned. In essence, as Nobel winners Robert Solow and Paul Krugman noted, the United States and other developed countries could turn into oligarchies.
As Esther’s father, who had not heard of Piketty’s book, noted at their family dinner Saturday night, it wasn’t always like this. The two world wars and the Great Depression destroyed a lot of wealth, which was followed by fast post-war growth that led to rising incomes. These exceptional circumstances made it seem like Karl Marx was wrong in arguing that the society would be dominated by owners of capital.
Marx’s economic analysis in “Das Kapital” is actually quite different from Piketty’s. But if the global crisis was not enough to convince you, the French economist provides yet another strong piece of evidence that the German thinker was right to warn about capitalism nearly 150 years ago.
The main weakness of this otherwise phenomenal book is that Piketty does not explain why inequality is harmful. You may argue this is obvious, but economic theory shows that it may even be beneficial for growth. Economists at the IMF, which is a few blocks away from my hotel, show in a recent paper that “lower net (after taxes and transfers) inequality is robustly correlated with faster and more durable growth.” Moreover, “redistribution appears generally benign in terms of its impact on growth,” except in extreme cases.
I did in fact watch one movie during my flight, a modern-day adaptation of Charles Dickens’ Great Expectations. I just had to: Esther, like her father, really liked Dickens and once suggested that she might subconsciously have been named after the protagonist of “Bleak House.” It also seemed like an appropriate follow-up to the Dickens references in Piketty’s book.
Inequality was tolerated in the U.S. because everyone had a chance to get rich through hard work. That was the American dream. Most Americans cannot have great expectations anymore. That may be even more damaging than the IMF analysis suggests.