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Professor Picketty democracy, not capitalism, is failing the middle class

By Dr. Peter Morici
web posted May 5, 2014

The new book by French economist Thomas Piketty, Capital in the Twenty-First Century has rocketed to the top of the Amazon.com best sellers list. It accomplished this feat by offering yet another apocalyptic vision of capitalism in the tradition of Malthus, Ricardo, and Marx. To American workers and a middle class besieged by stagnant wages and rising taxes, it provides justification for the dangerous elixir of confiscatory taxes on the wealthy hustled by liberal pundits and politicians.

Examining an incredible range of data across many countries and several centuries, the author purports to demonstrate that over time capitalist economies naturally concentrate ever greater shares of wealth and income into the hands of a few, leaving less and less resources to pay the wages of ordinary workers.

The theoretical mechanics of his assertions are as arcane as classical physics—and only a Ph.D. economist could reasonably divine their weakness—yet Piketty's answers to income inequality are remarkably seductive. He proposes an 80 percent tax on incomes over $500,000 or $1 million and an annual levy on wealth of as much as 10 percent. In turn, the revenue raised could finance more redistribution programs, championed by progressive politicians seeking votes, such as state subsidized health care and superfluous government jobs.

Without those taxes, Piketty asserts society will become ever more stratified and hard work will become futile. The best and brightest among those not born to great wealth, like characters in a 19th century novel, will conclude that marrying a fortune is a much better life strategy than seeking gainful employment. All this will kill economic growth, and make ordinary people poorer and poorer.

Piketty argues the ever greater concentration of wealth continued into the 1920s, when disparities between rich and poor reached a peak. It was only the disruptions of two world wars and the Great Depression that destroyed much of the capital concentrated in the hands of the wealthy and permitted the post-World War II prosperity and rise of the middle class.

Now, Piketty argues, the forces driving inequality have re-emerged. We live in another Great Gatsby era with Wall Street barons earning in the millions while workers toil at Manhattan restaurants for barely more than the minimum wage.

Piketty's model of capitalism is tight and compelling because of what it ignores.

The 1920s was a period of exceptional optimism and opportunity in America—if you need your memory jogged, go view a Harold Lloyd movie on Netflix.

Nowadays a good deal of the mega incomes are not accruing to the heirs of the Rockefeller and Ford fortunes but falling into the hands of middle class offspring who became entrepreneurs or worked hard to become top corporate managers, stars in the media, financiers, and the like.

The founders of Microsoft, Fedex, Facebook and other recently established mega enterprises were generally not particularly privileged as young adults but rather they had great insight or ideas and the drive to commercialize them.

The huge incomes of many top corporate managers, athletes and entertainers may be set by arbitrary forces as Piketty asserts. For example, the monopolies granted by congress and federal agencies to the cable TV providers permit NFL athletes to receive outsized salaries financed in significant measure by unregulated and ever-rising cable subscription fees. And top corporate leaders do set their own pay by controlling the membership and serving on one another's boards of directors.

It's a fool's errand to try to solve those kinds of problems by simply taxing high incomes and wealth.

Rather, modern economics prescribes that when natural monopolies emerge, such as in the delivery of cable television, it is the responsibility of governments to regulate rates—as they do the electric utilities—to ensure fair incomes to providers and reasonable prices to consumers. And to discipline corporate governance to ensure senior managers do not place their interest above those of shareholders and ordinary workers at large corporations.

The extreme positions for and against measured government intervention embraced by politicians too often block such prudent regulation. In the end, it's a failure of democratic governments to act responsibly, not the shortcomings of capitalism that is failing America's workers and middle class. ESR

Peter Morici is an economist and business professor at the University of Maryland, national columnist and five-time winner of the MarketWatch best forecaster award. He tweets @pmorici1






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