Early on in his (rightly) highly complimentary review of Thomas Piketty'sCapital in the 21st Century, Paul Krugman declares: “This is a book that will change both the way we think about society and the way we do economics.” Krugman is certainly correct about the impact that Capital in the 21st Century will have on the way we think about the world. But, I wonder whether the book will have much impact on the progressive policy agenda in the United States.
Last week, when Piketty was in Washington, DC, I attended one of his book events (at the Economic Policy Institute with co-sponsorship from the Washington Center for Equitable Growth) and watched another (at the Urban Institute) online. At those events, as in the book, Piketty warned that unless we can lower the rate of return to capital (r) below the rate of growth (g) in the overall economy, it will be very hard to block rising inequality in income and wealth at a national and a global scale. Piketty's preferred policy for getting “r” below “g” is a steep, global, progressive wealth tax.
At the first event, EPI's Josh Bivens argued that one important implication of the book is that if we want to combat inequality, we should pursue policies that lower r by raising the bargaining power of workers relative to the owners of capital and what Piketty calls “supermanagers.” Among other options, Bivens specifically mentioned full-employment macroeconomic policy, increased unionization, and a higher minimum wage. These policies, he said, would “push r and g closer together” helping to reduce inequality. In her comments at the same event, Betsey Stevenson, one of the members of the Council of Economic Advisors, pushed policies that would raise the growth rate (g), including universal preschool programs and other measures.
At the second event, my colleague, Dean Baker called for policies aimed at lowering the return to capital by greatly reducing economic rents in the financial sector and other parts of the economy that benefit substantially from various forms of government protections, including pharmaceuticals and health care.
In both sessions, Piketty had the same polite, but blunt, response. The policies proposed by Bivens, Stevenson, and Baker were all well and good, but ultimately they are only “complements” and “not substitutes” for his global, progressive wealth tax. At EPI, he said (about minute 58:00): “These are all very useful policy options” but “...we are not going to replace progressive taxation by a pre-school program and patent law [reform], and whatever.” (The “whatever” here reads harsher in print than it sounded live or on the video. I believe Piketty meant it more in the spirit of “and the other policies you mention.”)
At the Urban Institute, Piketty referred to Dean's list of proposals, including a financial transactions tax, patent law reform, a universal public health system, and other policies, and said (about minute 53:00): “...I don't think it is going to be enough to change much [the] r-g finding I am showing.” He continued: “I am in favor of your better patent law [and] public health system... But, do you really, seriously believe that a public health system is going to bring down [the high rate of accumulation of wealth]?”
(An important reason Piketty believes that Dean's proposals are not substitutes for Piketty's preferred progressive wealth tax is because he does not think that economic rents stemming from imperfect competition are an important part of the return to capital. Rents could be significant in “subsectors” of the economy, Piketty says, but his analysis suggests that r will exceed g, even if the economy is perfectly competitive.)
Back to my initial question: does Capital in the 21st Century point progressive policy in a new direction? Piketty makes one core recommendation: a high, progressive, tax on wealth, preferably implemented on a global scale to minimize evasion. I know very few on the left that would disagree with that as a policy goal. I know even fewer people of any political stripe who think that such a policy stands much of a chance of happening any time soon.
By Piketty's reading of his own book, however, nothing short of a global progressive wealth tax (or a repeat of a succession of cataclysmic events such as World War I, the Great Depression, and World War II) will be enough to prevent the further rise of inequality.
So, what is to be done?
Well, if Piketty is right, we push for a global wealth tax and the useful --but insufficient-- policies that progressives have advocated for decades.
If Piketty is wrong, we push for a --highly improbable-- global wealth tax and the useful policies that progressives have advocated for decades.
Let's call this Piketty's Wager.