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Piketty and Policy

Written by John Schmitt   
Tuesday, 22 April 2014 09:22

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.

Comments (5)Add Comment
written by Kat, April 22, 2014 2:35
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.

What??? Well, that certainly requires the will to believe.
written by watermelonpunch, April 22, 2014 11:49

Sounds like a demoralizing set-up to me.

I'm sure that's not what this Piketty intends as a worldview to be promoting... but I'm thinking this is a scenario where you say it's okay for a few people to exploit the masses, and then criticize them as being in need of charity as you give it to them...
Instead of recognizing the vast amount of humans in the society who contribute and simply haven't gotten their fair share of hard earned returns on their contribution to civilization.

It may be the same thing in Piketty's mind, but it's not.
It may even be that Piketty's way would be more efficient or even better overall in a practical way... if it were feasible.

But the world doesn't work that way, human emotions don't work that way, human society doesn't work that way.

Pay people what they're worth for doing the work of our civilization.

Treating them like slaves in the workplace while treating them like charity cases at the same time in society, is a real f'd up dysfunctional way to run a civilization, not to mention a recipe to brew resentments and confused attitudes about what's worth anything.

I'm really getting tired of having to remind people that having trash taken away and having a working sewer & clean toilets are just as important to human health as doctors & nurses, and are necessary jobs in a civilization.

I'm tired of people saying "they should better themselves if they want to make more money" - Well okay but then who's going to clean the toilets and move the garbage around in the landfill?

Piketty should be also at the same time promoting conscription for ALL citizens globally - being required to serve 1-2 years after leaving school working in sanitation, infrastructure labor, or food service.
If he doesn't propose conscription of this type, then he's just another snooty-patooty who thinks he's better than everyone else and is just promoting forcible charity, rather than recognizing the true value of "all the little people" & what they deserve.
Probably not a game-changer-but what would be?
written by Jennifer, April 23, 2014 10:21
I agree with you that I do not see the book adding anything dramatic to the progressive agenda. But it has undoubtedly had a cultural effect It seems to have, if for a moment, thrown some of the mainstream and right-wing economists/commentators for a loop. While the left-critiques have argued in essence he does not go far enough, the other side of the spectrum seems to have issues with logical conclusions of Piketty's data.

Policies and political change come from all kinds of places, and I have to think when a 600 page translated book on economics-focused on inequality and promoting a tax increase-sells out on Amazon, this is a good thing.

I also agree that Piketty is open to a variety of ideas, I do not think he was dismissing Dean's ideas as not having any use but not being enough-that is having enough of an impact on capital to change the trajectory. I think he might have a point, things like patent reform, a financial transaction tax and the like should have a significant impact on future capital but might not have a significant effect on the current situation.

As for political possibilities I always think one has to careful on deciding what is feasible based on political considerations. Based on the actions of the Congress over the past few years one would have to look hard for anything hopeful from a progressive point of view. Things are always impossible until they are not, which is why it's important to organize/demand for what we want, and not based on what we think politicians are amenable to.
getting there from here
written by Tak, April 24, 2014 12:18
I have to agree that Piketty's global wealth tax seems highly unlikely, and not only now but increasingly so into the future if you examine the trends. Also with the Baker et al very mild reforms: try getting any of them thru any conceivable Congress and see how far you get, not to mention getting any president's signature who owes his position to massive funding by the oligarchy/upper crust/1%/whatever. As anyone who pays attention to their own experiences can see, recently quantified by the Gilens & Page study, that simply ain't happening. Even in my own deep-blue West Coast town, it's nearly impossible to stop corporations from buying local government and elections.

Unions can still make a dent, just because they operate to a degree outside of the tightly controlled sphere of electoral politics in that they deal directly with the oligarchy over immediate conditions of work and life.

The rest of us however must come up with a new form of politics, one that does not play on the same turf as the oligarchy, where they can control the outcome. This will need to focus more on process than prescription and be extremely flat in structure (in other words be democratic) to avoid getting bogged down in those squabbles we have seen so often.
written by PeonInChief, April 24, 2014 10:39
First, thanks to the author for giving those of us who need Ms. Calculator to help us with Mr. Arithmetic a guide to the issues. Second, to watermelon punch: I've always wanted to do an experiment in which the lower-wage workers disappeared for a month. Then people would see how important those workers are to the middle class--and not just the ability to purchase things on the Internet and have them delivered, but public health, sanitation and the like.

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