We all owe a debt to Thomas Piketty and his various co-authors for hugely advancing our understanding of income distribution at the top. As a result of their work, we now have a much clearer picture of the big gainers over the last three decades and the process that has resulted in this upward redistribution.
This past work is the basis for the great expectations around his new book. And there is much here to like, including a vast amount of new research on the distribution of income over the last three centuries that will provide the basis for much future work and analysis.
However, I am afraid that the core thesis in "Capital in the 21st Century" also has serious limitations. To hugely simplify, Piketty sees a world where the ratio of capital to income rises and where patterns of bequests cause ownership of capital to become ever more concentrated. Piketty’s method for preventing an ever greater concentration of wealth and income is to impose sharply progressive income taxes and stiff inheritance taxes.
I wouldn’t object to this policy prescription, but it doesn’t seem to hold much hopes of success, certainly not in the current U.S. political environment. I would also say that we actually have a much larger menu of options than Piketty suggests.
The larger range of options becomes clearer if we start to look at the specifics of the corporate sector. In this respect it is worth noting that Piketty departs in an important way from Marx in treating capital as wealth and not distinguishing between different forms, such as pure financial wealth (e.g. government bonds), wealth in housing, and corporate capital. Presumably it is the trend in the last category that will have the most long-term impact on both the economy and distribution of income. I don’t think we have to worry that the super-rich will overwhelm the rest of us because the price of their mansions rises ever further out of the reach of normal mortals.
If we turn to the corporate sector we see that there are several clearly identifiable mechanisms through which government policy has acted to increase private sector profits in recent decades:
1) Implicit subsidies in the form of government guarantees or exemptions from taxes;
2) Rents earned through government granted monopolies in the form of patent and copyright protection;
3) Rents earned from government provided access to valuable resources at little or no cost;
4) Rents earned from the failure to maintain even minimal anti-trust standards to restrict monopoly power;
5) Rents earned by privatizing sectors of the economy where services are more efficiently performed by the government.
In addition to these five areas, the United States government has also adopted a trade policy, the main effect of which has been to depress the wages of large segments of the workforce. This has almost certainly also contributed to the rise in the profit share in the last three decades.
These areas all offer clear paths for reducing the profit share of output in the decades ahead in ways that increase productivity and growth. They offer a clear alternative to the path of ever greater concentration of wealth and income inequality described by Piketty.
This post was excerpted from Baker's essay, "Living In The Short Run: Comment on Capital in the 21st Century." The full essay is available below and on the Center for Economic and Policy Research website.