Thomas Piketty and the economics of inequality

University of Paris economist Thomas Piketty has tapped into the global debate about wealth inequality with his book Capital in the Twenty-First Century.

Pikettys argument is that capitalism, with its impetus to innovation,is by and large a good thing, but its taken a wrong turn somewhere in the past 30 years, as an increasing amount of the growth of modern economies has gone to the people at the top.

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I think we should just have a pragmatic, non-ideological dialogue about this and this is what Im trying to contribute to, Piketty says in an interview with CBCs Lang & OLeary Exchange that will air on Friday.

As recently as a month ago, theOECD found that the top one per cent of income earners in Canada had captured about 37 per cent of total growth in the last three decades. The trend is the same in most developed economies. It was the rallying cry of the Occupy movement the oneper cent vs. the 99 per cent. Inequality is turning up as an issue in political campaigns at every level of government.

'If you have growth performance of one to two per cent in percapitaGDP over past 30 years and if two-thirdsof growth is going to the top, thats not a good deal for the middle class.'Thomas Piketty, author of Capital in the Twenty-First Century

Piketty says that inequality should renew interest in tools such as investment in education, progressive taxation and labour market policies, including minimum wage all of which can help address wealth disparity.

If you have growth performance of one to two per cent in per capitaGDP over past 30 years and if two-thirds of growth is going to the top, thats not a good deal for the middle class, and I see this has contributed to the increase in household debt and increasing financial instability, Piketty says.

Wealth inequality can make people discouraged about the economic system, prevent mobility and discourage the establishment of new businesses,he says.

The danger is disenchantment with globalization and a growing class of people who will never fully participate in society.

Capitalism and market forces can produce innovation and better living standards Ibelieve very strongly in these forces. Even inequality can be good up to a certain point, because you can still get innovation and growth, Piketty says.

But the trouble is, when inequality gets too extreme, it can actually be detrimental to growth. It can reduce mobility, makes it more difficult for new groups to make the right investment to enter the economic game.

Money begets money

At the core of Capital in the Twenty-First Century is the idea that there is a tendency of the rate of return on capital to exceed the gross rate of return of the economy, Piketty says.

In other words money begets more money, so ever-rising wealth inequality is an inevitable part of capitalism.

During most of human history the growth rate was pretty small. So before the industrial revolution the growth rate was close to zero but the rate of return to capital was more than that it was maybe five per cent, Piketty says.

In the 20th century, two world warswere followed by a phenomenal growth period marked by the birth of the welfare state and a huge population growth in developed countries (the baby boom).

A dense tome full of statistical charts, Pikettys book takes a historic look at the record of capitalism and pinpoints the 1980s as the period when growth began to slow, but more wealth began to flow to the top earners.

Debate over progressive taxation

In the U.S. between 1930 and 1980, the marginal top tax rate for high-income peopleearning over $1 million was 82 per cent. Apparently that did not destroy American capitalism,and when this marginal rate was reduced to 28 per cent and stabilized around 40 per cent, what youve seen is a large rise in executive compensation, Piketty says.

He says he would like to see more debate about whether high executive compensation has improved company performance.

He also urges more progressive taxation of high income earners, including a wealth tax as a means of spreading the wealth.

Theres no right formula Piketty says, but he argues the issue of inequality cannot be left to market forces.