Few subjects stir up and polarize national discussion quite like capitalism in general and inequality in particular. Recent evidence is the English-language publication of Capital in the Twenty-First Century, which has ignited a firestorm of opinion and debate. The new book, by the French economist Thomas Piketty, is hailed by some as “a masterpiece” and criticized by others as “seriously flawed.” Paul Krugman, the Nobel Prize-winning economist, wrote in The New York Review of Books (5/8) that the book “will change both the way we think about society and the way we do economics.” At the very least, the book has made everyone with a stake in capitalism sit up and take notice. Why all the hype over this 700-page tome?
Mr. Piketty offers a far-reaching analysis of modern economic trends, especially as related to inequality. His central observation: In modern capitalism, over the course of three centuries, people who own “capital”—assets like businesses, housing and land—are able to reinvest profits at a higher rate than overall economic growth. The rich get richer, while many others struggle in minimum wage jobs, if they are employed at all. The rise of a strong middle class and the convergence of incomes and living standards in the mid-20th century were historical exceptions, not the rule, he says. In modern capitalism, according to Mr. Piketty, the “forces of divergence” tend to concentrate wealth in the hands of a very few, and he fears we are moving toward a future with “levels of inequality never before seen.”
Not everyone is buying it. Critics of the thesis say that the overall gains of the capitalist system eventually reach every person, even if some benefit more than others. They point, for example, to the significant drop in extreme poverty around the globe in the past 40 years. Vast income inequality is not the problem, they say.
In an interview with The New York Times (4/20), Mr. Piketty agreed there is nothing inherently wrong with inequality, which can spur initiative and help create wealth. But the benefits of wealth, he explained, need to extend to a larger group. To that end he proposes a global tax on wealth and steeply progressive tax rates on large incomes.
Such measures are fiercely opposed by those who demonstrate an intense concern for the rights of individuals to make money and pass it to their heirs with little or no government interference instead of defending the rights of the poorest Americans to basic necessities like food, shelter, health care and education. President George W. Bush signed legislation to lower the top tax rate on dividends from 39.6 percent to 15 percent and to completely phase out the estate tax. Congressman Paul Ryan has proposed a more radical plan to eliminate all taxes on interest, capital gains, dividends and estates. In Capital, Mr. Piketty expresses concern about the increasing percentage of wealth that is inherited, not earned. He calls it a system of “patrimonial capitalism,” and argues that it undermines the role of merit in democratic societies.
This analysis should challenge Americans to rethink our notions of wealth and poverty and whether any semblance of “equal opportunity” actually exists. Who is the “taker”—someone who gets $133 each month to buy food, or someone who inherits a multimillion-dollar fortune from his or her parents? Is the opportunity for the American dream equal for a child who grows up in one of the poorest areas and one from a wealthy suburb? Of course not.
The true test of any economic system is whether it protects human dignity and provides for the basic needs of every member of society, especially the most vulnerable. In “The Joy of the Gospel,” Pope Francis denounced an economy of “exclusion and inequality” and asked why it is news when the stock market drops two points but not when an elderly homeless person dies of exposure. The promotion of justice in society, he wrote, requires “decisions, programs, mechanisms and processes specifically geared to a better distribution of income, the creation of sources of employment and an integral promotion of the poor which goes beyond a simple welfare mentality.”
What policies will reduce inequality rather than exacerbate it? Though little can be expected of Congress these days, they would be right to increase the federal minimum wage, expand the Earned Income Tax Credit and reinstate the tax rates of the 1990s, which would decrease dependence on public assistance and strengthen the safety net for those who still need it.
The questions, problems and solutions regarding the use and abuse of capitalism are as varied as the think-tanks, position papers and experts who study them. Mr. Piketty has made an important contribution. His book prompts the discerning person to evaluate anew the human and social costs of capitalism. The creative thinking of citizens is now required to combat the ills he has diagnosed.