Why do the rich get richer? French economist Piketty takes on inequality in ‘Capital’

JUDY WOODRUFF: Questions about the scope and causes of income inequality have resonated loudly in the U.S. in recent years. Now a new economics book about these issues is making a big, and surprising, splash of its own among experts and the public.

We're going to spend the next couple of nights looking at it, and the debate around it.

Tonight, our economics correspondent, Paul Solman, has a look at what's in the book that's capturing so much attention. It's part of his ongoing reporting Making Sense of financial news.

PAUL SOLMAN: Perhaps the most unlikely bestseller in America: the English translation of French economist Thomas Piketty's 577-page tome, "Capital."

His recent U.S. press tour was likened to Beatlemania, with standing-room-only events. Nobel laureates on stage with him piled on the praise…

JOSEPH STIGLITZ, Columbia University: This is — it's a fantastic book.

PAUL SOLMAN: … especially ones tilting left who share concern for the global trend the 42-year-old Parisian has definitively documented: growing economic inequality.

So our first question, when we sat down with Piketty, was about his political slant.

Capital, capitale, the name of Karl Marx's famous work, so are you a French Marxist?

THOMAS PIKETTY, Author, "Capital in the Twenty-First Century": Not at all. No, I am not a Marxist.

I turned 18 when the Berlin Wall fell, and I traveled to Eastern Europe to see the fall of the communist dictatorship. And, you know, I had never had any temptation for communism or, you know, Marxism.

PAUL SOLMAN: Piketty has long been known for demonstrating, with colleagues, that inequality of wealth has reverted to a lofty level last seen in 19th century Europe. Here he was at Harvard's Kennedy School of Government, recapping the share of U.S. national income going to the top 10 percent.

And according to the very latest data:

THOMAS PIKETTY: In 2012, the share going to the top 10 percent would be slightly over 50 percent. You know, it's not clear whether this is a good deal or not for the rest of the population.

PAUL SOLMAN: It's a great deal, of course, for the kings of the economic hill, and the closer you get to the summit, the greater the distance from everyone else. It reminds Piketty, among others, of America's gilded age, which was seen back then as a harbinger of a very un-American drift toward aristocracy.

THOMAS PIKETTY: Many people in America, in 1900, were shocked by the possibilities that their country would become as unequal as old Europe.

PAUL SOLMAN: An old Europe in which land was wealth, and thus inherited land guaranteed you the life of Riley, or of Jane Austen's Mr. Darcy.

ACTRESS: Who is this Mr. Darcy?

ACTRESS: He's one of the Darcys of Pemberley.

ACTRESS: Oh, Mr. Darcy of Pemberley.

ACTRESS: The Pemberley estates alone are worth a clear 10,000 a year.

PAUL SOLMAN: Ten thousand pounds of income, that is, generated by Darcy's land holdings.

For centuries, even well into the Industrial Revolution, inherited land, the main wealth or capital of civilization, guaranteed a predictable income: about 4-5 percent of that wealth, year in, year out.

THOMAS PIKETTY: Everybody knew what the rate of return was and that it was 4 or 5, and not 2 or 3 or 6 or 7. These numbers were important.

PAUL SOLMAN: They're of particular importance to Piketty because his book's new contribution to economics is said to be this very simple and, to him, ominous equation: R is greater than G. R is for the return on capital, historical 4 to 5 percent a year. And G stands for economic growth, for most of human history, less than 0.1 percent a year, almost zero, because population grew slowly and agricultural productivity more slowly still.

So, if R is growing at 4-5 percent a year in economies that are barely growing at all, it's pretty obvious that those who have the capital, the rich, will keep getting richer, and inequality will grow.

THOMAS PIKETTY: And this is, I believe, the force that explains the very large concentration of wealth that we had up until World War I.

PAUL SOLMAN: Now, early in the 20th century, things did begin to change. Inequality fell, for so many decades that economists imagined a new law: after a certain stage of development, increasing equality would become the norm.

But Piketty has a different explanation of what's called the great compression in wages and wealth: It was a fluke of history.

THOMAS PIKETTY: World War I, the Great Depression, World War II, which, of course, reduced the return to capital to a very low level because of capital destruction, because of inflation, because of taxation to finance the war, and so the rate of return to capital fell to 1 percent or very close to zero percent.

Then the growth rate themselves after World War II increased enormously.

PAUL SOLMAN: The great postwar boom in babies, buggies, bungalows.

THOMAS PIKETTY: But this lasted for so long that, at some point, we thought this was a new permanent regime.

PAUL SOLMAN: And when you say the new permanent regime, you mean greater and greater income and wealth equality?


PAUL SOLMAN: But, of course, the great compression didn't last.

THOMAS PIKETTY: So we are sort of back to the initial situations that we had prior to World War I, and this tends to push toward rising concentration of wealth.

PAUL SOLMAN: In other words, he thinks we're back to R — return — being greater than G — growth — and with capital returns growing and growth slowing, inequality will just get worse and worse.

There is a strong feeling in this country that people deserve what they earn, and the inequality is a function of how hard people have worked or how cleverly they have put their skills to use.

THOMAS PIKETTY: Yes, but there are also dozens of millions of people who are working hard in their daily jobs.

PAUL SOLMAN: And back to another Forbes list for another point of Piketty's: that the richest aren't just self-made entrepreneurs.

THOMAS PIKETTY: What you see actually in the data is not only entrepreneur. You also see a growing part of inherited wealth, which grows almost as fast as entrepreneurial wealth. Right now, in this country, the bottom 50 percent of the population owns 2 percent of national wealth.

Even if you don't want to go to all the way to socialism, you know, maybe it's possible to do a bit better than that.

PAUL SOLMAN: Better than the current inequality, and, says Piketty, the worst inequality to come.

THOMAS PIKETTY: There's no natural force that guarantees that this will stop somewhere that is, you know, acceptable and compatible with our democratic institution.

PAUL SOLMAN: So what do we do about this?

THOMAS PIKETTY: We need to return to the type of progressive income taxations that we have had in the past. Between 1930 and 1980, the top marginal rate was 82 percent in the U.S., and during this period, you have some of the best growth that there's ever been in this country.

PAUL SOLMAN: But look at the 1920s, when they dropped the top marginal rate to 25 percent, I believe, and you had the Roaring '20s. So we have a counterexample.

THOMAS PIKETTY: Yes, but there's a much longer counterexample with the roaring '50s, '60s '70s.

PAUL SOLMAN: Piketty also favors an internationally coordinated tax on wealth and a higher minimum wage, all uphill battles, given the current sharp political divide.

THOMAS PIKETTY: I hear, of course, lots of people say that this will never happen.

PAUL SOLMAN: But Piketty dismisses such criticism with a Gallic shrug.

THOMAS PIKETTY: You know, sometimes, things happen.

PAUL SOLMAN: Aren't you at all surprised that a 577-page book gets standing-room-only audiences?

THOMAS PIKETTY: I'm surprised that this is so successful, but certainly I was hoping that it would — you know, it will be. I tried to — to write it so that this — this would happen.

PAUL SOLMAN: And happen, it has, to the point that "Capital" is now back at the printer. Its publisher, Harvard University Press, failed to anticipate the demand for the most ballyhooed book of economics in years.

GWEN IFILL: Online, you can find more of Paul's interview with Piketty about his diagnosis and his prescriptions. Tomorrow, we will debate the issues raised by the book.