Piketty on the U.S.: The birthplace of freedom and progressive taxation

Editor’s Note: Thomas Piketty acknowledges that some level of inequality is necessary. But what we have in America today — when the bottom 50 percent of the population owns only 2 percent of the national wealth — is bad for economic growth and democracy. It wasn’t always this way, he explains in his best-selling book, “Capital in the Twenty-First Century,” the subject of our Making Sen$e segment Monday and a debate on the NewsHour Tuesday.

In fact, the United States had a wealthy middle class much earlier than Europe ever did, in part, because America invented progressive taxation and later tried to spread it to the rest of the world.

Piketty’s inequality theory is based on a formula he calls “R > G,” meaning that the return on capital wealth exceeds the rate of economic growth. That was the case in 19th century Europe, and it’s increasingly the case in contemporary America, where wealth concentration is greater than ever before. We don’t need extreme wealth disparity to grow, and as Piketty argues, we’d all have a better shot at moving up in society without it.

In this extended conversation with Paul Solman, edited and condensed for clarity, Piketty explains why the United States can do better on inequality — without going all the way to Socialism.

Simone Pathe, Making Sen$e Editor

Thomas Piketty: It’s easier, in a way, for my generation to re-open the fight of inequality and capitalist dynamics than it was at the time of the Cold War, when people would have been suspected [of agitating for Communism].

Paul Solman: But, if you’re talking about greater equality, that’s something that’s still associated with, let’s not say Communism, but Socialism where there’s more sharing of the means of production and more public ownership of companies. So people are still suspicious, I think, of somebody who says that inequality is a terrible problem.

Thomas Piketty: But it’s our democratic ideals that require some form of equality or at least require us to avoid extreme inequality because extreme concentration of wealth tends to lead to extreme concentration of power.

It has always been like that. In 19th century America, many observers starting with Alexis de Tocqueville, thought that more equal distribution of wealth and broader access to property, particularly because of land availability, was a condition for the proper working of American democracy.

There’s this attachment in the U.S. to this ideal of democracy not based on full equality of property but based on broad access to property and mobility.

Paul Solman: The idea that everybody can make it; everybody can be richer than their parents?

Thomas Piketty: And you don’t want excessive concentration of wealth in a few hands. This country invented progressive taxation of income and progressive taxation of American wealth of the kind that Europe never invented. In the 1920s, and then again in the ’30s, ’40s, ’50s, up until the 1980s, the income tax system, and also, even more so, the taxation of inherited wealth was more progressive in this country than in Europe. That [progressive system] was invented in America largely because many people in America in 1900, 1910, 1920, were shocked by the possibilities that their country would become as unequal as old Europe.

This can seem strange today because today the concentration of wealth is higher in the U.S. and Europe, but for a long time, the American democratic ideal and some form of equal access to property went together.

Paul Solman: Around 1900 is when you first have numbers that you can rely on. Inequality’s very high, and as we go across over time, inequality begins slowly and then more rapidly to go down during World War I, but particularly during World War II, the Great Depression and so forth. And then it’s very low all the way until around the 1970s, 1980s, and then it starts going up again. And that’s what’s happening now and that’s what you’re worried about, right?

Thomas Piketty: That’s right, and one reason for this is that with the slowdown of growth, we are entering a new long period where the rate of return to capital tends to be higher than the growth rate. (See Tuesday’s Making Sen$e post with Piketty for a more in-depth explanation of the relationship between return on capital and growth.)

So we are back to the initial situation that we had prior to World War I that tends to push toward rising concentration of wealth.

Paul Solman: What about the argument that starting during World War I, the idea was to soak the rich? In your book, you talk about the first head of the American Economic Association, saying right around 1919, “Hey, the biggest problem in America is inequality,” and then we did something about it. Continually, we had income taxes and the top marginal rate was over 90 percent. So isn’t that a political decision as opposed to something natural that’s happening in the rate of growth?

Thomas Piketty: It is a political decision. So in the United States, the rise of progressive taxation of income and inherited wealth did play a very large role in this reduction in inequality. In Europe, the destruction, due to the war, played a much bigger role.

Paul Solman: Because people who had factories no longer owned them; the factories were gone?

Thomas Piketty: Exactly, and those who start with nothing lose nothing, if they don’t lose their life. And so, in the U.S., the response was much more political and democratic in the sense that this was a democratic system that responded to the fear of inequality.

It’s quite fascinating to see that actually, not only did the U.S. invent this very progressive taxation, but actually, the country also tried to bring it to other countries and in the post-World War II period, we see that in Germany and in Japan, the U.S. authorities actually imposed very high tax rates on top incomes on the order of 90 percent. This was not to punish the Germans or the Japanese because it was what the U.S. did at home. It was about bringing together democratic institutions with fiscal institutions to prevent plutocracy — in the sense of excessive concentration of wealth.

At that time, this was really part of the American ideal. This seems like ancient history today, but I think it is very important when we study inequality now to realize that we can have this political reaction once again today.

Paul Solman: I was at West Point about a year ago, in a class with first year cadets and plebes, and I was talking about American infrastructure and one of the cadets said, “But how would you finance it?” I said, “Well one possibility of course, I’m not advocating it, would be higher taxes on the wealthy,” and she said, “But how would that be fair?” 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: It’s all a matter of proportion. As long as people in the middle class also have access to wealth and as long as disparities in wealth do not get to really enormous levels, everybody agrees that inequality is actually necessary for growth and is a necessary condition to incentivize people.

But right now in this country, the bottom 50 percent of the population owns 2 percent of national wealth and the next 40 percent owns 22 percent of national wealth. You don’t need to go all the way to equality to understand that we could do better than that.

Paul Solman: The bottom 50 percent gets Social Security and Medicare at some point. Those are, in essence, income that represents or could be said to represent wealth? (Bob Lerman made that argument to us in 2011.)

Thomas Piketty: The level of disparities of wealth is in a way more extreme than it has ever been in U. S. history. It’s very strange that America is a country that had a wealthy middle class much before Europe. (In the 19th century, there was no middle class in Europe and there was already one in America or at least in white America), but now, inequality is actually getting bigger. We need entrepreneurs, we need wealth — we definitely don’t want to go to full equality of wealth — but we also need some possibility of mobility that we have lost to a large extent.

When half of the population owns 2 percent of national wealth, even if you don’t want to go to all the way to socialism, it’s possible to do a bit better than that. Maybe it could be 5 percent or 8 percent. I don’t know the target, but it’s difficult to be satisfied with this low access of a very large part of the population to any kind of wealth accumulation.

Paul Solman: But it’s just a judgment on your part, right? I mean I’m not saying you’re wrong, but who is to say what the ideal level is? You don’t see people starving in America. You don’t see people freezing in America and you don’t see people revolting in America.

Thomas Piketty: There’s no magic formula that tells you when inequality becomes excessive, but one lesson from the 20th century is that we don’t need 19th century inequality to grow. With progressive taxation, growth still happened, and if anything, growth in the post-war period was even higher because it allowed more mobility. It was easier for new groups of the population to accumulate wealth, to create businesses. The other lesson of history is that extreme concentration of wealth can be a danger for the proper working of our democratic institution.

Paul Solman: Will inequality threaten our democratic institutions because the people who are wealthy will commandeer them — buy too much influence over them?

Thomas Piketty: Yes, in several ways. Access to the political process and influence in Washington and tax policy is certainly disproportionate, which allows the wealthy to keep some advantages.

When you have large wealth, you cannot just consume like other people. You start to consume influence, consume politicians, consume academics, you consume power; this is what high wealth is here for…

Paul Solman: Wait, but have you been consumed as an academic?

Thomas Piketty: Well, I try not to be, in general, but when the possibility to fund a think tank depends so much on large individual wealth holdings, yes, I think wealth can buy influence and knowledge.

Paul Solman: Have you “sucked up to” wealthy grant-givers ever?

Thomas Piketty: No, I am lucky enough to have a wage that is paid by my public institution in Paris that makes it so that I don’t need to do that.

Paul Solman: But you know people who do?

Thomas Piketty: Well if you look at the funding of think tanks and expertise centers, in both Asia and Brussels or in Washington, but I think even more so in Washington, yes, private money is playing a big role.

And universities in Switzerland would have research centers funded by UBS, which is the bank that has tried to develop a tax haven and tax optimization to reduce the tax burden of rich American and European taxpayers for the past few decades.

Watch Paul’s interview with Piketty about the popularity of his book.