Debating Piketty’s theory on how wealth begets wealth, widens the economic gap

In "Capital," French economist Thomas Piketty explores how wealth and the income derived from it magnifies the problems of inequality. Gwen Ifill gets debate on his data and conclusions from Heather Boushey of Washington Center for Equitable Growth and Kevin Hassett of American Enterprise Institute.

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    Next: the second of a two-part look at a bestseller that's provoking discussion and debate about inequality and growth in America. The book is called "Capital in the 21st Century" by the French economist Thomas Piketty.

    Last night, economics correspondent Paul Solman laid out a key part of his thesis: Wealth, and the income derived from it, magnifies the problems of inequality over time.

    Paul talked to Piketty, who explained the heart of his argument.

    THOMAS PIKETTY, Author, "Capital in the Twenty-First Century": 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.


    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.


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


    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.

    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.


    Thanks to Paul.

    Now we get two takes on Piketty's thesis.

    Heather Boushey is executive director and chief economist at the Washington Center for Equitable Growth, a liberal research center. And Kevin Hassett is resident scholar and director of economic policy studies at the American Enterprise Institute, a conservative think tank.

    Thank you both for joining us.

    Heather Boushey, what is it about this pretty dense economic theory that has caught fire?

    HEATHER BOUSHEY, Washington Center for Equitable Growth: Well, I think first and foremost, it's the intensity of his data.

    Thomas Piketty with a bunch of other people put together all this data on income, especially high incomes and wealth, looking at a bunch of countries over a long period of time. And from that, he developed this idea that R is greater than G, that if the return on capital, the return on stocks of wealth and assets that people have is greater than what the economy is actually producing, greater than growth, well, then those piles of money will just get bigger and bigger.

    And he didn't develop that because it's some theory that he was just coming up with in his office. He developed that because actually looking at the data and looking at — and what that data told him. So it's very, very powerful, and in some ways very different than the way a lot of economics work is done, because it's not starting from theory in some ways. It's really starting from what we see.

    And what he saw was that high incomes lead to high piles of money, high concentrations of capital. And once you have that money, it becomes much easier for it just to accumulate and accumulate, and that gets us to where we are today.


    Kevin Hassett, what's wrong about his approach and his conclusions?

  • KEVIN HASSETT, American Enterprise Institute:

    Well, sure.

    I think that Thomas, if he has named his book inequality, then he would have a classic that would stand the test of time because his data on inequality, as Heather mentioned, is very good. He's worked with co-authors to gather tax data from around the world. And it's really authoritative as a measure of inequality.

    But he didn't call his book inequality. He called it "Capital," and he's really, really confused about capital. And all of this discussion about capital, I think, is in the end going to go down in economics as a historic blunder.

    I discussed him at a conference in Washington when he was there a couple of weeks ago, and I really don't think he defended the capital part of the book very well. But, to be clear, I think that it's a courageous book, and I love when people shoot for the fences and try to take a really controversial topic and make it accessible to the populace.

    But, in the end, the capital side of his book is really fundamentally flawed. And if you like, we could go into why.


    Well, let me start with — let me go back and stick with the inequality part for a moment.

    Do you agree, Kevin Hassett, that the argument he makes, that the real problem here is that people at the top are earning more and people at the bottom are flat, is that correct? Is that the reason for the gap we see?


    Well, that part of what he documents is correct. But even that part is very incomplete, because what he analyzes is pre-tax and pre-transfer income.

    But the fact is that, since 1970, the share of income going to the people at the top has skyrocketed in the U.S., but, at the same time, transfer programs to the poor have skyrocketed as well, even more as a share of GDP, and he completely ignores those.

    And my view is that, if we are going to ask is society just or less just than it used to be, then we need to look at everything society is doing. And he doesn't. He only looks at before government intervention that already exists.


    Heather Boushey?


    Well, I think that — I appreciate Kevin's point about the data.

    But I there's a couple of important things to bear in mind. First of all, the United States does a far worse job than other countries in redistributing income from the top to the bottom. So we haven't seen the kinds of social programs that Kevin talked about really making the kind of difference that we would like to see.

    But, importantly, I think one of the things that really comes clear in Thomas' book is that, as you see this capital concentrating in the hands of a small number of individuals or families, that has really deep and important implications for economic mobility and economic opportunity.

    If you're seeing high incomes calcifying into tomorrow's stock of capital, that means that today's children who aren't in those high-wealth families don't have the same opportunities. And we're seeing a lot of economic evidence that shows that mobility is a problem in the United States, the United States is less economically mobile than other countries.

    And what Thomas' book does is really gives us a lot of data to dig into that and understand it.


    And what the book seems also to do, Kevin Hassett, is say there is not really a way out of it that's doable?



    And that's the part of the book that's really fundamentally flawed. And I think it's really easy to explain. So, basically, if you look at what capital is — and so what do you think of when you think of capital? You think of — as a blast furnace or an industrial robot or a machine.

    And if you look at what's been going on in his data, then the share of income going to capital in the United States has gone up over time. And what he does is, he gives a theory for why that's going to continue, and eventually capital is going to have everything, unless we have 80 percent tax rates and so on.

    But the problem that he has is that his story for why that could happen, why capital will ultimately get all the income, is that we're going to substitute capital for workers, and so we're going to have robots making hamburgers and so on, which is a story — it could be true that that's something that we need to think about.

    But the problem is that the uptrend in the capital income share in his data — and there's a French economist that has pointed this out and a German economist as well — is 100 percent attributable since 1970 to an increase in rate of return on housing. It's basically kind of measured by a housing bubble.

    And so he's built this whole artifice to explain why capital is going to be substituting for labor and labor income share is going to go to zero, but the trend that he is trying to explain is all housing. And there's no way that you can substitute a house for a worker. Housing is not substitutable. And so his theory is fundamentally flawed because of that.


    Kevin Hassett says he goes off the rails with his theory.


    Well, I don't think so.

    We have seen income inequality rising for virtually my entire life. That is the economy that we have. And Kevin is talking about are — you know, he's sort of building on economic models that assume that the reality that we have been experiencing for these decades is actually somehow not normal, that our economy doesn't just automatically create more inequality and that it is not calcifying into greater wealth inequality.

    That's what the data is showing us. And I think we really have to dig deep and understand what that means. Now, how we solve that and what we do about it, that does seem…


    That was my very next question.


    That seems very challenging.

    Thomas talks about taxing wealth. You know, we already tax wealth all across America. We tax houses. We have property taxes, so we do do that. We do tax inheritances, to a lesser degree now than we used to. So there are models that we can look to.

    And the United States first introduced an income tax and a wealth tax at the dawn of the 20th century because we didn't want to be a country that was dependent on old money. We wanted a vibrant economy, where somebody could come in and they could make their fortune with a good innovative idea.

    What we are risking if we don't act is that those good ideas won't see the light of day because a small number of people have all the capital, and you don't have that kind of vibrancy.


    Kevin Hassett, how to act?


    Well, first of all, you have to say that just because our nation has problems, that doesn't mean that Piketty is right.

    And the fact is that he is right that income inequality, pre-tax, pre-transfer, has been going up, but he ignores transfers. And it just can't be defensible intellectually to do an analysis that's partial on the inequality side and avoid taxes and transfers completely, not even introduce them into the discussion.

    And on the capital side, you're basically going to side with him if you think you can substitute a house for a worker. If you can, then you're with Piketty. If you're not, you're not. And I don't think a serious person should frankly be with him.

    And all of his policy prescriptions come from this really, really flawed analysis. And, so, therefore, we could talk about what optimal tax policy should be, but I don't think that the motivation to have that discussion should be his flawed analysis.


    It sounds like there are serious people on both sides of this argument, I think we can agree, among them, two people we're talking to right here, Kevin Hassett and Heather Boushey.

    Thank you very much.


    Thank you.


    Thanks, Gwen.

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