Inequality in the Twenty-First Century

INEQUALITY IN THE TWENTY-FIRST CENTURYCAPITAL IN THE TWENTY-FIRST CENTURY. By Thomas Piketty. Translated by Arthur Goldhammer. Cambridge and London: The Belknap Press of Harvard University Press. 2014. Pp. viii, 577. $39.95.INTRODUCTIONRising inequality in the developed world has become a hot topic, especially in the shadow of the Great Recession in the United States. Social movements ("We are the 99%!"), university courses, documentary films, and best-selling books have capitalized on-and contributed to-the heat. Thomas Piketty's Capital in the Twenty-First Century,1 the most significant and probably best received of these books, is provocative, data driven, very French, pessimistic, widely reviewed, admirable, and maddening. In contrast to many other works on inequality, it is organized around a single idea. The thesis predicts growing inequality of wealth in the absence of external shocks or interventionist policies. This argument is set forth in lucid fashion and then surrounded by a great deal of evidence from around the world; this evidence dates from the late-1700s to the present. The data, including available technical appendices, provide context and confirmation.This is a serious book. In its final chapters, the book turns to its eponymous time period and suggests a global wealth tax and other means of reversing the present course. Here, it is more speculative than empirical. These prescriptions have unsurprisingly garnered a large fraction of the attention paid to this book, although Piketty's data choices have hardly gone uncriticized-or undefended.2 Data collection and analysis have been Piketty's impressive stock-in-trade for many years, but this Review focuses on his central thesis and normative prescription.Part I sets out the book's central thesis. Whether or not it is completely correct, the thesis may well emerge as one of the great ideas of social science. This is not just another book about inequality, economic history, or the relationship between labor and capital in production functions, although these subjects do find their way into the book. Piketty presents a big idea. It may not be quite as jolting as comparative advantage or deadweight loss or rational expectations, to name a few of economists' truly lasting ideas from several centuries. But it comes close. The number of copies sold and the number of professional reviews suggest that professional and lay readers alike recognize the remarkable potential of Piketty's idea. Part I, therefore, attempts to introduce the thesis in plain terms and to show its counterintuitive qualities. Part II widens the picture by discussing alternative explanations of some of the data, as well as selected objections to the logic advanced in the book. Part III turns to assets that are excluded from Piketty's calculations. Part IV then explores the book's suggestion about wealth taxation and other means of offsetting the march to destabilizing inequality. The discussion uses the occasion of Piketty's great splash to introduce the idea that optimal fiscal policy needs to include considerations of political decisionmaking, or public choice. Concerns about inequality might provide the impetus necessary to make us rethink the way we tax and spend.I. THE BASIC THESIS: r > gThe central idea begins with the observation or intuition that the rate of return available to a passive investor generally exceeds the rate of growth in income available to most people in an economy (pp. 25, 571). One who sits back with inherited wealth, reasonably well invested, will have an increasingly large claim on resources compared to the hard-working laborer across town who relies on earned income. Over time, the gap between the two will grow, and, on a larger scale, wealth (as well as income) inequality in the economy will increase. For a variety of technical reasons, Piketty normally states this thesis-or trend-in terms of the inequality, r > g, where r is the rate of return on capital and g is the growth rate of the economy (p. …