Thomas Piketty and the Trinity of Inequality: What If Higher Taxes Are Not the Solution?

Thomas Piketty and the Trinity of Inequality: What If Higher Taxes Are Not the Solution?

Thomas Piketty’s new book, Capital in the 21st Century, has captured the imagination of the lefty intelligentsia. Yet the French economist’s ambitious work, which seeks to revive leftist redistributionist politics, seems strangely inadequate to the declared task of mandating equality.

In particular, we might ask: What if inequality of capital is simply a proxy for other kinds of inequality–technological, intellectual, motivational? In other words, what if it’s the case that inequality is hardwired into everything?

Yet for now, Piketty, focused on financial inequality, is riding a flying carpet of liberal rapture. Paul Krugman, dean of leftist economics, gushed over his tome in The New York Review of Books, describing it as “awesome” and “truly superb.” And here’s The Guardian, deliriously linking Piketty to the “Occupy Wall Street” movement: “Occupy was right: capitalism has failed the world: One of the slogans of the 2011 Occupy protests was ‘capitalism isn’t working.’ Now, in an epic, groundbreaking new book, French economist Thomas Piketty explains why they’re right.” Meanwhile, New York magazine sums up the liberal adulation–he’s a “rock star.”

Piketty teaches at the Paris School of Economics, boasting a typically Gallic hard-left background. He was formerly a staffer for the French Socialist Party and is now a columnist for the French socialist newspaper Libération. It seems fair to say that the professor’s book aims to do for the left today what Karl Marx’s CapitalDas Kapital in the original German–did for the left in the 19th century.

The heart of Piketty’s argument is that the rate of return on capital investment exceeds overall economic growth; as Piketty puts it, “Wealth accumulated in the past grows more rapidly than output and wages.” And so inequality must rise, as accumulated capital crowds out labor and even new business. So that’s the argument: The rich get richer, and everyone else gets squeezed.

Yet we might step back and ask ourselves: Is income inequality rising? And if so, how big a problem is it? And then we might further ask: What are the true causes of inequality? And what could, or should, be done about it?

The answer to the first question is undeniably yes: Income inequality is, undeniably, rising. Just three decades ago, the top ten percent of earners collected about a third of the income in the US; today, they earn more than half. Today, the rich have a higher share of national income than at any time since the 1920s.

Okay, so now to the second question: How big a problem is this income inequality? Without a doubt, it’s a major political issue; the election, last year, of Bill de Blasio as mayor of New York City tells us that “progressive” Democrats see “class warfare” as a winner. Moreover, a thoughtful argument can be made that the economy would be stronger if the middle class had more purchasing power–we’ll come back to that point later.

However, we must note that while income inequality is real, it’s of a rather benign kind, insofar as everyone is still better off in crucial ways than in the past. Today, 90 percent of Americans have cell phones, and more than half have a smart phone. Indeed, around the world, the percentage of cell-phone users is almost as high, 86 percent. For people everywhere, rich and poor, these cell-phone percentages are up from zero just three decades ago–and those few early phone pioneers, or course, had to work with phones that weighed ten pounds and had about a thousandth of the capacity of a phone today.

And at this point, we might observe a paradox: The equalization of technology has actually accelerated the inequality of income. Why? Because the folks who own the networks–that is, networks of mass production and data management, as well as of transmission–stand to make money on every usage of the network. And thanks to globalization and the power of the digital, these networks are now larger than ever.

Facebook, for example, is estimated to have 1.3 billion customers–more than 80 percent of them outside of the US. Mark Zuckerberg and his fellow Facebook shareholders are in the happy situation of collecting micro payments from customers all over the planet. That’s a good way to get really rich: Build a global brand, and sell it globally. So let’s give Zuckerberg full credit for being a genius, as we further note that his net worth is $27 billion.

So now, to the third question: What are the real causes of this income inequality? To Piketty, Krugman, and their allies, the problem is simple–the rich have too much money. And the solution is even simpler–raise taxes.

In France, Piketty’s fellow socialists have already imposed a 75 percent tax rate in France that has led to an exodus of talent and capital. Yet to an ideologue, the failure of a policy is no reason to stop pushing for it; Krugman, for example, has called for a restoration of the old top tax bracket of 91 percent, not seen in the US since the early 60s. Meanwhile, Ezra Klein, the ex-wunderkind of The Washington Post, now at new media startup co-founded by Markos Moulitsas of the Daily Kos, declared in a tweet that he would settle for a top rate of 90 percent.

For his part, Piketty seems to understand that individual countries can’t soak their rich, because the rich won’t stay put and be soaked; they will simply move to another country, as has happened to France in the wake of its 75 percent rate. So Piketty wants to see a global wealth tax–you know, the sort of tax that might be levied by, say, the United Nations. Truly, some cures are worse than the disease.

Yet if we step back and think carefully about income inequality, we can see deeper forces driving this skew in wealth–forces that the left chooses to ignore in its eagerness to raise taxes. And yet if these forces are ignored, it’s unlikely that any lefty redistribution scheme would have the desired effect of reducing inequality. Indeed, such schemes could make the human condition violently worse.

What if, for example, financial inequality is just the foam on the surface? What if the real sources of income inequality were deeper and even more powerful currents within human existence?

Let’s look at three currents within our civilization that are clearly causing ripples, even waves. These currents, as we’ve already noted, are technological, intellectual, and motivational. If we can agree that these currents are changing things, then we might further see that the goal of confiscatory tax rates is simply beside the point–and ultimately meaningless.

Let’s start with technological issues. In his recent book, Who Owns the Future?, cyber-visionary Jaron Lanier–he was one of the first pioneers of virtual reality–argues, “If things don’t change, those who own the top machines will gradually emerge as the only elite left standing.”

Lanier might be stating his point too strongly, but he is onto something. He cites the music industry as an example of what happens when new networks disrupt old processes: Thanks to Napster and other file-sharing programs, the music biz has been hollowed out; top artists still make money, but the old jobs of making, shipping, and selling albums have disappeared. Yes, the consumer is better off, but the biggest winners, in dollar terms, have been those who created the new digital distribution channels–the Zuckerberg class.

As Lanier points out, the same cyber-disruptive process is happening in many fields, including photography, or, as we would now call it, digital imaging. Once upon a time, Polaroid employed 140,000 people; it is now bankrupt. Meanwhile, Instagram, which employed just 13 people, was sold to Facebook for a billion dollars.

Lanier’s list goes on and on, from sales to services to manufacturing. In fact, we might think about how the functions of a smartphone have wiped out whole product categories: A typical smartphone includes the app-equivalent of a pencil and paper, a map, a flashlight, an address book, a calculator, a dictionary, a flashlight, and, oh yes, a huge book library and an even bigger music library. Once again, we can salute the brainiacs who made these wonders possible–and salute the overall free-market system–even as we note that the financial benefits accrue upward. That is, we get the cool products, they get the money.

Clearly something is happening here, and it’s way beyond the rich getting richer. Zuckerberg, for example, wasn’t born rich; his father was a dentist from Brooklyn. Instead, the Facebook founder seized upon some paradigm-shifting technology and then created a new product–the proverbial better mousetrap.

As Charles Darwin told us, all systems evolve toward complexity. That’s the difference between an amoeba and a human being, and it’s the difference between a communication system based on scraps of parchment and one based on interlinked computer screens.

Indeed, evolution–including, now, technological evolution–seems to be accelerating. Every year, Moore’s Law puts all the more distance between a computer user, and, say, a house pet. So what to do about such techno-inequality? Frankly, there’s nothing to do, other than to stop all progress. And again, if that’s a cure, it’s far worse than the disease.

Yet while technological currents are important, even more important are the intellectual currents; after all, it was the power of human brains that created and expanded all that technology.

Zuckerberg was a Harvard student before he dropped out to start his company; thirty years before, Bill Gates also dropped out of Harvard to start a company. When you’re smart, you have lots of good options, although even among the ranks of the brainy, Zuckerberg and Gates are epic standouts.

It’s been estimated that Bill Gates has an IQ of 160, and the same estimate applies to his Microsoft co-founder, Paul Allen. The achievements of Gates & Allen, and of Zuckerberg, remind us that brainpower is a big variable. And of course, IQ is far from the only kind of intellectual measure; artistry might not be easily measurable, but it’s still real. Andy Warhol’s IQ has been estimated at 86, and he did pretty darn well.

So we might ask: What would happen if the left got its way and raised tax rates to, say, 90 percent? What if the government grew bigger and more powerful as a result of the policy prescriptions of Piketty and the rest? Would smart people still go into business, knowing that they were going to have to give almost all their money to the government? Or would they take their Promethean ambitions and go into some other line of work, such as government or war? Do we really want entrepreneurial politicians and generals? Most dictators and autocrats have been intelligent, and some even brilliant; their unfortunate subject populations would have been better off if those tyrants had chosen to use their talents to build cars and shopping malls, as opposed to tanks and death camps.

So part of our challenge is to envision a system in which smart people are rewarded for doing good things, not bad things. This was the preoccupation of the Founders, seeking to build a novus ordo seclorum, as it says on the dollar bill–a new order for the ages.

As Thomas Jefferson observed in an 1813 letter to John Adams, it’s possible to identify a “natural aristocracy… of… virtue and talents.” Jefferson and Adams were both born comfortable, but it was only their brains, hard work, and, yes, virtue that propelled them into the pantheon of greatness. So we can add motivation to our list of powerful currents upsetting the static equilibrium beloved by lefty economists.

Happily, such a powerful mix of virtue, talent, and motivation is not limited to one time or region. We are seeing it today in Seattle and Silicon Valley, but we could also be seeing it across the country as a whole–and literally, under our feet. Indeed, once again, human ingenuity is carrying us on a new upward path.

What is this upward path? It’s the “fracking” industry–which, using new drilling techniques to increase oil and natural gas production exponentially, could be as big or bigger than the Internet. Yet if it hasn’t received anywhere near the attention of tech stuff, well, that could be changing.

Gregory Zuckerman, a reporter for The Wall Street Journal, asks some pointed questions in his new book, The Frackers: The Outrageous Story of the New Billionaire Wildcatters:

How did a few unlikely, ambitious and headstrong wildcatters… manage to tap massive energy deposits dismissed by the largest energy powers? ExxonMobil’s corporate headquarters are directly above a huge shale formation, but the oil giant disregarded the area, even as George Mitchell worked on coaxing historic amounts of gas from rocks in the region.

Why did a new age of energy emerge from the depths of the Great Recession, even as Federal Reserve Chairman Alan Greenspan warned of dwindling US supplies, investors Warren Buffett and Henry Kravis bet on a dearth of natural gas, and Vladimir Putin predicted a Russian gas monopoly?

Why did private enterprise revitalize the nation’s energy outlook with a focus on fossil fuels, of all things, even as the government funneled $2 trillion toward cleaner, alternative energy?

As Zuckerman details, one of the leading frackers is Harold Hamm, born poor in Lexington, Oklahoma, the youngest of thirteen children in a sharecropper family. Hamm grew up in a shack and never attended college, and yet he applied his virtue and talent in a way that Jefferson would have applauded: He helped invent a whole industry–and a vast new source of wealth.

Indeed, the wealth that could come from fracking threatens to overwhelm the political establishment: All our assumptions, piled up over the last four decades, about “limits to growth,” “peak oil,” and permanent dependence on OPEC and the Arabs are now out the window. To be sure, there will be an historic political fight, because the establishment power structure that justified its existence on the basis of scarcity will not easily yield to a new system of abundance.

And yet as I wrote here, victory for pro-growth forces is inevitable. Why? Because the stakes are so huge; the Institute for Energy Research estimates, for example, that that $128 trillion in oil and natural gas wealth sits underneath federal lands and waters; it won’t sit untouched forever. Maybe the Americans will frack it out–or maybe the Chinese will come and frack it out for us, if we idle through the 21st century while they grow rich and strong and aggressive. The only sure bet is that somebody will.

The human brain turned an ordinary element, silicon, into something more useful and precious than gold. And now the human brain is turning the dirt beneath our feet into yet another treasure trove. To see how fracking is done is to be reminded of just how hard it was to figure it all out. Yet it is being figured out, and the leading figurers are now billionaires.

Yes, wealth creation takes a lot of work, that’s for sure: Ayn Rand had every right to celebrate these marvelous creators, these virtuous conquerors. One could say that the true variables for wealth creation are IQ, caffeine, adrenaline, and elbow grease. A critical mass of smart people, suitably inspired–or wired–can do amazing things.

Thus we see the secular trinity of inequality–that is,technological, intellectual, and motivational forces that defy all the egalitarian professors and their preciously concocted Gini coefficients, aimed at measuring inequality to an nth-decimal-place, self-torturing, number-crunched extreme.

Are the traits of this trinity equally distributed? Are they fairly apportioned according to the Piketty/Krugman metric? Not at all. Zuckerberg has more than his share, and so does Hamm. And so did Warhol. Nothing, short of repression and murder, will stamp out the varied expressions of human creativity, from wealth creation to art creation.

So as we can see, inequality is built into the complicated systems that define our lives today; that is, digital technology makes our lives better, even if it makes some spikily richer than others. Fracking technology provides us all with energy, leading to greater overall prosperity–even as it assigns the greatest profits to those who figure out how to do it. And as for art, well, even econ professors can’t account for the aesthetic spirit–and they certainly don’t know how to redistribute it.

Okay, so inequality is here to stay. Confiscatory tax rates can distort the system, but they can never even it out.

Still, we might ask: Is there anything to be done to mitigate the ill effects of inequality, including a politically debilitating perception that the system is unfair? After all, in politics, the polity matters; even with their genius, Zuckerberg and Hamm can flourish only within a stable regime of laws and property rights.

Thoughtful observers have long wrestled with this issue of preserving social order by reinforcing the middle class. Alexander Hamilton argued for such policies in the late 18th century, and in the 19th century, the Republican Party was founded on that very idea. That’s how the GOP came to champion, for example, the Homestead Act and the infrastructure programs that would make homesteading possible. The Party of Lincoln believed in free enterprise, but it also believed in a big middle of farmers, workers, and artisans.

Indeed, Uncle Sam’s formula of investing in promising technology–oftentimes starting with a military purpose, be it electronic, chemical, or aerodynamic–and then turning that technology over to civilian entrepreneurship has been a proven winner.

And it takes nothing away from the genius of Gates or Zuckerberg to point out that the federal government helped make their work possible. The Pentagon’s investment in ARPANET back in the ’60s, for example, was tiny, and the National Science Foundation didn’t put much into NSFNet in the ’80s, but the payoff to the nation, in the form of the resulting Internet, has been cosmic.

So yes, let’s celebrate Zuckerberg and Hamm. And then let’s use a tiny portion of the wealth that they generate to finance such “seed corn” endeavors as infrastructure, R&D, and medical research. History tells us that these expenditures will not only help assure the agreeable consent of the governed, they will also help assure a future supply of additional wealth-creating breakthroughs. That’s about as virtuous a cycle as we can hope to see.

Meanwhile, of course, Piketty and his ilk will continue living in their own hell of income inequality. They can offer class envy, but not economic growth, because growth comes from innovation and production, not taking and leveling.

So yes, the left can rail against high incomes, but if it isn’t willing to examine the three deep currents–technological, intellectual, and motivational–that are rapidly accelerating inequality, then it has no plausible plan for greater equalization.

Of course, the situation isn’t all bad for Piketty. He has a bestseller on his hands, and he will no doubt garner huge speaking fees as well. In other words, if he’s not careful, he could find himself piling up capital faster than others. So he, too, could be part of the phenomenon that he fears–or says he fears.

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