Will Piketty's 80% Income Taxes and 10% Wealth Tax Fix Our Economy?

Will Piketty's 80% Income Taxes and 10% Wealth Tax Fix Our Economy?

The economist offering this “solution” has been fêted by the Obama White House economic staff, the International Monetary Fund, and by many of the people running world economies today. His ideas are definitely “in play.”

Thomas Piketty, the forty-two-year-old French economist whose book, Capital in the Twenty-First Century, became an overnight sensation and unexpected bestseller, is being hailed as the new Keynes, an economic thinker who can lead us out of our current economic malaise, just as Keynes is alleged by his followers to have lead us out of the Great Depression.

Keynes’s keynote book, The General Theory, is loaded with economic theory. There are only two pages of data in that book, and Keynes dismisses the scant data he cites as “improbable.” By contrast, Piketty’s new book, Capital in the Twenty-first Century, is stuffed with data. Indeed Piketty considers himself a successor to the economist whose data Keynes dismissed, Simon Kuznets. Almost everyone admits that Piketty’s theoretical case is weak – but, his supporters say, look at all this data. You can’t argue with this mass of historical evidence!

Let’s take a closer look. Piketty’s primary argument is that wealth (which tends to be concentrated in few hands) grows faster than the economy, so that those with a lot of wealth keep getting richer relative to everyone else. This is supposed to be an inescapable feature of capitalism. (If this sounds familiar, it should be. It echoes both Marx and Keynes, although we should remember that Keynes mocked most of what Marx said as “hocus-pocus.”)

So what then is the evidence that wealth has grown faster than the economy?

We’ll start with the chart below, adapted from Piketty’s book. The top line is return on capital and the bottom line is the economic growth rate. The top line is supposed to be how the rich are faring and the bottom line how the average person is faring. Note that the lines on the far right are just a projection of Piketty’s, and not actual history.

Piketty 1

This chart is astonishing for many reasons. First of all, it suggests that capital earned a 4.5 percent or higher return for the years 0-1800 C.E. This is a crazy number. If the human race had started out with only $10 in year 1 and compounded it at 4.5 percent a year for any series of 1,800 years, by now we would have much, much more than a trillion times the entire world’s wealth today, which is estimated at $241 trillion by Credit Suisse.

The 4.5 percent or higher number is also crazy because Piketty is right that there was negligible economic growth prior to the industrial revolution, and such high returns for the rich are just not consistent with so little growth. The truth is that rich people for most of those years were interested in spending or hiding their wealth, not in investing it, because wealth out in the open was likely to be stolen, if not by bandits, then by government.

If you look closely at the more modern part of the chart and ignore the projection into an unknown future, you will see that the lines do not support Piketty’s thesis. His idea that the rich will always necessarily get richer relative to everyone else under capitalism is not supported by the data he presents.

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Hunter Lewis is co-founder of AgainstCronyCapitalism.org, co-founder and former CEO of Cambridge Associates, a global investment firm, and author of two recent books, Free Prices Now!, about the Federal Reserve, and Crony Capitalism in America 2008-12.

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