Inequality debates and Piketty 2.0

Reviews of Thomas Piketty's latest book, Capital and Ideology.

Idrees Khaloon in the New Yorker writes,

In his retelling, the so-called Trente Glorieuses, the thirty years of relative equality between 1950 and 1980, were the result not of two world wars—which played “only a minor part in this collapse,” he has determined—but, rather, of political decisions made “to reduce the social influence of private property.” And the policies we adopt certainly do influence inequality. Steeply progressive income taxes and estate taxes shaped income distributions during those Trente Glorieuses... He argues that the “Brahmin left”—the most educated citizens and the greatest beneficiaries of the knowledge economy and the supposed meritocracy—has captured the left-wing parties in Western democracies, distracting those parties from their mission of improving the lives of working people. Conservative parties, meanwhile, are under the sway of the “merchant right.” Such polarization makes debate over redistribution impossible, and so the lower classes debate immigration and borders instead.

The review itself is representative of the views of the "brahmin left". Two points in particular. One, the big problem is not inequality per se, but the excessive levels of inequality and the extreme concentration of wealth in the hands of a few plutocrats. Two, the bigger problem with the prevailing levels of inequality is that of elite capture of rule making. The latter makes such levels of inequality bad in itself.

Raghuram Rajan in the FT writes,

Inequality is a real problem today, but it is the inequality of opportunity, of access to capabilities, of place, not just of incomes and wealth. Higher spending and thus taxes may be necessary, not to punish the rich but to help the left-behind find new opportunity.

I think this is somewhat digressive and platitudinous. The inequalities of opportunity etc are only second order manifestations of economic inequality. The real problem is with inequality of income and wealth. And here too, inequality by itself is not the problem, but excessive inequality is the problem.

Excessive inequality with income and wealth, as is the case now, inevitably leads to rigging the rules of the political system and its processes which affect the entire society in favour of a handful and against the overwhelming majority. If a few people become so rich compared to the rest, political capture is inevitable. This is just a fact of life.

Political choices then get made by and for the elites, often to the exclusion and detriment of the vast majority. It becomes a threat to the democratic system itself. So preventing such excessive accumulation of wealth, even if it means punishing the rich by way of taxation, cannot be avoided.

As to "scholarship without solutions", I am inclined to believe that widening inequality and its consequences, as the reviews indicate, are widely under-appreciated. So in some ways, the gravity of the problem itself is inadequately recognised. In the circumstances, articulation of the problem with evidence and historical comparisons is itself worthwhile. As Rajan himself writes,

So Piketty’s focus on documenting the true state of economic inequality, following which informed voters will push for change.

Unfortunately, this alone is very unlikely to do much in realising change, though it is essential to create the conditions.

Rajan is right with the challenges associated with redistribution. And also with the perils of excessive activism by governments. But irrespective of what is driving the widening of inequality, its corrosive effects and the need for corrective action cannot be denied. As to what those corrective actions should be, one can rightfully disagree with Piketty' suggestions.

As to solutions, the idea of "steeply progressive taxes on income, wealth..., and bequests" may sound fanciful today. But history tells us that once far-fetched thoughts can quickly get adopted as the norm, though one can never tell with certainty about the tipping point.

Ananth has a post on Rajan's review. 

Paul Krugman in Times perhaps gets it right by making the distinction between the presentation and substance of the material. He is disappointed at the breadth and scope of the narrative and feels that it detracts from the central point about what is driving recent inequality that Piketty is making. He calls it an "endless series of digressions rather than the cumulative construction of an argument" and feels that the arguments are scattered throughout the book and "gets lost in the dubiously related material". His summary,

To be fair, the book does advance at least the outline of a grand theory of inequality, which might be described as Marx on his head. In Marxian dogma, a society’s class structure is determined by underlying, impersonal forces, technology and the modes of production that technology dictates. Piketty, however, sees inequality as a social phenomenon, driven by human institutions. Institutional change, in turn, reflects the ideology that dominates society: “Inequality is neither economic nor technological; it is ideological and political.”... 

For Piketty, rising inequality is at root a political phenomenon. The social-democratic framework that made Western societies relatively equal for a couple of generations after World War II, he argues, was dismantled, not out of necessity, but because of the rise of a “neo-proprietarian” ideology. Indeed, this is a view shared by many, though not all, economists. These days, attributing inequality mainly to the ineluctable forces of technology and globalization is out of fashion, and there is much more emphasis on factors like the decline of unions, which has a lot to do with political decisions.

But why did policy take a hard-right turn? Piketty places much of the blame on center-left parties, which, as he notes, increasingly represent highly educated voters. These more and more elitist parties, he argues, lost interest in policies that helped the disadvantaged, and hence forfeited their support. And his clear implication is that social democracy can be revived by refocusing on populist economic policies, and winning back the working class. Piketty could be right about this, but as far as I can tell, most political scientists would disagree. In the United States, at least, they stress the importance of race and social issues in driving the white working class away from Democrats, and doubt that a renewed focus on equality would bring those voters back. After all, during the Obama years the Affordable Care Act extended health insurance to many disadvantaged voters, while tax rates on top incomes went up substantially. Yet the white working class went heavily for Trump, and stayed Republican in 2018.

Could it not be that the shifts in choices of centre-left parties and liberals (perhaps their co-option as ideologues) has had the effect of exacerbating the racial and social cleavages which for years had been alleviated through progressive policies?