Ted Boettner: What Can W.Va. Tell Thomas Piketty?
Every couple of years I read a book that dramatically changes the way I view the world. In college, it was Noam Chomsky’s penetrating critique of the mass media in “Manufacturing Consent.” In 2006, it was Michael Pollan’s “The Omnivore’s Dilemma” that made me see corn everywhere and start shopping around the perimeter of our local Kroger. This year I’ve been glued to my couch reading a 696-page behemoth called “Capital in the Twenty-First Century” by French economist Thomas Piketty.
Piketty is best known for his pioneering work with UC-Berkeley economist Emmanuel Saez that traces the historic growth of income inequality in the United States and Europe over the last century. They found that the total share of annual income received by the top 1 percent in the United States has grown markedly from 8 percent in 1980 to over 22 percent in 2012 while income for the middle class has stagnated.
Their work on income inequality has not only inspired political movements like Occupy Wall Street with its 99 percent vs. the 1 percent slogan, but it has impacted fiscal policy decisions and shaped academic research interest in the political power of average voters, the country’s dwindling middle class, and the source of health disparities.
In “Capital in the Twenty-First Century,” Piketty now turns his attention to mining centuries of data on the distribution of wealth in Europe and the United States. According to Piketty, we are entering a new Gilded Age of “patrimonial capitalism” in which accumulated wealth is not only growing faster than income from wages and salaries but is threatening the very moral foundation of democratic societies.
Piketty constructs a “general theory of capitalism” to explain this wealth concentration where the rate of return on capital is greater than economic growth. In other words, the private income growth from capital stock — the growth of financial assets like stocks and mutual funds as well as non-financial assets like land, patents, and business property — exceeds the rate of return on national income or output growth. This means that those who make their living off inherited wealth or accumulated non-human assets — mostly those in the top 1 percent — are seeing larger income gains than those who rely on their labor for income. Put another way, holding wealth is more lucrative than working.
Piketty also correctly observes that the recent rise in wealth and income inequality has also been facilitated by reduced taxes on profits and income and the quasi elimination of taxes on inheritance. These changes, which were ushered in during the Thatcher and Reagan economic revolutions in the late 1970s, have incentivized rent-seeking behavior like bloated CEO pay that has transferred income from labor to capital. This, in turn, has increased the political influence of those at the top to lobby for policies that distribute money upward.
While many observers may say that this is an obvious point, Piketty is the first to empirically prove that this is a fundamental feature of the capitalist economy and that eventually, if it remains unchecked, it will lead to a state of oligarchy where birth will always and overwhelmingly matter more than effort and talent. This helps explain why this presumably wonky economics book has become an international bestseller and has ignited so much debate in the media and among academics recently.
What can Piketty tell us about West Virginia?
Better yet, what can West Virginia tell Piketty? Unlike most rich countries, West Virginia was born in a state of patrimonial capitalism where outside wealthy land speculators and mineral owners have benefited the most from the natural resource wealth created in the state.
When George Washington was asked if he would be willing to sell his 32,000 acres in Kanawha County he responded by saying: “I had never had it in contemplation because I well knew they would rise more in value than the purchase money at the present time would accumulate by interest.” Today, a large portion of the state’s minerals and land is still owned by large out-of-state companies who make their money through economic rents from mineral royalties and leases and from managing large swaths of private forestland for investors.
As Adam Smith observed in “The Wealth of Nations,” “ is perhaps the most disadvantageous lottery in the world, or the one in which the gain of those who draw the prizes bears the least proportion to the loss of those who draw the blanks.”To help reduce wealth inequality, Piketty proposes a global tax on wealth of 2 percent combined with progressive income tax rates as high as 80 percent. Though this proposal might today appear to be pie-in-the-sky, it is important to remember that the United States had a top marginal income tax rate of over 91 percent in the 1950s and early 1960s during a period of not only stronger economic growth but of a growing middle class.
While it is unlikely that Congress is going to take action to implement changes based on Piketty’s tax policy recommendations anytime soon, there are number of steps state policy makers can take to not only curb rising income and wealth inequality in but also give use the resources we need to build a stronger economy. This could include changes to tax policy that help reduce the perpetuation of inequality, such as reinstating West Virginia’s estate tax that it had for over 100 years, establishing a higher personal income tax bracket on income over $1 million, closing corporate tax loopholes like tax havens, applying a larger property tax rate on property over 500 acres, and fully funding West Virginia’s Future Fund. Other avenues for reform could also include investing more human capital like higher education, early childcare and education, entrepreneurship, and physical capital like broadband, innovation, and tourism.
Piketty has not only provided us with a new and rich framework that shows that wealth inequality is a central feature of modern capitalism, but he has given us a well-written and deeply researched book that will be discussed for some time to come. “Capital” is a must-read for anyone concerned that concentrating more wealth and power in the hands of fewer people is leading to the decline of the American middle class.