The future will be vastly more unequal, Piketty predicts, thanks to tax laws that allow virtually unlimited inheritances to pass from generation to generation. This sort of out-of-control inequality recalls similar class divides in 18th and 19th century France that were reversed only by sharp-edged popular responses.
The good news is that such increasing inequality is not inevitable. Piketty shows that the degree of inequality results not from natural forces or individual choices but from government policy. This is comforting to those of us who been making this argument for years, especially since even The Economist, that staid British magazine devoted to the interests of the investor class, has embraced Piketty’s theory.
Piketty’s fully developed argument is backed by careful analysis of official data and supplemented by his brilliant use of economic facts pulled from classics of 19th century literature. To his credit, he offers an easy-to-follow model to explain how, even when economic growth is weak, the rich can get richer while the rest of us find ourselves worse off.
When an economy grows at 1 percent annually but investment returns are 5 percent, the already wealthy need to reinvest only a fifth of their gains for their fortunes to grow at the same rate as the overall economy. The rest can be spent on a sumptuous lifestyle.
Since by definition the very rich do not need to consume 80 percent of their incomes — the portion by which investment returns exceed the growth of the economy in Piketty’s model — they can reinvest most of their annual gains in the market. Over time this accumulating capital will snowball.
The official American income numbers, crunched by Piketty and his sometime colleague Emmanuel Saez, show that in the 21st century wealth and income increases are almost all taking place among the tiniest sliver of the wealthiest and highest-earning. This trend emerged in the mid-1970s, accelerated under Reaganism and took off like a rocket after the tax cuts and anti-regulatory policies of the George W. Bush administration.
The top 1 percent of Americans raked in 95 cents out of every dollar of increased income from 2009, when the Great Recession officially ended, through 2012. Almost a third of the entire national increase went to just 16,000 households, the top 1 percent of the top 1 percent, Piketty and Saez’s analysis of IRS data shows.
By contrast, in 1934, the year after the Great Depression officially ended, the 1 percent of the 1 percent saw their incomes slip by 3.4 percent.
The income changes for the vast majority are just as revealing. The bottom 90 percent saw their average incomes rise 8.8 percent in 1934 over the prior year, while in 2012 the same statistical group had to get by on 15.7 percent less than in 2009.