Feb
5
Thomas Picketty-Class #3-Gerald Lizzo
February 5, 2015 | 1 Comment
Upon reading about Thomas Piketty’s historical analysis of income inequality in his “Capital in the Twenty-First Century” I could not help but to have a bit of a concerning thought. One assertion Piketty makes is that the growth of accumulated capital far exceeds the national income. He points out how it was approximately six or seven times the national income in Europe before the First World War broke out. He then discusses how the ensuing period of global turmoil disrupted the growth of capital but since the end of the Second World War, the level of capital compared to national income is approaching its pre-war levels. In other words, we are right back where we were before two of the world’s deadliest and most devastating wars broke out. I think everyone would agree that we do not want history to repeat itself. After all, we are supposed to be learning from history’s mistakes.
Still, I think Piketty makes several compelling points about income inequality that harp back to what I stated in my previous post. He asserts that income from capital is what dominates the top of the income distribution. In other words, capital gains, the increase in value of an investment, is what earns the most money, not earned income such as salaries. If you take a look at today’s ultra wealthy, this would most certainly appear to be true. Those who are wealthy earn their money from investments. The Occupy Wall Street protests against the income distribution in America did not take place on Wall Street for no reason.
As a matter of fact, the current state of Wall Street brings up an interesting connection to Piketty’s argument. He brings up the idea of the rate of return on capital versus the rate of economic growth. Most interestingly, if the rate of economic growth falls, then the difference between it and the rate of return on capital will rise. The return on capital will not fall with it at the same rate. This is a phenomenon that has been occurring since the 1970s but a look at the past several years makes a strong case for this point. After the financial crisis, the Federal Reserve, the bank in charge of monetary policy in the United States, decided to lower interest rates by pumping more money into the economy through a process called quantitative easing. The theory is that lower interest rates will make money cheaper and thus spur investment. Investment will then lead to growth for businesses, followed by job growth, followed by wage growth and thus the entire economy will turn around. Well, if you take a look at the stock market in the past 5 years there has been a significant increase in investment. Stock markets have been on a historic bull run during those years. Return on capital has been soaring and those with the means to invest have been making large quantities of money. On the other hand, those who are limited to wage earning jobs, have been left out of the historic run. They have been stuck to deal with an economy that has been growing sluggishly at best.
In this sense, I agree with Piketty’s theories. But on some points I disagree with him. In order to try and rearrange the distribution of wealth he proposes a radical increase in taxes on the wealthy by as much as 80%. At the end of the day we live in a capitalistic society in which the individual’s potential for success provides them with the motivation to work hard. Money is what is defined as the measure of success and thus it is the motivating factor in our society. Significantly high taxes would then deter people from working hard to achieve success and in doing so, contributing to the economy in a positive way.
Ultimately, I think the underlying issue in today’s modern age is the value of money and wealth. Individuals are extremely materialistic and as a result it seems nearly everything in our society is motivated by money. The emphasis on wealth today corrupts some individuals to not consider ethics in decision-making. In turn, this causes others to be hurt by another’s pursuit of money. Modern day politics are significantly marred by these situations. But for this, I do not have a solution. Is there a way we can get individuals to not put too much of an emphasis of money in their daily lives?
