Opinion

The politically convenient but largely bogus Unified Economic Theory of Modern Liberalism

Thomas Piketty really only got it half right

Wealthy without the growth.

Here's some good news for America's 99.99 percent: We probably aren't destined to wage slave our way through a nightmarish Downton Abbey-meets-Elysium dystopia where all the wealth is owned by the lay-about scions of today's Silicon Valley and Wall Street elite.

Indeed, inequality alarmist Thomas Piketty, author of the best-selling (though lightly read) Capital in the Twenty-First Century, is pulling back from his strong claim that the super-rich are going to get ever and always super-richer and super-richer. "An endless inegalitarian spiral," as he puts it. And that ought to be good news for all of us.

The French economist originally argued that he had discovered a "fundamental law of capitalism," where over the long run, the return on capital ("r") exceeds the economy's growth rate ("g"). Income from investment would thus likely grow faster than income from wages this century and "radically undermine the meritocratic values on which democratic societies are based." Thus "r > g" will explode wealth for the already-wealthy just like "E = mc2" exploded the atom bomb. In this liberal view, Karl Marx wasn't wrong to fear the concentration of wealth in ever fewer hands. He was just 100 or so years early. And President Obama was right to describe income inequality as the "defining challenge" of modern America.

But in a new paper, Piketty takes a step or two backward. He now denies that he views his simple economic formula "as the only or even the primary tool for considering changes in income and wealth in the 20th century, or for forecasting the path of income and wealth inequality in the 21st century." Seems his fundamental law isn't so fundamental after all once you factor in things like how some of that wealth is (a) spent on super-yachts and bad investments; (b) divided among children through the generations; and (c) already taxed fairly heavily. In particular, the rise in income inequality, as opposed to wealth inequality, has "little to do" with "r > g," he says. Blame education access and CEO compensation instead, stuff better public policy can fix.

Piketty's modest retreat isn't all that surprising, given the withering academic assault on his research. In a survey of top economists late last year, 81 percent disagreed with his thesis. And several used fairly rough language — at least for scholars — such as "weak" and not "particularly useful," with one accusing Piketty of "poor theory" and "negligible empirics."

This is all rather bad news for what I have termed the Unified Economic Theory of Modern Liberalism: Not only are the rich getting richer — and will continue to do so because, you know, capitalism — but this growing gap is hurting economic growth. Redistribution must commence, tout de suite!

But Piketty's clarification isn't this politically convenient theory's only problem. The part about inequality and growth has also suffered a setback. The link between the two is a key part of the "secular stagnation" theory of superstar Democratic economist Lawrence Summers. Since the rich save more than the middle class, growing income inequality is sapping the economy of consumer demand. So government must tax more and spend more. But Summers recently offered an updated view, saying that while boosting consumer demand is necessary, it is not sufficient for strong economic growth. Washington must also do the sort of "supply-side" stuff that Republicans kvetch about, such as business tax reform.

Income inequality matters. For one thing, it increases the penalty for America's stalled upward mobility. And inequality driven by capitalist cronyism rather than entrepreneur innovation should be intolerable to both the left and right. But concern about the income gap shouldn't be used an excuse to ignore America's real top problem, a possible permanent downshift in the growth potential of the U.S. economy. At least Piketty got half his equation right.

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