Lessons from a rock-star economist
Last week, I watched something rather peculiar unfold in a lecture theatre at the Graduate Center of the City University of New York. A collection of earnest American economists met to ponder a 577-page tract on inequality and tax policy by Thomas Piketty, a 42-year-old professor of economics from Paris.
But instead of simply meeting in sombre, academic isolation, the event was so wildly popular that tickets for it sold out – and the discussion had to be broadcast into a neighbouring auditorium. The excitement did not stop there. In recent days, Piketty’s new book, Capital in the Twenty-First Century, has soared up the bestseller lists and sparked endless blogs, debates and comment.
The White House and US Treasury have held talks with the Frenchman. An entire segment of the primetime television show Morning Joe pondered its message of fiscal reform (with co-host Joe Scarborough declaring, “I just don’t think that a billionaire should be paying just 14 per cent tax!”). Interest has been so high that the style-savvy New York magazine has dubbed Piketty a “Rock-Star Economist”. Not bad for a leftwing French intellectual whom (almost) nobody in the US had ever heard of a month ago. Particularly given that the book essentially argues that inherited wealth and inequality have soared in the west – and can only be contained by much higher taxes.
What explains this feverish excitement? Some observers might blame it just on the facts: Piketty’s tome is exhaustively researched and contains numerous statistics showing that the American economist Simon Kuznets was wrong to argue back in the 1950s that economies would become more equal as they matured. On the contrary, Piketty argues that inequality has grown in the US and Europe over the past decade because a new cadre of “supermanagers” has captured more wage income and returns on accumulated wealth have outstripped the (modest) pace of economic growth. This means that people who are already rich are becoming richer, and many inherit their wealth.
But I suspect that the real reason for Piketty’s rock-star reception is not the quality of his numbers but the fact that he has forced Americans to confront a growing sense of cognitive dissonance. Nearly two-and-a-half centuries ago, when the country’s founding fathers created the nation, they proudly believed they had rejected Europe’s tradition of inherited aristocracy and rentier wealth. Instead, it was presumed that people ought to become rich through hard work, merit and competition.
Thus, inequalities of wealth were often tolerated because everyone hoped they could become rich. That was the American dream which fostered admirable waves of entrepreneurial energy and – crucially – provided a social glue.
Piketty’s book shows that this dream is increasingly a myth. In decades past, he notes, America was indeed more egalitarian than Europe. Today, wealth in the US is more unequally distributed than almost anywhere else, and returns on accumulated wealth are so high that riches are increasingly inherited, not made. Most Americans instinctively know, or sense, this. And even before Piketty arrived the issue was provoking unease. Recent surveys by the Pew Research Center, for example, suggest that two-thirds of Americans think that their society is becoming more unequal, while 90 per cent of liberals, and 60 per cent of moderate conservatives, want the government to address this. Meanwhile, media references to “inequality” and “America” were five times higher last year than in 2010 or 2005, according to the Factiva database; this month they have been six times higher.
What Piketty’s book has done is frame this issue with new clarity; like a modern Alexis de Tocqueville, he has forced Americans to confront some of their contradictions (although de Tocqueville’s message back in the 19th century was completely different). That does not mean the elite will accept his analysis; on the contrary, rightwing commentators have attacked him. Nor does it imply that Congress will embrace his call for drastically higher tax rates; that seems utterly unlikely.
But, if nothing else, Piketty’s work touches a very raw nerve about the reality of the modern American dream. Of course, as a cynic – or anthropologist – might note, a dream does not necessarily need to be “real” to work as social glue; all that is necessary is for enough people to believe in the illusion. But can the American dream now survive a shift towards oligarchy? Can the egalitarian myth still act as a social glue? These are the big questions implicit in his book; and if Piketty’s analysis is correct, they can only become more acute in the coming years as inequality fuels not just more inequality – but greater cognitive dissonance too.
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