Forces of Divergence – Is surging inequality endemic to capitalism?

Source: John Cassidy, New Yorker, March 31, 2014

….What are the “forces of divergence” that produce enormous riches for some and leave the majority scrabbling to make a decent living? Piketty is clear that there are different factors behind stagnation in the middle and riches at the top. But, during periods of modest economic growth, such as the one that many advanced economies have experienced in recent decades, income tends to shift from labor to capital. Because of enmeshed economic, social, and political pressures, Piketty fears “levels of inequality never before seen.”

To back up his arguments, he provides a trove of data. He and Saez pioneered the construction of simple charts showing the shares of over-all income received by the richest ten per cent, the richest one per cent, and, even, the richest 0.1 per cent. When the data are presented in this way, Piketty notes, it is easy for people to “grasp their position in the contemporary hierarchy (always a useful exercise, particularly when one belongs to the upper centiles of the distribution and tends to forget it, as is often the case with economists).” Anybody who reads the newspaper will be aware that, in the United States, the “one per cent” is taking an ever-larger slice of the economic pie. But did you know that the share of the top income percentile is bigger than it was in South Africa in the nineteen-sixties and about the same as it is in Colombia, another deeply divided society, today? In terms of income generated by work, the level of inequality in the United States is “probably higher than in any other society at any time in the past, anywhere in the world,” Piketty writes…..

….In the United States, the story was less dramatic but broadly similar. The Great Depression wiped out a lot of dynastic wealth, and it also led to a policy revolution. During the nineteen-thirties and forties, Piketty reminds us, Roosevelt raised the top rate of income tax to more than ninety per cent and the tax on large estates to more than seventy per cent. The federal government set minimum wages in many industries, and it encouraged the growth of trade unions. In the decades after the war, it spent heavily on infrastructure, such as interstate highways, which boosted G.D.P. growth. Fearful of spurring public outrage, firms kept the pay of their senior executives in check. Inequality started to rise again only when Margaret Thatcher and Ronald Reagan led a conservative counter-revolution that slashed tax rates on the rich, decimated the unions, and sought to restrain the growth of government expenditures. Politics and income distribution are two sides of the same coin…..