French economist Thomas Piketty is burning up the book charts as of late — during our Tuesday morning broadcast, it was pointed out by a variety of publications that his “Capital In The Twenty-First Century” was on back-order on Amazon — and his theories and policy prescriptions are also heating up the economic world.
Piketty’s main points — that extreme wealth concentration in the very tip top of the economic scale is bad for overall growth, that a weak middle class is bad for the functioning of our larger democratic society and that there’s more we can do overall to promote a more even economic playing field — came out in his early interview segments with host Tom Ashbrook.
But we were interested — and thought you might be, too — in the scope of the conversation he had with our other guest, Harvard University economist and former Chairman of the Council of Economic Advisers N. Gregory Mankiw. Beyond the international divide, Mankiw and Piketty have a very different understanding of the problems plaguing our economic system at the moment.
“Most people would rather have a root canal than read a book on economics, so I applaud his success in this,” Mankiw said, congratulating Piketty on the surprising and overwhelming popularity of his new book. But from there, Mankiw veers away from total praise.
“Where I part company with Thomas is looking forward,” Mankiw said. “He has this premise which he called the central contradiction of capitalism, which is that we’re in trouble if the rate of return on capital is greater than the growth rate, that the economy is gonna tend toward increasing inequality.
I don’t see wealth increasing at the rate of return on capital. That’s simply because people spend their money when they have capital. Some it’s in consumption in the form of fancy vacations and luxury houses and fancy cars; some of its transformed in the form of charitable giving. Wealth tends to get dissipated as people have children, it gets split up in multiple ways. I don’t see wealth as naturally growing at the rate of return on capital, and as a result I don’t see as wealth concentration as continuing to increase.”
Piketty’s take on wealth consumption is bit different.
“Of course, people will consume some of the return to wealth,” Piketty said. “What’s the point of having property if you reinvest 100% of the return?
“The problem is that this can go together with a huge concentration of wealth and a very large perpetuation of wealth over time and across generations. And of course, inequality will grow forever. I agree with Greg that this will stop somewhere. But there’s no natural force that brings this into any reasonable level in any meaningful sense.”
Mankiw’s concern with some of Piketty’s policy suggestions are that they threaten the initiative of upper income workers.
“The question is how do we help people at the bottom, rather than thwart people at the top. I would much rather see, rather than policies that taxed capital if people accumulate too much, I’d rather see policies that encourage people at the bottom to accumulate capital. For example, things like automatic enrollment in 401K plans so that the typical worker out there when they get a job can put some of that away and they can become capitalists as well.”
Piketty noted the inequality of the US system leaves a lot to be desired.
“Right now, the bottom half of the US population owns two percent of US national wealth. You know, I’m not saying that we should have perfect equality where it would be fifty percent by definition of national wealth for the bottom. I’m just saying that it’s hard to pretend that two percent is the best we can do. I think there must be an instition that make it to five percent, eight percent, I don’t know, would you really say that two percent is the social optimum, that there’s nothing more for the bottom half of the population, we can do?”
Mankiw found Piketty’s concern for optimization as too close to the politicization of economics.
“I think when we start talking about questions like what’s the optimum, you’re moving beyond economics and going into political philosophy…I think we need to think about what is economics, and what are the facts, and what’s the forecast, and then when we think about normative economics, as what should we do, you have to realize that that’s not just a matter of science that’s a matter of philosophy, that’s a matter of political philosophy.”
Their entire conversation is worth a listen — especially a section on the shrinking middle class and its implications on democracy — and we’d love to hear your take on the tax and economic talk here. Who’s got a better handle on the pulse of the moment? Will you read Piketty’s text and judge for yourself?