By Karl Arnold Belser
9 June 2015

I read Thomas Piketty's book Capital in the Twenty First Century in my effort to understand how politics might evolve in order to fulfill the social contract which I discuss in my post Future Politics.

Alan Ryan, the author of On Politics, gives the history of how the Social Contract came to be a part of modern governments.  He doesn't discuss the history of politics in economic terms, but it seems clear that the central problem throughout history has been that the rich get richer and the poor suffer. The exponential growth of capital by a few have been reset by wars or some other disaster. After all exponential growth has to stop somehow because of the finiteness of the world and its resources. It seems to me that Ryan's point is that the Social Contract between the government and its citizens has been the key development in human civilization.

In this post I want to summarize some key things I learned, just as I did for the book On Politics
in my post Future Politics.

Piketty points out that there are two key quantities in the economic world, income from labor (i.e. income from human capital) and return on capital (i.e. benefit from everything else that has value). He states that capital has a return, which he says is historically about 5% without justifying why this kind of return happens. It is just historically true. He observes that income from labor will be proportional the the gross world product. He observes, as I have, that the world seems to have entered a period of very slow economic growth, again without stating why this might have occurred. When the rate of return on capital is greater than the rate of growth of income, capital will grow exponentially and without bound, and the rich people or entities such as sovereign wealth funds will end up with very large proportions of the wealth of the world. This situation is what engineers call unstable.

Piketty rightly points out that if governments want stability and the fulfillment of the social contract it will have to somehow stop this exponential growth of wealth in the hands of a few people. He names three methods, which when used in conjunction, could mitigate and limit this unbounded growth. They are high marginal income tax rates, a graduated wealth tax, and a high marginal rate inheritance tax. He also points out that the only way this kind of constraint could be implemented is if all of the nations of the world cooperated in this kind of taxation so that people could not simply move to another country to avoid the tax.

The reason that there is a political component to the solution to this situation is that world leaders will have to work together to solve the problem. At this point in history this cooperation seems unlikely. Further, the politicians, especially in the United States, have a conflict of interest. They in general are part of the top one percent of the wealthiest people in the world. For example, American politicians have a median net worth of around 15 million dollars., which puts many of them in the top 0.1 percent of wealth in the United states. They are not likely to reign in their accumulation of wealth, much less try to convince the other world leaders to stop accumulating wealth. This does not bode well for the future. Sooner or later the disparity in wealth will become a serious survival problem for the majority of the population and a crisis will occur.

The good news is that Piketty hits the nail right on the head in describing the problem, and the fact that his book has become a best seller means that a large number of people know what the problem is.
Today the United States seems to be the worst offender in excessive wealth accumulation, the core reason being excessive executive pay that is taxed at a very low rate. There is really no limit as to how high executives could push salaries in the US. More highly taxed nations do not have this problem. Piketty suggest that the top US marginal  tax rate should be about eighty percent, roughly double the current marginal rate. The high tax rates will mitigate wealth accumulation from salaries.

The first and second world wars leveled the wealth playing field so that compounding of Inherited wealth has not been a dominant source of wealth accumulation since then. The wealth has come partially from excessive executive pay and partially from successful businesses. This new wealth will continue to compound and become inherited wealth even if salaries are effectively reigned in. Piketty suggests that this wealth inequality could be managed by a one-time wealth tax as I previously discussed in my post Limiting Wealth Accumulation. Piketty would have a zero marginal rate for most people and a very high marginal rate for the wealthy.

Piketty points out the such a wealth tax might produce enough income to pay off, at least partially, the huge debt recently accumulated to stimulate the world economy. Since most of the developed nations have this debt issue, this might be the "foot in the door' leading to a world wide tax reform to mitigate excessive wealth accumulation. His message is that there is hope. See my post Global Debt Redux.

I remain firm in my conviction that there has to be some major crisis that is serious enough to result in changes to the US constitution before the wealth disparity problem can be totally controlled.
Last updated July 23, 2015
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