Anyone who has been paying attention over the past three decades knows that the developing big story, which is now up front and center and unavoidable as a topic of discussion, is the growing inequality in the national distribution of wealth and income. And anyone who follows such progressive social and economic policy blogs as the Center for Budget and Policy Priorities, Economic Policy Institute, the Center for Economic Policy Research, or even the Political Economy Research Institute has encountered the work of French economist Thomas Piketty and his colleague Emmanuel Saez on this very issue. His new book Capital in the 21st Century is a hefty tome including chapters on economic theory, economic history of the US and Europe, in depth analysis of long run trends in the US economy over the past 200 years and recommendations for economic reform. It is a difficult but rewarding read and is absolutely essential for understanding the debates surrounding the current direction of the US economy and makes an equally essential contribution to those debates. It is up to progressives to ensure that the issues, ideas and analysis offered by Piketty enters the current political discourse and that the reforms suggested by him find a place, in some form, in the progressive agenda.
Piketty's work is a general restatement and empirical validation of Marx's thesis on the Historic Laws of Motion of Capital which basically says that capitalism concentrates and centralizes property, wealth, income and output over the course of its long history. The capitalist economy moves from the village level, at the very outset, to the regional, national and finally global level of concentration. This is important for Piketty who believes it is a factor that has been dropped from economic analysis over the course of the last 30 years due to the rise of supply side conservatism. As Piketty told one NYT interviewer; "I am trying to put the distributional question and the study of long-run trends back at the heart of economic analysis. In that sense, I am pursuing a tradition which was pioneered by the economists of the 19th century, including David Ricardo and Karl Marx. One key difference is that I have a lot more historical data. Piketty's book is filled with such data spanning over three hundred years from the early 18th century until now.
One crucial point made by Piketty, which has been repeatedly confirmed by much empirical evidence, is that as capitalism matures, income and wealth concentrate (as does market share and output) until concentration levels reach such a stage that the system slows down due to a lack of sufficient levels of effective demand generally found in less concentrated middle class based societies. Piketty examines this by tracing the correlation between average rates of return on productive capital investment and overall rates of economic growth (in terms of Gross Domestic Product or gross inflation adjusted levels of output). Capitalism grew very slowly over the course of the 18th century mostly as merchantile capitalism based on trade. But with the shift in the early 19th century in the UK from the small workshop system of Adam Smith's time to the large scale factory system that emerged during the industrial revolution inequality grew as income concentrated to allow rapid investment growth. The social consequences were dramatic and urban poverty was widespread. The rate of return on capital investment was even greater than was economic growth which was itself quite impressive.
In making his point, Piketty begins his examination of what could be termed the formative period of late capitalism, or what some have termed the era of monopoly capitalism. He looks at the 1914 to 1945 period which, in the US followed some very rapid GDP growth rates in the two decades following the recovery from America's "long depression" which spanned from 1873 to 1893. Beginning in 1896 when the recovery began in earnest, US industrial output, already highly concentrated, sped up dramatically. Annual growth rates between this time and 1914 were quite high with six to seven percent a year being very common. But during the 1914 to 1945 period, a period of a steady stream of what Piketty refers to as "capital shocks," rates of return slowed as growth increased. The shocks to which he refers are the "creative destruction" of war (calling forth ever greater rates of investment), inflationary spikes, recurring depressions, recessions and cyclical crises, financial instability and massive bank runs (which ceased after the Great Depression due to the New Deal financial reforms) and, of course, political instability created by the intensification of class conflict brought on by the effects of the capital shocks.
The reforms which created a "capital-labor accord" (my term) in the form of legal union rights and other New Deal reforms such as minimum wages and progressive taxation which funded social programs meant that most of the growth during the 1945 to 1980 period went to the lower ninety percent of income earners while a much smaller share went to the top one percent. Thus prosperity was widely shared in this "golden age" of reduced inequality. Several recent income studys, some of which were done by Piketty with colleague Emmanual Saez of the UC-Berkeley, show that in the 1960s, for example, about 65% of the income growth from that decade, which experienced average annual growth rates of well in excess of 4.5%, went to the bottom 90% of income earners. Even in the 1970s, a decade rife with recessions and unemployment, the bottom ninety percent garnered no less than 46% with "only" about 37% going to the top one percent. By the 1980s "supply side revolution," this all began to change.
According to many recent studies done by Piketty and Saez the incomes of the top one percent grew much faster than that of the bottom ninety percent from 1980 onwards. In a study covered in a report by CBPP of the 2002-2007 Bush era business cycle expansion, "...two-thirds of the nation’s total income gains (adjusted for inflation and population growth) in the economic expansion from 2002 to 2007 flowed to the top 1 percent of U.S. households; the top 1 percent held a larger share of income in 2007 than at any time since 1928. From 2002 to 2007, the real (inflation-adjusted) income of the top 1 percent of households grew more than ten times faster than the income of the bottom 90 percent of households." In his book Capital, Piketty points out that between 1977 and 2007, roughly three quarters of the income growth was appropriated by the top ten percent with the top one percent alone taking about 60% of the total increase in this period. Over the same period, the bottom ninety percent saw real average annual income increases of a mere 0.5 percent! (Piketty, 2004, 297)
Uneven distribution of income gains during the post-2009 recovery from the recession also were striking. According to the report;
The 2010 data show that incomes at the top of the distribution have begun to rebound in the first full year of the recovery — especially at the very top (see box). In the Piketty-Saez data, an astounding 93 percent of the income growth after inflation and population growth has gone to the top 1 percent. The average income for this group increased nearly 12 percent ($105,000) in the first year of the recovery, while the average income of households in the bottom 90 percent of the distribution remained at its lowest level in nearly 30 years.
Even more striking is the income growth of households
within the top one percent; the top 0.1%, whose average income is $2.8 million, saw their income increase in the first year of the recent recovery by 13.7% while the top 0.01%, with an average income of $23.8 million, saw an increase of 21.5%!
According to Piketty, this is part of a long term trend that began around 1980 with the Reagan supply side economic reforms. According to a CBO chart cited in the CBPP report cumulative income growth between 1979 and 2007 increased by a mere 18% for the bottom 20% of income earners; 38% for the middle 60% (middle three quintiles); 65% for the lower 19% of the top quintile and about 277% for the top one percent! The top one percent nearly quadrupled their real income since 1980 while average annual income growth for the median household is widely held to be about 1.5%! Piketty's studies, confirmed by government figures from the CBO and the IRS, show massive income inequality growth over the past three decades! One astounding study by columnist David Cay Johnston pointed out that in 2007, IRS figures showed that the 400 richest American households had an average yearly income (in inflation adjusted 2009 dollars) of about $356.7 million (up from $71.5 million in 1992 for a 399% increase) while the income of all top 400 households accounted for about 1.6% of total gross adjusted income in the US (up from only 0.52% in 1992). The bottom 90% of US households had an average yearly gross adjusted income of only $33,546 for a mere 13% real income increase since 1992! Growing income inequality is the most defining trend of the twenty first century!
The last decade and a half have been a period of much slower growth; less than two percent a year if most government figures are accurate. Bush's recovery was the very slowest on record. According to one CBPP report,
The Gross Domestic Product, consumption, net worth, non-residential investment, wages and salaries, and employment all grew less rapidly than during other comparable expansionary periods.[2] Labor market progress was especially weak, with employment and wage and salary growth far below average and, in fact, lower than in any previous post-World War II expansion. Employment grew at an average annual rate of only 0.9 percent from November 2001 to September 2007, as compared with an average of 2.5 percent for the comparable periods of other post-World War II expansions. In addition, real wages and salaries grew at a 1.8 percent average annual rate in the 2001-2007 expansion, as compared with a 3.8 percent average annual rate for the comparable periods of other post-World War II expansions.
The same report shows that the only thing that recovered impressively was corporate profits (which now stand at over $2 trillion!) which
"...experienced average annual growth of 10.8 percent, as compared with average growth of 7.4 percent for other comparable post-war periods." The fact that wages and salaries have declined as a share of US GDP while corporate profits have increased since 2001 is well documented and bears no repeating here.
It must be cautioned that when Piketty talks about profit rates he is not only concerned about the ratio of capital to non-capital income but about gross corporate revenues after expenses. Doug Henwood of Left Business Observer, defines the rate of profit as "...cash money [received], relative to the amount of capital that ha[s] to be invested to gain the return.". In other words he divides the pre-tax rate of profit of non-financial corporations by the value of the tangible capital stock. Henwood thus calculates that the average pre-tax rate of profit of non-financial corporations peaked at nearly 11% in the mid to late 1960s, plummeting to a nadir of below 3% during the 1979-1982 Reagan/Volcker recession and rising again to a new peak in the early 1990s of nearly 8% before plunging again with the 2000 stock market crash to around four percent. True, the corporate rate of profit seemed to peak in the post WWII period along with high wage levels and dramatically reduced inequality but it must also be remembered that the early post-WWII was a unique (and relatively brief) period in which massive pent up demand from the WWII years created three decades of consistent GDP growth helped along by the immediate need to repair war damage abroad, the spending for the wars in Korea and Vietnam, a second surge of automobile production, a renewed wave of US urbanization and infrastructure spending and the rapid expansion of overseas markets for US exports. This epoch was short lived and when profit rates fell in the early 1980s, the capitalist class sought to restructure capital so as to break the capital/labor accord and marginalize the middle class. As Henwood points out;
"...the class war from above, led by Volcker, Reagan, and the Shareholder Rebellion, succeeded in breaking labor, cutting costs, and speeding up everything. With that came a long upsurge in the profit rate, rising to a peak in 1997. This rise was the fundamental reason behind the great bull market in stocks of the 1980s and 1990s...Profitability recovered rather quickly [from the 2000 stock bubble collapse], coming close to the 1997 highs in 2005..."
The restoration of high profit rates, as we well know, coincided with the utter collapse of average real wage growth. Real GDP growth rates rose briefly during the 1990s boom (as did wage levels) but never returned to the peaks of the 1950s and 1960s. The expansion, as I explain, was the slowest of any on post-WWII record. It was here that wage levels also began to slide as profit rates and profit as a share of national income grew rapidly.
So does Piketty's claim that slow GDP growth parallels growing profit rates over the course of capitalism's past two hundred years. It would seem to be confirmed by most empirical evidence. Profit growth seems to be a function of the impoverishment of the working class and the elimination of the very middle class that pro-capitalist pundits, politicians and academics have always saw as capitalism's proudest achievement and most powerful source of political validation. In other words, Piketty's damning evidence consists of the fact that the growth of profits is not that salvation of both the worker and capitalist: profits come at the expense of the working class. If profits grow while the economy slows than profits don't come from growth (the cliché that "a rising tide lifts all boats" hasn't been true for decades!) but from squeezing workers and by avoiding tax obligations. Profits seemed to grow slower in the 1950s and '60s when average CEO salaries were 50 times that of the average worker as opposed to 500 times the average salary as it is today! In other words, falling profit rates in the 1970s made the corporate rich realize that getting rich from overall economic growth would never be as profitable as getting rich from squeezing workers, lowering costs, avoiding taxes and outsourcing for cheap labor. Shared prosperity gets tiresome for those at the very top! And so enter the Reagan Revolution!!
Recognizing Piketty's most important observation, that historically capitalist profits have been highest in times of low not high GDP growth utterly tears asunder the long standing myth that profitability comes from growth and prosperity rather than exploitation. This is Piketty's most important but also his most dangerous assessment of the capitalist system's long history. His attack on the patterns of late capitalism is not merely empirical but ideological in its implications. It should also provide more than adequate grist for the progressive mill in political organizing and agenda setting in the coming years.