Tags
American Society, Arthur Goldhammer, Capital, Capital in the Twenty-First Century, economics, Finance, Inequality, Political Economy, The One Percent, Thomas Piketty
“In my view, there is absolutely no doubt that the increase of inequality in the United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.
In support of this thesis, it is important to note the considerable transfer of US national income—on the order of 15 points—from the poorest 90 percent to the richest 10 percent since 1980. Specifically, if we consider the total growth of the US economy in the thirty years prior to the crisis, that is, from 1977 to 2007, we find that the richest 10 percent appropriated three-quarters of the growth. The richest 1 percent alone absorbed nearly 60 percent of the total increase of US national income in this period. Hence for the bottom 90 percent, the rate of income growth was less than 0.5 percent per year. These figures are incontestable, and they are striking: whatever one thinks about the fundamental legitimacy of income inequality, the numbers deserve close scrutiny. It is hard to imagine an economy and society that can continue functioning indefinitely with such extreme divergence between social groups.
Quite obviously, if the increase in inequality had been accompanied by exceptionally strong growth of the US economy, things would look quite different. Unfortunately, this was not the case: the economy grew rather more slowly than in previous decades, so that the increase in inequality led to virtual stagnation of low and medium incomes.”
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From the book that reviewers are calling “watershed,” “magisterial,” “a bulldozer of a book,” and at least a few economists are already crowning as the best economics book of the last decade: Capital in the Twenty-First Century by Thomas Piketty.
Though I’ve only been flipping around its 700-plus pages — and my economics-minded friends have expressed to me some qualms with the methodology and approach of its author — I can confidently recommend Capital. I’ve been engrossed by not only chart after chart of Piketty’s rigorous and wide-ranging data analysis, but also his refreshingly light and fluid (though translated, by Arthur Goldhammer) exposition and writing. The book is long, especially for a bestseller, but as you tread through its pages you’ll be surprised by how rarely you have to slog through the dense weeds of pedagogical jargon. Even for dilettante economists and laymen looking to understand the state of the economy today, the book is not just comprehensible and illuminating — it’s fun to read.
More economics:
- David Ricardo’s famous description of comparative advantage
- Robert Nozick compares taxes to enslavement
- Calvin Coolidge warns against excessive and unnecessary taxation
librarylady said:
All I know, is that it’s almost impossible to find a job that pays a living wage these days. I keep hearing that the recession is turning around, but I’ll believe that when the unemployed in my family can get back on their feet.
Eugene Patrick Devany said:
Piketty is brilliant but his capital (net wealth) tax would help the poor and middle class more if it were an option to combine with a low income tax rate and no job killing payroll taxes. See TaxNetWealth.com
Full employment is more important than soaking the rich.
Jessie Henshaw said:
I don’t think swelling inequity contributed so much to the last crisis in general. I do think there’s a real reason why swelling inequity seems to have preceded every great financial crisis though. I’m a systems scientist, and have been following this story for 30+ years, wondering why the community has yet to notice that economies become unstable if they have no good way to cap unbounded exponentials.
It’s the mirage, I think, that keeps investors from seeing the need for that, causing them to become repeatedly overtaken… by the appearance that you can keep compounding bets in a sure thing. The only truly “sure thing” about that is piling up bad bets. It “gets’m every time” though, throughout history it seems.
I could go into a lot more detail, but if in the end “r > g” as a rule, and in the beginning, to get started, you would naturally have had “g > r”, there are only a few options available to get back to “r < or = g" in the long term. The biophysics seems rather clear, that investors would need to feel some kind of revulsion for the mirage of limitless compounding bets or we'll just have another, surely worse, financial crisis.
If there was a "break" and the power of the mirage of limitless wealth then we might talk about the one most normal true solution. People would have a chance study why it is in life that after you build things you need to take care of them, especially if you rely on them for your own income.
That simple realization could have lasting value in our situation I think.