Monday, April 28, 2014

Insights from a rock-star economist

TODAY

BY GILLIAN TETT -

APRIL 28, 2014

Two weeks ago, I watched something peculiar unfold at a lecture theatre at the Graduate Center of the City University of New York, where United States economists met to ponder a 577-page tract on inequality and tax policy by Thomas Piketty, a professor of economics from Paris.

Instead of a meeting in sombre, academic isolation, the event was so popular tickets sold out — and the discussion had to be broadcast in a neighbouring auditorium.

The excitement did not stop there. In recent days, Prof Piketty’s book, Capital in the Twenty-First Century, has soared in rankings on bestseller lists and sparked endless debate. The White House and US Treasury have held talks with the Frenchman. Interest has been so high, New York magazine has called Prof Piketty a “rock-star economist”.



Not bad for a left-wing French intellectual whom almost nobody in the US had ever heard of a month ago. Particularly given that the book essentially argues that inherited wealth and inequality have soared in the West — and can be contained only by much higher taxes. What explains this feverish excitement?

Some observers may blame it on the facts: Prof Piketty’s tome is exhaustively researched and contains numerous statistics showing US economist Simon Kuznets was wrong to argue in the ’50s that economies would become more equal as they matured.

On the contrary, Prof Piketty argues that inequality has grown in the US and Europe over the past decade, as a new cadre of “supermanagers” has captured more wage income and returns on accumulated wealth have outstripped economic growth. This means the rich are becoming richer and many inherit their wealth.

TOUCHING A RAW NERVE

I suspect the real reason for Prof Piketty’s rock-star reception is not the quality of his numbers, but the fact that he has forced Americans to confront a growing sense of cognitive dissonance.

Almost two-and-a-half centuries ago, when the nation’s founding fathers created the US, they believed they had rejected Europe’s tradition of inherited aristocracy and rentier wealth.

Instead, it was presumed people ought to become rich through hard work, merit and competition. Thus, inequalities of wealth were often tolerated as everyone hoped they could become rich. That was the American dream that fostered admirable waves of entrepreneurial energy and — crucially — provided a social glue.

Prof Piketty’s book shows this dream is increasingly a myth. Today, wealth in the US is more unequally distributed than almost anywhere else and returns on accumulated wealth are so high that riches are increasingly inherited, not made.

Even before Prof Piketty arrived, the issue was provoking unease. Pew Research Center’s polls suggest two-thirds of Americans think their society is becoming more unequal, while 90 per cent of liberals and 60 per cent of moderate conservatives want the government to address this. Media references to “inequality” and “America” are six times higher this month than in 2005 or 2010, the Factiva database shows.

Prof Piketty’s book has framed this issue with new clarity. Like a modern Alexis de Tocqueville, he has forced Americans to confront their contradictions. That does not mean the elite will accept his analysis. Nor does it imply Congress will embrace his call for much higher tax rates; that seems unlikely. If nothing else, Prof Piketty’s work touches a raw nerve about the reality of the modern American dream. Of course, as a cynic may note, a dream does not necessarily need to be “real” to work; all that is necessary is for enough people to believe in the illusion.

But can the American dream now survive a shift towards oligarchy? Can the egalitarian myth still act as a social glue? These are big questions implicit in his book and, if Prof Piketty’s analysis is correct, they can become only more acute as inequality fuels not just more inequality, but also greater cognitive dissonance. 

The Financial Times

ABOUT THE AUTHOR:

Gillian Tett is a markets and finance commentator and Assistant Editor of the Financial Times.



[“Piketty’s big idea is that we are in the early stages of returning to a society dominated by great dynastic fortunes, by inherited wealth.”

Here’s a video http://vimeo.com/92308666

Here’s the simple idea as I understand it. 

(1) In a developed economy – like the US, Europe, Singapore – the GDP growth tends to be small – less than 4% usually (Singapore is still around 4% in the long term, or slightly below, and we considered “abnormal”).
(2) However, returns on capital tends to be a little higher say 6-8% for a moderately risky (or low to moderate risk) investment or more. 

GDP growth is how the poor (“non-capitalist) increase their wealth – via income/salary from work. Returns on Capital is how the rich (“capitalist”) grow their wealth.

So, for as long as Returns on Capital/Assets is higher than GDP (in the long term), the rich (“Capitalist”) with get richer faster than the poor, and income inequality will grow.

A salient (or germane?)  issue for Singapore as we grapple with widening inequality. Does Piketty’s idea apply to the SG situation? That’s what I want to find out. Certainly ideas about how registration for top primary schools favour the well-connected seems to suggest that Singaporeans are losing faith in meritocracy.]

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