More of the same...

To the surprise of just about everyone, but especially right-leaning economists, a lumbering economics book has zoomed to the top of the Amazon best-seller lists. The success has irritated many in the profession because 1) they didn't write it and 2) the research is very impressive even if you disagree with his conclusions and prescriptions.

I will try to link to the helpful reviews and commentaries I used to form my first opinions, but if you want to save a LOT of time on a topic that is important but hard to grasp, I will offer this very brutal and necessarily incomplete summary, along with expert opinions.

Capital in the 21st Century by Thomas Piketty first accumulates the most extensive database of income, wealth, and inequality ever done. His premise is the data show that capitalism fosters wealth and income inequality for the simple reason that the rate of return on capital tends to be greater than the economic growth rate. This is the meaning of the "r>g" you will see scattered about the reviews. As societies advance, more income shifts to capital and away from wages. The result is a strong case for expecting the  rich to get richer. Forever. There are simply no market counter-forces or politically feasible ways to reverse this accumulation of wealth and power, short of wars, in his opinion. This truly uncomfortable assertion has left free market believers floundering because it closely matches what we are seeing right now in the global economy: that vast bulk of economic growth accrues to a tiny number of uber-wealthy.

Here's Jared Berstein's take on why the book matters.

As the US recovery proceeds into late middle age, the benefits of growth are heavily skewed toward the top.  Wall St. is once again way ahead of Main St.  In many other advanced European economies, recession-like conditions persist, in no small part resulting from first reckless finance and then from contraindicated austere fiscal policy.So even if you’re not reading Krugman and others regularly, there’s a sense among many people of many different political stripes that something is structurally wrong with both the economy and the practice of economics.   Between financial bubbles and busts, the macro-management seems inept and even once the economy starts growing again, the benefits accrue narrowly to the top.In part, it’s a sense that “the fix is in” when it comes to the distribution of growth.  In this regard, Piketty’s r>g (see herefor a very cogent explanation) can be viewed as the economic mechanics of the fix.  Moreover, especially given the uniquely pervasive money-in-politics problem in the US, it’s a self-reinforcing fix.Against that backdrop, we get a long, carefully researched tome with literally centuries of data across numerous countries showing a pretty inexorable trend of income and wealth concentration and providing a cogent analysis of the mechanics behind those dynamics.  At the same time, though Piketty clearly knows his economics, he is quick to dismiss a knee-jerk elevation of assumption-based economic analysis that has led so many policy makers astray in recent years.  Moreover, he is not a known partisan who can quickly be compartmentalized and thus distractingly plugged into the existing debate that tends to generate more heat than light.So, summing up, I think at least part of the reason for the book’s big splash is the intersection of a) timing and a latent demand for an explanation of what’s really going on, b) the weight of its scholarship and credibility of its evidence, and c) the unique attributes of the author. [More]

On the other side, the brilliant , but ever more self-impressed (IMHO) Tyler Cowen reluctantly admits his conclusions are not beyond reason and could even refute one of more treasured myths about the American Way.

 Whatever the debate over the book’s claims, it may be forcing Americans to admit that their revolution has failed and that the founders’ fight against the European tradition of inherited aristocracy and rented wealth will have ended up a noisy defeat. Hard work and dedication are platitudes, not practical advice, in Mr. Piketty’s America. Whether or not you agree with such a message, America — not France — is where that is news. [More]

Piketty is depressingly thorough in detailing how modern economic forces, especially globalized finances, deregulation, the ability of wealth to buy political power, technology substitution for labor, decline of unions, etc. are virtually insuring a future where the current share held by the very rich just keeps on growing. Free market defenders have been caught flat-footed because everything we are currently observing - greater shares of income and wealth flowing to a tiny top layer, stagnant median wages, lower income mobility, greater inequality - seem set to continue ad infinitum.

Krugman describes the right's response accurately.

Mr. Piketty is hardly the first economist to point out that we are experiencing a sharp rise in inequality, or even to emphasize the contrast between slow income growth for most of the population and soaring incomes at the top. It’s true that Mr. Piketty and his colleagues have added a great deal of historical depth to our knowledge, demonstrating that we really are living in a new Gilded Age. But we’ve known that for a while.No, what’s really new about “Capital” is the way it demolishes that most cherished of conservative myths, the insistence that we’re living in a meritocracy in which great wealth is earned and deserved.For the past couple of decades, the conservative response to attempts to make soaring incomes at the top into a political issue has involved two lines of defense: first, denial that the rich are actually doing as well and the rest as badly as they are, but when denial fails, claims that those soaring incomes at the top are a justified reward for services rendered. Don’t call them the 1 percent, or the wealthy; call them “job creators.”But how do you make that defense if the rich derive much of their income not from the work they do but from the assets they own? And what if great wealth comes increasingly not from enterprise but from inheritance? [More]

The best overall summary for laymen, as pointed out be right and left economists, could be Robert Solow, who has great "econ cred" (and a Nobel). He nails the important implication of r>g for us today, I think:

There is yet another, also rather dark, implication of this account of underlying trends. If already existing agglomerations of wealth tend to grow faster than incomes from work, it is likely that the role of inherited wealth in society will increase relative to that of recently earned and therefore more merit-based fortunes. Needless to say, the fact that the aggregate of wage incomes grows only at a relatively slow rate does not exclude the possibility that outstandingly successful innovators, managers, entrepreneurs, entertainers, and others can accumulate large amounts of wealth in a lifetime and join the ranks of the rentiers. But a slower rate of growth certainly makes such success stories less likely. There will be more to say about this. Yet the arithmetic suggests that the concentration of wealth and its ability to grow will favor an increasing weight of inheritance as compared with talent. [More]

How inevitable is this outcome? This is where the brawl is beginning to form. Prediction for both the rate of return (r) and economic growth rates (g) are notoriously inaccurate, so insert your own views here. Personally, I think rates r will drop as accumulated wealth exceeds the sum of possible places to invest. We are seeing that now in bond prices. 

With the vast majority of incomes stagnant, demand grows sluggishly, if at all. "Safe" investment opportunities are swamped by available capital. Diverting into riskier investments has its own hazard: loss of capital. So, I think Piketty's weakest point may be his predictions about r. I am oversimplifying his arguments, so check for yourself.

At the same time, economists are puzzled over the slowing global economy, so g may not be as large as we imagine either. Combined, the ratio of r/g could vary wildly. Ryan Avent has a complete review that may be better than the book, and also notices this.

Third, "Capital" provides a framework for thinking about how inequality might evolve in future. Mr Piketty's data give us a view of the past. He also gives us his thoughts on how things might unfold in future (albeit with plenty of caveats). But even if readers doubt his forecasts for the rate of return on capital or for economic growth, they will have a way to think about how key distributions will change, thanks to this book. Among pundits, policy discussions have already begun to reflect this: the distributional effects of possible policy changes are beginning to be discussed in terms of how the policy might shift r or g (or s, the savings rate, or other key variables). [More]

Piketty's fiercest criticisms are aimed, deservedly so, for his politically impracticable solution to growing inequality, namely a global wealth tax. This would be an annual, progressive tax on your net worth. I know, I know - I'm just telling you what he wrote.

Like virtually all commenters, I don't see that happening anytime soon - even in Europe. Nor has anybody else offered any way to slow the inequality juggernaut that seems likely to continue. 

Here in the US, our belief in the free market system (including me) is nearly sanctified. We truly believe the Invisible Hand will eventually work things out better than any other possible human action. What Piketty has done is provide a very strong case the global economy has pushed beyond the point where the Hand is effective. After a certain level of global wealth, free markets lose their magic, if you will. 

I find this suggestion persuasive, especially because the needs for raw labor are dropping everywhere, severely damaging the "hard work" route upward. Try to think in terms of your grandchildren. I look at mine and wonder how best to equip them to be successful. Of course, I could hope they would be brilliant and simply invest the next Twitter, but that's a lottery-odds outcome. 

But as you search to identify career ladders that will offer them a path upward, the landscape is remarkably bare. College degrees - even in STEM areas - are no guarantees. In fact, people skills to help them survive in a service economy might have a greater return.

For farmers, I think Piketty has just identified what has been an instinctive farmer urge to prepare for this unequal future: own land. We are betting that r>g, every time we pay "too much" for land. Capital (land) is the single best way to provide economic stability in the future. Simply being a good farmer won't make you stand out in the crowd.

I have imagined leaving my children at least, sufficient wealth to backstop them against any contingency. While this may be a delusion I use to justify my own avarice, it still seems like a good idea. In other words, I am betting on Piketty's future, and that the odds of a meritocratic route to wealth are much lower than inheritance. 

Piketty's analysis could be completely wrong. If so, nobody really has strong proof to refute his picture now.  Meanwhile, economic data on inequality pour in to substantiate his predictions. So much so that in the end, we are left with a fairly grim outlook (Felix Salmon):

The many reviews of Piketty’s book are surprisingly unanimous on one point: that the weakest part of the book is the final part, where Piketty moves away from diagnosis and starts attempting to formulate a solution. Piketty’s rather French idea of a global wealth tax isn’t getting nearly the same amount of acclaim as the rest of the book is, and is very unlikely to happen: countries will always compete with each other to attract the stateless rich by not taxing them.Which means that my reading of Piketty is ultimately pessimistic. The dynamics of the world economy are bad, and they’re getting worse; inequality is natural in human history, and right now we’re reverting to a state of affairs which is highly unfair but also both sustainable and, in its own way, unsurprising. Piketty has diagnosed a nasty condition. But I don’t think there’s a cure. [More]

What he said.