Glen Weyl and I wrote a piece for The New Republic on Piketty’s book. Piketty’s book has received a lot of attention for two reasons–the first is that it is rigorous and fascinating; the second is that its focus on inequality resonates with public anxieties about the direction of the market economy.
There is a sensible argument about inequality and there is a dubious one. The sensible argument is that today certain lucky folks–financiers, start-up entrepreneurs who hit the jackpot, top CEOs, and so on–who earn vast incomes, almost certainly far in excess of what is needed to motivate people to generate value for the economy, and in many cases (above all, in finance) even in excess of whatever value they do generate, should pay higher income taxes. Many people think that Piketty’s book makes this argument. But while Piketty endorses this view, or at least seems to, this view is not the distinctive contribution of his book.
The book is called “Capital in the Twenty-First Century,” not “Income in the Twenty-First Century.” Piketty argues that extreme inequality is the result of the accumulation of capital in the hands of the few across generations. And because the rate of return on capital is higher than the “natural” rate of economic growth, inequality can only increase. This argument really is distinctive–it is the distinctive contribution of the book–and it is what leads him to endorse a wealth tax (as opposed to a higher income tax, though he does support a higher income tax as well). This argument is dubious. It rests on implausible assumptions about how super-rich people spend their money, and, most of all, how they transfer it to heirs.