There’s a new book by French economist Thomas Piketty, called “Capital in the Twenty-First Century,” that supposedly identifies the Achilles’ Heel of the market economy.
Piketty argues that the rate of return to capital is higher than the economy-wide growth rate and that this will lead to untenable inequality as the rich grab a larger and larger share of the pie.
The solution, he claims, is confiscatory tax rates.
I’m not impressed.
Garett Jones of George Mason University has a very good review that casts doubt on Piketty’s hypothesis, but I also think Margaret Thatcher pre-debunked (if I’m allowed to make up a word) Piketty in this classic video from the House of Commons.
Simply stated, if you care about those with lower incomes, your goal should be faster growth.
If the economy is more prosperous, that means a rising tide that will lift all boats.
Piketty’s class-warfare prescription, by contrast, almost certainly will hurt the poor because of anemic growth, largely because higher tax rates will discourage productive behavior and exacerbate the tax code’s bias against saving and investment.
This means less capital and there should be no doubt about the strong link between the capital stock and worker compensation.
But I sometimes worry that this type of analysis sounds too theoretical for a lot of people and that perhaps it would be helpful to offer some tangible real-world evidence.
So it is quite fortuitous that I’m currently in Lithuania as part of the Free Market Road Showand that one of the participants is John Charalambakis, who teaches at the Patterson School of Diplomacy and International Commerce at the University of Kentucky.