Sun., May 11, 2014 5:40am (EDT)

On Income Inequality: A French Economist Vs. An American Capitalist
By Marilyn Geewax
Updated: 2 months ago

Picture a cozy caf. At a small table, an economics professor from Paris is chatting with a wealthy businessman from New York.

As they sip coffee, they discuss economic history, and often nod and agree.

Then as they stand to leave, each states a conclusion drawn from their conversation. But what they say is exactly, completely opposite.

One says economic history proves governments must impose very heavy taxes to break up concentrations of wealth. The other says governments should cut taxes to encourage wealthy people to pursue even bigger profits.

Huh? Why such different conclusions about the future when they agreed on the past?

Let's go back to the beginning and eavesdrop and then decide whose conclusion makes the most sense. You can vote at the bottom of this story.

First, meet the debaters:

The professor is Thomas Piketty, author of Capital in the Twenty-First Century, a runaway bestseller about income inequality.

The businessman is Edward Conard, author of Unintended Consequences, Why Everything You've Been Told About the Economy Is Wrong, a 2012 book about the role of investors. From 1993 to 2007, Conard was a partner at Bain Capital the firm made famous by another partner, Mitt Romney.

In real life, Piketty and Conard may not be hanging out together, but their books can allow them to debate. Here is an imaginary conversation, drawn directly from what they wrote.

The discussion begins with the men agreeing that during a golden era from roughly 1950 to 1980 wealth inequality receded as the middle class expanded.

CONARD: "In the 1950s and 1960s, an explosion of great corporate jobs, together with a restricted supply of labor, produced healthy wage growth."

PIKETTY: "The high growth rates observed in all the developed countries in the post-World War II period were a phenomenon of great significance, as was the still more significant fact that all social groups shared in the fruits of growth."

The two agree that the good times were based on conditions unique to that period when labor was in short supply because of the birth-rate plunge of the 1930s and death-rate increase of the war-torn 1940s. In addition, the great fortunes of earlier eras had gotten battered by depression, war and war-related taxes. It wasn't until the 1950s that the global economy could rebuild, and this rising economic tide starting lifting all boats. But the era couldn't last.

CONARD: "After the post-war catch-up, advanced economies saw their growth slow and their unemployment rise ... . Free trade weakened labor unions' monopolies on the supply of labor for industries such as steel, auto manufacturing ..."

PIKETTY: "We subsequently see a rapid rise in inequality in the 1980s ... the magnitude of the change is impressive."

Both men agree it would be unrealistic to try to reproduce post-World-War-II conditions. Conard said it best.

CONARD: "The United States was prosperous for a unique set of reasons that are impossible to duplicate today."

But now here's where they part company.

Conard concludes that in today's world, the engine of growth is technological innovation. Income concentration is good for everyone because 1-percenters can afford to invest in breakthrough technologies. And it was their investment in Silicon Valley that created good jobs from 1990 to 2008, he says.

CONARD: "The United States ran the table on Internet innovations, creating companies like Google, Facebook, Microsoft, Intel, Apple, Cisco, Twitter, Amazon, eBay, YouTube and others. Europe and Japan scarcely contributed."

His bottom line is simple: Only people with big fortunes can afford to take the big risks that keep innovation going. And while investors do make a lot of money, most of the rewards are widely dispersed among the 99 percent in the form of radically cheaper, faster ways to shop, communicate, work and entertain, he says.

CONARD: "The willingness to take risk is largely a function of wealth. ... An increase in risk taking accelerates the growth of the economy. [Therefore, Congress should] ... accelerate the accumulation of equity by lowering marginal tax rates."

Piketty comes to the opposite conclusion: Unless governments use heavy taxes to break up concentrations of wealth, the economy will become increasingly unbalanced, with only a few people inheriting massive fortunes.

Rather than take investment risks and innovate, the hereditary elite will become complacent monopolists who try to hang on to the status quo. And average people will become discouraged. It will make more sense to focus on marrying into wealth rather than on working hard.

PIKETTY: "Capital reproduces itself faster than output increases. The past devours the future. ... The right solution is a progressive annual tax on capital. This will make it possible to avoid an endless inegalitarian spiral while preserving competition and incentives for new instances of primitive accumulation."

And Piketty notes that in a democracy, all citizens can vote. So if rich people want political backing for pro-business policies, they should support higher taxes to pay for programs that would win over poorer voters. Higher taxes would allow for more government spending on health care, schools, roads, housing and food stamps for voters struggling in the modern economy.

Consider the example of free-trade policies. Right now, Senate Democrats are blocking the trade agreements favored by businesses because they know many voters fear foreign competition. Why vote for trade pacts that help wealthy investors but cut jobs and wages for low-skilled factory workers?

PIKETTY: "Globalization weighs particularly heavily on the least skilled workers in the wealthy countries. ... The progressive tax is indispensable for making sure that everyone benefits from globalization, and the increasingly glaring absence of [heavy] progressive taxation may ultimately undermine support for a globalized economy."

In contrast, Conard says voters just needed to be better educated about free trade, which brings poorer consumers big savings in the form of much cheaper goods.

CONARD: "Making products for $17 an hour that we could have purchased for 75 cents an hour wastes resources that we could have used elsewhere."

And so ends the fantasy conversation. (As the men head out of the caf, the rich guy reaches for the tab). Now you pull up a chair. Get your coffee, think hard and vote. Who wins the debate?


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