What a Top Liberal Economist Gets Right—and Wrong

The French economist hailed by Paul Krugman is better than you would expect.


Capital in the Twenty-First Century, by the French economist Thomas Piketty, is being hailed as "the most important economics book of the year—and maybe of the decade" by Nobel laureate Paul Krugman. The Economist says the book may revolutionize "the way people think about the economic history of the past two centuries."

I've read it and can report that the book, issued by the Belknap Press of Harvard University Press and translated into English by Arthur Goldhammer, both isn't as bad as you might think and is worse than you might think.

It's not as bad as you might think because there is quite a bit in the book that free-market, pro-growth types can embrace.

He concedes, for example, that "inequality is not necessarily bad in itself: the key question is to decide whether it is justified, whether there are reasons for it." Sounds reasonable enough.

He sounds a note of caution about high public debt: "From the standpoint of people with the means to lend to the government, it is obviously far more advantageous to lend to the state and receive interest on the loan for decades than to pay taxes without compensation."

He displays a healthy skepticism toward other professional academic and government economists, noting that, "In 1970, when Paul Samuelson published the eighth edition of his famous textbook, he was still predicting that the GDP of the Soviet Union might outstrip that of the United States sometime between 1990 and 2000."

He mentions that both Germany and Sweden have no national minimum wage law, something that many Americans are probably unaware of even as President Obama presses for an increase in our minimum wage. He concedes that "raising the minimum wage cannot continue indefinitely; as the minimum wage increases, the negative effects on the level of employment eventually win out."

Professor Piketty warns, wisely, that "inflation is hard to control: once it gets started, there is no guarantee that it can be stopped at 5 percent a year."

He concedes that "the tax and transfer systems" of modern governments "have a achieved a level of complexity that makes them difficult to understand and threatens to undermine their social and economic efficiency."

Most usefully, and substantively, Piketty explains how both fertility and immigration contribute to economic growth and, relatedly, to a reduction in inequality. "In a world in which each couple has ten children, it is clearly better as a general rule not to count too much on inherited wealth, because the family wealth will be divided by ten with each new generation," he writes. A new argument to convince the left to drop the contraceptive mandate from Obamacare?

So far, so good.

Where Piketty goes far off the rails is with his policy prescriptions and his justifications for them. He advocates sharply higher tax rates on both income and capital. For America, he recommends "a rate on the order of 80 percent on incomes over $500,000 or $1 million a year," along with rates of "50 or 60 percent on incomes above $200,000."

In addition to that, he proposes a tax on capital of one percent a year on fortunes of about $1,380,000, increasing to an annual tax of five or 10 percent a year on fortunes of several hundreds of millions or billions of dollars. That would be enforced globally with new tax forms requiring everyone to disclose the value of all assets. On top of that, he raises the prospect of an "exceptional one-time" tax on capital to reduce sovereign debt in Europe.

Piketty writes that "confiscatory tax rates on income" were "an impressive U.S. innovation of the interwar years" that deserve to be "reconceived and revived."

How does Piketty justify, morally, what he concedes to be confiscation?

To me the weakest part of his argument is his assertion that the money he is proposing to tax, now in private hands, was stolen in the first place.

He writes, "the courts cannot resolve every case of ill-gotten gains or unjustified wealth. A tax on capital would be a less blunt and more systematic instrument for dealing with the question." After all, he writes, "Broadly speaking, the central fact is that the return on capital often inextricably combines elements of true entrepreneurial labor (an absolutely indispensible force for economic development), pure luck (one happens at the right moment to buy a promising asset at a good price), and outright theft."

Here Piketty is speaking "broadly" indeed, tarring as "outright" thieves anyone who has managed to amass a million dollars or so worth of assets, and proposing to deal with the problem not by enforcing the criminal laws against theft, but by taxing everyone. He acknowledges his own ignorance here—"To be frank, I know virtually nothing about exactly how Carlos Slim or Bill Gates became rich." Surely the decent thing would have been to have looked into the matter and learned something about it before tarring the two men as thieves and proposing to tax away billions of their fortunes as punishment for their supposed crimes.

There's much to learn from in this book, but much to beware, as well.