Another look at income inequality

Since Obama is bringing up income inequality, The Economist (JA 4, “Free Exchange”, pg. 60) points out that a landmark study of just this topic has been done by Thomas Piketty of Paris School of Economics.   Before you say, “so who believes some guy from France?” just understand that his analysis fits the data of 200 years of capitalism in USA, Europe, and Japan.  In a nutshell, he points out that societies with large divergences of incomes have capital of over 600% of GDP, that is capital (wealth) is greater than 6 times national income.  All that wealth is locked up by a few rich.  USA has had about capital of about 400% GDP for most of its history. Most countries in Europe had about 700% prior to WW I, when the upper ten percent of households controlled 90% of wealth.  After the wars, they declined to the 400% territory but now have reverted to higher numbers.

What makes a country have lower capital? The author found amazingly that a country’s capital tends strongly to follow the ratio of Savings Rate / Growth Rate.  Savings rate of USA is about 8% and long term growth is about 2%. SR/GR= 400%= capital GDP.  But what if our growth rate were to decline to 1%?  Then capital would be pushed to about 800% and income inequality would become more pronounced. So growing the economy is highly important if you want people to be more equal. Indeed, the growing inequality of the last few years is due to USA’s growth falling from 3+%  of the nineties to 2013’s recovery level of 1.7%.  And what makes growth?  Piketty found that increased population often drives growth as well as an unregulated free market and encouragement of business.  If you are business unfriendly and demographically non-growing in population, then you have the current problems of Italy or Japan.

There’s more to the theory than I have shared.  Piketty links total capital to capital’s (investment’s) share of national income (as opposed to wages share of national income).  Thus the wealthy investors suck up most of the national income (in wealth heavy states), and the poor are poorer. 

So as we observe Obama’s seeming lack of concern over economic growth—every year he says he will focus like a laser on the economy and then has no proposals—it becomes obvious that he is really focused on the political angle.  If the economy falters, it is so much the better for him.  He bountifully gives out “benefits” to the have-nots.  He seizes the imperative to transform America from what it has been, to what his vision for a redistributive state looks like.  But even if he wins the politics, he is creating the very thing he swears he wants to correct, income inequality.  The way to significantly make the life of the poor better is with a booming economy and a good job. Unemployment benefits are just a cosmetic to cover the inequality.