French Economist Piketty Clarifies Findings on Rising Inequality

French economist Thomas Piketty sought to clarify his findings on the causes of rising inequality in a new paper published in the American Economic Review.

In his best-selling book “Capital in the Twenty-First Century,” Piketty posited that the return on capital -- property, stocks, bonds and the like -- would outpace economic growth over time, tending to increase wealth inequality. He summed up that relationship in a simple equation: r>g.

Piketty said in his new paper that formula shouldn’t be seen as the “primary tool” for explaining changes in income and wealth inequality in the last century nor in forecasting what’s ahead in the current one. Other forces -- both political and economic -- also will play a major role in determining what occurs, he wrote in the article.

“One of the main conclusions of my research is indeed that there is substantial uncertainty about how far income and wealth inequality might rise in the 21st century,” he said.

“Capital in the Twenty-First Century” was hailed by Nobel-prize winning economist Paul Krugman as “the most important economics book of the year -- and maybe of the decade” after its publication in English last year. Piketty has given presentations on its findings to the White House Council of Economic Advisers, the International Monetary Fund and the United Nations.

The 43-year-old professor at the Paris School of Economics examined centuries of data on countries including the U.S., Sweden, France and the U.K. to come up with his findings.

Piketty stressed in his new article that rising inequality in the U.S. in recent decades was not due to capital accumulation by wealthy Americans -- a point he said he also made in his book.

Executive Compensation

Rather, it’s been caused by a widening gap between the labor incomes of top-earners and the rest of Americans. That in turn can be explained by “exploding” compensation for top company managers, large cuts in the maximum tax rates and more access to higher education by those better off, he said.

As for wealth inequality, Piketty said it “is currently much less extreme than it was a century ago” in the developed world. In trying to discern where it is headed, he said he had to “clarify the role played by r>g in my analysis.”

The gap between the return on capital and the growth of the economy “is certainly not a problem in itself,” he said. And an increase in that gap “does not have much impact on labor earnings inequality,” though it can lead to greater disparities in wealth, according to Piketty.

Other forces though can work in the opposite direction, he said. Some of the wealthy may make bad investments. Others may have large families, splitting their inheritance among many offspring. Changes in economic policy and institutions also can play a big role, he said.

Piketty repeated his support for a tax on the accumulation of wealth, saying that the optimal inheritance tax rate “might be as high as 50 to 60 percent, or even higher for top bequests.”

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