By STEVEN ERLANGER In NYT

In his new book “Capital in the Twenty-First Century” (Harvard University Press), Mr. Piketty, 42, has written a blockbuster, at least in the world of economics. His book punctures earlier assumptions about the benevolence of advanced capitalism and forecasts sharply increasing inequality of wealth in industrialized countries, with deep and deleterious impact on democratic values of justice and fairness.

“He is also not afraid of literature, finding inspiration in the descriptions of society in the realist novels of Jane Austen and Balzac. Wealth was best achieved in these stories through a clever marriage; everyone knew that inherited land and capital was the only way to live well, since labor alone would not produce sufficient income. He wondered how that assumption had changed.

As he extended his work on France to the United States in collaboration with Emmanuel Saez, a professor of economics at the University of California, Berkeley, he saw that the patterns of the early 20th century — “the top 10 percent of the distribution was full of rental income, dividend income, interest income” — seemed less prevalent from the 1970s through the early 1990s.

“It took me a long time to realize that in effect we were returning slowly in the direction of the previous equilibrium, and that we were part of a long transitory process,” he said. When he started working on the issue in the late 1990s, “there was no way this could be understood so clearly — having 20 additional years of data makes a big difference to understanding the postwar period.”

His findings, aided by the power of modern computers, are based on centuries of statistics on wealth accumulation and economic growth in advanced industrial countries. They are also rather simply stated: The rate of growth of income from capital is several times larger than the rate of economic growth, meaning a comparatively shrinking share going to income earned from wages, which rarely increase faster than overall economic activity. Inequality surges when population and the economy grow slowly.”

A higher than normal rate of population and economic growth helped reduce inequality, along with higher taxes on the wealthy. But the professional and political assumption of the 1950s and 1960s, that inequality would stabilize and diminish on its own, proved to be an illusion. We are now back to a traditional pattern of returns on capital of 4 percent to 5 percent a year and rates of economic growth of around 1.5 percent a year.

So inequality has been quickly gathering pace, aided to some degree by the Reagan and Thatcher doctrines of tax cuts for the wealthy. “Trickle-down economics could have been true,” Mr. Piketty said simply. “It just happened to be wrong.”

His work is a challenge both to Marxism and laissez-faire economics, which “both count on pure economic forces for harmony or justice to prevail,” he said. While Marx presumed that the rate of return on capital, because of the system’s contradictions, would fall close to zero, bringing collapse and revolution, Mr. Piketty is saying the opposite. “The rate of return to capital can be bigger than the growth rate forever — this is actually what we’ve had for most of human history, and there are good reasons to believe we will have it in the future.”

In 2012 the top 1 percent of American households collected 22.5 percent of the nation’s income, the highest total since 1928. The richest 10 percent of Americans now take a larger slice of the pie than in 1913, at the close of the Gilded Age, owning more than 70 percent of the nation’s wealth. And half of that is owned by the top 1 percent

Inequality by itself is acceptable, he says, to the extent it spurs individual initiative and wealth-generation that, with the aid of progressive taxation and other measures, helps makes everyone in society better off. “I have no problem with inequality as long as it is in the common interest,” he said.

But like the Columbia University economist Joseph E. Stiglitz, he argues that extreme inequality “threatens our democratic institutions.” Democracy is not just one citizen, one vote, but a promise of equal opportunity.

The last part of the book presents Mr. Piketty’s policy ideas. He favors a progressive global tax on real wealth (minus debt), with the proceeds not handed to inefficient governments but redistributed to those with less capital. “We just want a way to share the tax burden that is fair and practical,” he said.

Net wealth is a better indicator of ability to pay than income alone, he said. “All I’m proposing is to reduce the property tax on half or three-quarters of the population who have very little wealth,” he said.

http://www.nytimes.com/2014/04/20/business/international/taking-on-adam-smith-and-karl-marx.html?hp

This article was mentioned by Paul Krugman in his column in NYT today. It is worth reading to understand how full employment can be achieved, how interest rates fluctuation works and why Big Businesses like to keep the un-employment high. The article is relevant even today.( F. Sheikh)

1.  A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plan to employ all existing labour power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports.

If the government undertakes public investment (e.g. builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved.  Such government expenditure increases employment, be it noted, not only directly but indirectly as well, since the higher incomes caused by it result in a secondary increase in demand for consumer and investment goods.

2.  It may be asked where the public will get the money to lend to the government if they do not curtail their investment and consumption.  To understand this process it is best, I think, to imagine for a moment that the government pays its suppliers in government securities.  The suppliers will, in general, not retain these securities but put them into circulation while buying other goods and services, and so on, until finally these securities will reach persons or firms which retain them as interest-yielding assets.  In any period of time the total increase in government securities in the possession (transitory or final) of persons and firms will be equal to the goods and services sold to the government.  Thus what the economy lends to the government are goods and services whose production is ‘financed’ by government securities.  In reality the government pays for the services, not in securities, but in cash, but it simultaneously issues securities and so drains the cash off; and this is equivalent to the imaginary process described above.

What happens, however, if the public is unwilling to absorb all the increase in government securities?  It will offer them finally to banks to get cash (notes or deposits) in exchange.  If the banks accept these offers, the rate of interest will be maintained.  If not, the prices of securities will fall, which means a rise in the rate of interest, and this will encourage the public to hold more securities in relation to deposits.  It follows that the rate of interest depends on banking policy, in particular on that of the central bank.  If this policy aims at maintaining the rate of interest at a certain level, that may be easily achieved, however large the amount of government borrowing.  Such was and is the position in the present war.  In spite of astronomical budget deficits, the rate of interest has shown no rise since the beginning of 1940.

3.  It may be objected that government expenditure financed by borrowing will cause inflation.  To this it may be replied that the effective demand created by the government acts like any other increase in demand.  If labour, plants, and foreign raw materials are in ample supply, the increase in demand is met by an increase in production.  But if the point of full employment of resources is reached and effective demand continues to increase, prices will rise so as to equilibrate the demand for and the supply of goods and services.  (In the state of over-employment of resources such as we witness at present in the war economy, an inflationary rise in prices has been avoided only to the extent to which effective demand for consumer goods has been curtailed by rationing and direct taxation.)  It follows that if the government intervention aims at achieving full employment but stops short of increasing effective demand over the full employment mark, there is no need to be afraid of inflation.²

II

2.  The above is a very crude and incomplete statement of the economic doctrine of full employment.  But it is, I think, sufficient to acquaint the reader with the essence of the doctrine and so enable him to follow the subsequent discussion of the political problems involved in the achievement of full employment.

In should be first stated that, although most economists are now agreed that full employment may be achieved by government spending, this was by no means the case even in the recent past.  Among the opposers of this doctrine there were (and still are) prominent so-called ‘economic experts’ closely connected with banking and industry.  This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic.  That is not to say that people who advance them do not believe in their economics, poor though this is.  But obstinate ignorance is usually a manifestation of underlying political motives.

There are, however, even more direct indications that a first-class political issue is at stake here.  In the great depression in the 1930s, big business consistently opposed experiments for increasing employment by government spending in all countries, except Nazi Germany.  This was to be clearly seen in the USA (opposition to the New Deal), in France (the Blum experiment), and in Germany before Hitler.  The attitude is not easy to explain.  Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter’s profits rise.  And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation.  The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them?  It is this difficult and fascinating question with which we intend to deal in this article.

The reasons for the opposition of the ‘industrial leaders’ to full employment achieved by government spending may be subdivided into three categories: (i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment.  We shall examine each of these three categories of objections to the government expansion policy in detail.

2.  We shall deal first with the reluctance of the ‘captains of industry’ to accept government intervention in the matter of employment.  Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense.  Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence.  If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment).  This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.  But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness.  Hence budget deficits necessary to carry out government intervention must be regarded as perilous.  The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

3.  The dislike of business leaders for a government spending policy grows even more acute when they come to consider the objects on which the money would be spent: public investment and subsidizing mass consumption.

The economic principles of government intervention require that public investment should be confined to objects which do not compete with the equipment of private business (e.g. hospitals, schools, highways).  Otherwise the profitability of private investment might be impaired, and the positive effect of public investment upon employment offset, by the negative effect of the decline in private investment.  This conception suits the businessmen very well.  But the scope for public investment of this type is rather narrow, and there is a danger that the government, in pursuing this policy, may eventually be tempted to nationalize transport or public utilities so as to gain a new sphere for investment.³

One might therefore expect business leaders and their experts to be more in favour of subsidising mass consumption (by means of family allowances, subsidies to keep down the prices of necessities, etc.) than of public investment; for by subsidizing consumption the government would not be embarking on any sort of enterprise.  In practice, however, this is not the case.  Indeed, subsidizing mass consumption is much more violently opposed by these experts than public investment.  For here a moral principle of the highest importance is at stake.  The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’ — unless you happen to have private means. Click link for full article;

http://mrzine.monthlyreview.org/2010/kalecki220510.html

In case you ever wondered just how much wealthy students dominate America’s top colleges, here’s a nice illustration from a new report by the Century Foundation. At the most selective schools in the country,* 70 percent of students come from the wealthiest quarter of U.S. families. Just 14 percent come from the poorest half. And while these statistics date back to 2006, I think it’s safe to say they haven’t changed greatly in the last few years.

If you think higher education should be a ladder for upward mobility, then you should regard these numbers as a disgrace. As we’ve written before at The Atlantic, elite colleges do a consistently poor job recruiting the intelligent but low-income high school students who could benefit most from a top-notch education. Part of their problem, as Josh Freedman explained for us recently, is that it’s expensive. Low-income undergrads need financial aid, and many institutions either don’t have the resources, or would simply prefer to deploy them elsewhere. Others have the money and are willing to use it, but aren’t sufficiently aggressive about reaching out to a population of students who often don’t realize they have the academic skills to attend a great school or that aid would cover most of their expenses. Click link for full article

http://www.theatlantic.com/business/archive/2013/05/americas-top-colleges-have-a-rich-kid-problem/276195/

Posted by F. Sheikh