Justice in the Twenty-First Century
Op-ed in Aspenia 66 "Falchi, colombe e gufi," Aspen Institute Italia, www.aspeninstitute.it.
The author gratefully acknowledges support for his inequality work from the ERANDA Foundation, but the views expressed here are solely his own.
The response to Thomas Piketty's Capital in the Twenty-First Century has been truly phenomenal, both in popular discourse and in academic debate. It is perhaps unsurprising that provocative efforts to push the boundaries of economic knowledge forward are met with academic interest. Piketty's central thesis that capitalism has a natural tendency to generate massive inequalities in wealth ownership when economic growth falls significantly below the rate of return to capital challenges many widely held beliefs in the economics profession such as the reliance on representative agent models in macroeconomics, the stability of competitive market mechanisms, or the conventional wisdom about the degree of substitutability between capital and labor in aggregate production.
However, the huge popular interest in Piketty's book also reflects a growing sense of injustice in the face of contrasting fortunes of a small elite and the majority of citizens. This is particularly so in the United States, where, as Piketty shows, the gap between the top and the rest has grown larger than in any other developed economy.
Piketty's own work suggests that these concerns over fairness in the popular discourse are at least partly justified. He shows, for example, that the "supermanagers" at the apex of the income distribution in English-speaking countries are rapidly increasing their incomes relative to the rest of the population, including those with similar educational attainment, and relative to their counterparts in continental Europe and Japan. There is, however, no corresponding improvement in their performance observable in aggregate productivity data.
One may quibble with Piketty's preferred explanation, which blames the reduction in top income tax rates for increasing incentives to engage in rent-seeking activity on the part of senior managers of large firms. But the striking cross-country differences suggest that there is something distinctive and unsavory about the path Anglo-Saxon capitalism has taken over the past thirty years. We cannot discuss and assess the determinants of top incomes or wealth, their social value, nor the remedies of injustice with the summit of the distribution shrouded in mist. The data gathered by Piketty and his colleagues therefore represent an enormous contribution to social science and to democratic debate.
Piketty's data offer us a better view upwards in the distribution of resources, but in our anger at the sight of plutocrats continuing to increase their share of the economic pie, largely unscathed by the Great Recession, we should not forget that justice also demands attention to the other end. Indeed, the liberal egalitarian tradition, to which I think Piketty would subscribe, pays particular attention to the conditions of the least advantaged members of society. An important purpose of progressive taxation is to finance social programs aimed at improving the lot of those at the bottom not just to prevent the rich from getting too far ahead of the middle class.
Measuring a concept as morally charged as inequality is clearly a challenge and no statistical measure can fully capture society's normative attitude towards the distribution of resources. The top of the distribution is where much of the action has been over the past few decades but the share of income or wealth going to the top 1 or 10 percent obviously tells us little about the position of the least advantaged. For example, the relationship between top income shares and poverty rates across advanced countries is positive but very weak. Moreover, top income or wealth shares are unsuitable for analyzing some of the most important questions of justice such as material deprivation that is attributable to past and present discrimination.
To be fair to Piketty he is well aware of the pitfalls of trying to summarize inequality in a single measure. He notes that "social reality and economic and political significance of inequality are very different at different levels of the distribution, and it is important to analyze these separately" (page 266). My comment is meant only as a point of emphasis to those who expect to find in Piketty's book an exhaustive account of inequality. They will not.
For example, from a liberal egalitarian perspective, the improvement in the wealth distribution in the twentieth century that Piketty documents looks less impressive than suggested by the significant decline in top wealth shares because all of the redistribution occurred above the median. Wealth ownership of the bottom 50 percent is today as minuscule as it always has been. There is no denying that the rise of the patrimonial middle class had profound political and social implications for the developed economies, but it does not follow that it has made them significantly more just.
In the same vein, Piketty's proposed remedy to deal with rising top wealth shares, a global tax on capital or net assets, redistributes wealth primarily among existing wealth owners. It alleviates the tax burden of (mostly middle class) mortgagors, who currently pay property tax based on the gross value of the property rather than the value net of mortgage debt and increases the burden on the truly wealthy whose portfolios are composed primarily of financial and business assets that currently avoid tax. Unless the tax is designed to raise substantial revenue little benefit would extend to those in the bottom half of the distribution.
Another point of fairness worth emphasizing relates to the distinction between wealth that results from accumulation of lifetime savings and wealth that is inherited. A popular approach to the distribution of resources says that it should be sensitive to people's choices but insensitive to their circumstances or endowments that are a result of luck rather than choice. Inequality in wealth accumulated from savings and investments is partly influenced by the distribution of income from which people can save. But it also to a considerable degree reflects people's choices between saving and consumption, and between risky and safe investments. Provided such choices are well-informed it is fair that people should face the consequences. Inequality in wealth from savings is therefore much less morally problematic than inequality in inherited wealth, which is an example par excellence of differences in arbitrary circumstances and material endowments.
To my mind the most shocking analysis in Piketty's book concerns the growing importance of inherited wealth. He shows that among recently born cohorts in France around one in eight individuals can expect to receive in inheritance at least the equivalent of the lifetime labor income received by the bottom 50 percent of labor earners. This is higher than at any time in history and is a direct consequence of the redistribution of wealth above the median. More individuals are now in the position of heirs of sizable fortunes that add to their lifetime resources more than the average person in the bottom half can expect to earn in a lifetime. The wealth redistribution among the relatively well-to-do is making a remedy of this injustice more difficult because a growing share of the electorate stands to benefit from low inheritance taxes.
Capital in the Twenty-First Century breaks new ground in analyzing what is undoubtedly an important component of inequality and distributive justice, the increasing concentration of income and wealth at the top. But building a more just society in the twenty-first century will also require increased attention to those at the bottom.
A key priority should be the reduction of inequality in human capital by supporting the educational attainment of children from poor households. Mounting evidence on the importance of early childhood development should refocus public investment towards preschool education, support and training for parents, and nutritional assistance. At the secondary level the challenge is to balance the benefits of vocational education and apprenticeship programs in providing effective transition to the labor market with the costs of early and rigid selection of students by ability into different tracks, which tends to reproduce education differentials by socioeconomic group. Most countries, but particularly those with university fees, can do more to encourage students from poorer households to pursue tertiary education through student grants.
More can also be done to help vulnerable adults. Income support for low-wage workers, such as the Earned Income Tax Credit in the United States, is an effective way of reducing working poverty. It is particularly effective when combined with a minimum wage, which prevents the subsidy on low wage labor from being captured by employers. Regional disparities in unemployment can be tackled with policies to aid geographic mobility such as grants, migration zones, and support for rented housing. Tax incentives and affirmative action policies can be deployed to encourage employment of disabled people and other disadvantaged minorities, such as the Romas in Europe.
Even if Piketty's tax utopia were to become reality there is no question that it is the middle class who will continue to constitute the bulk of the tax base called upon to finance such policies. Making sure that the rich contribute their fair share is important. But the real political challenge in the twenty-first century will be to maintain support for the idea that the burden of achieving justice has to be shouldered by all.