The Milken Institute Global Conference, an annual gathering of investment bankers plus a smattering of social entrepreneurs, scientists and Hollywood stars, is a sea of expensive suits and beautiful shoes — a convention not of the top 1% but of the top 0.1%.
Hot topics this year included some you would expect: the outlook for the world economy, ways to make new fortunes in finance and energy, the prospects for disruptive innovation in technology and medicine.
But there was also a lot of talk at the conference this week about a 656-page book on inequality. Thomas Piketty, a French economist who thinks the increasing concentration of wealth threatens democratic societies, didn’t attend the Milken gathering, but his message — and his conclusion that the solution is to tax the assets of the rich — rattled through the Beverly Hilton’s meeting rooms.
Piketty’s argument boils down to this: Economic history suggests that the golden years that followed World War II and the technology boom of the 1990s were exceptions, and that the kind of slow growth we’re seeing now is more normal.
During periods of slow growth, he posits, income grows slowly for all but the top 1%. But investments are another matter; on average, they grow faster than the economy.
These days, we’d be delighted to see the U.S. economy grow by 3% a year, but anyone with investments expects them to grow at least 4% a year (and, of course, hopes for more).
When wealth grows faster than income, so does the gap between rich and poor. Those with wealth will see their assets grow ever larger, while those who have little or no wealth will miss out.
There was no real disagreement at the Milken conference with Piketty’s premise.
As Alan Schwartz, chairman of Guggenheim Partners and a charter member of the 1%, put it, “If society doesn’t think it’s a fair game, it will not work, no matter what we think. ‘Let them eat cake’ didn’t work so well in France.”
Still, it’s striking that a 656-page economics treatise is commanding such a large share of public debate at the moment — especially from people who are unlikely to ever read it. (In fact, it’s not as daunting as it looks, especially if you stick to the easy chapters at the beginning and the end and skip the denser economics in the middle, as I did.)
Piketty has clearly found our not-so-sweet spot. Perhaps it’s that, on some level, we’re all finally worried — rich and poor alike — that, as he warns, the growing inequality is likely to create resentment and class warfare.
These resentments will increase, Piketty suggests, as wealth passes from the hands of entrepreneurs and investors — who at least had a hand in creating their fortunes — to their heirs, who simply had the good luck to be born into wealthy families.
The growth of that inheritance-heavy elite, Piketty warns, will “radically undermine the meritocratic values on which democratic societies are based,” with “consequences [that] are potentially terrifying.”
Inequality of wealth, Piketty argues, also makes it harder to create the kind of equal opportunity that can help level the playing field. Take education, the most important escape route from poverty for generations. Piketty notes that the average income of Harvard students’ parents is now about $450,000 a year. That’s the parents of all Harvard students, not just the alumni legacies. So much for pure meritocracy.
But even if we all agree there’s a problem, we’re still far apart on a solution, and the prescription Piketty offers belongs on the fantasy shelf.
He says the best remedy would be an annual tax on capital. Anyone who owns more than $1.5 million in assets might be taxed, say, 1%, while assets over $5 million might be taxed at 2%.
That idea is economically logical, but it’s politically impossible. Too many American voters would think it sounds like communism. Besides, it would require an international treaty to keep rich people from simply moving their assets to tax havens. Even Piketty calls it “a utopian idea.”
Raising income taxes on the 1%, as President Obama has repeatedly and fruitlessly asked Congress to do, might help, but it wouldn’t get at those giant pools of inherited wealth. Or, Piketty suggests, we could reinstitute the estate tax, which now applies only to bequests over $5.34 million, the top 0.1% of estates. But none of that is likely to happen in this anti-tax era.
We’ve reached a moment, in other words, when there’s broad consensus that we have a problem but we’ve sworn off all the obvious ways to fix it.
Long ago, Herb Stein, the chief economic advisor to President Nixon, coined Stein’s law: If something cannot go on forever, it will stop. Our growing gaps in income and wealth are likely to continue for a long time, but they won’t continue indefinitely. All that remains to determine is how — and how badly — they will end.