A Piketty ‘Inflection Point’ Heads Up

The concentration of America’s wealth may be reaching a point where any further gains for the top 1 percent must literally come at the direct expense of everyone else.

The exquisitely succinct equation at the heart of Thomas Piketty’s best-selling Capital in the Twenty-First Century — r  > g — has impressed readers worldwide. Just three symbols. Even Einstein, for his masterwork, needed five.

French economist Thomas Piketty’s work invites us to consider what happens once 100 percent of a country’s growth in wealth starts going to the 1 percent.

Piketty’s core principle: The rate of return on the investments the wealthy make will normally be greater than the rate of growth in a nation’s economy and total wealth.

Piketty considers the three decades right after World War II an exception to his rule. In those anomalous postwar years, the French economist explains, the rebuilding required after Europe’s destruction generated a rate of growth, g, not sustainable in the long term.

In more normal times, Piketty believes, r > g will drive ever-increasing concentration of wealth at the top — unless tax and other policy choices impose sufficient constraint on that concentration.

Few nations in the world today, unfortunately, are supplying that constraint. And they may be why we now could be living through an inflection point in the concentration of America’s wealth that helps explain our current political turbulence.

Let’s review here how r > g operates as wealth concentrates. If the deep pockets of a nation’s top 1 percent are holding 10 percent of that nation’s wealth and are achieving investment returns (r) twice the overall rate of growth (g), then 20 percent of that country’s increase in wealth would flow to the top 1 percent.

That 20 percent would constitute an outsize share of the nation’s economic growth, but the everyone else could probably live with that. The bottom 99 percent, after all, would still be receiving 80 percent of the country’s growth in wealth.

But as the wealth share of a top 1 percent increases, that bottom 99 percent would inevitably start feeling an increasing pinch. Consider what happens when the top 1 percent wealth share reaches 25 percent. At that point, the 1 percenters would be collecting 50 percent of the country’s growth in wealth.[pullquote]Between 2014 and 2016, the wealth of America’s 1 percent jumped by $3.53 trillion.[/pullquote]

Under Piketty’s principle, the ultimate in pressure would arrive once 100 percent of our imaginary country’s growth in wealth started going to the 1 percent. At that point, the rate of return on the investments the wealthy make could continue to exceed the nation’s overall economic growth rate only if the wealthy started taking away wealth from the 99 percent, by encumbering that wealth with increasing levels of household debt, for example.

Recent data indicate this scenario may now well be the case.  Between 2014 and 2016, researchers from the Swiss bank Credit Suisse report, the wealth of America’s top 1 percent jumped by $3.53 trillion, from $32.26 trillion to $35.79 trillion. During the same period, the wealth of America’s bottom 99 percent dropped by $2.52 trillion, from $51.74 trillion to $49.22 trillion.

That decrease was borne almost entirely by the bottom 90 percent. Those in between the top 1 percent and the bottom 90 percent about broke even between 2014 and 2016.

Data over a short period can be misleading, for a variety of reasons, so another French Revolution-like event, this time in the United States, may not be around the corner. Not yet at least. But the recent wealth numbers from Credit Suisse remain alarming. They suggest that under Piketty’s r > g principle, America may have reached a critical inflection point beyond which the top 1 percent’s wealth gains come at the expense of everyone else.

No wonder so many Americans are feeling squeezed — and desperate for change. Desperate enough to elect a Donald Trump.

Bob Lord, a veteran tax lawyer and former congressional candidate, practices and blogs in Phoenix, Arizona.