Piketty and The Forces of Divergence

John Cassidy reviews French economist Thomas Piketty's book, Capital in the Twenty-first Century. It investigates income and wealth inequality in Europe and the United States, and suggests the causes and potential solutions to address the situation.  I think this accurately addresses the driving forces creating the "good ol' days" of the mid-20th century for the middle class and then mutating them to today's much more perilous situation: 

Piketty is certainly right to emphasize that there was nothing natural or inevitable about the income compression that occurred in the middle of the twentieth century. It was the product of global conflict and domestic political struggles. In Europe, two World Wars and the progressive tax policies that were needed to finance them did enormous damage to the old estates and great fortunes: many rich people, after paying their income and inheritance taxes, didn’t have enough money left to replenish their capital. During the postwar era, inflation ate away at their savings. Meanwhile, labor-friendly laws enabled workers to bargain for higher wages, which raised the proportion of income that labor received. And the task of rebuilding after the wartime destruction made for the rapid expansion of G.D.P. This helped to keep the growth rate above the rate of return on capital, fending off the forces of divergence.
In the United States, the story was less dramatic but broadly similar. The Great Depression wiped out a lot of dynastic wealth, and it also led to a policy revolution. During the nineteen-thirties and forties, Piketty reminds us, Roosevelt raised the top rate of income tax to more than ninety per cent and the tax on large estates to more than seventy per cent. The federal government set minimum wages in many industries, and it encouraged the growth of trade unions. In the decades after the war, it spent heavily on infrastructure, such as interstate highways, which boosted G.D.P. growth. Fearful of spurring public outrage, firms kept the pay of their senior executives in check. Inequality started to rise again only when Margaret Thatcher and Ronald Reagan led a conservative counter-revolution that slashed tax rates on the rich, decimated the unions, and sought to restrain the growth of government expenditures. Politics and income distribution are two sides of the same coin.
Piketty takes some well-aimed shots at economists who seek to obfuscate this reality. “In studying the eighteenth and nineteenth centuries it is possible to think that the evolution of prices and wages, or incomes and wealth, obeys an autonomous economic logic having little or nothing to do with the logic of politics or culture,” he writes. “When one studies the twentieth century, however, such an illusion falls apart immediately. A quick glance at the curves describing income and wealth inequality or the capital/income ratio is enough to show that politics is ubiquitous and that economic and political changes are inextricably intertwined and must be studied together.”
That’s more than mere rhetoric. By insisting that economic laws always take shape through social norms, values, and political choices, Piketty would rescue his discipline from the aridity of abstraction and return it to the richer model of political economy that its best nineteenth-century practitioners pursued. Certainly, it’s hard not to be impressed by his history and his methodological assault on theorists who believe that economics can be reduced to a pure science.

Piketty's suggested solutions closely match what I think would be required-a much more progressive tax system, targeting income or wealth.  The main criticism Cassidy has with Piketty's book is that it doesn't address the convergence of living standards between developing economies and developed ones, which Cassidy suggests in a great benefit that may justify the rising inequality in the Western economies.  I think this overlooks a significant issue, which is that the inequality in developed economies is driven by the managerial and financial class using arbitrage to profit from the convergence.  In other words, they are profiting massively by shifting wealth from the U.S. and European middle classes to China, India and other countries. Why do they profit from it? Because they can.  Do they work for it?  Hell no.  We're caught in a rigged game.