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It says something about how much attention the French economist Thomas Piketty’s new book, Capital in the Twenty-First Century, is getting — and something about how deeply flawed Piketty’s thinking is — that I have, for the second straight week, dedicated my column at Defining Ideas to rebutting the arguments made in the book. As I’ve noted before, one of Piketty’s greatest errors is focusing on inequality to the exclusion of economic growth. We should welcome any increase in wealth to the rich or the poor that does not leave other people worse off, whether that change increases or narrows the gaps in wealth between rich and poor—any such Pareto improvement meets the gold standard of economic welfare.
As I write in this week’s column:
Unfortunately, Piketty’s preoccupation with inequality blinds him to the huge hit to growth that comes from union organization and, more generally, from regulations across the labor, product, and real estate markets that artificially set wages, prices, or the terms of trade. Ignoring these mid-level institutions leads Piketty to assert that overall growth rates are constrained by some invisible Malthusian hand so that “there is ample reason to believe that the growth rate will not exceed 1– 1.5 percent in the long run, no matter what economic policies are adopted. “
What economic nihilism! Countless systems of direct taxation and regulation reduce gains from trade in countless economic areas. One key way to spark growth is to reduce the repressive income and growth taxes that Piketty favors because, ironically, he thinks that overall growth is not sustainable. It would also do him a world of good to look more closely at current schemes of industry-specific direct regulation that result in the inefficient deployment of capital. He might, for example, consider the adverse impact on pharmaceutical innovation that arises from the unduly risk-averse attitude of the Food and Drug Administration, or the perverse distortions of energy markets from the equally misguided efforts to subsidize wind and solar energy in ways that make it harder to take advantage of the enormous advances in traditional fossil fuel technologies.
You can read the whole thing here.