Vignettes on Inequality

FORBES – Luis Rubio

Thomas Piketty’s book on inequality has created an enormous commotion because it touches a sensitive nerve worldwide. The financial excesses, the extraordinary valuations of the technological companies and of the Internet and the appreciation of the value of intellectual over manual work have created a new social reality that is the natural raw material of responsible politicians as well as of opportunists. The very fact of inequality becomes an opportunity that offers infinite possibilities for being exploited although, unfortunately, these rarely lead to diminishing it. Frequently what is done leads to its exacerbation.

Picketty’s argument is very simple and very relevant:  comparing census and fiscal data he explains that income grows much more slowly than wealth, which inexorably leads to its concentration. According to Piketty, the rate of return on financial investments is systematically superior to the growth rate of economy and this is an uncontainable tendency. From his statistical analysis he engages in a series of extrapolations from which he concludes that unless the growth of wealth is controlled (by means of taxes) concentration and polarization will grow without limit. In other words, for Piketty the solution resides in the incorporation of governmental control mechanisms.

There was no wait for objections to the argument of the French scholar to ensue. Some are extraordinarily technical, others merely superficial. Some embrace their arguments without thought. What come next are some arguments and arguments that have emerged, directly or indirectly linked with Piketty:

For Tyler Cowen wealth derives from the assumption of risk and not from the fact that it exists: that is, wealth does not grow in a natural manner but as the result of decisions that often are erroneous, entailing immense losses for their owners. Tyler argues that at the beginning of the XIX Century David Ricardo affirmed something similar to Piketty on ownership of the land but that, however, this source of wealth ceased to be relevant. Ricardo’s conclusion is that the two factors that really have had bearing in the creation of wealth are not financial but rather derive from technological change and globalization. The solution Tyler proposes is that “creating more value in an economy would do more than wealth redistribution to combat the harmful effects of inequality”. 

Donald Boudreaux utilizes a metaphor to dispute Piketty’s argument: “I spend about six hours weekly (and weakly) lifting weights at the gym. The modesty of my effort combines with my age (early 50s) to ensure that I’ll never be as buff as younger guys who spend more time at the gym than I do. The result is muscle inequality! And I’m tempted to feel envious. I want to be bulging-biceped, broad-shouldered, and as chiseled as are my young gym-rat friends. Really, though, how seriously do I want this outcome? I could build more muscle if I spent not six hours weekly at the gym but, rather, six hours daily. But I choose not to do so. Spending more time at the gym means spending less time working (earning income), less time with family and friends, and less time doing other things that I judge to be worthwhile. The fact that I’d be more buff if being more buff were costless is irrelevant. It’s not costless; therefore, the size of my muscles is largely the result of the way I choose to make trade-offs. So I resist the temptation to envy men with bigger muscles, men with muscles (do note, were not built with fiber taken from my muscles). And if muscle distribution by government were possible, I’d oppose it. Not only would the result be less muscle bulk to ‘redistribute’ (Would you pump weight for hours each day knowing that a large chunk of what you build will be stripped away and be given to someone else?) but, more importantly, I’m not entitled to the confiscated fruits of other people’s efforts”.

Paul Krugman, true to his nature, carried out a diligent and interesting analysis of an analytical publication (New York Review of Books, NYRB), while he simultaneously launched a politico-ideological diatribe in his article in the New York Times (NYT). In the former he examines the phenomenon of inequality from the impoverishment of the U.S. middle classes without wholeheartedly embracing the fiscal argument of Piketty. In contrast, in his journalistic article he accuses the “apologists of the oligarchies” of burying their heads in the sand. What Krugman evidences is that, in effect, there is a problem, but that its root cause is never arrived at.

Beyond the U.S. debate, I ask myself whether the circumstances are similar in Mexico. No one could dispute the fact of the inequality in the country, but its dynamic is radically distinct, To start with, there are two “structural” phenomena that distinguish the two countries: in the U.S. both the tax as well as the estate law promote the distribution of great fortunes through foundations. The two wealthiest men in that country –Bill Gates and Warren Buffet- devote themselves body and soul to distributing their money to causes that they consider worthwhile: that is, at the end of their days, a good part of their fortunes will have disappeared or will have been transformed into something else, negating part of the argument of the French author. On the other hand, the U.S. market is vastly more dynamic than the Mexican market and its opening to competition frequently implies that that’s the way great fortunes are made, and others disappear overnight: the losses of thousands of investors during recent years have been huge. Although in Mexico there’s always some of the latter, the former certainly is (almost) non-existent in Mexico.

In Mexico it is much more likely that the government will seek out those who are already wealthy for these to start new businesses that create conditions for the emergence of new entrepreneurs. The success of so many Mexicans in the U.S. should tell us a lot: why there and not here. The same is true concerning the incapacity of Mexican governors to confront the educative problem and to create conditions for true equality of opportunity. Inequality is not exclusive to Mexico, but here we persist in preserving it and rendering it permanent.