The Rise of Supersalaries, Income Inequality, and Thomas Piketty's 'Capital'

Published: May 06, 2014

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I live in Brooklyn, and this past weekend, at my local independent bookstore, where the titles that typically move are those written by the many novelists who live in the outer borough, front and center in the store window and on the checkout counter was the new, Bible-thick, nonfiction title Capital in the Twenty-First Century, by French economist Thomas Piketty. Capital, if you haven’t heard, has been receiving a ridiculous amount of praise. Nobel Prize-winning economist Paul Krugman has called it the “book of the decade.” Esquire has called it the “book of the century.” And the Economist has called its author “a modern [Karl] Marx.” And so, it came as little surprise when, after I asked the bearded clerk at the checkout counter how Capital had been selling, he told me: “We can’t keep the thing in stock.”

And apparently no one else can either. Capital is now No. 4 on the New York Times nonfiction best-seller list and among the top 30 best selling books in any genre on Amazon. As for what’s inside Capital’s more than 700 pages that has everyone so excited, Piketty does nothing less than tackle what President Obama recently called “the defining challenge of our time.” That is, Piketty’s book addresses rising income inequality throughout the world—why the so-called 1 percent now holds so much of the world’s wealth and why the so-called 99 percent holds a pittance in comparison.

Here’s how the Economist summarizes Capital’s contents:

Mr Piketty, a pioneer in using tax statistics to measure inequality, painstakingly documents the evolution of income and wealth over the past 300 years, particularly in Europe and America. In doing so, he shows that the period from about 1914 to the 1970s was an historical outlier in which both income inequality and the stock of wealth ... fell dramatically. Since the 1970s both wealth and income gaps have been rising back towards their pre-20th-century norms.
[Piketty’s] central claim is that the free-market system has a natural tendency towards increasing the concentration of wealth, because the rate of return on property and investments has consistently been higher than the rate of economic growth. Two world wars, the Depression and high taxes pushed down the return on wealth in the 20th century, while rapid productivity and population rises pushed up growth. But without such countervailing factors, Mr Piketty argues, higher returns on capital will concentrate wealth—especially when, as now, an ageing population means that growth should slow.

In other words, what Piketty’s research shows (and he spent the past decade along with 20 other scholars researching this very topic) is that rising income inequality throughout the so-called free world might actually be the inevitable end result of capitalism. And all that equality that our parents and grandparents enjoyed after the Great Depression and two world wars was, in fact, merely an aberration (see the U-shaped graph below created by the New Yorker). And, further, if we don’t make any drastic policy changes soon, income inequality will likely skyrocket and we’ll be going not forward but backward, all the way to the 17th and 18th centuries, to the time of Jane Austen (Piketty actually tips his beret to Austen, among other canonical writers, in Capital), when the best chance you had of rising out of your meager circumstances was marrying rich, that is, back to the time when it actually didn’t pay to “work.”

income inequality

Which brings me back to Krugman, who was among the first to sing Piketty’s praises. Last month, Krugman wrote a Times column entitled “Wealth Over Work” in which he praised Piketty and Capital and discussed income inequality and how “the United States is slowly becoming an oligarchy where capitalism has been usurped by ‘patrimonial capitalism,’ in which the commanding heights of the economy are dominated not just by wealth, but also by inherited wealth, in which birth matters more than effort and talent.” Krugman went to note that six of the 10 wealthiest Americans have inherited their wealth, not worked for it. (To give you a hint as to who those six are, their last names are either Koch or Walton.)

And, this month, Krugman reviewed Capital in the New York Review of Books. In that review, he pointed to something called “supersalaries,” which I admit is a term I’ve never come across before but one I took to immediately (if only for the way all those Ss so delicately and musically roll off the tongue). In any case, here’s Krugman on supersalaries:

… what we have seen in America and are starting to see elsewhere is something “radically new”—the rise of “supersalaries.” … Capital still matters; at the very highest reaches of society, income from capital still exceeds income from wages, salaries, and bonuses. Piketty estimates that the increased inequality of capital income accounts for about a third of the overall rise in US inequality. But wage income at the top has also surged. Real wages for most US workers have increased little if at all since the early 1970s, but wages for the top one percent of earners have risen 165 percent, and wages for the top 0.1 percent have risen 362 percent.

What Piketty himself has to say about supersalaries is the following (paraphrased from a recent NPR interview with the French economist, who has a rather thick accent when speaking English so it’s not always easy to make out each of his words, although it should perhaps be pointed out that his accent is rather pleasing to the ears; imagine a French, late-night radio host when reading the following):

You don’t need to pay managers 100 or 200 times the average wage to make them work. When we look at the evidence, when we look at the growth performance of companies that pay their managers $10 million a year, you don’t see any extra growth in their performance that some people say you get … Although you do need some inequality to provide incentive, beyond a certain point you don’t get any extra performance.

Piketty goes on to say that there wouldn’t be so much wrong with the exorbitant pay that senior managers (think Wall Street CEOs, tech firm CEOs, and hedge fund managers) make if U.S. GDP were rising quickly. But that’s not the case. Piketty explains that since GDP is only rising at 1.5 percent annually, “if two-thirds or three-fourths of that growth goes to the wealthiest 1 percent, it isn’t such a good deal for the rest of the population. But if growth were 3, 4, or 5 percent, you could make a case that [supersalaries] are worth it. But it’s not worth it. It’s not useful inequality. It’s just excessive.”

As for how to fix this problem, here’s where Piketty’s book has received a fair amount of criticism. His idea is to bring back a progressive income tax that was alive and well from about 1930 to 1980 in the U.S. He points out that the progressive income tax (where the richest 1 percent are taxed at very high rates—think more than 80 percent on their income) were invented by the United States and “didn’t kill American capitalism.”

Of course, it comes as no surprise that conservatives HATE this idea. But it perhaps comes as a slight surprise that even left-leaners don’t think Piketty’s solutions are so excellent either.

Still, most agree that Capital is a groundbreaking book, that what Piketty presents will change forever how we talk about wealth and inequality, that it will further the fury that the Occupy Movement started, that it will perhaps cause boards and senior managers to rethink the way they pay top performers, and that it will invigorate regulators of Wall Street. Not to mention that it is the must read of 2014 thus far.

And so, if you can afford to pay full price for Capital, you might want to run and not walk all the way to your local bookstore while supplies last.

As for me, the first edition hardcover—currently retailing for $39.95—is a little too rich for my non-blue blood. I’m waiting for the paperback.

Follow me @VaultFinance.

Read More:
What Drives Income Inequality (NPR)
Why We’re in a New Gilded Age (NYRoB)
The Most Important Book of the Twenty-First Century (Esquire)
A modern Marx (Economist)
You Won't Believe How Low Your Salary Falls on this Chart (Vault)