Wednesday, January 29, 2014

Did communism keep the west in the pink?

Thomas Edsall relays* the core ideas of a book by French economist Thomas Piketty, Capital in the 21st Century, that is causing a stir among economists. According to Picketty, the broad sharing of wealth and shrinking of economic equality in the developed world in the middle of the twentieth century was an historical anomaly:
There are a number of key arguments in Piketty's book. One is that the six-decade period of growing equality in western nations - starting roughly with the onset of World War I and extending into the early 1970s - was unique and highly unlikely to be repeated. That period, Piketty suggests, represented an exception to the more deeply rooted pattern of growing inequality.

According to Piketty, those halcyon six decades were the result of two world  wars and the Great Depression. The owners of capital - those at the top of the pyramid of wealth and income - absorbed a series of devastating blows. These included the loss of credibility and authority as markets crashed;physical destruction of capital throughout Europe in both World War I and World War II; the raising of tax rates, especially on high incomes, to finance the wars; high rates of inflation that eroded the assets of creditors; the nationalization of major industries in both England and France; and the appropriation of industries and property in post-colonial countries.

At the same time, the Great Depression produced the New Deal coalition in the United States, which empowered an insurgent labor movement. The postwar period saw huge gains in growth and productivity, the benefits of which were shared with workers who had strong backing from the trade union movement and from the dominant Democratic Party. Widespread support for liberal social and economic policy was so strong that even a Republican president who won easily twice, Dwight D. Eisenhower, recognized that an assault on the New Deal would be futile. In Eisenhower's words, "Should any political party attempt to abolish Social Security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear from that party again in our political history."

The six decades between 1914 and 1973 stand out from the past and future, according to Piketty, because the rate of economic growth exceeded the after-tax rate of return on capital.
Those decades stand out for another reason: they were the heyday of implemented communism. That was terrible for people unfortunate enough to live in in communist countries. But perhaps it was good for the wealthy west -- and later, the wealthy east. The specter of communism operated in industrialized free-market countries like the Ghost of Christmas Future on Scrooge: policymakers acted in the hope that it showed them not things that "will be" but things that "might be." The hollowing out and disappearance of the Soviet Union and its empires coincides pretty neatly with the era of deregulation, tax cuts, and accelerated assault on labor that have at least exacerbated galloping inequality.

According to Edsall, "Piketty's prognosis is extremely bleak," in that he forecasts a reduced world growth rate along with an apparently inexorable rise in the return on capital.  Just why the continued growth of the latter is likely to continue is not clear from Edsall's relatively brief precis. Picketty's recommended solution is a heavy global tax on capital, which he admits to be unlikely.  My immediate reaction was given voice by two of the economists whose responses Edsall relays (Lawrence Mishel and Richard Freeman): why can't labor recapture a higher share of business profits -- regain some weight in the eternal tug-of-war?  Why be determinist about it?

I am reminded, too, of a somewhat different if not necessarily incompatible historical pattern advanced by Peter Turchin, a professor of mathematics and ecology: that inequality ebbs and flows in long cycles -- two to three centuries in eras past, apparently accelerating in the last 200 years to periods of several decades. Turchin focuses mainly on labor supply (and on immigration as a factor weakening labor in recent decades). Periods of instability often shift the balance back toward labor and reduced inequality. That seems congruent with Piketty's citing of the world wars and intervening depression as a catalyst for the relative golden age of reduced inequality.  In fact, now that I look again, it seems likely that the memory of Turchin's piece triggered my reaction to Piketty (via Edsall):
It is no coincidence that the life of Communism (from the October Revolution in Russia in 1917 to the fall of the Berlin Wall in 1989) coincides almost perfectly with the Great Compression era. The Red Scares of, firstly, 1919—21 and then 1947—57 suggest that US elites took the Soviet threat quite seriously. More generally, the Soviet Union, especially in its early years, aggressively promoted an ideology that was highly threatening to the political-economic system favoured by the US elites. Reforms that ensured an equitable distribution of the fruits of economic growth turned out to be a highly effective counter to the lure of Bolshevism.

Nevertheless, when Communism collapsed, its significance was seriously misread. It’s true that the Soviet economy could not compete with a system based on free markets plus policies and norms that promoted equity. Yet the fall of the Soviet Union was interpreted as a vindication of free markets, period. The triumphalist, heady atmosphere of the 1990s was highly conducive to the spread of Ayn Randism and other individualist ideologies. The unwritten social contract that had emerged during the New Deal and braved the challenges of the Second World War had faded from memory.
 I look forward to reading Piketty.

* As with so much good nonpolitical or not-entirely-political stuff, I read it first on the Dish.

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