We were fortunate to get Harvard Professor Daniel Carpenter to write an important piece on wealth inequality in the new issue of the Washington Monthly. Despite the headline, What Piketty Missed: The Banks, the article should be seen more as a complement to the French economist’s work than a refutation.
Carpenter’s central insight is that financial regulation, if it is done correctly, can be a very important and effective component in reducing the difference between the rate of return on capital (r) and the rate of economic growth (g). Piketty argued that as long as r is greater than g, wealth disparities will grow over time, and the degree of difference determines how fast inequality will expand.
In the piece, Carpenter focuses on three main regulatory efforts that he believes would be useful in bringing r and g closer together: Glass-Steagall, regulation of stock buybacks, and core capital requirements.
All of these policies target organizations and institutions of capital—banks, investment firms, and, in many cases, regulatory agencies themselves. This approach differs from Piketty’s methodological individualism because the targets of policy are less individuals—or not exclusively individuals—and more organizations and institutions. And following Daniel Seligman’s classic Public Interest article in 1970 on the transformation of Wall Street to a world of more organizational investors, it is organizations and not just individual investors that need to be regulated in the world of finance.
Piketty’s call for a tax on global assets is more focused on clawing back wealth from individuals, but Carpenter is looking for structural reforms that can encourage organizations to behave differently and to use their capital in a way that is more beneficial to society.
Seven years ago, Mitt Romney was arguing that wealth inequality was a divisive issue that should only be discussed in “quiet rooms,” but lately we’ve seen Republicans show more interest in discussing the subject in the public square. If you want to be part of that conversation, you should definitely check out Professor Carpenter’s piece.
