Piketty: The End of the American Dream?

Non-US authors often go unnoticed in the United States. But Thomas Piketty, the French economist who wrote "Capital in the 21st Century" ("Le Capital au XXIe siècle") has become an economic superstar overnight, and his book an Amazon bestseller. His basic claim, that inequality in the United States has become so excessive that it endangers the superpower's economic foundation and vitality, not to speak of the American Dream, has hit like a bomb and rocked the US establishment; virtually unprecedented for an economist, and for a French author at that, ever since Alexis de Tocqueville wrote about America in the 19th century. But is Piketty right?

It's funny: my last blog post was about middle management. In this post I get to write about the middle class. Soon I'll be Malcolm in the Middle. But I promise to return to the top soon.

"Capital in the 21st Century" challenges the bedrock of the United States' self-image, namely that anyone can make it to the top through hard work and ambition. It is being read the world over (today it is ranked #3 on Amazon) and has earned its author a meeting with President Barack Obama, the cover story in the leading German weekly "Der Spiegel" and three articles in "The Economist."

To give you a quick overview of Piketty's argument, here is a video of a recent interview by BBC Newsnight (at the end he briefly digresses into the end of Swiss banking privacy, an intriguing footnote).



Why this intense interest? Albert O. Hirschman (whom all political economists had to read when I was a Columbia student) offered the metaphor for the situation: a traffic jam in a tunnel. Imagine you are stuck in traffic, and suddenly the lane next to you starts moving. You get in a good mood, anticipating that your lane will move soon too. But it doesn't. So your good mood turns into disappointment, a sense of being duped, anger.

That is what happened in the United States according to Piketty. The American Dream is in danger. It was the desire to share in the quintessential land of opportunity that made me try my luck in New York in 1987, live there 21 years, build a successful company and be a Columbia leadership professor. Things that would have been difficult if not impossible to achieve in old Europe.

The American Dream offered anyone the chance to be another Donald Trump. (Most people forget that not the Donald, but his father Fred Trump was the one who pulled himself up by his bootstraps and became a tycoon. Donald Trump largely followed in his father's footsteps and built on his foundation. But never mind.)

Inequality has long been seen in the United States as opportunity: the chance to succeed. America was the quintessential meritocracy, where even an immigrant like Barack Obama could make it to Columbia University, the U.S. Senate and the top of the heap.

(On the other hand, one could argue that John F. Kennedy and George W. Bush made it to Ivy League universities and then to the presidency not out of their own effort but because of his family connections. So perhaps the United States was always less of a meritocracy than the legend in its own mind would have it.)

Here is Piketty's line of thought in brief (and I apologize in advance for not doing justice to his whole argument):

As the graph below shows, the share of the top earners in the income of the whole population has risen dramatically since the 1970s, and much more dramatically than in Europe. In the first decade of this century, the top 10% earned close to 50% of all income in the U.S.

The trend becomes even more pronounced when we look at the next graph below, which shows the share of the top 1%. It turns out that the 1% of the population who earn the most have become the real drivers of the wealth of the top 10%.

For example, in 2010 the top 1% earned 20% of the nation's income. This is a dramatic change: in the 1970s the top 1% earned less than 10% of total income. (Capital gains and losses are included in the graph, hence the spikes of the 1% line.)

But the main thrust of Piketty's book is not incomes. It is net worth. The next graph shows among the wealthiest Americans, the wealthier they are, the more they live from their capital ("capital income" in the graph), and the less they make money from working ("labor income").

For example, the super-rich (the top 0.01%, one-ten-thousandth of the population) make 70% of their income from capital, not from working. They live off their capital, for example their inheritance, and add less to the productivity of the country.

And their return on investment will likely be higher than the economic growth of the country. This, together with the fact that larger investments yield more growth than smaller investments, will increase the concentration of capital in the hands of a few. According to Piketty, this is what endangers the sustainable growth of the United States. And it could ultimately split the country.

Piketty also shows that social mobility in the United States is low. Over and over, it is the same people who strike it rich. This busts the myth of America as the land of opportunity. And since kids of lower income brackets cannot afford the top schools anymore, that pathway to wealth has closed down too.

What do you say? Is the United States culture no longer a meritocracy? Have we crossed a line where there is too much inequality? Is the American Dream over? Or do you think Thomas Piketty is crying wolf? Do you have concrete examples that argue either way? I look forward to reading you on my blog:http://thomaszweifel.blogspot.com/.

Dr. Thomas D. Zweifel is a strategy & performance expert and coach for leaders of Global 1000 companies. His latest book Strategy-InAction: Marrying Planning, People and Performance offers a practical how-to methodology for company leaders who want to align all stakeholders on strategy and integrate strategy design with execution.