The United States, along with much of Europe, is entering “a new Gilded Age,” according to French economist Thomas Piketty. His translated book, “Capitalism in the Twenty-First Century,” is reviewed by Paul Krugman in the May 8 issue of The New York Review of Books. 

“This is a book that will change both the way we think about society and the way we do economics,” wrote Krugman, a New York Times columnist who teaches at Princeton University and was awarded the Nobel Memorial Prize in Economic Sciences in 2008.  

Krugman’s key takeaway from the 685-page book: “Public policy can make an enormous difference.” Public policy is what Piketty says was largely responsible for the dismantling of the original Gilded Age 100 years ago, and it’s what is reviving it now. 

Studies about income inequality are not new, but Piketty’s approach is, Krugman said. The French economist and his colleagues used tax records to supplement traditional survey results, producing a more complete picture than has been available in the past of the super wealthy.

“Piketty sees economic history as the story of a race between capital accumulation and other factors driving growth, mainly population growth and technological progress,” Krugman wrote. 

“This is a race that can have no permanent victor; over the very long run, the stock of capital and total income must grow at roughly the same rate. But one side or the other can pull ahead for decades at a time,” Krugman said.

That’s what happened in Europe at the dawn of the 20th century, when the richest 1 percent controlled 60 percent of the wealth in France and 70 percent in Great Britain, according to Piketty. 

A period of concerted trust busting, along with two world wars, helped rebalance the distribution of wealth, but now a massive accumulation of capital by the elite is happening again, although with a slightly different twist. The twist, Krugman explained, is that the vast majority of wealth controlled by the richest 1 percent in 1910 was inherited wealth.  

“What we have seen in America and are starting to see elsewhere is something radically new – the rise of ‘supersalaries,’” Krugman said.

“Real wages for most U.S. workers have increased little if at all since the early 1970s, but wages for the top 1 percent of earners have risen 165 percent,” according to Krugman. 

Before Piketty, economists tended to assign that shift in economic power to advances in technology that created “winner-take-all markets in which a handful of exceptional individuals reap huge rewards, even if they’re only modestly better at what they do than far less well paid rivals,” Krugman said. 

Piketty, however, contends that changing social norms play a bigger role than we realize. “Falling tax rates for the rich have in effect emboldened the earnings elite,” Krugman wrote.

“When a top manager could expect to keep only a small fraction of the income he might get by flouting social norms and extracting a very large salary, he might have decided that the opprobrium wasn’t worth it,” Krugman summarized. 

But today, high-level executives effectively set their own pay, constrained by social norms rather than any sort of market discipline, according to Piketty.

Krugman criticizes Piketty for failing to assign a role to deregulation and for not explaining the concentration of very high incomes in the finance sector.

But he praises the French economist’s conclusion. “Progressive taxation – in particular taxation of wealth and inheritance – can be a powerful force limiting inequality,” Krugman wrote. “Wealth taxes, global if possible,” he said are needed “to restrain the power of inherited wealth.”

“Unfortunately,” Krugman wrote, “the history covered in his own book does not encourage optimism,” because “then, as now, great wealth purchased great influence – not just over policies, but over public discourse.”