Piketty, Capital, and the World Wars: does government policy make a difference in wealth concentration?

I'm halfway through Thomas Piketty's magisterial Capital in the Twenty First Century, a vital, incredibly influential, brilliantly researched history of wealth concentration stretching back through several centuries and spanning the globe. Even Piketty's critics can't fault his methodologies, though there are critiques of his conclusions -- which propose that unregulated capitalism will produce a hereditary class of the super-rich -- on both the right and the left.

Here's a sharp critique from the left, published in American Prospect by Robert Kuttner. Kuttner takes issue with Piketty's conclusion that government intervention between WWI and WWII and after WWII had no real effect on the distribution of wealth; according to Kuttner, the shocks to hereditary wealth from WWI created a series of policies intended to restore old money fortunes, triggering a global depression. By contrast, the post-WWII period saw a series of pro-labor interventions driven by a strong trade union movement, and an ensuing flattening out of wealth distribution and a degree of unprecedented social mobility.

The period during and after World War I did not just demolish a good deal of capital held by the rich. The 1920s were an era of stupid, deflationary policies and needlessly high unemployment. In their hapless effort to rebuild the prewar rentier economy, the leaders of the interwar period chased one another to collect war debts that could not be repaid and sought to establish prewar values for their currencies. The result was deflation, deepening austerity, and high unemployment. So while World War I may have wiped out a lot of French and British wealth at the top, the aftermath did not benefit the bottom or the middle.

World War I was a different experience for the U.S., which ended the war as the world’s dominant industrial and financial power. Our wartime policies briefly imposed surtaxes on the rich (who also profited handsomely from the war boom) but did not lead to destruction of capital. On the contrary, the extreme inequality of the Gilded Age marched onward, right up until it peaked in 1929. While the Great Crash and the Depression did destroy some fortunes, the more significant era for the compression of income and wealth was World War II and its immediate aftermath.

In Europe, World War II was massively destructive of both physical capital and financial wealth. France suffered huge losses and Germany even more, while Britain lost roughly one-fourth of its prewar capital in borrowing to pay for the war. Though Piketty treats the period of 1914-1945 as a single statistical era for purposes of understanding wealth compression in all the major Western nations, the American experience was entirely unlike Europe’s. In the U.S., the most interesting years are 1941-1973, not the years bracketed by the two wars as Piketty contends.

Despite some losses to financial capital during the Great Depression, the more powerful era of equality in the U.S. began during World War II. The war was a massive macroeconomic stimulus; it produced full employment, stronger unions, and investment of public capital. The government’s wartime policies also repressed private finance in multiple and reinforcing ways, including the Fed’s pegging interest rates on Treasury bonds at a maximum of 2.5 percent, marginal tax rates set as high as 94 percent, and an intensification of the anti-speculative financial regulation of the New Deal. All of this did not end with the war. It had a half-life well into the postwar era, until unions were bashed and finance deregulated beginning in the 1970s.

Capital in the Twenty First Century

What Piketty Leaves Out

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