Oct 30 2015

Piketty on Higher Education


Thomas Piketty on Higher Education

 In Capital in the Twenty-First Century, Thomas Piketty demonstrates that when the rate of return on capital exceeds the rate of growth of output and income, arbitrary and unsustainable inequalities emerge that radically undermine the meritocratic values of democratic societies (1).

This erosion in values is most apparent in diminishing access to American higher education due to the stagnant wages of middle and lower class families, and outrageously high tuition and fees. Contrary to the myth of the American Dream, social mobility remains lower in the United States than in Europe (as it was throughout most of the twentieth century)—and Piketty expects it “will decline even more in the future” (484-85).

Piketty confirms that historically capital in Europe grew from 1870 to 1913, while wage labor incomes stagnated, causing unsustainable income inequality (8). A short-lived phase of compression in income inequality between 1913 and 1945 followed (in part due to the combined economic shocks of the Great Depression and two world wars).

Yet, by the first two decades of the twenty-first century, income inequality rebounded in most rich countries, particularly in the United States, where it now exceeds levels reached in the second decade of the last century—when the top 10 percent of US earners claimed 40-50 percent of annual national income (13-15).

Shockingly, in the thirty years prior to the Great Recession of 2008, the richest 10 percent of Americans absorbed nearly 60 percent of the total increase in US national income—while income growth for the bottom 90 percent was less than 0.5 percent per year. Such extreme divergence between social groups makes it hard to imagine that the country’s economy and society “can continue functioning indefinitely” under such conditions (297).

Meanwhile, we are entering a period of global convergence in which emerging countries, especially those in Asia, are catching up with rich nations to the extent to which they achieve the same level of technological know-how, skill, and education (71). China, for example, continues to invest significantly in higher education, and per-capita income in that nation is now approximately 600 to 800 euros a month, or about the global average.

To achieve that parity in less than two generations following the death of Mao Zedong, per capita output growth in China exceeded 9 percent per year from 1990 to 2012—a level “never before observed” (99). As China sustains its investments in higher education, there is every reason to believe the that gap between the Middle Kingdom and rich nations will narrow further in the coming decades.

Piketty projects that if rich countries were to grow at an optimistic rate of 1.2 percent from 2012 until 2100 and emerging nations at 4 and 5 percent, then “per capital output in China, Eastern Europe, South America, North Africa, and the Middle East would match that of the wealthiest countries by 2050.” Thereafter, the distribution of global output would approximate the distribution of the population (100).

A major driving force of global convergence (i.e. the reduction and compression of inequalities) is the “diffusion of knowledge and investment in training and skills.” They are the key to overall productivity growth, and the reduction of inequality, “both within and between countries” (21). While all educational systems are shaped by public policy and the manner in which the costs of study are financed, all educational systems must increase the “supply of new types of training and [their] output of new skill at a sufficiently rapid pace” to keep up with technological progress (306).

Piketty concurs that the current level of wage inequality in the United States results directly from “a failure to invest sufficiently in higher education” (307). High tuitions at American colleges and universities (both public and private) now keep many individuals from receiving the training needed to shrink wage inequality and make the country more competitive globally. Given such trends, Piketty anticipates that social mobility “will decline even further in the future” as income increasingly determines access to American higher education (484-85).

For the sake of contrast, tuitions in Europe (outside of Britain) are considerably lower than in the U.S. (and remain inexpensive in Scandinavian countries). It should not surprise that social mobility is lower in the United States than in Europe, as it was throughout most of the twentieth century. Yet, all is not lost, for the best way to reduce inequality and increase “the overall growth of the economy is surely to invest in higher education” (307-08).

As more countries offer advanced educational opportunities and allow broad access to them, their wages will increase “at the low to medium end of the scale” while decreasing the upper 10 percent’s share of wages and total income (307). The United States could achieve better income outcomes with “substantial public financing” of higher education (485-86). Taxes would have to go up (for example to 50 or 60 percent on incomes above $200,000)—a realistic social and fiscal policy to build up the “meager US social state” (513).

In sum, while all market economies based on private property contain powerful forces of convergence associated with the diffusion of knowledge and skill—they also hold formidable forces of divergence that may threaten the values of social justice upon which democratic societies are based (571). To maintain a competitive edge in a rapidly transforming knowledge economy, the United States needs to invest more in higher education.

As Thomas Piketty reminds us, not even minimum wage schedules can “multiply wages by factors of five or ten: to achieve that level of progress, education and technology are the decisive factors” (313).