What Piketty missed: the banks.

• Author: Carpenter, Daniel
• Position: Thomas Piketty

The explosion of finance, and its weak regulation, has exacerbated inequality. Stronger regulation could lead to higher middle-class wages.

Like Alexis de Tocqueville almost two centuries before him, the French economist Thomas Piketty has a distinctively American spirit--more than we might think, in fact. American social scientists lean heavily toward what is called "methodological individualism." Like our fellow citizens, we tend to think that the mechanics of, and solutions to, our social, economic, and political problems are located in individual incentives and attitudes. And among the many voices remarking on the growth of American inequality, most focus on the forces and policies that affect individual citizens. These voices have come to the eminently sensible conclusion that the growth of American inequality has mainly to do with changes in the labor market and social policy--globalization of supply chains, outsourcing of manufacturing, changes in taxation, developments in education and family structure, weakening of labor organization and bargaining power. That collective hunch has received perhaps its strongest academic support from Piketty's landmark book Capital in the Twenty-first Century, published in April of last year. Piketty's book harnesses the power of centuries-long data series that reflect a striking and growing divergence among household incomes in France, England, and the United States. His principal proposed solution to rising inequality--a global tax on assets--is a tool that targets wealthy people and families more than companies, banks, and labor unions. According to Piketty, the basic problem is an ever more yawning gulf in the spread of individual incomes; the basic solution is thus a tax on wealth held by individuals.

Piketty is right in many respects. No discussion of the causes or solutions to the inequality crisis can ignore changes in how work and investment are compensated, and no attack on inequality could possibly dispense with taxation as a salve. Wealthy individuals stash untold trillions of dollars in offshore accounts, thousands of miles away from the taxing powers of the nation-states whose institutions protect the very markets that made the wealth possible in the first place. (One of Piketty's collaborators, Gabriel Zucman, estimates that the amount of asset storage in offshore tax havens is at least $7.6 trillion; other estimates place the amount two to four times as high.)

Still, it is more than odd that an economist writing a magnum opus on capital and inequality in the wake of the financial crisis of 2007-08 pays so little attention to the regulation of banks and financial institutions as cause, symptom, and partial cure in the inequality crisis. There is no better example of exploding top incomes--explosions largely robust to the recent recession--than the compensation of bankers, lawyers, analysts, and executives in the financial industry, and the financial crisis shriveled and decimated the fortunes of tens of millions of working-class and poor families in the United States and Europe. Of course, just because the financial sector is involved in inequality's run-up does not mean that financial regulation is. We tend to think that regulation is a matter of keeping the banking system safe and of protecting consumers of all incomes and classes. Outside of preventing a crisis, how could it possibly shape inequality?

The answer is found in Piketty's basic argument. Piketty believes that the key to...