The Bank of Canada's fellowship is one of the most coveted economic prizes in the country, and not just because it pays $90,000 annually for five years.
The award promotes cutting-edge research on issues at the heart of what the central bank does.
This year's recipient is one of Canada's leading income inequality experts: University of British Columbia labour economist Thomas Lemieux. The choice is a tacit acknowledgment by the bank that the widening gap between haves and have-nots – in Canada and throughout the developed world – is challenging what we thought we knew about the global economy and modern capitalism.
Populist angst has spawned a renewed appetite for capitalist-bashing, evident in the Martin Scorsese film The Wolf of Wall Street and the Michael Lewis book Flash Boys: A Wall Street Revolt, which explores the threat posed by high-frequency trading.
But it is also causing policy makers to question economic orthodoxy. French economist Thomas Piketty's book, Capital in the Twenty-First Century, newly released in English, is to the policy community what The Wolf of Wall Street and Flash Boys are to the mainstream. The 685-page tome is about as close to a blockbuster as there is in the world of economic literature – easily the most discussed book of its genre in years.
The central premise is provocative and profoundly bleak. Prof. Piketty, a professor at the Paris School of Economics, says the postwar economic boom of the last century – marked by rapidly rising wages, the rise of the middle class and a vast expansion of social programs – was an aberration from the longer sweep of history.
Now, he says, the global economy is reverting to its natural state of slow growth, triggering an inevitable and dangerous widening of disparity between the super-rich and everyone else. Just as rapid growth reduces wealth and income inequality, stagnation exacerbates it. The trend, he says, has already take root in the United States.
World Bank economist Branko Milanovic has called Capital in the Twenty-First Century "one of the watershed books in economic thinking." In a widely circulated review, Mr. Milanovic praised its "huge scope and breadth of vision."
Prof. Piketty challenges one of the underpinnings of modern democracies – namely, that growth and productivity make each generation better off than the previous one. With hard work and education, conventional thinking goes, anyone can achieve upward mobility, and live the Canadian (or American) dream.
Prof. Piketty warns instead that global economic growth will limp along at just 1 per cent to 1.5 per cent for the rest of this century – roughly half the pace of the past century. The spoils will flow increasingly to the wealthy – entrepreneurs, owners of capital and those fortunate enough to inherit wealth, he argues. Workers will fall further behind.
Think of Prof. Piketty's world as the antithesis of free-market champion Milton Friedman's mantra that capitalism spreads the "fruits of economic progress among all people."
Without radical intervention, the result will be growing inequality and social strife, Prof. Piketty argues.
He bases his conclusions on a simple observation, painstakingly documented with several centuries of data, that inequality increases when the rate of return on capital outpaces the pace of economic growth. That reality was the norm before the mid-1900s, and it is the rule again now, he concludes.
What we all assumed was the way the modern economy works is really just a blip, according to Prof. Piketty.
Just as controversial as his dissection of the problem is his recommended solution – a global tax on wealth. Prof. Piketty would slap an annual graduated tax on stocks, bonds and property, which are typically not taxed until they are sold (capital gains). The tax would thwart the concentration of wealth and limit the flow of income to capital.
To be effective, it would have to be applied not just in one country, but virtually everywhere.
Prof. Piketty acknowledges that a global wealth tax is almost certainly a non-starter, politically. And therefore, the world will have to live with slow growth and worsening inequality.
Little wonder the Bank of Canada wants economists to explore the enigma of inequality.