Piketty Slit

It is heartwarming to see a scholarly work of Economics become so popular. In case you have missed it, the book in question is Capital in the 21^st Century, by Frenchman Thomas Piketty, and it is outselling pretty well everything except Twilight and hunger Games just now.

I understand the book is long and detailed, and I don’t intend to read it myself. So I am grateful to the Economist and some other publications for reviewing it so thoroughly. To its credit, the Economist has been quite balanced in its critique, even though the attitude of the book lies far to its left. The FT has also given serious attention, but seems more inclined to pick at the logic and proofs than try to see the bigger picture. Even that approach shows that the FT is scared.

The basic premise of the book, supported by reams of historical analysis, is that capital tends to grow faster than the wider economy, so those with capital tend to get richer quicker than those who don’t and inequality tends to widen. The period from about 1930-1980 was a historical exception, one that spawned the dominant economics agenda of today. Which, according to Piketty, is wrong-headed and disastrous.

Like most ground-breaking theories, this one is simple and elegant. It feels true, based on recent observations. And Piketty seems to show that it is true historically as well. He advocates a global wealth tax, among other unlikely measures, as the most effective antidote.

Some people have claimed that capital does not usually grow so quickly as Piketty claims. For me, the most elegant evidence is the assumptions capitalists make about future capital growth. Most notably, almost all our pension investments actually need to grow at something like 6% real to avoid a black hole appearing in state and corporate coffers, not to mention banks.

So 6% is dutifully assumed in pension models, pushing the can down the road. Piketty only claims 4%, which is probably attainable. It could be argued that the 6% assumption is the root cause of many failings, creating unrealistic expectations of company boards, passed on via ever-more desperate lobbying, aggressive short-term goals and heartless labour policies, and stressed out executives comforted only by their ridiculous bonuses.

6% is not attainable long-term, but maybe 4% real is, and that is roughly what Piketty calculates. And capital can hardly argue against that when their own models require an even higher return.

Once Piketty establishes his simple equation and demonstrates the devastating consequences, the really interesting is what global society can do about it. Piketty advocates socialist style redistribution remedies. Chief among them is a global wealth tax, supported by progressive income and property taxes and a heavy inheritance tax. I am sure Tobin will be in there too if I read into the detail.

As a European, I support all this, but, as someone living in the US, I see the scale of the gap to close before any of it gains currency here. The greedy have done such a thorough job of selling their liberty and small government message that it becomes political suicide (for now at least) to argue for progressive measures.

I am particularly pleased to see the Piketty focus on inheritance tax. This is such an emotional issue. We all want the best for our children, and to feel the state will steal our legacy is tough to accept. But don’t we have enough opportunity within our lifetimes to set our children up? If it is our true priority, wouldn’t we invest more in them while we were still alive? And isn’t this the single most obvious example of unequal opportunity?

I was staggered to learn that in the US the minimum inheritance tax threshold is five million dollars. That is enough to set up a small family for life without contributing even a cent of tax, or without taking account of what parents can do to evade the tax or pass on assets while alive. It is perhaps the loudest signal of all of a structural unequal society. But it is such a hard sell to change, striking at the heart of our desires as parents.

So we will wait a long time for progressive redistribution. Still, the tide has to start to turn before it can roll back, so well done Piketty (and the OECD, and even the Economist) for igniting the debate. But I think I have spotted an alternative opportunity, one that might just be more palatable to the vested interests.

Piketty highlights the period from 1930-1980 as an exception to his rule, a time when inequality declined. It is telling to understand why. In response to crisis and war, governments between 1930-1980 invested at an unusually high level.

It is important to distinguish government spending with investment. The difference is between running costs and capital improvements. You don’t necessarily have to spend more overall to invest more. The small government brigade will of course argue differently.

Now the question is – what stops a massive global injection of investment right now? The potential benefits are huge.

In the developed world, we could establish pre-school for all. We could upgrade roads and public transport and create green and sustainable cities. We could ensure quality housing for all. We could set up care systems for our old.

In the developing world we could establish infrastructure, including internet, for all. We could bring universal education to the current level of developed countries. We could eradicate many diseases and early deaths. With some help, we could establish corruption-free institutions.

All of this is feasible with current technology. All it takes is money. A by-product would be full employment, since many of the projects require many willing workers. Further, if addressed globally, the money can simply be printed. It is not possible for the world to rack up debt (at least not monetary debt), since debt is a zero-sum game.

What would be necessary is to prevent government from dominating the implementation. Government should nudge and steer, but not necessarily spend or employ. Since starting these projects up would add to government spending in the short-term, we should be open to privatisations and partnership financing to offset this. That argues for things like free schools and more market-based health. 

So why not? Blind orthodoxy is one reason – with the IMF doing a reasonable job but sometimes in thrall to financiers. A lack of global consensus is another – if for example Germany chose not to participate they would build up surpluses and plunge the rest into more debt.

All this could be overcome were it not for the vested interests. For this scheme creates billions of winners, but a few losers, that is those with capital today. There are a couple of reasons. One is inflation, which would grow with investment, deflating the value of savings, in other words reducing the net worth of the wealthy. Another reason is that full employment would rebalance power between capital and labour. Living wages would emerge from the market, reducing profits.

I can’t see any other downsides. And these don’t really feel like downsides, merely necessary rebalancing. We can even use the famous trickle down answer in reverse. Capital today argues that their orthodoxy maximizes growth, which trickles down to all. Recent evidence scarcely supports the claim but they still make it. We could argue the converse. Investment rebalances wealth, but even the wealthy benefit from the social gains.

The tragedy here is less inequality and more squandered global development. We could make the world so much better for every single citizen, right now. Progress was wonderful from 1930-80; there has been progress since but at a slower pace. What a waste that is, and all to protect the citadel of privilege. If Piketty can help turn that tide, we all owe him a huge debt.