Posted by: Dr Churchill | May 9, 2014

Capital, Thomas Piketty, Progressive Economics

Thomas Piketty — The best-selling economist sounds off with Salon’s Josh Eidelson, in an interview…

The author of “Capital” talks about entrepreneurship, education, risk, rentiers, capital, progressive taxation, schools, immigration and depression. He even answers his critics:

“The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor,” economist Thomas Piketty writes in his explosive and unexpected best-seller “Capital in the Twenty-First Century.”

“Once constituted, capital reproduces itself faster than output increases. The past devours the future.”

That warning — along with Piketty’s signature inequality “r > g” inequation, have drawn a volume of attention, admiration and scorn unmatched by any other recent economics volume. So we called up Piketty to react to the reaction. In short, Rentier’s capital grows faster than Economic Growth.

“The idea that progressive taxation is politically infeasible is just wrong…”

Piketty said: “I am not impressed by that kind of claim, because the same people one century ago would have said that the progressive income tax will never happen in the U.S. or elsewhere.”

The newly famous professor pushed back against his critics on the left and right; considered how much education or migration can mitigate inequality; and defended his book’s signature policy proposal: an unprecedented global progressive wealth tax.

“I’m very sad if the book “Capital” made some people depressed,” Piketty said. “But I am not depressed.”

A conversation with Thomas Piketty follows:

Your book is a hit. What, in your view, is the best-case scenario for what kind of impact your book could have on economic policymaking and politics?

I don’t know. It’s never a sort of deterministic, immediate impact. The most it can do is to influence the views of many people… This will operate together with many other books, that will also play a role…

We have to accept the fact that we will never know what kind of influence we’ve had. We are all part of the same political community. Books have a political influence, but every one of us has also a little bit of political influence…

In any case, the primary purpose of books is to be read, and so I’m very happy that many people are reading the books … Given the large number of copies that we sell, it must be that some of them at least are reading it.

David Leonhardt, in his New York Times Magazine essay on your book, writes that rather than a wealth tax, there’s “another, more politically plausible force that can disrupt [Piketty’s] first law of inequality: education. When a society becomes more educated, many of its less-wealthy citizens quickly acquire an ephemeral but nonetheless crucial form of capital — knowledge — that can bring enormous returns.” Do you share that view?

I do share partly that view. As I say in the book, education and the diffusion of knowledge are the primary forces towards reduction in inequality…

The question is, is that going to be sufficient?

…You need education but you also need progressive taxation.

It’s not an all-or-nothing solution. I think a lot can be done at the national level. We do already have progressive taxation of income, progressive taxation of inherited wealth, at the national level. We also have annual taxation of wealth at the national level. For instance, in the U.S. you have a pretty big property tax… Technically, it is perfectly possible to transform it into a progressive tax on net wealth…

The main difficulty is not so much to make it a global tax. The main difficulty is not international tax competition. The main difficulty is more internal political [obstacles]… Right now the property tax is a local tax, and so the federal government cannot do anything. You know, it was the same with the income tax one century ago.

So I don’t share the pessimistic view that a progressive wealth tax will never happen.

You write in the book that “once we introduce the hypothesis of imperfect information…the very notion of ‘individual marginal productivity’…becomes something close to a pure ideological construct.” You also write that “even with the considerable increase in the average level of education over the course of the twentieth century, earned income inequality did not decrease,” and that mass education seems not to have “led to more rapid turnover of winners and losers for a given skill hierarchy.” Are those points in tension with an emphasis on education as a way to address inequality?

No… Mass education cannot solve every problem, but that doesn’t mean that it doesn’t solve any problem…

Another way to interpret these quotes is that without mass education, certainly inequality of pay would have increased a lot. So it’s already a great achievement that mass education was able to increase everybody’s productivity and everybody’s wage in comparable proportion over the long run. It was not enough to reduce inequality, but still it was enough to shift everybody upward…

You can use these quotes in a positive way, and I prefer to look at them in a positive way. I mean, of course we can always do better, and we should try to aim for more inclusive educational institutions.

On the question of making the wealth tax a political reality – you argued to Vox and to the Huffington Post that people were more willing in the ’20s and ’30s in Europe to accept a progressive tax because of the threat of a Bolshevik revolution. Is there anything now or on the horizon that you think offers some kind of comparable threat from the left?

No. But there is still the threat of an anti-globalization movement, [which] can be a reason to try to make globalization more equitable…

In many ways, the U.S. invented the progressive taxation of income — in limited ways. This was not due to the threat of the Bolshevik Revolution, which was very far away viewed from New York or Washington. So I think it was mostly the response of the democratic institutions. It shows that sometimes the democratic system, even if it’s imperfect, even if it’s captured by the elite, there are some forces that can make our democratic institutions respond. And if this happened already one century ago, with far less sophisticated means of communication and access to information than we have today, I think this means that this can happen again, and with new policy tools that are more suitable for today…

I’m not as pessimistic as what a number of people seem to believe. I’m very sad if the book made some people depressed. But I am not depressed after I’ve written the book…

Look: Five years ago, people were saying that bank secrecy in Switzerland would be with us forever. This shows that sometimes things happen faster than we expect… For a long time it was impossible for the IRS to get the information from Swiss banks — because that was part of the lure of Switzerland, was to protect bank secrecy. And then the U.S. government a few years ago said “OK, if you keep doing that, we will take away your banking license in the U.S.…” And then suddenly Switzerland had to change the rule. They had to change their legal system so as to make this possible.

Sometimes things can change.

You write in the book that “Neither the economic liberalism that began around 1980 nor the state intervention that began in 1945 deserves much praise or blame.” Robert Kuttner at the American Prospect argues that that’s wrong, and [regarding] the “Great Compression” in the middle of the twentieth century… that you attribute it too much to the destruction of capital in the war and not enough to the role of the state in economic stimulus, the role of organized labor, the role of regulations that were put in place.

I agree with him that if we think of the “Great Compression” of U.S. inequality, then yeah, it was largely due to institutions… The Great Depression had big impact, and bankruptcy, et cetera. But I certainly agree with him that a big part of the “Great Compression” of inequality of the mid-twentieth century was due to change [in] institutions and organized labor. So [on] this, I do not disagree at all…

What I meant is that if you look at the growth performance — the per capita GDP growth — in the 1950s, 1960s, 1970s, and you compare it to the post-1980 period, at the end of the day it was not that different. Actually it was a bit better in the 1950 to 1980 period than since 1980.

There are strong claims saying that after 1980, due to Reagan changing policy, there was a better economic performance in the U.S. I’m just saying you don’t really see it in the data. But I think the opposite claim — that the growth performance, due to more government intervention, was higher in the 1950s, ’60s, ’70s — is not really there either.

To what extent, then, do you think what those institutions accomplished in the U.S. in the mid-twentieth century can happen again?

If you’re thinking the big wage compression during World War II, this was really very specific – a very specific time period, and very specific institutions. These were very much related to the war economy… I’m not sure these can really happen again in the foreseeable future.

Now, what can happen again is the kind of progressive tax policy that we had during this period, and also the very big investment in mass education and rapid increase in the average education of the workforce.

David Brooks… writes that “Piketty predicts that growth will be low for a century, though there seems to be a lot of innovation around. He predicts that the return on capital will be high, though there could be diminishing returns as the supply increases. He predicts that family fortunes will concentrate, though big ones in the past have tended to dissipate and families like the Gateses give a lot away. Human beings are generally treated in aggregate terms, without much discussion of individual choice.” What do you make of those critiques from David Brooks?

I do my best to respond to them in the book. As a general response, let me say that I don’t know what the future value of the growth rate and the rate of return will be.

It could be that we manage to get a lot higher growth that we’ve had in the past. It could be that we are all going to have so many children, and we are all going to be making so many new inventions, that the growth rate will be 4 or 5 percent, and will be as large as the rate of return. Or it could be that we don’t know what to do with capital anymore, and the rate of return will fall to the growth rate. You know, this could happen. But it would really be an incredible coincidence.

So in case this incredible coincidence happens, we will be fine. We will not need my other solution. And I will be very happy. All I am saying is that we should not bet on that. And we should make another plan, in case this incredible coincidence does not happen…

There is a lot of evidence suggesting that even if we try to promote innovation as much as we can, and even if we try to increase growth rate as much as we can – and I am certainly in favor of any policy going in this direction – that even if we do that, that’s not going to bring us to a 4 or 5 percent growth rate. We are still going to be somewhere between 1 and 2 percent, at least for productivity growth. And it’s not so easy to impact on population growth…

Maybe the total growth rate will not be 4 or 5 percent in the long run. Maybe it will be only 1 to 2 percent. I guess my main point in the book is that we should organize ourselves so as to be able to react to whatever happens.

So right now, what we see is that the top of the wealth distribution is rising at 6, 7 percent a year — more than three times faster than the size of the economy. How far is this going to go? Is this going to stop somewhere? Yes, of course it will stop somewhere. But where exactly will it stop? I think nobody knows…

We should not just be waiting for natural forces to get us to the right place… There is no natural force that makes the rate of return and the growth rate of the economy coincide in the long run. And there is no natural force that prevents the concentration of wealth from rising to a high level. So I am not saying this will rise forever. This will stop somewhere. I am just saying that this somewhere can be very high, and there is no natural force that prevents this from happening.

So instead of just waiting and seeing, I am just saying we should have more transparency on wealth — more financial transparency, more democratic transparency on wealth dynamics — and then we will adjust the tax rate to whatever we observe…

If what we observe is that the top of the wealth distribution is not rising more than the average… we don’t need to have a sharply progressive tax rate at the top. But if the top of the wealth distribution is rising at 6, 7 percent a year, then don’t tell me that a 1 or 2 percent tax rate on top wealth will kill the economy. So we have to be very pragmatic on this. And most importantly, we need to have democratic and fiscal institutions that are able to produce the kind of information, and the kind of transparency, that will allow us to adapt to whatever we observe…

I don’t pretend that I can predict the future value of the growth rate or rate of return. I’m just looking at the data. And if the data changes in the future, and the top stops rising three times faster than the average, then I will be very happy to look at the data and to say it.

I don’t have any stake in this.

Now that you are a celebrity, would you consider running for office?

Oh no, not at all. That’s not part of my plan now.

On the question of global inequality: The new Purchasing Power Parities report from the World Bank’s International Comparison Program, while noting the result should be “interpreted with caution” due to methodological changes, finds that “The spread of per capita actual individual consumption as a percentage of that of the United States has been greatly reduced, suggesting that the world has become more equal.”…

First, are you convinced by that result? And second, how do you see the relationship between global inequality and inequality within individual countries?

There has been a great reduction in global inequality over the past few decades — that’s for sure… That’s convergence between emerging countries and rich countries… a diffusion of technical knowledge and skills and operational knowledge — and that’s the most powerful force pushing in the direction of reducing inequality. So in principle, this could also work within [a] country, this same process of diffusion of knowledge and skill, but this requires a very inclusive educational institution, so that people with less skills can catch up…

What’s quite striking is that in spite of this convergence at the global level in terms of per capita GDP, the top of the distribution of wealth at the global level has been rising a lot larger than per capita income or output or wealth at the global level. This convergence — although they are very strong, they have been less strong than this “r bigger than g” at the global level…

[The book considers] the growth rate at the top of the global distribution of wealth… The top has been rising three times as large as the average. Which was not obvious to me before I did this computation. Because you could have that thought that the convergence force in terms of per capita GDP would dominate the “r bigger than g” effect.

The economist Suresh Naidu suggests… “if we’re aiming for politically hopeless ideas, open migration is at least as good as the global wealth tax in the short run, and perhaps complementary.” Does he have a point?

These are complementary positions. These are not substitutes. Yeah, I am in favor of migration. But I am also in favor of education. But at the same time I am in favor of progressive taxation. I think we need all of this. I think we don’t have to choose one.

The idea that progressive taxation is politically infeasible is just wrong… I am not impressed by that kind of claim, because the same people one century ago would have said that the progressive income tax will never happen in the U.S. or elsewhere…

Sometimes things happen even when we don’t expect them to happen.

Yours,
Pano

PS:
All the above gleaned from a Conversation of Thomas Piketty with SALON’s Josh Eidelson this week.


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