ECONOMIC AFFAIRS: by Colin TeeseNews Weekly
Growing inequality in an era of economic stagnation
, June 21, 2014
This writer has recently worked his way through a remarkable new book, Capital in the Twenty-First Century (Harvard University Press), written by French economist Thomas Piketty, and brilliantly translated into English by Arthur Goldhammer.
It is the result of some 20 years’ research by its author and his many assistants. Notably, the book is less about capital than about unequal wealth distribution.
What follows in this article is rather like those puzzling labels one sometimes sees on packaged food — “this product may contain traces of nuts”. This article may contain some traces of a review, but it is intended to go further and deeper than a review.
Capital in the Twenty-First Century has been described by some overseas reviewers as forbiddingly long at 696 pages — which suggests that such readers have done little more than skim through it. Actually, it has 578 pages of text — the remainder contains endnotes, references and other explanatory information.
Piketty has been at pains to point out how careful he has been with the collection and evaluation of his research sources. He freely admits that some of the data on which he has based his conclusions are less than perfect; he has had to manage as best he can with what is available.
He offers an open invitation to critics of his use of the data. Moreover, he invites them to provide better data from which different conclusions might reasonably be drawn or, alternatively, to advance more persuasive conclusions from those he has reached.
Only one critic has attempted to do so — Chris Giles, the economics editor of London’s Financial Times.
Any fair-minded observer would have to say that Giles has not succeeded. He has not been able to disprove Piketty’s conclusions. The best he has managed to do is suggest that “the data underpinning [his] tome … contain a series of errors that skew his findings”, and that therefore the material inequality in some countries might be less than Piketty concludes (Financial Times, May 23, 2014).
In his study, Piketty quickly makes his intentions known. His purpose is to present the facts about wealth distribution. He concludes on the best available, though admittedly imperfect, information that wealth has for the most part been unequally distributed as far back in history as we choose to go. Notwithstanding this, he believes that there is no necessary reason to assume that uneven wealth distribution is an inseparable part of capitalism.
Professor Lawrence Summers
He does, however, have a theory about what drives inequality in wealth distribution. He calls it “r” is greater than “g” — “r” being the rate of return on capital and “g” being the rate of growth of output.
When the rate of return on capital exceeds the rate of growth of output, it follows arithmetically that the owners of wealth are retaining a larger part of the output pie. This is a process that has continued through most of recorded history, according to his book.
For the purposes of Piketty’s observations it should be recognised that his entire focus is on Europe and North America during the past 200 years. Reasonably reliable statistics are not available for other regions for this period.
On Piketty’s evidence the only time wealth was not growing faster than output was during the first three quarters of the 20th century. He attributes this deviation principally to the economic, social and political upheavals associated with two devastating world wars, which mainly impacted on Europe and North America.
His concern is that we are now returning to the highly uneven wealth distributions that prevailed towards the end of the 19th century.
In the course of his research, Piketty dispels myths about growth and capital. Over the long haul he demonstrates that growth has always been slow. His calculations show that, from 0 to 1700AD, annual world output and population each grew on average by 0.1 per cent. Per capita output remained the same.
From 1700 to 2012, world output grew on average by 1.6 per cent annually. World population by 0.8 per cent annually, as did per capita output.
This long-term average of 1.6 per cent annual growth contrasts sharply with the modern experience, between 1913 and 2012, of annual growth of around 3.0 per cent. This he attributes to emerging economies catching up.
Of the 3.0 per cent annual growth during this recent 100-year period, 1.6 per cent was per capita GDP growth and 1.4 world population growth.
Total output growth has always depended on an almost equal contribution from output growth and population growth.
Growth after the industrial revolution, compared with almost none during the previous 1700 years, was relatively rapid — though still slow compared with what we talk about currently.
However poorly it might compare with the recent past, growth over the last 300 years was actually massive; but again one half was due to population growth, which has increased from about 600 million in 1700 to nearly 7 billion in 2014.
Nobody believes that this kind of population growth will continue into the foreseeable future. Indeed, many industrialised countries face the opposite problem of current birth rates falling far short of what is required for a population to replace itself.
Since population accounts for half of subsequent output growth, we must accept much lower growth rates as a consequence of slowing population growth — with all the implications that carries.
The consequence of Piketty’s research — incidental to the main thrust of the book — has largely been overlooked by commentators. Their focus has been on trying to establish the merits or otherwise of his views about wealth inequalities.
Yet, it could be that his points about growth may turn out to be more important than the wealth distribution issue. Ever-expanding growth is essential to the success of the model of capitalism we are currently following. If growth is actually slowing, then that fact has consequences for the model.
For example, lower growth expectations will likely require more government involvement in economic life than we have been accustomed to over the last 30 or so years.
The problem of faltering future growth has already begun to trouble contemporary economists. It has been introduced into the U.S. economic debate by no less a figure than Lawrence H. “Larry” Summers, a distinguished Harvard economist who served as Secretary of the Treasury for President Clinton and as director of the National Economic Council for President Obama.
In November last year, in a speech he delivered at the International Monetary Fund (IMF) Fourteenth Annual Research Conference, held in Washington, DC, Summers made headlines with his contention that the U.S. — and therefore possibly the entire West — may have already entered a period of what he called “structural stagnation”.
The phrase is actually economic jargon for “an economy without growth”. Summers thinks it is possible that we have been in this state for perhaps some 30 years, but its impact has been obscured by a combination of asset “bubbles” and the debt-funded consumer spending from the late 1990s until the 2007/08 bust that ushered in the global financial crisis.
Summers concludes that, in this event, permanent government stimulus may be needed to maintain satisfactory levels of demand in the economy. Market forces on their own may no longer be capable of generating sufficient economic growth to absorb all those who are willing and able to work.
Effectively, Summers is making the argument for a fundamental re-examination of how we organise economic life. More recently, he has observed that U.S. academics will need to re-examine their assumptions about economics to take account of new realities. Summers is scheduled to review Piketty’s book for the New York Times in the coming weeks, and it will be interesting to see how he comments on Piketty’s observations on growth.
Back to the matter of income inequality, Piketty correctly, in this writer’s view, laments the fact that since the late 1970s we have moved away from progressive income tax as a means of wealth redistribution.
In the earlier period, from the end of World War II till the late 1970s, a steeply progressive tax on higher incomes was standard practice throughout the Western world. So were estate taxes on inherited wealth.
There is no doubt that together these measures helped to correct part of the problem of uneven wealth distribution, although it is doubtful if that was identified as their express purpose.
Piketty outlines many measures he believes we could adopt to halt and reverse the current trend towards greater inequality. His preference is to focus on excessive capital accumulation. He believes that uneven capital distribution is more important than large disparities in income, which, in any case, can be effectively contained with progressive income tax policies. In tackling disparities in capital accumulation, his preferred option would be for a globally-applied wealth tax.
Nobel prize-winning American economist Paul Krugman is among those who agree. Others dismiss the idea, whatever its merits, as impractical and impossible to realise.
For what it is worth, this writer belongs to the latter group — though for different reasons. There is a more fundamental issue to consider. Suppose such agreement was possible: what would be the basis for a tax on capital? How might authorities decide how much capital was too much?
Pursuing that path could lead us off in entirely the wrong direction. There are a variety of sound reasons for acknowledging that there will be, and should be, some disparity in both capital and income distribution. Trying to decide what may be too little or too much is both difficult and beside the point.
The more fundamental point is that a winner-takes-all approach to social problems is inappropriate for societies which have drawn their values from Christian principles. What such societies must ensure is that arrangements are in place to provide for the well-being of all citizens.
First, we need to ensure that, as a community, we are providing the basics — that is, food, clothing, shelter and jobs — for all the population. Adequate and affordable health care and universally-available education opportunities are also essential.
Once such measures are in place — and, at the moment, we are far from having achieved that — then it hardly matters if some have more capital or more income than others.
Some redistribution of wealth, as a necessary consequence of pursuing essential social objectives, may well be justified. A frontal attack on private wealth as an end in itself certainly is not.
Colin Teese is a former deputy secretary of the Department of Trade. Thomas Piketty’s book, Capital in the Twenty-First Century (Harvard University Press), is available from News Weekly Books.
Chris Giles, “Piketty findings undercut by errors”, Financial Times (UK), May 23, 2014.
Lawrence H. Summers, speech delivered on November 8, 2013, at the International Monetary Fund (IMF) Fourteenth Annual Research Conference in Honor of Stanley Fischer, held in Washington, DC.
Lawrence H. Summers, “Economic stagnation is not our fate — unless we let it be”, Washington Post, December 16, 2013.
Lawrence H. Summers, “The inequality puzzle”, Democracy: A Journal of Ideas, Issue no. 32, Spring 2014.