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Tuesday, May 20, 2014

Thomas Piketty—une star américaine

The 43-year-old French economist, Thomas Piketty, rocked the American intellectuals, both from the Main Street and Wall Street as well with his 685-page economics tome, Capital in the Twenty-First Century—a book that was released in English on March 10th.  Paul Krugman, the Nobel laureate, indeed hailed it as ‘the economic work of the decade’, while Martin Wolf, that popular columnist from Financial Times dubbed it as “an extraordinarily important book.” Within a few days of release, it hit No. 1 on Amazon’s best-seller list. It even entered the New York Times best-seller list, an unusual achievement for an economics text.

What is it that the book has which has drawn so many Americans towards it?  First things first: Piketty, analyzing the Tax records from France, the UK, the US, Germany and Japan over the past 250 years, avers that the rich are getting richer and there is no trickling down of their wealth—it’s only moving up.   Contrary to the prevailing opinion that it is the inequality in income in terms of salaries that results in inequality, Piketty argues that the wealthy who hold healthy stock portfolios have gotten much richer than those who make most of their money via plain old income route, i.e., salaries or wages that have gotten relatively poorer. He further argues that as long as the return on capital is higher than the rate of growth of the economy, there would be a natural tendency for inequalities to increase, for “the past tends to devour the future.” 

The first reaction of a common reader to this observation is that there is nothing new in this phenomenon, for commonsense tells that accumulated wealth generates disproportionate income vis-à-vis a factory worker’s wages. That’s what indeed Karl Marx (though limited himself to rate of profit) intuitively concluded as early as in the 19th century. So, some critics argue that Piketty’s book merely offers heaps of data in support of his argument.  

That said, he also makes another interesting point though debatable:  “Wealth is so concentrated that a large segment of society is virtually unaware of its existence, so that some people imagine that it belongs to surreal or mysterious entities.” But there are critics who prefer to counter it saying that such invisible accumulation of wealth is more in the form of wealth of corporates whose ownership is spread across many, and secondly, they also believe that much of soaring inequality in the US is more due to remarkably high compensation and incomes. Indeed, Piketty too acknowledges this fact when he says, “US inequality in 2010 is quantitatively as extreme as in old Europe in the first decade of the twentieth century, but the structure of that inequality is rather clearly different … radically new— super-salaries.”

Over and above it, there are critics who argue that tax records are not the best suited for studying the wealth. They also argue that there are reasons good enough to make us believe that rate of return on capital cannot continue to outperform growth, particularly as technology creates new jobs.  Indeed Simon Kuznets and Robert Solow had earlier shown that inequalities came down in the mid-fifties as technology and competition acted as the equalizing factors. 

Of course, Piketty has a counter argument: it is an aberration more due to war—when the rich tend to lose a bundle—or when the government kick-starts growth through direct intervention as the US did in the 1930s and under its Marshall Plan in the late 1940s.  He also argues that traditional measures such as spending on people’s education, worker protection, more progressive taxation, etc., can at the best be helpful at the margins, but inequality will worsen “no matter what economic policies are.” 

So, what then is the solution?  According to Piketty, there is only one solution: a global wealth tax—of course, over and above the tax on income—for only such a tax “would contain the unlimited growth of global inequality of wealth, which is currently increasing at a rate that cannot be sustained in the long run and that ought to worry even the most fervent champions of the self-regulated market.”

There are, of course, many counter arguments to Piketty’s tax proposal: One, as Kenneth Rogoff, a Harvard economist, argued, “the idea of a global wealth tax is replete with credibility and enforcement problems, aside from being politically implausible”; two, how to assess the wealth of corporates whose capital is owned by many spreading across the globe; and three, too much of taxation might deter enterprise, which is again detrimental for the growth.

Yet, Piketty’s argument that “capitalism is unfair” sounds pretty appealing.  But then, it immediately raises another question: Is it fair to curb citizens’ freedom?  For, the suggestion of Piketty to tax “a certain level of income or inheritance at a rate of 70 or 80 percent”, that too, simply “to put an end to such incomes and large estates” is a sure interference in the individual freedom of citizens, besides killing entrepreneurship in the country.

Similarly, his recommendation to shut down offshore tax havens, for: “No one has the right to set his own tax rates. It is not right for individuals to grow wealthy from free trade and economic integration only to rake off the profits at the expense of their neighbors. That is outright theft” is nothing short of interference in the sovereign rights of the nations. And no country will be just that willing to forego its right to set a tax rate system that best serves its own interests.Particularly, developing countries such as India and China cannot afford to ignore growth and the the role of capital in ensuring growth, for it  is only growth that has enabled them to get a greater chunk of its poverty-stricken people out of its jaws.

All these arguments again compel intellectuals and ordinary mortals alike to look for such alternatives which allow individual freedom while at the same time keeps the inequality at an acceptable level. That’s where economists like Kenneth Rogoff who opines that there are better ways to address the issue of inequality without disturbing growth—“a relatively flat consumption tax”—comes to mind. 

Nevertheless, Piketty’s Capital in the Twenty-First Century is an extremely important book. Yet,  when this book was originally released in French in Paris surprisingly,  it is reported to have drawn far less attention. One reason for such poor reception could be: ‘inequality’—unlike to the US—had been central to the political debate in France for long and hence could not stir up the minds of French readers. Does it really mean anything?


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