Thursday, December 26, 2013

Public debt, private wealth

The world is threatened by a huge mass of debt which has enormous consequences on the lives of  people and businesses. The central issue that needs to be addressed urgently if we want to restore growth is to escape from the debt economy. Many governments being confronted with this problem introduced austerity policies with severe cuts in public spending, particularly in basic social services, and tax increases. These policies have failed but no alternative policies have been found to date.

One possible solution to alleviate the debt burden is to introduce taxation on big fortunes rather than on high incomes (as proposed by President Hollande in France). This measure would introduce some social justice as it would not affect those households who have invested their savings in banks and hold a large part of the national debt. This is what the French economist, Thomas Piketty, an expert on income  inequality has recently proposed in his book 'Le capital au XXI siècle'. 


The basic rationale is that inequalities in income do not capture the reality and extent of the problem. The stress should rather be put on progressive taxation on capital, the big fortunes - the  richest 1% which according to Piketty own more than a quarter of total wealth in Europe and the US. The one-off tax would allow to repay total public debt. Subsequently, a strongly progressive taxation on income and capital would offset the reconstitution of wealth inequality. 


P.Krugman  has recently explained in his blog why inequality matters and should be treated as an urgent priority, not just as a subordinated issue to restoring growth. The cost of inequality (for middle classes) is as high as the effect of the great recession : the income share of the bottom 90 per cent has fallen dramatically, between 0,7 and 0,9% per year to less than half of total income. 

However, a mere redistribution of income will not solve the issue of mass unemployment since unemployed have no income from labour. But if there is  a significant shift from the wealthy to the middle classes and the poor, there will be room for governments to stimulate the economy while paying less for the unemployed. The problem, though is that there will be strong resistance from conservative parties. This is a battle for democracy not class warfare. 

No comments:

Post a Comment