Wednesday, January 7, 2015

The Piketty moment

Piketty's book , 'Le Capital au XXI si├Ęcle" has become a reference point in the current economic debate. It has revived the issue of economic inequality and brought it into the policy agenda. But no book has been so divisive among economists. 

The main point of the book is that governments should put in place a progressive wealth tax for the purpose of income redistribution and correct growing inequalities. In other words the rich should pay more so that the poor (or the impoverished middle class) could get more disposable income and spend more in goods and services. The consequence of inaction would be a return to the situation which prevailed in the early 19th century where the big fortunes concentrated most of total wealth. This happens, according to Piketty when the rate of return of capital is durably higher than the rate of growth of an economy creating a situation of disequilibrium which aggravates economic disparities. As heredity of capital becomes more important relative to labour, the big fortunes continue to grow almost mechanically while the wealth of the middle class tends to erode. To avoid this perverse mechanism, our societies has social institutions which aim to reduce such inequality but today these institutions are becoming more fragile and less capable to respond to such challenge. 

In our societies hardly hit by the crisis, rising inequality threatens the values of social justice which are at the heart of democracy. In past years, a neo-liberal discourse has prevailed, putting aside the issue of inequality and focusing on growth, which is good per se and in theory should benefit to all. The evidence shows that this is not true since not all or even a small fraction of the population actually benefits from growth. Orthodox economic policies based on sustained deficit reduction  led to a prolonged recession which has even widened the economic inequalities within societies, with the poor becoming poorer and the rich becoming richer. 

European governments, in particular France and Germany, have showed inaction to combat the crisis and its consequences in terms of social disruption. Is it a folly to argue that there are alternatives to current economic policies and that we should wait for the return to growth. History tells us that austerity does not contribute to  debt reduction bit in turn plunges the economy in a recessive or prolonged low growth cycle. The return to nationalism becomes the expression of the anger of the population which feels threatened by markets and globalization. 

Since the main inequality is unemployment which affects primarily the young, it is necessary to abandon austerity policies and pursue pro-growth policies. But they have to be coordinated at the European level which implies a stronger integration between economic policies and institutions. If we want to pursue progressive economic and social policies, we need to rebuild EU institutions around the euro area to make economic decisions more effective. 

Another source of inequality is on taxation: big multinational companies pay less taxes than the small and medium ones. This requires better coordination of tax policies along with the introduction a wealth tax as proposed by T.Piketty. It is obvious that such measures have to be taken at the supranational level with permanent exchange of information between States to avoid fraud and capital relocation for fiscal reasons. 

Furthermore, there is not enough investment into education, which increases the disparities in access to culture. the rich can afford expensive schools and universities making the education gap with the poor wider. In some counties, in particular in Italy, the amount of interests on debt represent 6-7% of the GDP while expenditure for university is less than 1%. This means compromising the well being of future generations with widening gaps in education and culture. 

While there may be an issue of high debt and States have less and less resources, it is also evident that collectively European economies have never been so rich in terms of  economic output. But private wealth has often become much larger ( in Italy the ratio is one to 7) than public wealth as a share of the GDP. If part of this wealth can be used to reduce inequality, this will also be a powerful engine for more growth as it will stimulate demand and reduce the appetite for financial investments. 

This is a matter of political choice and democracy. It is a pure illusion to think that a market economy can work without polity and ethics, rules and institutions.