Mounting inequality worldwide is inevitable without major policy shifts, French economist Thomas Piketty contends. In his recent book, Capital in the Twenty-First Century, Piketty reaches that conclusion by examining income and wealth distribution in more than 20 countries over the past two centuries. His solution — a global net worth tax similar to U.S. property tax — would be tough to implement but worth the effort, he says. Piketty, who supports economic openness, fears that greater concentration of capital will scuttle globalization. The former director of the Paris School of Economics, where he still teaches, has published more than 60 articles and books on inequality since earning his Ph.D. in economics from l’École des hautes études en sciences sociales (Ehess) and the London School of Economics in the early 1990s. Piketty, 42, spoke with Editorial Research Assistant Georgina Hurst about the risks if policymakers don’t act.
What message are you trying to convey in your book?
I’m trying to set the facts straight. I put income and wealth data from the U.S., Europe and emerging countries into a consistent story to see what we can learn. One of my main conclusions is that there aren’t pure deterministic forces going in one direction. You have forces increasing inequality and reducing it, such as the diffusion of skills, knowledge and education within and between countries. Which force will prevail depends on our institutions and policies. What is certain is that there’s no natural force in modern growth that would bring inequality under control. We can grow to a level of concentration of income and wealth that is not acceptable to most people and can drive people against globalization.
Your research suggests that the 21st century could be more unequal than the 19th, when inequality peaked. Why?
The most powerful force pushing in the direction of rising inequality is the tendency of the rate of return to capital to exceed the rate of output growth. When this happens, initial wealth inequalities tend to amplify and converge toward extreme levels. There are two reasons to believe this could be particularly strong in the 21st century. First, if you have free capital flows and international competition to attract investment, it tends to drive returns to capital upward because countries are competing to attract capital. Second, the growth rate might be smaller than in the 20th century because of the end of population growth. About half of GDP around the world over the past century came from population growth. The other component of growth, productivity growth, will likely remain between 1 and 1.5 percent annually.
If a technological revolution biased in the direction of capital were to occur that uses robots and drones to replace workers, it would increase the growth rate and the rate of return to capital. There’s no reason it’s going to increase the growth rate more than the return to capital. The gap between return and growth could actually increase because of this technological revolution.
A recent International Monetary Fund report found that inequality “tends to reduce the pace and durability of growth.” But the pace of growth helps determine the degree of inequality, you argue.
High inequality can also be bad for growth and reinforce the process I am describing; I just don’t think the effect on growth from inequality is that large. I mostly emphasize the opposite, and to me the main concern with high inequality is the proper working of our democratic institutions rather than the impact on growth. If you have a very tiny group of the population that controls an extremely large fraction of total resources, the very working of democracy is compromised. Democracy and capitalism can go hand in hand, but only to the extent that democratic institutions and the general interest take control of capitalist forces.
Why should the wealthiest people care about inequality?
If our democratic institutions are captured by a tiny top-wealth elite, this could trigger violent popular or nationalistic discontent. If everybody or a commensurate amount of the population turns against globalization, everybody will lose. It’s not a zero-sum game; it can become a negative-sum game, because economic openness is preferable for everyone. Ultimately, it’s in their own interest to regulate and limit inequality.
What’s the best way to do that?
A progressive wealth tax at the global scale is the most compatible with economic openness and the rule of law. Countries like China or Russia are experimenting in a more authoritarian way, through capital controls. There’s also a myriad of intermediate solutions between the perfect solution of tax and the horrible solution of putting your guys in jail, such as restricting foreign access to national capital. But these other solutions are much less efficient than progressive taxation. The main counterargument is that it’s difficult to agree on a common tax system at a global level, so it’s very tempting for each state or region to determine its own.
Follow Georgina Hurst on Twitter at @ghurst_iimag.
