Thomas Piketty: It's the inequality, stupid

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Before taking a big Budget stick to the poor and underprivileged, Treasurer Joe Hockey should review the research of economist Thomas Piketty, who shows that increasing inequality undermines democracy and stifles growth. Professor Thomas Clarke comments (via The Conversation).

THE COALITION GOVERNMENT is currently rehearsing a well-honed rhetoric on “everyone having to do the heavy lifting” to justify Treasurer Joe Hockey’s slash and burn budget on social services and pension entitlements.

But perhaps he might pause a while to consider a new book making waves around the world, which provides two centuries of financial data from 20 countries directly confounding Hockey’s central assumptions on the sources of growth.

French economist Thomas Piketty’s new book, Capital in the 21st Century has been generating an increasing amount of heated commentary with the argument that increasing inequality is undermining democracy and destroying the chances of equitable opportunity and sustainable growth.

Piketty argues – with the support of a massive amount of economic data – that the problem is not caused by the benefits paid to the poor, but the increasing wealth commanded by the rich (such as those happy to pay $500 a plate at Liberal fundraisers).

Hockey is an old-fashioned believer that state intervention crowds out entrepreneurial initiative, individual enterprise is checked by state benefits, and that public debt is a continuous drag on economic growth.

This week Hockey will publish the report of his hand-picked Commission of Audit to support his view that only dramatic cuts in benefits in the medium term can sustain growth.

Piketty demonstrates that Hockey is looking at the problem through the wrong end of the telescope; the problem is the increasing concentration of wealth of the rich, not a lack of incentives for the enterprising.

It is amazing the Financial Times, the Wall Street Journal, The Economist, the Huffington Post and the New Yorker magazine – among many mainstream media – are all earnestly debating Piketty’s devastating critique of increasing inequality.

Any consideration of inequality has been out of fashion for decades. Reagan and Thatcher cauterised any sensitivity to the causes of inequality stone dead with their disinterment of a laissez-faire celebration of free enterprise. Yet Picketty’s book on inequality is now number 1 on Amazon’s top 20 books list.

And Piketty is an economist!

With honourable exceptions such as A.B. Atkinson in the UK, and Paul Krugman, Joseph Stiglitz, Robert Reich and Emmanuel Saez in the U.S., with regard to the question of inequality, economists have been trapped in the fatal embrace of the efficient market hypothesis and studiously pursued quantitative modelling of increasingly obscure hypotheses.

Nobel prize winning economist Paul Krugman has said Piketty’s Capital inspires

“... a revolution in our understanding of long-term trends in inequality.”

From his more productive tunnelling through 200 years of meta-data, Piketty has emerged with the following dramatic propositions:

  • There is no general tendency in market economies towards equality. The reduction of inequality after the Second World War was caused by enlightened policy including progressive taxation. The erosion of progressive taxation in which the rich pay proportionately more than the poor, has in effect recreated the conditions for the return of the domination of inherited wealth of the 19th century. A new domination by dynastic wealth.

  • The drift back to extreme inequality is apparent in all of the advanced industrial countries, particularly the US and UK. Picketty demonstrates that while in the US the richest 1% of households took 22.5% of total income in 2012, what is even more worrying is the trend since: “the richest 1% appropriated 60% of the increase in US national income between 1977 and 2007.”

  • Accelerating this trend towards increased inequality is the rapid inflation in the reward of top executives in the US and the return of the system of inherited wealth of patrimonial capitalism in Europe.

  • These tendencies are worsening as the accumulation of capital continues to grow while Western economies have slowed in recent decades. The return on capital has outpaced the growth in economic output.

  • Piketty’s policy recommendations hark back to a different era – the democratic reformist zeal of the post-war period when higher marginal tax rates for the rich, and inheritance taxes were seen as essential to economic progress, not punitive.

  • The alternative we are now facing is the return of plutocracy, as Piketty comments: “Inequality is fine as not long as it is not completely excessive. At the end of the day, it’s hard to make democratic institutions work if you have 95% of the wealth in the top 10% of people."

  • Assumptions that inequality is necessary for economic growth are largely groundless: a more unequal society fails to deliver economic growth.

  • Austerity measures simply focused on reducing national debt, by reducing the capacity of other essential services such as health, education and social support, can compound inequality and further restrain growth.

Where will this extreme inequality end?

A recent Oxfam report suggests the richest 85 people in the world – the likes of Bill Gates, Warren Buffett and Carlos Slim – own more wealth than the roughly 3.5 billion people who make up the poorest half of the world’s population.

Inequality is not an accident, it is a result of the way we run our government and economy. Hockey claims this budget (and his budgets to come in the medium term when the more serious cuts will be made) is directly focused on removing the fetters on economic growth. In reality it is focused on removing the fetters on increasing economic inequality.

This article was originally published on The Conversation. Read the original article.

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