Thomas Piketty – “The Current Economic System is Not Working when it comes to Solving Inequality”

Following a recent event at LSE, Thomas Piketty took questions from LSE staff, students and members of the public on inequality and his latest book, Capital and Ideology.

Thomas Piketty  is  Professor at EHESS and at the Paris School of Economics. His latest book is Capital and Ideology (Harvard University Press, 2019)

Will we see a dramatic shift in inequality in the UK following Brexit?

I think, if anything, Brexit will exacerbate the trend toward rising inequality. This is because it will tend to exacerbate things like tax competition and social competition. I think there will be an attempt by the current British government at least to push toward more tax competition to attract the most mobile economic actors, the most powerful corporations, and high income/high wealth taxpayers.

We will see how it goes, it’s too early to say, but that would be the most natural tendency. I know that the current government claims they want to do something about regional inequality to keep their new voters from the North – a Brexit strategy is not going to work for every election so they will need to find something else to appeal to these voters. But I don’t think this is the most natural ideological path to follow for the Conservative Party in the UK. I think the logic of tax competition will tend to be the strongest one. But let’s see.

What do you think needs to shift politically and socially for us to reach a tipping point when it comes to tackling inequality?

The current economic system is not working when it comes to solving the key problem we have to solve – the problem of rising inequality. As you know, we have a huge environmental problem. I have previously discussed estimates we have carried out on the global distribution of emissions. If you look at the top 1% in the world who have the largest carbon emissions, they often come from North America and some from Europe as well. But what’s important is that this top 1% of carbon emitters have comparable carbon emissions to the bottom 50% of the world who have the lowest carbon emissions. It’s clear that you cannot solve this climate problem with the level of inequality that we have today. There is such a large concentration of emissions at the top that you have to address that.

And also, if you want the people in the middle and at the bottom to change their energy consumption, then clearly you have to convince them that the people at the top are making at least as much effort. I think climate change and growing awareness that the environmental crisis cannot be solved with current levels of inequality or under the current economic system can potentially be a powerful force to deliver the kind of shift that you are asking about. That being said, nobody knows how much time it will take for the concrete manifestation of climate change to raise this awareness. It could be that we cannot wait for that to happen and that there will be other crises – social and financial crises – that will contribute to the political shift.

If inequality cannot be eliminated under the existing capitalist model, do you envisage that this model can be reformed?

What I stress in my book is that the kind of property regime and legal system for property that we have today is already very different from the kind of capitalism that we had a hundred years ago. Over the course of the 20th century, the rights of property owners have been balanced against the rights of workers and the rights of local government. Today, if you are a property owner, you cannot get rid of your tenant or worker as easily as was the case a century ago. So, the legal system has already changed a lot.

There are countries like Sweden and Germany where you have between one third and one half of the seats on corporate boards going to worker representatives. This means that if in addition to the 50% of seats held by worker representatives, you have a share of 10-20% of equity in a company, or if a local government has such a share, you can basically change the majority in the company, in spite of the fact that there is a shareholder who holds 80-90% of the shares.

This is a system of property rights that is very different from the standard view of ‘one share, one vote’ which you still have in countries like the UK, the United States and in France. But this is an example that shows this kind of change can happen and you don’t need the entire world to go in this direction. Germany and Sweden have done it for half a century and in fact it has worked pretty well. It’s not an ideal system, but it has allowed workers to have better involvement in the long-term strategies of companies and I think we can continue in this direction.

What I call in my book ‘participatory socialism’ – or you can call it ‘social democracy for the 21st century’ if you prefer – is just a way to build on what has worked in the 20th century in terms of educational justice, educational inequality, workers’ rights and progressive taxation. I think we can go even further than what we saw in the 20th century and move toward a system where you still have private property of a reasonable magnitude, but you don’t have an excessive concentration of private property and power among property owners, and you have a permanent circulation of wealth as well as the economic power that comes with it. We live in societies that are more educated than ever and you need this very broad participation by large groups of people to avoid the hyper-concentration of power that we sometimes see today.

You have talked a lot about wealth, both in terms of wealth taxation and the importance of transferring wealth to the next generation. Can you describe how you would see this working?

Income redistribution is very important, and I talk in my book about salary scales and a universal basic income. But I think this isn’t enough because wealth and property ownership is what gives you the possibility to project yourself in the future to perhaps start a company, but also to be in a situation that is not the same as the rest of society. If you can own your own apartment, then you are in a different situation from someone who needs to sell their labour at whatever price it needs to be sold at to pay their rent. Having some property, rather than no property at all, makes a big difference for the structure of power in society. This has huge consequences for wage negotiation and business creation.

If you look at today’s situation, the average wealth in France or Britain is about 200,000 euros per adult and the median wealth will be closer to 100,000 euros per adult, but the bottom 50% owns virtually nothing. Around 5% of total wealth is owned by the bottom 50%, which means that they have on average, one tenth of the average wealth – about 20,000 euros instead of 200,000 euros. They own very little and this is true within all age groups. It’s not that the young are poor and are about to become rich. Some of them are about to become rich, but on average, the concentration of wealth is just as large within each age group.

One of the solutions I describe in my book is the idea of an inheritance for all. It is a concrete proposal and I attach numbers to it. I say that with the kind of progressive taxation I propose, you could pay for an inheritance for all of 120,000 euros at the age of 25. There have been other proposals that have been made in the past. Thomas Paine in the 18th century had a proposal to use a progressive tax on inheritance to pay for a universal capital endowment, particularly in terms of access to land and property. Tony Atkinson much more recently made the proposal to use inheritance tax revenue to pay for a capital endowment.

Here, the novelty is to push this idea much further by also using proceeds from an annual tax on wealth to finance this, which allows you to reach a much more significant level. You can go in this direction gradually, but I think this is really necessary if you want to change the structure of power in society. In France, I had a lot of reaction to this proposal in particular from the business media. They pretend to be in favour of economic liberalism, but when they saw this proposal they basically asked what would happen if you gave 120,000 euros to all these poor kids and children from the middle classes and lower classes – you know, what are they going to do with this money? Would it reduce their incentives to work? Should we put a limit on what they can do with this money? But these are the same people who have no problem with the fact that some people inherit millions of euros – in this case they see no need to put limits on what they are going to do. I think sometimes the ideology of economic liberalism is used to defend the liberty of a small elite group rather than the liberty of all.

Let me say, the proposal that is being made here is not radical at all. Just to give you some numbers, the people who are currently set to receive close to zero would instead receive 120,000 euros under this system, while the people who are currently set to receive one million euros would still receive 620,000 euros in the system I describe. There is still a huge gap between receiving 120,000 euros and 620,000 euros. If you want my opinion, you could go further than this.

Finally, there is the issue of making property accessible at a younger age, which is very important. Even if you had a completely egalitarian society in terms of parental wealth, you might want to socialise inheritance so that people receive it at the age of 25, rather than at the age of 50.

You have written about the so called ‘Brahmin left’ – the fact that social democratic parties, who used to attract lower educated voters, are now the parties of the most highly educated in society. What explains this change?

First of all, I should make clear that I don’t claim to have a complete answer to this question. It’s tough to provide evidence for this change and I should also say that this is a new comparative project – in future we are going to write another book with several chapters covering separate countries. But what I do in my latest book is I show the examples of the United States, France and the UK. I also show some results for Germany, Sweden, Norway, Italy and a couple of other countries, but I just summarise some of the main findings. We are still working on more countries and comparing different countries can of course be a way to better understand what’s going on.

Already what’s striking, though, are the similarities in the evolution across all these countries. I think this is important because in the United States, for instance, a lot of people have linked these changes to the civil rights movement and the fact the Democratic Party took up the cause of desegregation in the 1960s. Their story is this resulted in the party losing some of the lower educated, white voters, who didn’t like racial equality too much and started to turn toward the Republican Party, to Nixon, Reagan and finally to Trump. They say this has been a gradual process and somehow the Democratic Party is not really responsible for it – these poor, white voters are so racist that there is not much they could have done.

The story then is something like the idea that the left has been abandoned by lower income voters, rather than the opposite situation. The problem with this idea is that, as we can see, we have a pretty similar evolution in France, the UK and other European countries which didn’t have the civil rights movement in the 1960s. You could say that the conflict about migration, which has become more and more salient in Europe, has played a similar role, except that it came much later – it become salient in the 1980s, 1990s and 2000s, and even in countries where it never became salient, you have a similar evolution of political support.

What I’m trying to suggest in the book is that I think this evolution has more to do with the transformation of the policy platform and ultimately the lack of redistributive ambition from social democratic parties. If you look at education policies, in the 1950s, 1960s and 1970s, there was a relatively egalitarian platform of investing in primary and secondary education for all and bringing everyone to the end of secondary school. Gradually, in the 1980s and 1990s there was the rise of higher education, but this egalitarian platform has been abandoned in some cases.

There is a lot of hypocrisy in terms of access to universities. I show in the book that if you look at a country like the United States, there is data now available on the relationship between parental income and access to education that shows if your parents are poor, you still have a 25% chance to enter higher education, but when your parents are rich, you have a 95% chance. Actually, this is understating the impact on equality of opportunity because of course the universities that those with rich parents have access to are not the same as the universities that those with poor parents have access to.

If you look at the amount of education investment, you find that even in a supposedly more egalitarian public system like France, the picture is unequal. I have looked at data on all students who finished their education in 2018 and identified the total public education investment they received throughout their period in education from primary school to secondary school and further education. On average, public education investment has been about 120,000 euros, but it goes from 60-70,000 euros up to 250-300,000 euros. Those at the bottom are basically the people who leave school at the age of 17 or 18, and those at the top are those who receive very privileged forms of higher education, while in the middle you have people who are in the basic university system and don’t receive much investment.

Again, you can see how much hypocrisy there is in this system because you invest 200,000 more euros for the people at the top than you do for the people at the bottom. Of course, this is not parental income, it is just related to the people who do the most expensive studies, and some of them sometimes come from lower income backgrounds. But as you know, on average there is a correlation with parental income, so in the end public investment will tend to amplify initial inequalities. I previously mentioned the idea of an inheritance for all, well here you have a kind of double inheritance for some people who receive 200,000 euros extra.

Social democratic parties have been unable or unwilling to propose targets in terms of educational justice that are convincing enough. It’s more complicated to define educational justice in an era when you have higher education than in an era where the objective was just to bring everybody to the end of primary and then secondary education. It’s not that the world stayed the same and that social democratic parties just abandoned redistribution. The world changed, there were new challenges, and social democratic parties were unable or unwilling to update their platform. But the story I tell is not only about education, it’s also about redistribution in general, progressive taxation, financial deregulation and many other topics.

What do you think about the ongoing protests in Chile and demands for an end to inequality in the country?

What has happened in Chile in recent months – the demonstrations against inequality and the demand for more economic justice – is very important because it shows that in many ways we are at a turning point in the history of globalisation. You can see in many countries in addition to Chile, such as Lebanon or France with the Yellow Vests movement, that there is a demand for more economic justice and there is a feeling that the economic system is working in a biased manner for the highest income and highest wealth groups.

In the case of Chile, this is pretty clear. To me, clearly Latin America includes some of the most unequal countries in the world – in addition to Chile, we can also mention Brazil. In Chile, those responsible for the post-Pinochet transition never questioned even the constitutional basis for large inequalities in terms of wealth, the education system, and in particular the prevalence of private education. There was an ideology of inequality – you know, some famous economists and philosophers like Friedrich Hayek contributed to this legacy. But I think this has to change and I think this political mobilisation will contribute to this kind of change taking place.

Is economic growth compatible with tackling climate change, even if it is ‘sustainable growth’? Do you think that ‘steady state economics’ or a reduction in economic growth might serve to concentrate people’s focus on the equality of distribution?

Can we continue to have positive growth forever and solve the climate crisis? The answer is no. We have to rethink our notion of economic progress and we have to change the economic indicators that we use to measure this notion of progress and economic growth. There are different ways to do that. I should mention that I always try to use the idea of national income rather than GDP. If you take 100 billion euros of oil from oil reserves underground or you take 100 billion euros in fish from the ocean, you have 100 billion euros of GDP, but you have zero euros of national income. And if in addition when you burn oil or gas you create global warming and you reduce the durability of life on earth, then if you put a price on the negative impact of these emissions you should have negative national income instead of positive GDP. Changing the economic indicators both for companies and for national accounts could completely change our perspective of the same economic strategy.

Now, this is not enough. You also need direct environmental indicators, but the pure environmental indicators are not sufficient either because you still need some notion of income, wages and wealth in order to build some norm of social justice in terms of how you’re going to distribute the tax burden and the burden of adjustment with respect to environmental policies. It would be a mistake to forget about any indicators of income and wage growth. You have to combine both types of indicators in the future and you need to emphasise distribution in these indicators – who suffers from global warming and who receives what income level, rather than just looking at the aggregate and the average.

This is what we’ve been doing with the World Inequality Database at the Paris School of Economics, and this is of course what the International Inequalities Institute has been doing at LSE, and I think it’s great that there’s more work being done in the social sciences on the evolution of inequality, not only in economics but in all other departments where they sometimes take a more pragmatic approach to inequality than my dear colleagues in economics departments do. We need everybody to participate in this renewal of inequality studies in the social sciences.

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