Home > inequality, Plutonomy, upward income redistribution > Economic policy in a post-Piketty world

Economic policy in a post-Piketty world

from Dean Baker

Thomas Piketty’s new book, Capital in the 21st Century, has done a remarkable job of focusing public attention on the growth of inequality in the last three decades and the risk that it will grow further in the decades ahead. Piketty’s basic point on this issue is almost too simple for economists to understand: if the rate of return on wealth (r) is greater than the rate of growth (g), then wealth is likely to become ever more concentrated.

This raises the obvious question of what can be done to offset this tendency towards rising inequality? Piketty’s answer is that we need a global wealth tax (GWT) to redistribute from the rich to everyone else. That is a reasonable solution if we’re just working out the arithmetic in this story, but don’t expect many politicians to be running on the GWT platform any time soon.

If we want to counter the rise in inequality that we have seen in recent decades we are going to have to find other mechanisms for reversing this upward redistribution. Specifically, we will have to look to ways to reduce the rents earned by the wealthy. These rents stem from government interventions in the economy that have the effect of redistributing income upward. In Piketty’s terminology cutting back these rents means reducing r, the rate of return on wealth.

Fortunately, we have a full bag of policy tools to accomplish precisely this task. The best place to start is the financial industry, primarily since this sector is so obviously a ward of the state and in many ways a drain on the productive economy.

A new I.M.F. analysis found the value of the implicit government insurance provided to too big to fail banks was $50 billion a year in the United States and $300 billion a year in the euro zone. The euro zone figure is more than 20 percent of after-tax corporate profits in the area. Much of this subsidy ends up as corporate profits or income to top banking executives.

In addition to this subsidy we also have the fact that finance is hugely under-taxed, a view shared by the I.M.F. It recommends a modest value-added tax of 0.2 percent of GDP (@$35 billion a year). We could also do a more robust financial transactions tax like Japan had in place in its boom years which raised more than 1.0 percent of GDP ($170 billion a year).

In this vein, serious progressives should be trying to stop plans to privatize Fannie and Freddie and replace them with a government subsidized private system. Undoubtedly we will see many Washington types praising Piketty as they watch Congress pass this giant new handout to the one percent.

The pharmaceutical industry also benefits from enormous rents through government granted patent monopolies. We spend more than $380 billion (2.2 percent of GDP) a year on drugs. We would spend 10-20 percent of this amount in a free market. We would not only have cheaper drugs, but likely better medicine if we funded research upfront instead of through patent monopolies since it would eliminate incentives to lie about research findings and conceal them from other researchers.

There are also substantial rents resulting from monopoly power in major sectors like telecommunications and air travel. We also give away public resources in areas like broadcast frequencies and airport landing slots. And we don’t charge the fossil fuel industry for destroying the environment. A carbon tax that roughly compensated for the damages could raise between $80-$170 billion a year (0.5-1.0 percent of GDP).

This short list gives us plenty of places where we could pursue policies that would lower profits to the benefit of the vast majority of the population. And, these are all ways in which a lower return to capital should be associated with increased economic efficiency. This means that, unlike pure redistributionist measures like taxing the rich, we would have a larger pie that would even allow for some buying off of the losers.

These are the sorts of measures that economists usually try to seek out when the pain is inflicted on ordinary workers. Economists are big fans of trade agreements that arguably boost growth but lead to a loss of jobs and wages for manufacturing workers. For some reason economists don’t have the same interest in economic efficiency when the losers are the rich, but that is no reason the rest of us should not use good economic reasoning in designing an agenda.

In addition to the rent reducing measures listed above, there are redistributionist measures that we should support, such as higher minimum wages, mandated sick days and family leave, and more balanced labor laws that again allow workers the right to organize. Such measures should help to raise wages at the expense of a lower rate of return to wealth.

If this post-Piketty agenda sounds a great deal like the pre-Piketty agenda, it’s because the book probably did not change the way most progressives think about the world. The basic story is that income and wealth are being redistributed upward.

Piketty has produced an enormous amount of data to support what we already pretty much knew. This is very helpful. However the real question is how are we going to reverse this upward redistribution. For better or worse, Piketty pretty much leaves us back with our usual bag of tricks. We just might feel a greater urgency to use them.

See article on original website

  1. April 25, 2014 at 7:43 am

    I agree, except I would have led off with a tax shift from income and productive enterprise to land and natural resource rents – that’s the biggest monopoly privilege of them all.

  2. April 25, 2014 at 1:08 pm

    Okay, Dean is as correct as any one human can be with so few words, petersmithc puts land rent up for consideration and modernizes the idea by including what he calls resource rent, i suppose that might include atmospheric dumping space etc, another great theory that requires at least nation-wide cooperation by various elites agreeing to limit their wealth.

    I went the other direction and with others on the smallest possible issue, reusable bags in Greenfield, Massachusetts, a place with a progressive town council. After a year we gave up because resistance from the Town Council was like walking through spider webs in a banana planting at night.

    Along the way our democracy working group discovered the town charter specifically forbids the people to use democracy to improve democracy by expanding the issues and procedures people vote on. And this is in the Valley that used democracy every step of the way while defeating the English Empire in 1774.

    The time has come for full speed emergency evolution and economists are needed for practical subjects, like organizing the and sixth and seventh branches of the new replacement democracy that focuses distributed intelligence.

  3. April 25, 2014 at 2:03 pm

    Is it asking too much of economists to identify the monetary privilege to create what we use for money, as a (the?) key force in concentrating wealth to the corrupt “top?” That privilege clearly determines or very strongly influences society’s main policies that establish the other privileges. What will it take for you fellows to catch up with a growing body of citizens on this? Is that the “third rail” you feel you must avoid? Admitting that the econ textbooks are wrong on banking is a positive step, but now draw some reasonable political conclusions from that!

    • April 25, 2014 at 5:10 pm

      Stephen Zarlenga, “Is it asking too much of economists to identify the monetary privilege to create what we use for money, as a (the?) key force in …”
      (as Frederick Soddy stated ), “It was recognized in Athens and Sparta ten centuries before the birth of Christ that one of the most vital prerogatives of the State was the sole right to issue money. How curious that the unique quality of this prerogative is only now being re-discovered. The” money-power ” which has been able to overshadow ostensibly responsible government, is not the power of the merely ultrarich, but is nothing more nor less than a new technique designed to create and destroy money by adding and withdrawing figures in bank ledgers, without the slightest concern for the interests of
      the community or the real role that money ought to perform therein…
      The more profound students of money and, more recently, a very few historians have realized the enormous significance of this money power or technique, and its key position in shaping the course of world events through the ages… (E)very monetary system must at long last conform, if it is to fulfil its proper role as the distributive mechanism of society. To allow it to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of government.

      Frederick Soddy writings, namely “The Role Of Money”
      (Entire book as a free download… http://archive.org/details/roleofmoney032861mbp

      IS IT ASKING TOO MUCH OF ECONOMISTS TO CHALLENGE OR ENDORSE?

  4. Marko
    April 25, 2014 at 4:27 pm

    “If we want to counter the rise in inequality that we have seen in recent decades we are going to have to find other mechanisms for reversing this upward redistribution. Specifically, we will have to look to ways to reduce the rents earned by the wealthy. These rents stem from government interventions in the economy that have the effect of redistributing income upward. In Piketty’s terminology cutting back these rents means reducing r, the rate of return on wealth.”

    That’s a misrepresentation of Piketty. In his work on income inequality , he suggested a top marginal tax rate of ~ 80% on the highest income earners as optimal. This would have the effect of reducing pre-tax distribution inequities as well as post-tax , just as it did in the post-New Deal decades.

    Of course , like Baker’s take on the wealth tax – “don’t expect many politicians to be running on the GWT platform any time soon” – high top income taxes is simply too much to ask for. I tend to agree , especially when I see our supposedly progressive economists throwing the idea under the bus at the outset , preferring instead to try to enact a myriad of small-bore actions that will accomplish the same end , and which , by some mysterious , undisclosed mechanism , will evade the watchful eyes of the lobbyists for the rich and avoid their blocking actions. Yeah , I’m sure those same politicians will agree – “We’ll fool those rich guys this time , using “stealth taxes”.

    Republicans run circles around our guys. They start with demands to “Kill the Death Tax” outright , and then rejoice when Dems limit the damage to “only” lower estate tax rates and higher exemptions , “stealth taxes” in reverse.

    Jesus ! France , PLEASE ! , give me just one Piketty , and you can have a hundred of our Bakers , DeLongs and Krugmans in exchange.

    • April 27, 2014 at 2:19 pm

      “That’s a misrepresentation of Piketty. In his work on income inequality , he suggested a top marginal tax rate of ~ 80% on the highest income earners as optimal. ”
      To help create equality, one should not use a method that is “just and equal”
      As for personal income tax, Why not:
      “The new Federal Personal Income Tax :
      Income is to be taxed per individual at the rate of 15% with a
      standard deduction of the first $150,000.”
      This just being one step to help close the gaps of inequality and justice.
      Perhaps the acceptance of this would require an answer to the question posed by Obama,
      ”You can’t raise revenues by lowering taxes unless you get the money from somewhere else.” ?
      The solution is of course, simple: Raise revenues somewhere else by another fair and just
      taxation !
      DO FOR OURSELVES WHAT WE HAD ALLOWED THE CENTRAL BANK TO DO FOR THE BANKS (PFPB) !
      LOAN OUR MONEY AND CHARGE (interest) A TAX ON IT.

  5. paul davidson
    April 25, 2014 at 4:33 pm

    the most important message from the Dean Baker comment is to , in essence, restore much of Roosevelt’s New Deal system of progressive income taxes, government rebuilding of infrastructure, strong regulation of banks and other financial institutions,maintain a strong social security system , strengthen labor unions ability to get corporation to share economic rents with their workers— and some way of assuring that automation per se does not cut the share of income going

    .In addition we need something like the Keynes Plan of Bretton woods to prevent aggregate demand from leaking to foreign based factories and workers and creating a balance of payments problem– as I have suggested with my INTERNATIONAL MONETARY CLEARING UNION [IMCU] –a plan that is based on the principles of Keynes’s Bretton woods proposal without the need for a supra national central bank and Keynes’s “bancors”.

    Also is the need to prevent automation from stopping the generation of income to noncapital [wealth] holders.

    A global wealth tax will not work in our current global economy because there will always be small nations willing to become tax havens with secret bank account customers to shield the wealth of the very rich.

    • Marko
      April 25, 2014 at 7:38 pm

      ” A global wealth tax will not work in our current global economy because there will always be small nations willing to become tax havens with secret bank account customers to shield the wealth of the very rich. ”

      I’ll toss you in with my deal if the French are interested , since you have the same defeatist attitude about what’s possible r.e. U.S. tax policies.

      Tax havens exist because we allow them to – no , actually , because we want them to. It’s a political choice. We know the location of every unit of currency across the globe. Just ask Putin. The U.S. can bring any nation in the world to its knees if it tries to counteract our own desired internal policies , using our ability to manipulate the global financial system and the threats of withholding trade and/or military protection preferences.

      We told Germany and Japan how they were going to set up their economies after WWII. We’re in the process right now of moving Venezuela ( coup ) and Ukraine ( ditto ) back in line for reasons that are a whole lot less respectable than setting up a just taxation system in our own country.

      What we lack to do what FDR did is the political will , and that will never develop as long as economists like yourself and Baker insist on throwing in the towel at the opening bell.

      • April 25, 2014 at 11:21 pm

        We agree on Venezuela and Ukraine, probably Paraguay, the Maldives and Honduras as well. Dare we say the democrats have done bad to quite a few democracies as well as attempted democracy blooms like Haiti and the Arab Spring ensemble?

        So here’s where we need to admit economists are necessary to help with the nuts and bolts instead of lofty. Yes, we are in an open evolving system with energy input from the sun, in an expanding cosmos which allows an increase in information. Even so, going personal, if it is difficult for me to keep track of open, closed and bounded systems, imagine what our specie in general thinks about these subjects.

        Hugo Chavez attempted opened the door with the idea of a five branch democracy, I like seven.

        FDR did not have the political will until forced into it. Will someone here with standing please open a conversation on open systems and see if we can design a democracy for the information age, one that includes the economy?

      • Marko
        April 26, 2014 at 3:59 am

        Here we go – some prominent economists are speaking up , and they’re not afraid to talk about progressive income and estate taxes , and even tax havens :

        “Taxation, if properly used, can make a decisive
        contribution in reducing inequality. EU policy
        should favour progressive taxation of incomes,
        stiff taxation of inheritance with a strong
        philanthropic incentive, and taxation of real
        property and rents. The current reliance on VAT
        is excessive, regressive, and should be reduced.
        A range of additional measures are necessary:
        implementing the financial transactions tax to
        curb speculation and raise funds for investment,
        reinforcing transparency obligations, eliminating
        tax-evading transfer pricing, closing loopholes
        in national tax systems, putting an end to tax
        havens.”

        It’s for the EU , but still……

        http://www.progressiveeconomy.eu/sites/default/files/PROGRESSIVE_ECONOMY_ACallforChangesEN.pdf

  6. davetaylor1
    April 26, 2014 at 3:23 pm

    Marco

    http://www.progressiveeconomy.eu/sites/default/files/PROGRESSIVE_ECONOMY_ACallforChangesEN.pdf

    Spendid stuff, but still not seeing the issue of how money is generated as debt but arrogantly understood by those who acquire it as “earnings”, and so how antipathetic to them is even the concept of taxation.

    Not being academics, the 140 character platform Justalucky and I have been exploring at https://rwer.wordpress.com/2014/04/23/first-piketty-and-now-gilens-and-page/ lacks the admirable elegance of the above, but try comparing what we and they are saying.

    J: “The problem is: What 140 characters could be agreed as to be used as the basic plank in the platform for reform?”

    D: “Marx’s 68 character “To each according to their need, from each according to their ability” is not far off, and in the right order.
    Perhaps make it “IOUs to each according to their need; self-care and mutual service expected from each according to their ability; accounts for each of debts, write-offs and honours”?

    J: “Could we begin the ‘chess square’ with 2 agreed on:
    “A living standard to each according to their need; self-care and mutual service expected from each according to their ability.”

    D: “The reason I am saying IOU’s is to stress the reality of what money is: in fact a token of debt as created and a measure of it and of resources acquired from others when used in assembling an adequate “living standard”.
    “The reason I am wanting the honest equivalent of bank accounts is to remind us of our life history, wherein we start off life indebted to our parents, then our educators, then to the often anonymous multitude who maintain and share the resources of our society; that these debts get written off if we do what gratitude prompts or at least what justice expects, and that we are appreciated when we contribute or share (whether from more or less) beyond the call of duty. When our accounts go into the black, that should only represent an honourable surplus to enjoy or available to us for giving away or distributing via trade.

    • Marko
      April 26, 2014 at 9:44 pm

      Agreed. We really aren’t close to having a grownup conversation about debt , and considering the fact that the world is now buried in it , that’s a mistake that will haunt us going forward. Between big business and finance , debt restructurings and write-offs are commonplace , but when it comes to the debts of the average stiff , creditors must be protected , at any cost. Why is that , I wonder ?

      As you say , we often ignore our debts to the past , and the richer one becomes in the present , the more likely one disregards those past debts.

      And what about debts to the future ? Given our failure to respond collectively to the threat of global warming , can we really say we care a whit about future generations ? Compared , for example , to these philosophies of the early American natives , we’ve regressed in our thinking – severely :

      “In every deliberation, we must consider the impact on the seventh generation… even if it requires having skin as thick as the bark of a pine.”

      “In all of your deliberations in the Confederate Council, in your efforts at law making, in all your official acts, self-interest shall be cast into oblivion. Cast not over your shoulder behind you the warnings of the nephews and nieces should they chide you for any error or wrong you may do, but return to the way of the Great Law which is just and right. Look and listen for the welfare of the whole people and have always in view not only the present but also the coming generations, even those whose faces are yet beneath the surface of the ground – the unborn of the future Nation.”

      http://en.wikipedia.org/wiki/Seven_generation_sustainability

  7. April 29, 2014 at 12:32 pm

    Reblogged this on ..::popular spanish practices::.. and commented:
    and further and further…it’s a competitive world, they say…instead of sharing, stealing other people’s resources is the way to go in our political system. And if they don’t let us steal their resources first we send the NATO and then we put a puppet to rule the country. It’s our manifest destiny (and if we spaniards support the EEUU world regime is just because we want a piece of that pie).
    God bless our democratic way of life!

  8. May 2, 2014 at 7:14 pm

    I agree with your post and with the End of Loser Liberalism (book) thesis that seeking fair outcomes by redistributing income puts the liberals in a defensive position. You have to fight for redistribution every year, for very kind of income. It’s constantly questioned and resisted.

    What’s your view about directly redistributing wealth, towards an outcome where a substantial share of capital is held by a sovereign wealth fund or similar, for the purpose of securing the public a revenue stream within the mechanisms of capitalism? The objective is not to interfere or change the incentives of the management of firms.

    Although nationalisation of a whole asset like a firm would never be popular, taxation of securitised ownership may well work. Retail investors (wrongly) give up to 1% of their capital each year to fund managers. If the state appropriated, say, 0.5% or 0.2% of the share capital of a listed corporation per year, either through forced dilution or through central bank buying, the incremental effect would hardly be noticed.

    The cumulative effect would of course be noticed and a reasonable upper bound has to be agreed. But a consensus that, say, a blue chip company will eventually end up 20% or 30% or even 40% state owned after decades is likely a much easier sell than an 80% marginal income tax.

    • May 2, 2014 at 7:45 pm

      It might be best to find out where distribution goes after rationalizing the tax structure and removing subsidies, work on redistribution if fairness doesn’t do the trick.

      • May 3, 2014 at 12:24 am

        I’m all for the efficiency benefits of reducing rents, but I’m not so sure about the distributional benefits. Sure, small profits should yield more equality than high profits but small profits also yield inequality if there’s stability over a long time. In fact inequality is mostly a product of return on capital relative to stability. So I’m not sure lower returns solve the problem per se, they might just ameliorate it.

      • May 3, 2014 at 12:42 am

        The point of rationalization is not reduction of profit or redistribution per se. The idea is to find what a real civilization is. Examine the corporatized farm land in Greece, for example, we know that corporate agriculture produces about half the output of indigenous agriculture, per hectare, and requires semi-slave labor to do it. If Greece were to remove subsidies to giant corporate farms and require they clean up pollution of factory agriculural production, how long would it take the young and unemployed to figure out a living can be made producing good food? What percent of a vital civilization lives on the land and produces from it? Modern economists have no idea how to even think about optimizing anything but theoretical profits.

      • davetaylor1
        May 3, 2014 at 10:05 am

        Absolutely right, Garrett, and G K Chesterton was trying to say this in 1926, the year when austerity had provoked Britain into having a General Strike, in “The Outline of Sanity”: http://www.cse.dmu.ac.uk/~mward/gkc/books/Sanity.txt

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