Piketty’s ideas have struck a chord with those who believe that there has been a rise in inequality of income and wealth and that governments have failed to do the right thing in stopping that.
Yet the work is not without its critics, and two criticisms in particular have stuck:
That he only looked at rich countries, and would get a different result if he looked at the whole world; and
- That the main driver of wealth inequality is house price rises.
We will look at each of these issues in turn before exploring what that tells us about the real drivers of inequality, and how our tax and welfare system could solve the issue.
Globalisation has helped workers in the developing world
Firstly Piketty’s data sets fail to take account of the global impact of this period post the 1980’s financial deregulation.
Globalisation has boosted employment hugely in the developing economies as capital has been free to invest in areas with cheaper labour and land.
His work looks at the displacement of labour in more expensive economies and concludes that this has come about because of a ‘natural’ tendency for capital to capture more and more of national income.
Yet if he had taken account of the shift of employment from developed to the developing economies he would not have inferred from the data that capital was taking income from labour.
Quite the contrary in fact; it’s just that with globalisation the workers that have benefited most from investment aren’t in the developed world.
House Prices are the driver of wealth inequality
The second substantive criticism of Piketty (from Matthew Rognlie, MIT) is that even when restricting one’s study to individual developed economies in isolation, it’s been a specific type of capital that has captured a higher share of income – housing.
Excluding housing, and ensuring one looks at net investment (i.e.; gross investment less depreciation) there is no upward trend in the share of income returned to capital at all. There is no trend, there is no evidence to support the argument that capital generally is taking income from labour.
There is however evidence that housing is capturing more and more of the income cake, meaning that non-house owners are capturing a diminishing share of national income.
If there’s to be a rising inequality argument then it’s best limited to a discussion around the lot of home owners versus non-home owners.
The data fits with the anecdotal evidence that has captured headlines around the world over recent decades, that house prices have risen faster than incomes.
The drivers of this are many including the impact of agglomeration (or higher rates of urbanisation), financial deregulation which has eased access to mortgage finance for many, central bank prudential management directives to commercial banks to favour mortgage lending, tax breaks for home ownership, immigration, restrictions on high density housing from NIMBY-driven incumbent local residents, and the combined impact of all of the above which has fuelled speculative demand for property (as opposed to demand underscored by a need or demand for accommodation).
As income rises the demand for larger houses or lower occupancy rates rises as well, this has been especially acute in developing economies that have ridden the globalisation wave (like China).
So what is driving inequality?
In summary then, the increased inequality of income and even more acute increased inequality of wealth that has been evident in some developed economies, has arisen primarily because of globalisation moving jobs and income to other locations, the ICT revolution automating many jobs, and the property boom benefiting the balance sheets of property owners.
The confluence of the three phenomena has driven a wedge between into the distribution of material well-being across the population of these societies.
It is a an ambitious claim to suggest this is a ‘natural’ result of capitalism (which was Piketty’s claim) as the globalisation phenomenon and the property boom can be sheeted back to the financial deregulation of the early 1980’s, while the technological change of the online revolution has been profound but a single event (much like invention of the motor vehicle was).
What have governments done?
The more pertinent issue is the reaction or lack of reaction of governments to the rising inequality.
Unlike when the welfare state was born out of governments being determined to deliver a minimum level of income insurance, health and education services for the population at large, this latest struggle for those displaced or alienated by the aforementioned forces has generated muted policy response if any. Governments the world over have generally sat on their hands.
In New Zealand the most substantial acknowledgement of the problem has been the introduction of Working for Families (WfF), a policy that explicitly recognises that the market wage that some families are able to procure is not enough for them to live on. It is an acknowledgement that it’s not just the unemployed who are suffering undue (or socially unacceptable) hardship.
But WfF is a very crude targeted welfare measure attempting to identify and meet need.
It is restricted by a particular definition of “family” and pays little to no attention to single earners or part-earners.
In short it fails to equitably ensure all those who are unable to procure enough,sufficiently-paid work, are treated the same.
It makes judgements about numbers and the age of dependants and whether they ‘qualify’ or not for help. In short it is a patch on a needs-based social assistance model that was crude in the first place and whose inadequacies are accentuated as market wages for many occupations fall below what is required to support the earner and their dependants.
What could governments do?
In our 2011 book “The Big Kahuna” Susan Guthrie and I provided a tax and welfare reform that addresses the property-driven mania that is one of the three causes of rising inequality within the New Zealand economy; as well providing a far more equitable way to ensure those who are suffering from displacement or alienation from the modern economy can still live a dignified life.
Our policy suite had three critical elements:
a single rate of income tax no matter what the source of income, what the amount and what legal entity was earning the income
removing the loophole in our income tax regime by ensuring all forms of income to capital are taxable – whether that income is received in cash or kind
- replacement of the targeted benefit system that seeks to select people as being eligible for welfare, by an Unconditional Basic Income that everybody is entitled to. This can be seen as underwriting the dignity of every New Zealander.
Impacts of the package included nobody paying tax until they earned $40,000, all forms of income having the same tax liability, all New Zealanders treated the same insofar as minimum income entitlements are concerned.
While global phenomena like the ICT revolution and globalisation cannot be avoided, an efficient and equitable tax and welfare regime can minimise the shocks these megatrends can impart.
With much of the advance of robotics, artificial intelligence and automation still ahead of us, we need a tax and welfare regime that affords citizens the best chances of adapting to these challenges.
Hanging on to an obsolete regime that requires continual patch-ups to mitigate the worst of the distortions it causes, is an opportunity lost.
This article was first published on his blog, Gareth's World. It is here with permission.