The Piketty divide: Part 2

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Sunday, 6 July 2014 18:30 by Ken Wolff

The Right (and I include big business in that) is scathing of Piketty’s conclusions, and of his re-introduction of the role of government into economics. Please forgive a few longer quotes to illustrate the venom of the Right:

Louis Woodhill, a software entrepreneur, claims Piketty has his numbers wrong:

… Piketty’s painstakingly researched numbers are worthless because they ignore the existence of the modern welfare state. Our various welfare programs redistribute a huge percentage of national income and, therefore, for the purposes of Piketty’s comparisons across time, they redistribute the beneficial ownership of capital. … Labor has little to do with economic growth. Capitalism is about capital and knowledge. … Anything you tax you get less of and Piketty’s system would impose huge taxes on accumulating and maintaining assets, which are what drive GDP. Under American capitalism, the ultimate arbiter of ‘common utility’ is the market. … expressed in the form of voluntary offers to buy and sell, into an optimum allocation of resources and an efficient coordination of efforts. When Piketty talks about ‘common utility’, what he means is, ‘common utility as judged by progressive French intellectuals like me.’

In The Wall Street Journal:

Not that enhancing growth is much on Mr Piketty’s mind, either as an economic matter or as a means to greater distributive justice. He assumes that the economy is static and zero-sum; if the income of one population group increases, another one must necessarily have been impoverished. He views equality of outcome as the ultimate end and solely for its own sake. Alternative objectives — such as maximising the overall wealth of society or increasing economic liberty or seeking the greatest possible equality of opportunity, or even … ensuring that the welfare of the least well-off is maximised — are scarcely mentioned.

This last quote on the reaction of the Right, from an opinion piece in Forbes magazine, is quite frightening for what it reveals about the thinking of the extreme Right in America. (I originally thought it was satirical and it took me a few reads to take it seriously. If anyone can show me this really is satirical, I will be much relieved!)

Piketty drops Karl Marx’s name over and over again in this book. Enough to make you think that he’s hiding something. Such as the possibility that he is shilling for Charles Darwin. [that is, for social Darwinism in relation to the role of government]

One of the deadliest threats with which government has ever had to contend, over the entire pageant of human history, was the immense wealth and mass affluence generated by the industrial revolution. The usual metrics point to the exponential growth of goods and services from 1750 until 1914 if not 1929. Exponential growth of what we call the private or ‘real’ sector of the economy — everything that is not government — means that government also has to grow exponentially in order even to be detectable. Moreover, one can ask: if exponential real sector growth occurs over the long run, what possible need could civilization have for government. … World War I was a keen effort to lure the masses away from their pursuits in the real sector to pursuits in the government sector, which is to say trench warfare. In the offing, the real sector took a big hit … But it remains the Great Depression that has proven the best thing that has ever happened to government in modern times. To this day, memory of the 1930s is still there in the global psyche, convincing people that the market cannot go unchecked, that government has to be nice and big in order for there to be prosperity and economic justice. Cui bono — who benefited — from the Great Depression? Government did. … Signals got mixed, capitalism got the blame, and we haven’t been able to imagine life without government since. The challenge of the 21st century will be to see if we have the courage and the foresight — for we certainly have the means — to permit government to expire.

I won’t critique those comments from the Right but leave them to stand alone and you can judge for yourselves. But you can see what progressives are up against: ‘greed is good’ and ‘no role for government’, even ‘no need for government’.

The Right also like to point out that Piketty himself may become rich from the success of his book.

Here in Australia, Piketty does not seem to have hit the headlines. He is being discussed by local economists. John Quiggin, for example, has suggested that Piketty may be a little pessimistic about the possibility of success in introducing taxes on wealth because measures are slowly developing internationally to eliminate offshore tax havens.

But Piketty has not been a major topic in popular media or among politicians — a few articles over a few days and then, like old news, apparently forgotten.*

Why? Perhaps one reason is that inequality has not been seen as a major issue in Australia, as it has in France, the UK and the US, and has not reached the level it has in those countries, although it is increasing. Our politicians like to talk about equality in terms of fairness and to give Piketty any relevance in Australia would be to turn our political language on its head. Abbott and Hockey’s 2014 budget may do more than Piketty to emphasise inequality in Australia but, taking Bill Shorten’s budget reply as an indicator, we are more likely to continue to focus on ‘fairness’. (The unanswered question being whether ‘inequality’ and ‘fairness’ are addressing the same thing.)

In a speech to the Fabian Society on 18 May, Senator Penny Wong said that the debate on inequality ‘needs to become more prominent in Australia’ but she comes to what, in my opinion, are some strange conclusions. She refers to Piketty’s equation (r > g) but says that Labor, rather than reducing ‘r’, as Piketty proposes with his taxes, should focus on increasing ‘g’.

Labor should not only increase growth, we should also increase people’s opportunities to gain the benefits of growth. The traditional social democratic approach to fairness has focussed on redistribution through the tax and benefits system. But social democratic parties also need to focus on what has been called ‘predistribution’ — helping people to earn better incomes from the market economy in the first place, before the tax and benefits system kicks in.

The emphasis is on education, training and re-training, for what was earlier called ‘lifelong learning’, as an economy changes over time. Senator Wong refers to this as redistributing opportunity.

It is important for the reasons stated by Christine Lagarde, head of the IMF, as quoted by Senator Wong:

Let me be frank: in the past, economists have underestimated the importance of inequality. They have focused on the size of the pie rather than its distribution. Today we are more keenly aware of the damage done by inequality. Put simply, a severely skewed income distribution harms the pace and sustainability of growth over the longer term. It leads to an economy of exclusion, and a wasteland of discarded potential.

Senator Wong’s declared approach addresses Largarde’s ‘wasteland of discarded potential’ but I don’t think it fully addresses Piketty’s basic premise. To achieve greater equality following her approach Piketty’s equation needs to be reversed: that is become, g > r. As suggested in Part 1, that did occur around the time of the World Wars and the Great Depression, and up to about 1970, but it was assisted by much higher taxes and other government interventions. Unless Labor is prepared to tackle the issue in that way, through taxing the rich and thereby reducing the rate of return on capital, the path proposed by Senator Wong may only be addressing half the problem. Without a reduction in the rate of return, a small increase in the rate of growth may not fully reverse the equation and only lead to continuing accumulation of wealth in the hands of the elite, who then have the capacity to pass that to their children, creating dynastic wealth and power (could I possibly mention Gina Rinehart or the Murdoch and Packer families in this context?).

Part of the problem is that progressive parties around the world have bought into the free market philosophy because, in a globalised economy, they now face a dilemma. Continuing to support redistributive policies can lead to investors threatening to move capital and investments abroad and ‘that, in turn, would cost jobs in the national market and result in less economic growth, less public revenue, less social investment …’ The rise of the New Left in the 1970s also shifted progressive thinking from labour rights to human rights. As Christos Tsiolkas has pointed out in his personal account, Whatever happened to the working class? — The left has forgotten where it came from, the progressives often fail to address the real concerns of the workers, and this is not just the old working class but parts of the middle class — the more highly paid skilled workers and ‘cashed-up bogans’ as Tsiolkas calls them.

If many of them were now “cashed-up bogans”, just as many were unemployed. Many were on welfare, many on drugs both illegal and prescribed. Even among the “cashed-up bogans”, there was a real fear about how long this period of extended prosperity was going to last. … They were fearful of a rise in interest rates and in rents and of the loss of permanent jobs to casualisation.

The cost of living, the uncertainty of employment, the erosion of public health and public education — that’s what mattered.

With progressive parties worldwide not apparently listening to those concerns, the underlying conservatism of the working class has tended to move it to the right, and to the extreme right as evidenced by results in the recent European Parliament election. Returning to such basic issues will also have an influence on how inequality is approached by progressive parties.

Although progressive parties face their own problems in considering inequality, we will certainly not hear Abbott and Hockey talking about Piketty or inequality. While Piketty accepts some level of inequality, he considers that when it becomes extreme it is useless as an incentive and also becomes a threat to democracy. Abbott and Hockey do not see that. As Victoria Rollison described their view recently (and it is worth repeating):

You only have to know their two favourite words to understand Abbott and his government’s entire ideology, which drives their entire raison d’être. User pays. The likes of Abbott’s [sic] have a subconscious thought process that goes something like this: those who are born poor and haven’t worked hard enough are too lazy to stop being poor and are lazy and dependant on hard working rich people who pay taxes. Rich people who pay taxes shouldn’t be relied on to fund the lives of lazy, immoral poor people who are too lazy to get rich and pay taxes. It’s immoral to let people be dependent on the government and a big government encourages people to be lazy and to depend on the government. Big government should be destroyed in preference for a small, useless, and not able to be dependable government. Users should pay their way, so user pays is the best system for funding everything including health, education, infrastructure, community, everything. If user can’t afford to pay, user doesn’t get and user should stop being so lazy and hungry and in need of shelter and should go and get rich so they’re not reliant on the rich people who have to pay tax to support them.

Despite all the evidence, and Piketty and his colleagues have accumulated bucket loads of data, the right-wing believers like Abbott and Hockey will never accept inequality as a problem. They continue to believe that greater national wealth benefits all, which is true to an extent, but not when the top one per cent take the majority of the increase in national wealth and the bottom ten per cent get the crumbs.

Inequality, even fairness, will not be addressed under an LNP government, not until the laissez-faire economic rationalists lose their grip on economic debate and political thinking. Even progressive parties may not tackle the issue effectively unless they also take a stand against the financial markets (perhaps financial transaction taxes) and reconsider taxing the rich and addressing the basic concerns of workers. Piketty, at least, has opened the way for that debate to happen.

* Since preparing this post, I have seen much more discussion of inequality in the Australian media but, as I suggest in the piece, it seems that the Hockey budget, rather than Piketty, has been the driving force for that discussion.

What do you think?