More Effective Remedies for Inequality than Piketty’s

[A new book by Thomas Piketty, Capital in the Twenty-First Century, is drawing a lot of comment – here and here.  My own comment on it is now posted on Real World Economics Review blog.]

I have read only reviews of Thomas Piketty’s Capital in the Twenty-First Century, but clearly it is valuable for documenting the nature and history of inequality over the past century or three, and for highlighting the excessive political power that flows from super-wealth.  Yet he frames it in terms of capital and capitalism and, for all the quality of his diagnosis, his main prescription evidently is just to tax the wealthy, through income and inheritance taxes.

The trouble is, capital and capitalism are very ill-defined.  To speak of capitalism is to invite an un-constructive shouting match.  Capitalism has caused great harm to people and the world!  Yes but capitalism is what has made us rich!

A more useful framing is that there have been, and can be, many ways to structure a market economy.  When one looks into the mechanisms that have operated in market economies, one can readily identify mechanisms that pump wealth from the 99% to the 1%.  One can then think of ways to stop or reverse these flows, so wealth flows more fairly to everyone involved in its generation.  It will be much more effective to fix the problems at the source than just to apply traditional retro-active bandaids like taxes.

In my own book Sack the Economists, I identified seven fairly obvious such mechanisms.  Below is an edited excerpt that summarises mechanisms identified in the course of the book’s analyses.  (Dean Baker has also made lists, short and longer, which are a little more detailed and only partly overlapping with mine.)

Financial market speculation

The financial markets are dominated by speculation and other activities whose sole objective is to siphon wealth from the productive economy.  The amount of wealth involved is very large.  Some indication might be obtained from the fact that financial sectors in the US and Australia now account for 30-40% of corporate profits.  Because corporate profits would be a large fraction of GDP, this means a significant fraction of total wealth is pumped to the rich by this mechanism.

Capturing emergent community wealth

This is the wealth that results from the proximity of individual assets and investments.  It belongs to no individual, it belongs to the community.  In some places some of this wealth is captured for community use, but very commonly the wealth passes as a windfall to private interests, much of it to developers and landlords.  In this way small property holders and renters lose their share of community wealth to those rich enough to be able to capture it.

Interest charged on new money

Our money is created in the course of making loans, and interest is charged as though it were savings, rather than having been created out of nothing.  Because we need money for the economy to function, this burden of interest weighs on the whole economy.  Banks profit by maximising loans, so the amount of money in circulation is maximised, and this increases the burden on everyone.  This is effectively a private tax on the entire economy that pumps wealth to the richest ten percent.  A simple charge for the service of providing a medium of exchange, along with stronger regulation of loans, would be far less burdensome on the economy.

Access to loans

The rich can obtain loans much more easily than the poor.  They can invest their loans and become even richer.  This mechanism is widely recognised and clearly an important factor, though it is hard to estimate the amounts of wealth involved.  Mohammed Yunus demonstrated, with his Grameen Bank in Bangladesh, that it is possible to give loans to the poorest people and so to reduce this iniquity.

The ownership escalator

We use only a restricted range of ownership options in our present economic system.  As a result ownership is highly concentrated.  Even though public corporations are owned collectively, it is the rich who own shares disproportionately.  Even though many people own some shares through retirement funds, the distribution of ownership is still strongly skewed to the rich.  Once you gain ownership of significant assets, wealth begins to flow to you.  If you are poor and have to rent your accommodation, wealth drains away from you.  Owners are on an up escalator.  The poor are on a down escalator.

As William Greider observed, the problem is not that capital is privately owned, the problem is that most people don’t own any.  We already have many forms of ownership that can change this.  Ownership can be distributed much more equitably by actively promoting less common forms such as ownership by employees and other stakeholders.  Ownership can also be conditional, with time limits and progressive transfers of ownership, or owning buildings but not land, and so on, as discussed earlier.

Corporate welfare

There are many subsidies paid to corporations or rich minorities that benefit the rich at the expense of the poor.  Often they harm the environment as well, thus harming everyone.  Even a decade ago perverse subsidies amounted to perhaps $2 trillion annually, a considerable fraction of global wealth generation.  Subsidies to fossil fuel use amount to perhaps $300 billion globally.

Tax avoidance

This is closely related to corporate welfare, because it is practised mainly by large corporations, particularly transnational corporations.  They do this by complex internal transfers of money that exploit loopholes in tax laws, or differences in tax systems among nations.  They are abetted by a few small nations that charge minimal corporate tax.  Such tax havens could be closed down overnight by concerted action of a few rich nations, but those nations’ governments are owned by the rich, so it doesn’t happen.  The proportion of taxes collected from corporations has dropped by about half over the past half century.

This list will not be exhaustive, but it already demonstrates that vast amounts of wealth are transferred to the rich by mechanisms that cannot be justified as the fair operation of markets.  Either the markets operate perversely, through the invisible fist instead of the invisible hand, or they have been rigged, with the connivance of compliant legislators.  Corporate welfare and much tax avoidance result from explicit interventions.  The other mechanisms are due to malfunctioning markets that allow some individuals to exploit an instability, an up escalator, that allows the rich to become richer.

If we simply eliminated the mechanisms that unfairly pump wealth to the rich, our societies would be considerably less unequal.  The need for welfare would be greatly reduced.  The efficiency of the economy would be increased, because producers would pay closer to the full costs of production, markets would operate more effectively, and costly welfare bureaucracies could be reduced.  The dignity and self respect of the less wealthy would not be compromised by having to accept welfare, and by being perpetually robbed and vilified by the greedy.  Fixing the problems at their sources would be far more efficient and effective than the various retroactive mechanisms that have been developed through the twentieth century.