Thomas Piketty responds to his critics – full interview

The French economist stresses in this interview that investment in education, knowledge and technical progress are very important forces in creating economic growth and reducing inequality: But he adds that labor market institutions ought to play an important role as well

	Photo: Charles Platiau

Photo: Charles Platiau

17. maj 2014

– How has your book been received in the United States compared to other countries?

»I think it is a bit too early to say. It is really just coming out in Europe, the Spanish, German, Portuguese version (December), Chinese and Japanese version. What I expect and what I think is important is to be successful in all the different regions, but probably for different reasons. The reaction is different in each country exactly because the problems are not the same. In the US, the reception has been a lot about rising inequality and rising share of income going to the top percent, etc. In Europe the issues are a bit different. In Europe, the rising inequality has been less strong than in the US. The problems in Europe have to do with how do you deal with a large public debt? How do you organize monetary union? There are questions about a stronger political and fiscal union, there is a lot in the book about the history of public debt and private wealth and also how do you deal with the (…) between a very large level of public spending in a large welfare state and at the same time tax provisions. It is not the same issue in a country like the US where the overall level of taxation is much less than in Europe.«

»I am starting to give interviews in other parts of the world, like in South Korea, Japan and China, in Latin America. There is a lot of interest in the book, but the reception is different outside the Europe and the US. So for instance, right now in Chile there is a big tax reform and president Bachelet is very interested in my book, which was initially a big surprise to me. But I try to get more information about this tax reform. In fact, it is consistent with what they are trying to do. It is is a different political context than in Europe and the US. They are trying to increase public spending for education, so they are increasing the total tax revenue from 17 to 20 pct. of GDP in order to invest more in public education. I deal with that question in the book. In any case, there are different readings of the book and a lot of different historical material you can use.«

»Yes, I was very happy with the the way the book was received in the US. At the end of the day, though, I care about the European debate probably more. I am also very much interested to see how the book will be received in China. I have been recently been to China. They have a very interesting discussion in China about the introduction of some form of property tax or wealth tax in China right now. All this is very interesting to me. I don’t think the debate should be too US centered. Other countries are important as well.«

– If we look beyond the wealthy nations you analyze in the book is it not true that the capitalist system, in which inequality now is growing, at the same time is behind bringing hundreds of millions of people in 3rd world into the middle class. Inequality globally is actually decreasing. Is that not an important feature?

»Of course, this is what I talk about in Chapter 1. That is very important. The main issues are education, knowledge, technical progress. These are the main forces behind growth and reducing of inequality between countries and also within countries. The issue of education is a very powerful force within a country to reduce inequality and between countries. It is clear that we are right now in a period of convergence between emerging countries and rich countries. So, yeah – that is an important part of what I analyze in the book.«

– Kenneth Rogoff, the economist at Harvard, was pointing out it is important to understand that even though there is within nations increasing inequality, like in the US and Europe, actually the emerging economies are catching up now, and the gap between North and South is even less so than it was 10-15 years ago. It almost a paradox.

»I agree with this. I write about that in Chapter 1 in the book, about the convergence between emerging countries and rich countries. What can I say. I have no disagreement with Rogoff.«

– What he perhaps is trying to say is that you are focussing too much on inequality within Western countries and not…

»No, as I said. I think probably he has not read the book. In Chapter 1, I talk about the distribution of GDP and income at the global level. The very first figure in the book is exactly about convergence.«

– I know that. I’ve read the book. I am just asking the question because a prominent economist raises the issue.

»I think the problem is that everybody wants to write about the book. It is very nice. The problem is that some people who write about the book have not read it at all. You see the problem?«

– I myself read every word over a whole week.It is a major task. I am almost sure, but not 100 pct., that the American economist James Galbraith read your book. In any case, in his review he seems almost dismissive of your book. He claims you define capital in a neoclassical way – as physical assets, that is financially not taking into account market values going up and down. He claims that almost no capital was destroyed in WWI, it was higher wages from mobilization that drove down r. He says you never explain how you compute r (rate of return to capital), which you actually do, because I have read that. What do you say to that?

»I suspected that when I read his review. I regret that I did not cite his work about inequality (this is Galbraith’s complaint in his review, mb). I should say there are many references missing in my book. I give a more complete of list of references and technical work on our website. I suspect this lack of reference to his work partly explains his reaction. It is a bit sad.«

»At the end of the day, if we look at what he is really saying: You know, I dont claim – In my book, I try to deal with the multidimensionality of capital. That would be my main answer. I am aware and I try to make clear in my book that the history of real estate is not the same as history of financial affairs, it is not the same as the history of land capital, and it is not the same as the history of public debt, and it is not the same as the history of slave capital. You know, all these different forms of capital assets have their own history and they have their own social compromise and their own bargaining structure between owners and workers. You know, I try in the book to show this and to sort of deal with the multidimensionality of capital and social conflicts around capital.«

»I sum up all these different asset values using their market price. I am very much aware and I try to make clear in the book that this is a very abstract operation, and it is not sufficient to understand everything. Just computing this big capital stock and using market price for different assets can be useful for some purposes, like to get a sense of total market value at a given point in time. But I am very well aware, and it is something I agree with James Galbraith on, that you need to look at each type of asset.«

»For instance, I actually say in the book… I have estimated in a very detailed manner the relative importance of war destruction and of policy-induced changes in the market value of assets. So for instance in the book, I talk about the fact that new regulation policy, like rent control, indeed played a big role in the decline of real estate values and other asset values after World War II. Also wage bargaining and increase in the power of labor unions played a large role in the decline of capital share and of capital values.«

»Also, when I analyze the case of business and manufacturing capital in Germany I make this clear in Chapter 4-5 of the book. I show that the market value of German corporations is actually less than their book value. Actually, this is not a bad thing. Apparently, it does not prevent German companies from producing goods … It just reflects, it is a very good example of the fact that the market value and social value of assets do not always coincide. In the case of Germany, probably it is due to the fact that you have stakeholders like unions and sometime regional governments that have a say in German companies, and maybe that will reduce market value for shareholders, but for the social value that is not a bad thing.«

»So, I am bit sad that apparently he did not see that in the book. I don’t know if he has read it. I don’t know. I was surprised by his reaction. In the book, I do take this into account. I do talk about this. I think Galbraith focuses too much on the parts of the book where I make this big addition of all forms of capital assets, which again can be useful for some purposes, but it is never enough to give a complete view of capital in a given society, which always has a multidimensional nature and needs to be studied for each category of assets separately and it is very important to distinguish between market value, physical stock, social values, etc.«

– Galbraith also writes you never explain how you compute the rate of return to capital. That is not correct. You do explain that.

»Yes, I do explain that in the book. I don’t know. He seemed really upset. I don’t know why. At some point in his review he says: I already wrote this somewhere. This is a bit strange because he says everything I write is wrong and then he has written it himself before. This is strange. I think he seems to be a bit angry that I did not refer to his work sufficiently. I am sorry about that, because I actually like his work a lot. He has some very interesting stuff.«

– To what extent do you believe that the high rate of return to capital is a reflection of the power of owners of capital and how to measure this? You talk about it in the book, but someone I know in New York, the progressive economist Jeff Madrick, told me he felt you do not take that enough into account. You mention it of course in the book, but on the other hand it is true what he says that you do not deal with it in a very detailed way, and it is also very difficult to quantify, obviously.

»Yeah, I know it is very important. I think bargaining power of capital and of labor in particular with globalization and international competition to attract investment, that bargaining power is a very important part of the story. Yeah, I do mention it quite a lot in the book. It is true it is difficult to quantify exactly, and also I want to stress bargaining power is also influenced by the evolution of technology, so depending on how capital intensive the technology actually is and how easy it is to substitute capital and labor – how much can you replace workers by capital equipment – the state of technology is also going to have an impact on the bargaining power of capital and labor. It would be a mistake to just focus on bargaining power per se, and forget about the technological forces. In the book, I try to discuss both.«

»Maybe, at some point I focus too much on the discussion of technology and production function and the elasticity of substitution, but I really want to make clear that I think bargaining power, institutions, the balance of power between the different groups are very important forces. I certainly don’t believe that the text book model with production function and one capital good and one labor good and perfect competion is the right model. Sometimes, I refer to this model, because it is part of a simplified description of how the economy works, but I don’t believe - and I make this clear – that this simplified model is an acceptable description of the economy we live in. It is just a tool to try to simplify the world and think of logical implication of such and such assumptions. But if if you really want to understand what is going on you need to have a multidimensional view of capital and of the economy and of bargaining and social compromise between the different groups at stake.«

– You do not deal as much with the bargaining power of labor. I mean you seem to attribute current inequality trends more to the high capital income ratio than to wage inequality. So, for instance the compensation of managers is very important in your book. Is there not a case to be made that the lack of elasticity of labor to production is actually more important than you presume in the book?

»Probably, there should be more about unions in the book than there actually is. I think people will make this point as we go along. I should stress, however, that I do talk about labor market institutions and the importance of institutions in setting wages and in setting the division of products between capital and labor quite a bit in the book. Certainly, I talk about managerial compensation and the way it is set by institutions. But regarding the bottom wages I also talk quite a lot - in chapter 7 and 8 – about the role of minimum wages.«

»There is a huge variation in minimum wages over time between countries, so it is true I don’t provide a complete international history and analysis of minimum wage and labor market institutions, but I make these comparisons between France and the US, and I show that in the US the real value of the minimum wage right now is less than in the 1960’s. Whereas in France it has increased a lot. It is a clear example of labor market institutions and in this case minimum wages, but I also talk in this part of the book about how labor unions in some countries can negotiate a salary scale and mininum wages in a very powerful way. It is a clear example of where labor market institutions matter for the distribution of income.«

»Of course, the book is very big, so some people might not read every chapter. I think some of these issues are in the book. If they are not sufficiently visible in the book I apologize. I agree these are important issues.«

– Right, Thomas, but if inequality is due more to market failure for labor than a high rate of return to capital then one would suspect that a global wealth tax as an equalizer would be less effective than f.ex. a higher minimum wage, strengthening of labor market institutions like unions and more investment in education. No?

»But I think we need all of this. We don’t have to choose. Why should we choose? We are not going to replace the minimum wage with a global wealth tax or we will not replace a global wealth tax with education. We need all of this. Why should we choose? Frankly, I don’t understand this line of criticism, because I think we need education. That is main force for growth and main force for reduction in inequality, that is really investment in education, which is more important than taxation.«

»But even if you have all the proper investment in education it is not going to be enough to prevent rising concentration of income and wealth. And we also need labor market institutions and minimum wages, etc. We don’t have to choose. We need all of them.«

– Reading the book when you introduced the concept of a global wealth tax I thought you meant a capital gains tax, but then as I was reading along I realized it is a totally different kind of tax on net wealth. What is wrong with a higher tax on capital gains?

»No, I just think it is better to have an annual tax on wealth. You know, capital gains – the problem is that if you tax capital gains only when they are realized, then you will tax a lot in one year every 10-20 years when the gains are realized. It is better to tax a little bit every year. But in any case, I think capital gains, at least in some cases when they are realized, should be included in the progressive income tax. The problem is that sometimes you want to be able to spread them over 10 years. It depends on how often you have capital gains for a given individual.«

– Are you a supporter of the Tobin tax?

»I think the Tobin tax can be useful, but I think in the long run it will be less important than the progressive income and wealth tax. The reason is that if, in fact, the Tobin tax works well it does not raise a lot of revenue. It is more like a pollution tax, you want to reduce certain financial transactions, which we believe are not very useful for the working of the economy. If it works then this financial transaction will not be as important as it used to be so the tax  would not raise much revenue. And actually, it is good it does not raise much revenue, because the problem with the Tobin tax is that you do not control who is going to pay it, whereas with the progressive income and wealth tax you can target the high tax rate as a function of how rich people are, you can protect people with low wealth and you can protect the middle class, whereas the Tobin tax is a proportional tax on financial transactions. Instead of thinking about how much revenue we can raise in the case of a Tobin tax we should worry about what is going to be the final incidence of a tax. Who is going to pay for it.«

– Reading the book, I was unclear about what the final goal of a global wealth tax is. I get the sense – at a certain point you say the tax would be very important in the EU in terms of getting rid of high public debt, but other times you talk of its importance in terms of introducing a sense of social justice in capitalist democratic societies, that is distribution of wealth from the top and down. I was not sure what the priorities are for you?

»Well, I think it can be useful for different things. In the very long run, it is useful just to try to control the dynamics of wealth and inequality and wealth concentration. So in the very long run, I think this is the most powerful tool, first to produce information about wealth dynamics, a global tax would be a way to have more information about how the different groups are doing and then we can adjust the tax rates to what we observe. If the top of the distribution of wealth is rising at 6-7 pct per year, whereas the average is 1-2 pct per year, which is what we have at the global level now, if we believe Forbes wealth ranking, which I do not claim to be particularly credible, but if we believe Forbes, this is what we have, then it gives you a sense of the kind of tax rate you will need to use in order to try to limit the rising concentration of wealth.«

»To me that is the most important purpose of a wealth tax. But it can also be useful for more short run purposes. It can be useful when you have a financial crisis, a banking crisis. If you take the example of Cyprus crisis one year ago. You remember there was this discussion with the IMF and the ECB, they were saying they did not want to bail out the Cyprus banks because we have all these Russian oligarchs who have money there. But the problem is that, in fact, the IMF and ECB did not have any data on the Russian oligarchs. There was no precise information whether these people have 1 mio. euros each or 10 mio. euros or just 100.000 euros each. They had no idea. So at the end of day, they came up with a very bad idea of adding a flat tax on everybody with some money in Cyprus banks. So whether you have 10.000 or 10 mio. euros you will pay the same flat tax. Of course, people are mad about that. This example shows that more transparency about wealth and the possibility of having a progressive tax on net wealth can also be useful to deal with banking crises, so that you can find a way to distribute the costs of bankruptcy and the costs of crises in a way that is acceptable to all parties.«

»And finally regarding public debt in Europe, I think the progressive wealth tax is the same thing as inflation, except that it is a civilized form of inflation in the sense that you can protect the middle clsss, and you can protect the poor, whereas inflation in the past has very often been a tax on low wealth groups and middle class groups with savings accounts. When most of your wealth is in saving accounts you lose a lot because of inflation, whereas high wealth individuals who have stock market portfolios or real financial assets or real estate assets they don’t lose from inflation.«

»So, I think if we only have austerity and if we don’t want inflation it will take a very long time in Europe to reduce the public debt. We need to think about the possibility of a progressive wealth tax. Even the IMF and the Bundesbank a few months ago started proposing this idea of a private wealth tax in order to reduce public debt. So, I think this perception can change faster than we believe. There is no simple solution to reducing such a large public debt. All solutions are complicated and waiting for 20 years of austerity, and I don’t think it is more realistic than a progressive wealth tax.«

– One economist Richard Parker at Harvard had a suggestion: why not make a ”democratic growth” distribution part of a global wealth tax. A democratic growth rate would target for a certain GDP growth rate the share of income received by the upper centile or decile. In addition, you would have ”democratic goals” like eliminating poverty, strengthening middle class, health and education. Do you get this?

»I am not sure. This seems interesting.«

– He is saying one thing is to have a global wealth tax, but you also need to think about how individual nations address the issue how to distribute revenue …

»Sure, but let me make clear. I don’t believe we are going to have a global wealth tax with a global government. There is a lot that can be done and should be done at the national level. What I have in mind is more national tax reform at the country level and then intergovernmental agreements so as to have a better database of information from financial institutions. So to have a global registry of financial assets and common sanctions against tax heavens. This is the kind of institutional setting I have i mind. But this will be nationally taxed, not globally. I fully agree that at the national level one way to discuss the tax rate is to try to adjust the tax rate for wealth and income to the evolution of the different income and wealth groups in percentages. It depends on how well each groups is doing. There is this new proposal by (American economist, mb) Robert Schiller a few weeks ago to index the level of income tax progressivity to income inequality (the marginal tax rate would rise for the highest income earner if income inequality becomes worse, mb).«

»In a way, what I am proposing is sort of similar, which is you could adjust the progressivity of a wealth tax. Right now, in the US and in many European countries the only form of wealth tax is a proportional property tax and it is the same tax rate for all property values. It does not take into account financial assets and financial liabilities. What could be done at US level or national level would be transform this kind of 19th century style property tax to a progressive tax on net wealth. It can be done on a national level, you don’t need to have global tax reform.«

– This brings me to the Scandinavian welfare societies where inequality is increasing these years, albeit not at the rate we see elsewhere. Most of the data you use to point out that inequality was less worse in Scandinavia in 1960’s and 1970’s is from Sweden. I believe Sweden is different than Denmark. I presume the capital/income ratio is lower in Denmark. Were you able to confirm that?

»I don’t know. Actually. Have you seen some data on the evolution of capital/income ratio?«

– No. I have not. I thought you worked with a phd-student at University of Copenhagen?

»Yes, but I have not seen the results yet. I would be very curious to see that. We are in the process of extending our wealth data base to more countries and in particular to more northern European countries to Holland, Denmark and Norway. I am afraid I don’t know the answer yet. But let me tell you – there could be some differences in evolution due to a number of factors. If you think of the evolution of capital and labor share of income, that is not only of the capital/income ratio, it depends on wage bargaining in different countries, but it can also depend on the supply of human capital and labor in different countries. In principle, in a country where you have more inclusive educational institutions and higher investment in education it could be a way to keep the labor share at a higher level of income.  I am not trying to explain the difference here between Denmark and other countries. I don’t know enough yet about Denmark. I will need more data. I can imagine different mechanisms that would explain this interesting difference between Denmark and Sweden.«

– Well, first of all the the Danish wealth tax was abolished by a Social democratic government in, I believe, 1996. So, we don’t have tax statistics since that year. That is perhaps why you did not get this information.

»Yes, you are right this is a problem. Tax is a source of revenue but also a source of information.«

– So, a Danish professor of economics, Jesper Jespersen, told me there are perhaps some factors in the Danish model that might mitigate a high ratio. More people own their own home than elsewhere in the EU. A larger percentage of private wealth is placed in business foundations. He said another thing, and I don’t know how particular that is for Denmark: The state is owed 50 pct of GDP in taxes in retirement savings placed in mutual funds – pension funds play a huge role. He thought it would be a good cushion to have going forward financing some of the welfare programs you do not want to loose. I suppose that this pension fund issue does not play into the lower ratio of capital to income in Denmark than in Sweden. I doubt it.

»That is very interesting. I will look more at the case of Denmark. I think there is a lot to learn from the experience of each of these countries. I guess the data I have in this book is insufficient. It is better than what we had before but it is still too little, it is not the end of the story and the discussion will continue and we will collect more data and learn more.«

Martin Burcharth - Paris/New York May 14, 2014

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Brugerbillede for Martin Burcharth

Dear Mr. Burcharth

Thank you very much for this. A few brief responses:

1. I did read the book, in full.

2. I appreciate his comment about my work.

3. No, I was not motivated by the various things he mentions (anger, etc.) . I was asked to write a review. That was the motivation.

4. On the question of what determines "r", there is a misunderstanding. I did not write that TP doesn't explain how he computed it. I wrote (or anyway, meant) that he doesn't offer a theoretical explanation for the value he reports. I believe this to be correct.

Feel free to post this as a comment, if you would like, or to pass it on to Thomas, with my respects.

Regards,
James Galbraith

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