Thomas Piketty on why Austerity & wealth Inequality is bad for the economy.

 Here's a good thinking person's article to give further ammunition as to why a Labour vote is important this year.

Five minutes with Thomas Piketty: “We don’t need 19th century-style inequality to generate growth in the 21st century”

In an interview with EUROPP’s editor Stuart Brown and British Politics and Policy at LSE’s editor Joel Suss, Thomas Piketty discusses the rise in income and wealth inequality outlined in his book, Capital in the Twenty-First Century, and what policies should be adopted to prevent us returning to the kind of extreme levels of inequality experienced in Europe prior to the First World War. Professor Piketty recently gave a lecture at the LSE, the video of which can be seen online here.
Your research has shown that inequality is rising and that without government action this trend is likely to continue. However, are we correct to assume that inequality is a fundamentally negative development in terms of its consequences on society?
There is no problem with inequality per se. In actual fact, up to a point inequality is fine and perhaps even useful with respect to innovation and growth. The problem is when inequality becomes so extreme that it no longer becomes useful for growth. When inequality reaches a certain point it often leads to the perpetuation of inequality over time across generations, as well as to a lack of mobility within society. Moreover, extreme inequality can be problematic for democratic institutions because it has the potential to lead to extremely unequal access to political power and the ability for citizens to make their voice heard.
There is no mathematical formula that tells you the point at which inequality becomes excessive. All we have is historical experience and all I have tried to do through my research is to put together a large body of historical experience from over twenty countries across two centuries. We can only take imperfect lessons from this work, but it’s the best that we have. One lesson, for instance, is that the kind of extreme concentration of wealth that we experienced in most European countries up until World War One was excessive in the sense that it was not useful for growth, and probably even reduced growth and mobility overall.
This situation was destroyed by World War One, the Great Depression, and World War Two, as well as by the welfare state and progressive taxation policies which came after these shocks. As a consequence, wealth concentration was much lower in the 1950s and 1960s than it was in 1910, but this did not prevent growth from happening. If anything, this probably contributed to the inclusion of new social groups into the economic process and therefore to higher growth. So one important historical lesson from the 20^th century is that we don’t need 19^th century-style inequality to generate growth in the 21^st century, and we therefore don’t want to return to that level of inequality in Europe.
How would you respond to those who doubt whether there is sufficient evidence to draw this kind of conclusion?
This will always be an imperfect inference because we are in the social sciences and we should not have any illusions about what is possible. We can’t run a controlled experiment across the 20^th century or replay the century as if World War One and progressive taxation never occurred. All we have is our common historical experience, but I think this is enough to reach a number of fairly strong conclusions.
The lesson we have already mentioned – that we don’t need the kind of extreme inequality of the 19^th century in order to have economic growth – is simply one imperfect lesson, but there are other important lessons if you look at, for instance, the rise of inequality in the United States over the past 30 years. For example, is it useful to pay managers a ten million dollar salary rather than only one million dollars? You really don’t see this in the data: the extra performance and job creation in companies which pay managers ten million dollars rather than one. In the United States over the past 30 years almost 75 per cent of the aggregate primary income growth has gone to the top of the distribution. Given the relatively mediocre productivity performance and the per capita GDP growth rate of 1.5 per cent per year, having nearly three quarters of that going to the top isn’t a very good deal for the rest of the population.
This will always be a complicated and passionate debate. Social science research is not going to transform the political conflict over the issue of inequality with some kind of mathematical certainty, but at least we can have a more informed debate using this historical cross-country evidence. Ultimately that is all my research is aiming to do.
What specific policies can be used to prevent us returning to the kind of extreme levels of inequality you have discussed?
There are a large number of policies which can be used in combination to regulate inequality. Historically the main mechanism to reduce inequality has been the diffusion of knowledge, skills and education. This is the most powerful force to reduce inequality between countries: and this is what we have today, with emerging countries catching up in terms of productivity levels with richer countries. Sometimes this can also work within countries if we have sufficiently inclusive educational and social institutions which allow large segments of the population to access the right skills and the right jobs.
However while education is tremendously important, sometimes it’s not sufficient in isolation. In order to prevent the top income groups and top wealth groups from effectively seceding from the rest of the distribution and growing much faster than the rest of society, you also need progressive taxation of income and progressive taxation of wealth – both inherited and annual wealth. Otherwise there is no natural mechanism to prevent the kind of extreme concentration of income and wealth that we’ve seen in the past from happening again.
Most of all, what we need is financial transparency. We need to monitor the dynamics of all of the different income and wealth groups more effectively so that we can adapt our policies and tax rates in line with whatever we observe. The lack of transparency is actually the biggest threat – we may end up one day in a much more unequal society than we thought we were.
A video of Thomas Piketty’s recent LSE lecture is available here
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Note: This article gives the views of the interviewee, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.
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On Income Inequalities and Global Capitalism

How To Combat Inequalities Produced By Global Capitalism

12/05/2014 by Guy Standing

Guy Standing

Rising inequality is one of the most salient issues in global and European politics. Guy Standing writes that what we have witnessed in recent decades is not simply an increase in inequality, but also the emergence of a new globalised class structure. A key component of this structure is what he terms ‘The Precariat’: a new class comprising those who lack economic security and stable occupational identities, which has systematically been deprived of some of the fundamental rights afforded to citizens. He argues that a new ‘Precariat Charter’ is required to combat these insecurities, including provision for a basic income as a right of citizenship.

Next year is the 800^th anniversary of the Magna Carta, the first class-based charter of liberties against the state. Today, we need a Precariat Charter to advance the rights of the precariat and substantially reduce the inequalities and insecurities in society. This is the theme of my new book, A Precariat Charter: From Denizens to Citizens (Bloomsbury).

The context is clear. We are in the midst of a Global Transformation, in which a globalised market system is under painful construction. In its dis-embedded phase, the transformation was dominated by the interests of financial capital, just as was Karl Polanyi’s Great Transformation. Inequalities multiplied, economic insecurity became pervasive. Above all, a new globalised class structure took shape. All economic and social analysis of the growth of inequality that ignores the class dimension is like trying to play Hamlet without the Prince.

The emerging mass class is the precariat, looking up in income terms to a tiny plutocracy-cum-oligarchy striding the world, manipulating democracy and raking in rental income, and looking up to the salariat between them, receiving more and more of its income from capital and the state. The old proletariat, the old working class in numerical decline is rapidly losing its labour securities and non-wage forms of economic security.

The precariat has distinctive relations of production (unstable labour, lack of occupational identity, a high ratio of work-for-labour to labour, and so on), distinctive relations of distribution (depending on money wages that are stagnant at best, and volatile as the norm, living on the edge of unsustainable debt), and distinctive relations to the state. This last aspect has received too little attention. The precariat is the first mass class in history that has been systematically losing the acquired rights of citizenship – civil, cultural, political, social and economic. The precariat consists of supplicants, being forced to beg for entitlements, being sanctioned without due process, being dependent on discretionary charity.

More and more people, not just migrants, are being converted into denizens, with a more limited range and depth of civil, cultural, social, political and economic rights. They are increasingly denied what Hannah Arendt called ‘the right to have rights’, the essence of proper citizenship.

This is key to understanding the precariat. Its essential character is being a supplicant, a beggar, pushed to rely on discretionary and conditional hand-outs from the state and by privatised agencies and charities operating on its behalf. For understanding the precariat, and the nature of class struggle to come, this supplicant status is more important than its insecure labour relations.

Guy Standing argues in favour of a ‘Precariat Charter’ for workers. (photo: CC Zoriah on Flickr)

 The Precariat And Global Capitalism

The precariat’s position must be understood in terms of the changing character of global capitalism and its underlying distribution system, something that Thomas Piketty did not address. In the 20^th century, uniquely in human history, the distribution of income was primarily between capital and labour, between profits and wages, mediated by the state with its taxation, subsidies and benefits. The bargaining over the respective shares was won on points by the representatives of employees in the post-1945 period, but after the late 1970s was won decisively by capital. Everywhere the functional distribution of income became more unequal, with labour’s share of national income dropping dramatically, nowhere more so than the emerging market economies, including China most of all.

However, the key to understanding the challenge ahead is that two factors have changed the context completely. Historically speaking, from the 1980s onwards the labour supply to the global open labour market quadrupled, with all the newcomers being habituated to labouring at one-third or less of the median income of the workers in OECD countries. This led to the start of the Great Convergence. It was facilitated by the new technological revolution, which among other things allowed the corporation to unbundle, shifting production and tasks to wherever costs were lowest.

In this new context, rental income has become a major and growing component of total income. This is far more important than patrimonial capitalism, which Piketty identifies as the main feature of modern capitalism. Rent comes in several forms, notably by possession of so-called intellectual property, through patents, and through privileged possession of scarce commodities and natural resources. Last year was the first year in which over two million patents were registered, guaranteeing trillions of dollars to their owners stretching on average twenty years.

The rental economy extends all the way down to pay-day loans, whereby members of the precariat are exploited by disgustingly high interest rates, often exceeding 5,000 per cent. It includes the vast array of subsidies given by the state to corporations and the affluent in the salariat and elite.

What the precariat must demand now is little less than a new distribution system, not just a tinkering on marginal or average tax rates. Indeed, the weakest aspect of Piketty’s analysis is his prognosis. The likelihood of very high marginal direct tax rates is remote. Structural changes are required.

A Precariat Charter must start from understanding the nature and depth of insecurities faced by the precariat, and also from understanding the aspirations that exist in the more educated component of the precariat. It would be quite wrong to imagine that the precariat wants a return to the old norms of full-time stable wage labour.

It wants to build a good society, resurrect a sense of “a future” and create institutional networks that would enable more and more to pursue a life of work, labour and leisure. That means building their own sense of occupation, in which ecological values of reproductive work predominate over the resource-depleting values of labour.

The assets that need to be redistributed are not like the old socialist project of a hundred years ago, when the proletariat was emerging as the mass class. The assets underpinning a Precariat Charter are basic security, control of time, quality space, education, financial knowledge and financial capital. A key demand is for moves towards the realisation of a basic income as a right of citizenship. Without basic security, none of us can be expected to be rational and socially responsible. Let us find ways of going on that road.

For a longer discussion of this topic, see Guy Standing’s latest book, A Precariat Charter: From Denizens to Citizens (Bloomsbury). This column was first published by EUROPP@LSE.