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The Middle Class Continues Shriveling

by Thomas Piketty Tuesday, Jul. 01, 2014 at 5:17 AM

A century ago people said a progressive income tax would never happen. Today it is reality. The top tax rate in the US between 1930 and 1982 was 82 %. That was a very interesting experiment because very high incomes were covered.


Interview with Thomas Piketty

[With his book “Capital in the 21st Century,” the economist Thomas Piketty has stirred the wealth debate. Piketty, 43, is a professor at the Paris School of Economics. This interview published on 6.6/2014 focuses on growing inequality, low key interest rates and a progressive wealth tax and is translated from the German on the Internet,]

Thomas Piketty is breaking all records in America. The book of the French economist “Capital in the 21st Century” has led the bestseller lists for weeks. The controversial 700-page book is passionately discussed in Europe and China. His thesis is that an unavoidable trend to more inequality exists in capitalism. Recently the number of critics increased. He is criticized for dealing flippantly with the data.

Professor Piketty: You are celebrated as a new Karl Marx. He predicted that capitalism would end in an apocalypse. Do you also believe that?

“Capital” by Karl Marx is a dark mysterious work. It is very hard to understand. Marx wrote interesting early works explaining that something was absolutely wrong in the development of capitalism. Marx lacked a solid data base. In his time, there was a strong growth along with a quickly expanding inequality. Marx thought he had discovered an existing inequality and assumed an apocalyptic end was imminent through the accumulation of profit. He erred as we know. There is no economic determinism.

Why did you write the book? Do you want to change the world?

I did not reflect on how I could change the world. My book makes possible a better democratic debate. People should read the book because the contents are too important to be only left to economists.

Were you surprised by the success of the book?

Yes, although I hoped for success. I did not want to write a technical book but turned to a broad readership.

Was it clear what debate you would unleash?

When I began to assemble the historical data, I did not know what awaited me. Yes, I was surprised. That I gathered data with many other people in Great Britain, China, India and the US is new. A history of incomes and assets in over 20 countries over the past 200 years came out of that.

What is your conclusion?

There are many different conclusions that result from the data, even if some may only draw one conclusion. In history, there were forces that sought to reduce inequality while others strengthened inequality. Which dominated depended on how the institutions of the respective states were constituted as in relation to taxes or education. The book excludes an historical and economic determinism.

The main question is: does capital make one richer than labor?

The return on capital or assets surpasses the growth rate of the economy in the long term. This tendency was clear before the industrial revolution. Capital accumulation leads to ever greater inequalities in society. This process can even accelerate in times of economic crisis.

Is that an historical norm?

Yes, the capital return was greater than the return from labor. It took a long while until I understood that. The main conclusion is that the industrial revolution has not removed the existing inequality. In the long term, the productivity rate is one or 1.5 percent. In the long run, this is not enough to overtake the return on capital of six percent. This relation does not mean that there will always be inequality. The asset rate fell in the postwar time while the growth rate rose strongly on the other side. Now we have a growth as before the First World War and a high return on capital.

Will the distance between the rich and the rest become ever greater?

The top of wealth-distribution grows more than six percent a year – more than three times as fast as economic growth. Obviously this development will end somewhere. No one knows exactly where. We should not hope for a natural end. There is no natural force that will bring together the property-yield and economic growth.

This could be a political problem and not only an economic problem.

Yes. Our societies understand themselves as performance-oriented societies (or achievement/achieving societies). Achievement should be rewarding. Inequalities should not be based on assets or inheritance. Inequality must be limited. Good social institutions are needed that realize this. The development shrivels the middle class.

Is inequality always bad?

Inequality is not unconditionally bad. It can even be very useful for the economic competition. A problem arises when inequality becomes too great. Then it does not have any benefits for growth any more.

What do you propose?

Instead of waiting and seeing what happens, we should create more transparency in relation to assets and the movement of capital. Then we could adjust the tax rate correspondingly. I am for a progressive property tax that is higher the richer someone is. The people who are just beginning to accumulate assets should not be stricken. On the other hand, incomes above 0,000 or a million could be covered with a tax of 80 percent. The taxation must be graduated so the middle class does not suffer.

In Greece, we have seen the prospect for a wealth tax was enough for the rich to take their assets out of the country.

Without a greater fiscal cooperation, it is hard for any country to levy a tax on wealth. It is very simple for the wealthy to invest their capital from Greece in a bank in France or Germany for example. Censuring Greece for this is unjust. We need better international cooperation if we want to tax wealth. I do not say we should introduce a uniform tax system in all countries. Levying different taxes in the respective countries can be sensible. But the states should create the same conditions for international transmissions.

Many consider a global progressive wealth tax unrealistic.

This tax could be introduced in the countries of the Eurozone or in the framework of the 20 largest threshold- and industrial countries (G20). Our situation is similar to the progressive income tax a century ago. At that time people said something like that would never happen. Today it is reality.

High taxes always frighten.

The top tax rate in the US between 1930 and 1982 was 83 percent. That was a very interesting experiment because very high incomes over a million dollars were covered. When one considers today’s high manager salaries at over ten million dollars, such high tax rates countering enormous inequality in society should be brought back in the discussion.

You were acclaimed but there is also massive criticism of your book. Among others the “Financial Times” criticize errors in dealing with the data. Do you see your theory endangered?

No, it is not endangered. All the data is accessible. The conclusions are not touched by the criticism, not even by the criticism of the “Financial Times.” Several studies already support my findings. Look at the data of Emmanuel Saez or Gabriel Zucman. They were published after the publication of my book and confirm the great share of very wealthy parties in the total assets in the US. In general, the enormous assets grow more quickly than average assets.

Are you annoyed by the criticism?

I can accept criticism. If it is unfounded, that gets me really mad.

Isn’t the economic growth enough to diminish inequality? Wasn’t there a decreasing inequality after the Second World War?

It is not enough in the long run. For that, growth rates of four or five percent would be necessary that we in Europe and developed societies cannot reach any more. Politics cannot achieve a return to the growth rates that occurred in the postwar era between 1950 and 1970. That will never come again.

Does the economic policy we pursue make any difference?

Policy plays a role for growth but a smaller role than we often assume. The recovery of the postwar era in Europe, Germany and Japan depended on all of them receiving American assistance. That does not mean politics can do nothing. As one example, the political reaction to the 2008 financial crisis could clearly have been better in Europe… Politics cannot achieve a return of growth to four or five percent.

Is the austerity policy misguided?

The austerity policy simply has not functioned in Europe. One only needs to look at the growth statistics. There is a strong growth in Great Britain and in the US even though they were more intensely impacted by the financial crisis than Europe. If people only rely on savings, a very long time is needed to repay one’s debts.

In early June 2014 the European Central Bank lowered the key interest for the Eurozone to only 0.15 percent. How do you judge that?

I believe Draghi and the European Central Bank act with the best intentions. But in my opinion, we concentrate on fees and monetary policy and neglect tax policy. Drafting a European monetary policy for 18 different and enormously indebted states with 18 different tax systems is almost impossible. I fear the loss of trust in the Eurozone will continue as long as we move in this framework.

What worries you most?

The richest can usually increase their assets very well. This leads to wealth inequality. The assets of the middle class measured by the national assets are greater than 100 years ago but we do not know what this will look like in 30 years. Therefore changes are imperative.

Has everything become worse?

By no means! There was a great reduction of global inequality in the last decades. That is certain, as in the convergence between threshold countries and rich countries. Growth altogether increases; only distribution is a problem.

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