Saturday 14 December 2019

Isn't it rich: How living standards fall as a new elite pockets trillions

Thomas Piketty's bestseller 'Capital' has been described as 'Fifty Shades of Grey' for the thinking classes. But it does much more than make economics sexy, writes Dan White

Thomas Piketty
Thomas Piketty
Aurelie Filippetti

Dan White

When Forbes magazine published its first list of the 400 richest Americans in 1982, personal wealth of "only" $75m (now worth €54m) was enough to make the cut. Now you need at least $1bn (€7,209m) to qualify for the list. Over the same period the proportion of America's total wealth owned by the 400 wealthiest Americans has risen from 1pc to 3pc.

Now forecasters are predicting that we could see the emergence of the world's first dollar trillionaire – a trillion dollars is $1,000bn or €720bn – within 25 years. It would take someone spending $1m (€720,000) a day over 2,700 years to spend all of this money. Which begs the question: how much is enough?

Enter Thomas Piketty. His book Capital was first published in France in 2013 and an English translation was published in the United States in March of this year, where it promptly jumped to the top of the Amazon hardback – including fiction – bestsellers list. It has been described as Fifty Shades of Grey for the thinking classes.

Professor Piketty used European and American taxation records stretching back 300 years to show that income and wealth inequality, which had narrowed dramatically in the period from 1914 to the early 1970s, have since widened to levels last seen before the outbreak of the First World War over a century ago.

Professor Piketty's painstaking and innovative research goes only part of the way towards explaining the extraordinary reaction to his book. It is, at first glance, an unlikely best-seller running to 577 pages of sometimes densely-argued prose.

But at least as important is that it is seen to address some issue of pressing concern, not just to professional economists, but to the wider public.

There is little doubt but that Capital meets this requirement. With mounting concern about rising inequality levels in most developed countries, it is quite simply the right book in the right place at the right time.

Countries which had experienced two generations of prosperity with seemingly ever-rising living standards have entered a new age of economic uncertainty with high levels of unemployment, stagnant or falling incomes and the realisation that the next generation will be worse off than their parents.

The central thrust of the Piketty thesis is that wealth tends to increase at a faster rate than economic output and without government action, inequality levels will tend to increase over time.

Supporting his case is the fact that the period from 1914 to the early 1970s, during which inequality last narrowed significantly, coincided with two world wars and the Great Depression. To cope with these crises, most governments massively increased taxes on the wealthy and intervened far more aggressively in the economy than they had ever done before.

Since the early 1970s this trend has gone into reverse. Tax cuts and economic deregulation have been the norm in most developed countries while wealth and income inequality are fast returning to 19th Century levels.

Is the pendulum now about to swing back in the other direction? It could be argued that Professor Piketty's book is merely the latest straw in the wind. In recent years we have also seen the Occupy movement and the anti-globalisation protests.

What is indisputable is that the unexpected success of Capital has provoked a fiercely hostile response from many conservative commentators. They have been especially critical of his proposed solutions to the problem of inequality – a global wealth tax and an 80pc tax rate on annual incomes in excess of $500,000 (€360,000).

His global wealth tax proposal has been widely derided as being unenforcable while it has been claimed that an 80pc income tax rate would deter entrepreneurs.

While taking Professor Piketty to task for his tax proposals represents entirely legitimate intellectual debate, dredging up the details of the messy end of his relationship with Aurelie Filippetti – now French Culture Minister – is not.

Conservative media outlets have gleefully reported that Ms Filippetti made a formal complaint to the police in February 2009 alleging that she had been a victim of domestic violence by Professor Piketty.

Ms Filippetti later withdrew the complaint and Professor Piketty has always strenuously denied the allegations. Whatever the rights and wrongs of this unfortunate matter, there is little doubt but that Capital has touched a chord.

Concerns about rising inequality now extend well beyond the usual left-wing suspects. When Warren Buffett, America's third-richest man with an estimated fortune of $64bn bemoans the fact that he pays a lower proportion of his income in taxes than his secretary and calls for a minimum 30pc tax rate on all incomes between $1m and $10m (€720,000-€7.2m) and a 35pc rate on incomes above $10m, then you know that something is up.

Ever since the 2008 financial crash it has become increasingly clear that the Thatcher/Reagan economic consensus that emerged in the wake of the twin 1970s oil crises has run its course.

Indeed it was banking deregulation, one of their signature polices, which was one of the major contributors to the banking crisis on both sides of the Atlantic.

Professor Piketty's book almost certainly represents an important stage in the emergence of a new consensus – one that will seek to achieve greater equality through higher taxes on the wealthy. Stand by for more intellectual fireworks in this epic battle of the economists.

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