Friday 13 December 2019

Super-rich commit a capital offence by hoarding wealth

'Ill fares the land to hastening ills a prey; where wealth accumulates and men decay'. If Oliver Goldsmith were a modern poet, he would be a candidate for a Nobel prize. And it might be for economics.

That is the prospect they are holding out for Thomas Pikkety, the personable young French economist whose book, Capital in the 21st Century, is perhaps the most surprising US best-seller of all time.

You've probably heard of it by now. With over 700 pages of mostly historical data it can hardly be the content which explains its success. It must be the topic.

The topic is the thesis that capital, and therefore wealth, increases faster than economic output, which means that the rich do indeed get richer. Whether the poor also get poorer, as in the song, is a somewhat different question, but the gap certainly widens.

While this may be what interests most readers, if M Piketty does find himself bowing to the King of Norway, it will not be so much for the thesis as for what those in a position to know describe as a stunning piece of historical research.

He traces the growth of capital and output all the way back to the 1870s and finds a consistent pattern. This suggests that we are not talking about the peculiarities of late 20th and early 21st Century economies, but of a fundamental economic law, or at the very least a strong inherent tendency.

I am pleased to say that, without any statistical analysis, I came to one similar conclusion as Piketty some years ago. This is that the absence of major wars and their immense destruction of capital may explain many of the more troubling features of the modern economy, from growing inequality of wealth to the instability of financial systems.

This may even be one reason why 2014 often seems more like 1914 than it does 1964. There were wars involving all the great European powers in the 19th Century but it was 100 years from the really destructive Napoleonic War to the even more destructive World War I.

Soon, it will be 70 years since World War II all but wiped out Europe's capital. Those losses have since been made good several times over. Much of that wealth roams the world searching for a profitable home, or at least a temporary resting place. Hence the instability and risk-taking.

As for the poor – or those who could not be called rich – last week's OECD report on top incomes and inequality makes for somewhat easier reading, at just one tenth the length of the Piketty tome (although his data contributed to it).

It deals specifically with incomes. In Ireland's case, the 1pc with the biggest earnings saw their share of total incomes rise from 7pc to 13pc from 1981 to 2010. Only the top earners in the US, UK and Portugal enjoyed a bigger gain, but it is worth saying that Ireland had the fastest growth in the OECD in that period.

It is hardly surprising that those at the top would do best when things are booming, and vice-versa.

The report finds an 8pc loss in their income share across the OECD in 2008-10, but half of this was regained as recovery began.

One can see clearly enough how capital accumulates but the faster rise in the highest wages is more difficult to explain.

Globalisation and the impact of information technology are cited as making many ordinary people's work less valuable but the fact that countries differ so much in their statistics seems a clear indication that cultural and political forces are at work.

In this regard, the United States really is a city on a hill – or a horror on a hill, depending on your point of view. Its data is completely different from everyone else's. There is an English-speaking tendency, to which Ireland belongs, but nowhere comes close to the 45pc share of income growth captured by the top one per cent of Americans in the past 40 years.

Perhaps this explains the runaway success of the Piketty book in the States. It is dawning on a lot of people that there is something strange when 99pc of Americans got only 0.6pc of the annual income growth.

That is pre-tax income, which is one of the difficulties with these figures. As this column noted recently, the Irish tax and social welfare system reversed much of the rise in income inequality after the crash. Disposable income is what matters most and that would give a whole different set of statistics – although the USA might be even more of an outlier.

There is no obvious policy response to these trends in capital concentration and super-salaries, although one can expect plenty of obvious suggestions. Data for Denmark and Finland illustrate the complexity. Their top cats saw their share of national income rise by 70pc – the fastest recorded. But it brought the share from around 6pc to 8pc, which is one of the lowest.

What exactly policy should be is a difficult question. Unless, of course, one takes the view that the situation is fine as it is and should be left alone. Many do take that view and, in recent years, their view prevailed.

The OECD report reminds us that this as not always the case.

In the 1970s, half the OECD countries levied tax of more than 70pc on very high incomes. There were good reasons why policymakers began to think that was too much.

Wealth is even more difficult, as is the task of distinguishing income and wealth for tax purposes. As Richard Curran pointed out on these pages last week, tax shelters are a good place to start. Many of these, such as family trusts, are no more than devices to allow the wealthy legitimately avoid normal tax deductions.

This raises the question of why politicians across the OECD seem so much in thrall to the needs of the well-to-do. In Ireland, it cannot help that politicians and senior officials are now themselves among the top couple of per cent of earners but the general problem is that tax avoidance is inevitable where genuine business activities are given tax incentives. And that is Ireland's core product.

What matters, though, is what the Americans do. Relatively minor adjustments in most EU countries would make quite a big difference to these trends but the USA would need a tax revolution.

Pikkety suggests only a global wealth tax could really reverse the natural trend, while admitting that there is little prospect of any such thing.

Even so, the success of the book could be a pointer to the future.

The 21st Century still has a long way to go.

Indo Business

Today's news headlines, directly to your inbox every morning.

Don't Miss