Thomas Piketty: ‘inequality is not a problem per se’ | Video

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In 2013, President Obama called inequality ‘the defining challenge of our time’. But could this gap between the rich and poor have benefits for the economy? World Finance interviews Thomas Piketty, author of Capital in the Twenty-First Century, to find out whether such a gap matters if everyone’s getting richer, whether we can reduce inequality with out losing the benefits of capitalism, and what politicians can take away from his book.

World Finance: Thomas, capitalism has lifted many people out of poverty, but does the gap between rich and poor really matter if both are getting richer?

Thomas Piketty: Inequality is not a problem per se. Up to a point, inequality is actually useful for growth and innovation. The problem is when inequality becomes too extreme: then it becomes useless for growth, and it can even be bad because it tends to perpetuate inequality over time. It tends to reduce mobility.

But let me say very clearly that I have no problem with inequality per se. And most of all, what I’ve tried to do in this book is to tell the story of inequality; the story of money. I’ve put together with many colleagues a vast historical evidence on income and wealth in more than 20 countries across three centuries.

But let me say very clearly that I have no problem with inequality per se

And you know, I am much better at analysing the past than the future! I don’t pretend that the conclusions I draw about the future are the only possible ones. The purpose of the book is to make these important issues accessible to everyone. Because these are not just issues for economists: this is of interest to everybody.

World Finance: Well as you just said your research is focused on the past. So how relevant do you think it is for policymakers of today?

Thomas Piketty: Well you know, historical experience is our best guide. But of course, you know, history always advances its own pathways.

The thing is, there’s a lot to learn, because there’s already been some inequality crises in the past. Certainly in the 19th century, during the first stage of the industrial revolution, many people were asking, ‘Why is it that we have all this industrial growth, and still have very low wages for vast groups of the population?’ And you know, children working down the mines at the age of six.

And this was overcome by a mixture of market forces, labour laws, free schools, taxation systems that can pay for better health systems for everyone. So there were crises, there was a response. And I am confident that I can also find a response to the current inequality crisis.

Which I should say is, you know, particularly strong in the US, where the rise of inequality has indeed been quite large in the past two or three decades. In Europe it’s been much less strong so far, but maybe that’s not a reason to wait until it becomes as big as it is in the US.

But the story I’m telling is not a deterministic story, where inequality has to rise, or inequality has to decline. There are different forces that play together in different ways, in different parts of the world.

World Finance: Well I want to look at a quote from your book now, so you said “When a government taxes a certain level of income or inheritance at a rate of 70 or 80 percent, the primary goal is obviously not to raise additional revenue; it is rather to put an end to such incomes and large estates, which lawmakers have come to regard as socially unacceptable and economically unproductive.”

Well of course the idea of capitalism is that people are rewarded for working hard, and on the upper scale that is of course with large incomes and large estates. And then that becomes cyclical because they employ people and resources which creates wealth. So are you suggesting that maybe there should be a glass ceiling on how much people can achieve?

Thomas Piketty: For a very long period of time – for instance in the US between 1930 and 1980 – the top marginal income tax rate was on average 82 percent. This did not destroy American capitalism. And the reason for that is that this was applied only to very, very high incomes. So typically above one or two million dollars of annual income.

And at that level of income, you know, it’s not clear whether inequality is really useful for growth. So you know, when you pay your managers 10 million instead of one, or 50 instead of 10. You know, of course these people are saying that this is useful for growth, and this is useful for the rest of society. But the evidence for that is, you know, quite weak.

Above a certain point, inequality is not really all that useful. And I think that’s the reason why historically the growth performance of the US economy was not actually lower than what it has been since 1980. If anything the growth rate was higher in the 50s, 60s, 70s, than they have been since the 80s.

World Finance: Your book suggests we can reduce inequality without giving up the benefits of capitalism: you proposed a global tax on all assets. So can you walk me through your proposal?

Thomas Piketty: Well first, investment in education is a most important policy. Now sometimes it’s not sufficient to prevent inequality from rising, so you also need progressive taxation of top incomes, as we’ve talked about before.

Now progressive taxation of wealth, you know, it’s also important, this can be done – a lot can be done at the national level. With international cooperation, we can do more, because we can better tax the very top part of the distribution, in particular very large financial assets. So here we need automatic transmission of information. And we need to move toward more financial transparency generally speaking. So we need to have a registry of cross-border financial assets so that we know who owns what.

You know, this is useful for taxation, but it’s also useful for financial regulation. Because it’s very difficult to solve a banking crisis at a large scale, you know, if you don’t know who owns what in what banks.

World Finance: You have admitted your proposed tax system would be impossible on a global scale. And in effect it would trigger a national brain drain. So what’s your solution to tax avoidance, or loopholes, or people just moving to tax havens?

Thomas Piketty: This is difficult, but that doesn’t mean it is impossible. Five years ago, everybody would have said that bank secrecy in Switzerland would be with us forever. And then you know, finally there were some US sanctions against a Swiss bank, and the Swiss banks had to accept it.

It’s a bit sad that the European countries themselves were not able to solve the problem. Which in a way – you know, it’s much more of a concern for them than for the US. But still you know, I want to read this episode in a sort of optimistic and positive way. Which is that if you put the proper sanctions, this can work.

World Finance: Well if I might ask a very cheeky question: obviously best-selling author, Capital in the Twenty-First Century. You must have earned quite a bit from that. So are you tempted to move to the UK for – I think it’s 183 days – so that you can pay tax here rather than France?

Thomas Piketty: No, I belong to a minority in the population with, you know, pretty high income and wealth. And you know, I don’t have to worry too much about money.

And to me, that is what money is here for. You know, you want people to have enough money that they can think about something else. And I am fortunate enough that I don’t need to worry too much about money, but I would like more people not to worry as much as they do! And I think for this we need, you know, better institutions, so that it’s easier for the bottom half of the population, or the next 40 percent (which I call the middle class in my book) to access wealth, you know, without writing a bestselling book!

[T]he FT seems to be so afraid of my book

World Finance: The FT said that there were many unexplained data entries and errors underlying some of the book’s key charts; what was it like to have your entire research questioned?

Thomas Piketty: You know, they made a lot of noise out of nothing at all. Everybody can look at my response online, and I think anybody spending 30 minutes on the issue will conclude that they’ve made a lot of noise out of nothing at all.

I mean, I have no problem with debate. You know? I think, I tried to put everything online so that we can have an open and transparent debate. But I think it’s a bit sad that the FT seems to be so afraid of my book. I think they should be afraid of the reality, and they should try to be a bit more constructive, in my view.

But it’s okay. I think at the end of the day they’ve made for me a lot of publicity, and they’ve damaged their own reputation.

World Finance: Well your book has found its way onto very influential world leaders’ desks, so, what do you think politicians should take away from your book?

Thomas Piketty: The book tells us that there’s no natural force that prevents inequality from rising to excessive levels. And that, you know, we need to ensure through proper education and fiscal institutions that somehow we manage to keep track, and keep control, of how things are changing.

Some of the evolutions that I am describing in the direction of more wealth taxation and less labour taxation, to some extent, is happening. When we think of the debate about the mansion tax in Britain, the wealth tax in Spain. So you know, some of these evolutions are already happening.

But at the same time, the forces of competition between countries, you know, in order to attract investment, so you are very tempted to steal the tax base of your neighbour, basically. So yeah, we need more coordination, and this is what I think our political leaders should focus upon.

So, we’re going to have a European-American treaty next year? The US is one quarter of world GDP. The EU is another quarter of world GDP. This is one half of world GDP! So if this is not sufficiently big to bring more financial transparency, more coordination, in order to tax multinationals and in order to fight tax havens, what are we doing?

World Finance: So finally, what’s next for you? The rockstar economist! What’s next on your agenda?

Thomas Piketty: I plan to work more and more in emerging countries, and you know, wealth inequality is not only an issue for developed economies. In China this is becoming a really big issue. And so far they’ve been addressing the problem mostly on a case-by-case basis. You know, when an oligarch gets really too rich, they just put him in jail, a little bit like in Russia.

But they’re starting to realise that this is not a very efficient way to regulate the dynamics of wealth distribution and accumulation. So they’re actively talking about introducing some form of property and wealth tax, and yeah: I plan to work a lot more on inequality in emerging countries in the future.

World Finance: Thomas, thank you.

Thomas Piketty: Thank you.