‘Crisis of confidence will come back again and again,’ says Thomas Piketty
He’s treated like a rock star wherever he goes to lecture. His book “Capital in the 21st Century,” a study on income and wealth inequality from the 18th century to the present, recently translated into Greek (Polis editions), has been compared to Karl Marx’s “Das Capital” and Nobel Prize-winning American economist Paul Krugman has claimed that French economist Thomas Piketty has changed our economic discourse. “We’ll never talk about wealth and inequality the same way we used to,” Krugman wrote in a rave review of the book. At the same time, Piketty’s “Capital” drew scathing criticism, especially from the Financial Times. Chris Giles, the economics editor of the British paper, headed a campaign to deconstruct Piketty’s work, identifying “unexplained errors” in the data he used to prove his thesis. Nonetheless a few months later the FT named “Capital in the 21st Century” the “2014 business book of the year.”
The French economist was recently kind enough to agree to an e-mail interview with Kathimerini.
You are being hailed as the new Karl Marx, though you are not considered a Marxist. What is your response? Is it true that you haven’t read the original “Capital”?
Of course I’ve read Marx! In my book I am trying to put the study of the distribution and of the long term back at the center of economic thinking, so in a sense I am pursuing the tradition of 19th-century political economy. However, my book is very different from Marx: It is far less theoretical and much more historical, and I believe a lot more readable. My book deals with the history of income and wealth distribution across three centuries and over 20 countries. It starts from historical evidence and then tries to understand the many economic, social and political processes that can account for observed evolutions.
Your book is an Amazon best-seller. Do you consider it an easy read for non-experts? If you had to summarize the central idea in one sentence what would that be? “The rate of return on capital always exceeds the rate of growth of income”?
I can guarantee that my book can be read by anyone: It is maybe a bit long, but it is very easy to read. I think the success of the book stems from the fact that many people are tired of hearing that economics is too complicated for them. Issues about income and wealth, capital and public debt, wages and assets, are too important to be left to a small group of experts. The main conclusion of my book is that the history of inequality is primarily political and cultural: There are powerful economic forces going in every direction, and which one prevails depends on the institutions and policies that we choose. This is why the democratization of economic knowledge is so important. One important force is indeed the long-run tendency of the rate of return to capital to exceed the growth rate of the economy but there are other forces as well.
Some experts believe the eurozone crisis is back and that this time around it will be more severe. Do you agree?
I think that a single currency with 18 different public debts, 18 different interest rates on which financial markets can speculate and 18 different tax systems in competition with one another is a system that does not work, and will never work. As long as eurozone countries have not demonstrated that they want to stay together, with a common public debt, interest rate and tax policy (at least for the corporate tax, and ideally for top income and top wealth taxation as well), the crisis of confidence will come back again and again. The problem is simple: Germany and France decided in 2011-12 that they did not want to share their low interest rate with Southern Europe. This was a very selfish and silly decision, and now we are all paying the price, particularly in Greece.
In a recent comment you suggested it is unacceptable for the former prime minister of a tax haven – I suppose you meant Jean-Claude Juncker – to be the president of the European Commission. Do you think that a common tax policy would be the solution for such inequalities in the eurozone?
The problem is the unanimity rule for fiscal decisions. This is what made it possible for Luxembourg and other countries to steal the tax base of other countries. It is not enough for Juncker to apologize. It is the unanimity rule system that needs to be changed, otherwise this kind of scandal will happen again and again. Right now, all across Europe, small and medium-size companies are paying higher effective tax rates than large multinationals. This cannot continue.
In your European manifesto you wrote that you are in favor of a eurozone parliament. What more would that body add to the already heavily bureaucratic structure in Brussels?
If we want to replace the unanimity rule for fiscal decisions by majority decision-making, then we need a democratic body to take majority decisions. The European Parliament cannot play this role, first because it involves 28 countries (many of which do not want further political and fiscal union) and next because it is critical to involve the national parliament. This is why we propose to have a new eurozone parliamentary chamber where each country will be represented by members of its national parliament, in proportion to its population. I think that if Greece, France and Italy were to make such a proposal, then Germany would probably be afraid to be in a minority in such a chamber, but at the same time it would be difficult to refuse such a proposal forever. And I think that a democratic governance for Europe would have led to less austerity, more growth and less unemployment. There is still time to move in this direction. We have to trust democracy, we have no other option.
French President Francois Hollande was elected on the pledge of a 75 percent tax rate on the rich but he backpedaled quickly. SYRIZA in Greece is also promising similar measures if it comes to power. Do you think it is possible to tax the rich without capital flight?
Of course we need more fiscal cooperation. Europe asks Greece to make wealthy Greek taxpayers pay more taxes, but at the same time French and German banks are happy to receive money from them, and France and Germany do not transmit the corresponding information on cross-border financial assets to Greek tax administration. This is why we need a new governance system for Europe. That being said, the problem with Hollande’s policy was not the 75 percent top tax rate: The problem was that taxes were increased a lot on the entire population in 2012-14, in particular via the increase in value-added tax and the fact that income tax brackets were frozen. This was a much bigger tax increase than the 75 percent, and this is the austerity policy that killed growth.
You suggest in your book that a girl born to a poor family cannot become rich unless she marries a wealthy man. This notion annuls two centuries of feminist struggle, faith in education and technological evolution. Aren’t you exaggerating a bit?
I am not saying we are entirely back to the world of Balzac and Austen. I am saying that we are moving in this direction. For the generations born in the 1970s, 1980s or 1990s, inherited wealth is indeed a lot more important than for the baby-boom and postwar cohorts. This is true all across Europe, and in other parts of the world as well. If you do not have any family wealth, and if you want to buy an apartment in Paris or Athens with your labor income only, this will have to be a pretty high labor income. Note that the return of inherited wealth is important for both boys and girls. Gender equality is a separate issue: It is still unbridged and only limited progress has been made.
Through data examination, you come to the conclusion that inequalities are bigger than ever and your theory is proven by the eradication of the middle class in the USA and elsewhere. That was also the main problem in Greece during the crisis. Greece lost 30 percent of its GDP since the beginning of the crisis and has witnessed a surge in unemployment, whereas the elites seem to have suffered less since they’ve safeguarded their money overseas. If you were an economic adviser to the Greek government what remedy would you prescribe to tackle inequality?
I believe that the Greek government could implement a more progressive tax system (higher tax on high income and high wealth individuals) without waiting for international cooperation. But in order to solve the current crisis, what is really key is concrete proposals to transform the governance of the eurozone. The current system is a disaster, particularly for Greece, but also for the rest of Europe.
Before the Greek crisis cheap credit created a sense of democratic distribution of wealth, with middle-class Greeks going on a spending spree, buying expensive houses and cars. Was that just an illusion of wealth equality or is that lifestyle on credit sustainable under certain conditions?
You are right that there was too little saving and investment in Greece in the years leading up to the crisis. This is why it is so important to democratize economic information and economic knowledge. We need more financial transparency if we want to avoid this kind of crisis in the future.
When the Greek dream ended, the influence of establishment parties started to thin while new extremist parties were formed. Do you believe this is the direct political outcome of the crisis and the growing inequality?
New parties are sometime necessary in order to replace establishment parties and solve major inequality crisis. I would certainly not put the nationalist extreme right on the one hand, and SYRIZA on the other, under the same “extremist party” label. As far as I can see SYRIZA is internationalist and pro-European. What’s important to me is that SYRIZA makes concrete proposals for another governance system for the eurozone. Greece needs a more democratic Europe, and so does the rest of Europe.
