The Piketty Effect: Part 2

Back in November, we began our first collaboration with the French online journal La Vie des Idées, to examine what we call “The Piketty Effect.” Our first pair of essays, by American sociologist Erik Olin Wright and French economist Nicolas Frémeaux, address the questions of class that remain inchoate in Piketty’s work and detail how inequality has evolved since the 2007 crisis. In our new issue, we are delighted to co-publish a second set of reflections, by American feminist economist Nancy Folbre and Düsseldorf-based economist Ulrike Stein.

— Nancy Folbre: Power to the Pikettys

— Ulrike Stein: Inequality and Economic Policy in Germany

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If there were more economists like Thomas Piketty, the world would be a better place, though it’s hard exactly to say how much better without a detailed econometric model. I jest only to explain the history of my own love-hate relationship with the economics profession. I love it when brilliant economists like Piketty bring trends in wealth inequality to the fore, showing how they affect the trajectory of economic growth. I hate it when they treat it in mechanical terms, as though the economy was nothing more than a GPS in need of reprogramming, or a car we’d lost control of.

Piketty’s book almost escapes this criticism by explaining how we could take the steering wheel, but what he reaches for—a progressive, global tax on wealth—seems small and remote. It’s hard to imagine how to campaign for, much less implement, such a tax. And while Piketty emphasizes the growing power of a small wealthy elite, he doesn’t say much about how they wield that influence.

His book has more to say about how the gears in the machine fit together than who’s pulling the levers and making it run. Many economists on the left have registered similar complaints. My favorite exposition of these, published online in Jacobin by Suresh Naidu, is called “Capitalism Eats the World”; in it, Naidu aptly describes the policy prescription as “technically feasible and politically hopeless.” Still, like Suresh, I love Piketty’s book because it effectively undermines the case mainstream economists have made against a tax on capital—a technical litany of claims about stunting efficiency and economic growth. In the context of the global economics profession, the theoretical model he develops is subversive because it shows why profits may continue to expand at the expense of wages, a process that could potentially undermine the growth economists love to hail. His historical narrative, based on persuasive empirical research, clearly shows how political power has shaped tax policy, and vice versa. And he respects the data, making his painstakingly collected numbers available to everyone, with detailed documentation.

In person, Piketty is even better than his book. In a September talk at the University of Massachusetts Amherst, where I teach, he won over his audience with his humility, a quality rare among economists. He got a laugh for confessing that part of his desire for a wealth tax comes from knowing it would generate better data on the distribution of wealth (the most reliable data on income distribution comes from obligatory income tax returns).

He presented figures on the real growth rate of top global wealth between 1987 and 2013, substantiating his claim that the more capital individuals own, the faster it seems to grow. He illustrated the same point with a comparison of rates of return on college endowment portfolios in the U.S. between 1980 and 2010. Elite universities with the largest endowments garnered far higher rates of return than those (like mine) with small endowments. Whether or not capital eats the world, it seems to reproduce faster the bigger it gets.

In person, Piketty is even better than his book.

He also made strong political points in a gentle way, contrasting the mainstream emphasis on the “invisible hand” of markets with the “grabbing hand” of power. His graph of long-run trends in the U.S. shows income inequality rising in the 1920s, then falling, partly as a result of more progressive taxation, then rising yet again as marginal tax rates were cut. The U-shaped dip in inequality in the mid-20th century demonstrates political interruptions to an economic trend. “The ruling class,” he explained, “hasn’t always had this kind of power; otherwise we wouldn’t see this kind of graph.”

There’s also an openness to more complex narratives. Responding to a question about the impact of midcentury decolonization, he conceded that it, too, had played a role. He went beyond an emphasis on progressive taxation to mention possibilities for changing corporate governance, referring to the German policy of co-determination that has given workers more voice in management and, likely as a result, contributed to lower stock market valuations in that country. Cooperative businesses and employee stock ownership plans could widen the road to wealth accumulation.

Still, I came away with several questions about how we define the groups contending for wealth and power: Like the traditional left, Piketty’s focus is on capital versus labor. But how do differences among workers affect class conflict? While Piketty acknowledges the importance of growing inequalities in labor income, particularly with regard to the U.S., he doesn’t fully explain this polarization. Why are high-wage earners faring so much better than low-wage earners? Are they really that much more productive than their less successful peers? Or are they essentially capitalists in disguise, able to capture higher rents for their skills than other earners? If so, might predominantly white, native-born professionals and managers ally themselves with owners to keep wages low at the bottom where people of color and immigrants are over-represented?

Similarly, how do differences based on gender come into play? Kathleen Geier and others have observed that gender goes completely unexplored in Picketty’s story, even though it shapes both wealth and income inequality. Men enjoy a significant earnings advantage over women, in part because they take less responsibility for the care of dependents. Public policies, too, have an impact on gender inequality. Since women take more responsibility for other people’s welfare than men do, it’s not surprising that they benefit more—and offer more political support for—the welfare state.

Inequalities based on ethnicity, citizenship and gender don’t reach the extremes of those based purely on wealth or income. Still, they clearly influence family living standards and cleave the larger constituency of “labor” in ways that hinder effective negotiations with “capital.”

Whether or not capital eats the world, it seems to reproduce faster the bigger it gets

Finally, should economic inequality within one nation, or even within a group of nations (such as the advanced capitalist economies), be the paramount issue? Or is growing inequality between the richest and poorest nations of the world an even more serious problem, as Branko Milanovic persuasively argues in The Haves and the Have Nots? That fissure helps explain skepticism regarding a global wealth tax. Poor countries have good reason to welcome rich immigrants, along with their tax havens—on any terms. That’s another reason to move beyond a simple capital versus labor model and consider other dimensions of collective conflict.

The last question in the public lecture came from a radical student. Responding to her dissatisfaction with his political emphasis on taxation, Piketty’s French-inflected English complemented a politically bilingual response. “Let’s not make an opposition between progressive taxation and class struggle,” he explained. “You need class struggle to implement progressive taxation.”

I think he’s right about that. We also need a theory of how collective interests based on class intersect with those based on citizenship, gender, and other dimensions of collective identity and action. The development of that theory may require many more Pikettys. More power to them.

Jump to remarks:

Nancy Folbre, Ulrike Stein

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INEQUALITY AND ECONOMIC POLICY IN GERMANY

 

The vivid empirical material and proposals for reform found in Piketty’s book bring new grist to discussions of political economy in Germany. Visible here in many respects even before the release of the German edition, the “Piketty effect” has provided an opportunity for both supporters and opponents of his work to publicize their arguments on the subject of inequality.

Germany has paid a heavy price for the supply-driven economic policy that has dominated politics and economics in the country since the 1970s. After a brief period following the 1967 Stability and Growth Act, when government policy focused on collective negotiation, solidarity, and wage-leveling, priority has been given to lowering comparative labor costs through wage moderation, labor market deregulation, and the reduction of non-wage labor costs. The effects of this policy are clear. Inequality has increased in Germany. The deregulation of the labor market and the weakening of collective bargaining standards have led to the emergence of a dual labor market, characterized by a large low-wage sector.¹, IAQ-Report (January 2013). ] For this part of the population, increasing inequality has not only been associated with diverging incomes, but also with real income losses.², DIW Wochenbericht, no. 46 (2013). ]

The increase in income inequality, especially sharp in the first half of the 2000s, is now perceived as a problem—a subject of public discussion and an integral part of political debates aimed at ascertaining whether the rise in inequality has been the result or the cause of long-lasting economic weakness and stagnation. More and more people consider Germany’s one-sided focus on export strength and national competitiveness to be the real source of the problem. Meanwhile, very weak wage development has caused the growth of unit labor costs to lag dramatically behind that of other countries in the Euro area. Enormous account imbalances built up as a result, which in turn contributed to the development of the crisis.³, IMK Report, no. 77 (November 2012). ]

Although it remains to be seen whether there will be a paradigm shift in Germany, this double problem—the Euro crisis and inequality, inseparably linked—surely requires a change of policy. In the face of increased criticism of the current economic system, many still want to hold on to it, and feel confirmed by the strong performance of the German labor market, identifying the labor market reforms of 2003–2005 (the so-called Hartz reforms) as key to this improvement. For them the fact that income inequality has not increased further is already a success.

Wealth and Income Inequality in Germany

Piketty’s analyses shed an interesting light on German wealth distribution mainly because data is scarcer in Germany than in many other countries. There has been no requirement to collect such information since the German wealth tax was abolished in 1997, and the evaluation of wealth inequality is therefore usually based mainly on household surveys, which leave out very large fortunes. Despite the shortage of data, it is undisputable that in Germany, as in the United States, wealth is distributed extremely unevenly, more so than in any other country in the Euro zone.⁴, DIW Wochenbericht, no. 9 (2014). ]

The data available for personal income distribution is much better. The increase in income inequality since German unification is well documented and evident at all levels of income distribution.⁵ (2013). ] However, one must distinguish between different concepts of income: while the equivalized household income⁶ (both market and net income) takes the redistributive impact of households into account, the concept of individual earned income does not.

Whereas the inequality of household market income rose sharply from German unification to 2005, and fell slightly after that, household net income followed a different pattern. Inequality in the latter category was prevented from rising in the 1990s by the effectiveness of public redistribution. In the 2000s this public redistribution effect diminished gradually, and as a consequence inequality in net income increased significantly until 2005, thereafter remaining at a high level. The good state of the labor market is responsible for the decline in inequality of market income after 2005. It is striking that inequality in net income has not declined to the same extent, and indeed signs now point again to an increase rather than to a decline in income inequality.⁷

In focusing on inequality measures one often neglects the evolution of the income levels themselves. An increase in inequality would be much more bearable in a society where all individuals benefit from welfare gains. In Germany the opposite was true. The development of market income shows that only the individuals at the top of the income distribution experienced real income gains. In contrast, many individuals at the bottom end suffered real income losses. In terms of net income the development was less dramatic in the 1990s, but in the 2000s we find that the bottom 40 percent of the income distribution did not participate in welfare gains and had to cope with real income losses.

The Conceptual Illusions of Inequality

In Germany the focus on net income, together with use of the concept of net equivalized household income on which we base our measures of inequality, tends to mask the persistent increase in the inequality of earned income (even after 2005). As well as market income from capital and employment, this concept of income also comprises taxes and transfer payments from the state. In addition, it takes into account not only public redistribution but also redistribution within households, which is particularly pronounced in Germany.⁸, WSI-Mitteilungen, vol. 64, no. 4 (2011). ] These two different forms of redistribution can pull in opposite directions and even cancel each other out, with the effect that overall income inequality can remain unchanged. Thus, despite rising inequality of earnings, due to decreasing inequality of capital income from the crisis-induced fall in capital income, the concentration of inequality of net income has not risen since 2005.⁷

If we look at earned income alone, without considering the various redistribution mechanisms (in the household context or through tax and public redistribution), a worrying picture emerges. Wage inequality has increased at both ends of the wage distribution: in the upper tail in the 1980s, and at the bottom since the 1990s.¹⁰, working paper of the Sachverständigenrates zur Begutachtung der gesamtwirtschaftlichen Entwicklung (April 2012). ] Even when only full-time workers are considered in the analysis, data from employment statistics show an increase in the pay spread.¹¹ (2013). ] My own analysis of wage inequality, based on gross hourly wages, also shows an increase in inequality of labor earnings.

Lately, the problem of the increasing spread of labor earnings has become a subject for public debate, even for individuals and institutions that had previously been strong supporters of the German system of wage moderation and had taken every opportunity to continue to defend supply-side economic policy. The Bundesbank, or German Federal Bank, has argued that, given the good shape of the German labor market, it is good to have higher wage settlements than in the past, and the Organisation for Economic Co-operation and Development (OECD) has shown that increased numbers of low-income earners and workers in atypical employment have not benefited equally from the economic boom.¹² (2014); OECD, “OECD-Wirtschaftsberichte: Deutschland 2014” [OECD economy reports: Germany 2014], OECD Publishing (2014). ] The OECD also criticized the high relative risk of poverty, which has not been reduced despite the good performance of the German labor market, and denounce the fact that the upward mobility of low-income workers has decreased.

Piketty has shown that returns from capital increased faster than the growth rates of GDP and labor income. This would not be a problem if capital were equally distributed across all individuals. However, this is not the case, and a chosen few benefit from social prosperity more than the majority. The trend also implies an absence of equal opportunities or performance-related fairness: prosperity in Germany largely depends on how rich the family is, what somebody inherits, or how rich the person one is getting married to is. The combination of lack of upward mobility and growing inequality is a source of enormous social unrest.

An Urgent Need for Reform

Many kinds of measures are available to correct these trends. Two of them tackle inequality at the source. The first aims to reduce the inequality of capital income and wealth concentration, by for instance changing inheritance tax through a reduction in the generous exemptions regarding inherited firms, or undoing the flat tax on capital income to equalize the taxation of capital and labor income, or reactivating property tax (with the added advantage that information on wealth in Germany would once again be recorded as a matter of course). A second kind of measure aims to reduce the inequality of labor earnings (which accounts for the largest part of market income), by stabilizing the collective bargaining system, reducing the low-wage sector, and strengthening earned labor incomes. The legal minimum wage, due to come into effect in Germany on January 1, 2015, will prevent further downward pressure on wages and stabilize wages at the bottom of the distribution. The argument put forward by some opponents of the minimum wage—that it will lead to massive job losses—is empirically unfounded.¹³ (Hans-Böckler Foundation, 2014), p. 304. ] Finally, the effectiveness of public redistribution needs to be strengthened again, because this determines how much of market income is left to become net income.

However, Germany will also face new challenges. For instance, the statutory pension scheme is also part of the public redistribution counted in the concept of net equivalized income. Recent reforms that led to a lowering of pension entitlements, combined with the fact that future retirees will more often have interrupted work histories, will tend to boost income inequality, and if the government is not working to counteract these effects, a sustainable reduction in income inequality appears unlikely.

Society as a whole would benefit from a less unequal distribution. Strikingly, this same conclusion has also been published by the International Monetary Fund. In an IMF “Staff Discussion Note” from early this year, Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides demonstrate the advantages of egalitarian societies by showing a positive correlation between lower income inequality and faster and more sustainable economic growth. They also show that policy actually can do something about inequality, because public redistribution has no detrimental effect on growth.

Jump to remarks:

Nancy Folbre, Ulrike Stein