May 8th 2014

Where Is the Inequality Problem?

by Kenneth Rogoff

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF.

CAMBRIDGE – Reading Thomas Piketty’s influential new book Capital in the Twenty-First Century, one might conclude that the world has not been this unequal since the days of robber barons and kings. That is odd, because one might conclude from reading another excellent new book, Angus Deaton’s The Great Escape (which I recently reviewed), that the world is more equal than ever.

Which view is right? The answer depends on whether one looks only at countries individually or at the world as a whole. 

The overarching fact in Deaton’s book is that over the last few decades, several billion people in the developing world, particularly in Asia, have escaped truly desperate levels of poverty. The same machine that has increased inequality in rich countries has leveled the playing field globally for billions. Looking from afar, and giving, say, an Indian the same weight as an American or a Frenchman, the last 30 years have been among the greatest in human history for improving the lot of the poor.

Piketty’s brilliant book documents within-country inequality, with the main focus being on the rich world. Much of the cultural groundswell surrounding his book has come from people who view themselves as middle class within their own countries, but who are upper middle class or even rich by global standards.

There are various arcane technical debates surrounding the facts that Piketty has established over the past 15 years with his co-author Emmanuel Saez. But I find their results persuasive, especially given that other authors, using completely different methods, have reached similar conclusions. Brent Neiman and Loukas Karabarbounis of the University of Chicago, for example, argue that labors share of GDP has been declining globally since the 1970’s. 

However, Piketty and Saez do not really offer a model; nor does this new book. And the lack of a model, combined with a focus on the world’s upper-middle-class countries, matters a lot when it comes to policy prescriptions. Would Piketty’s followers be nearly as enthusiastic about his proposed progressive global wealth tax if it were aimed at correcting the huge disparities between the richest countries and the poorest, instead of between those who are well off by global standards and the ultra-wealthy?

Piketty argues that capitalism is unfair. Wasn’t colonialism unfair, too? In any event, the idea of a global wealth tax is replete with credibility and enforcement problems, aside from being politically implausible. 

Though Piketty is right that returns to capital have increased in the last few decades, he is too dismissive of the wide-ranging debate among economists concerning the causes. For example, if the main driver is the massive influx of Asian labor into globalized trade markets, the growth model put forth by the Nobel laureate economist Robert Solow suggests that eventually capital stocks will adjust and the wage rate will rise. Retirements from an aging labor force will eventually drive up wages as well. If, on the other hand, labor’s share of income is falling because of the inexorable rise of automation, downward pressures on that share will continue, as I discussed in the context of artificial intelligence a few years ago.

Fortunately, there are much better ways to address rich-country inequality while still fostering long-term growth in demand for products from developing countries. For example, a shift to a relatively flat consumption tax (with a large deductible for progressivity) would be a far simpler and more effective way to tax past wealth accumulation, especially if citizens’ tax home can be linked to the locale where their income was earned. 

A progressive consumption tax is relatively efficient and does not distort savings decisions as much as today’s income taxes do. Why try to move to an improbable global wealth tax when alternatives are available that are growth friendly, raise significant revenue, and can be made progressive through a very high exemption.

In addition to a global wealth tax, Piketty recommends an 80% marginal tax rate on income for the United States. Though I strongly believe that the US needs more progressive taxation, particularly of the top 0.1%, I don’t understand why he assumes that an 80% rate would not cause significant distortions, especially as this assumption contradicts a large body of work by the Nobel laureates Thomas Sargent and Edward Prescott.

There are many practical policies that can be adopted to reduce inequality, in addition to a progressive consumption tax. Focusing on the US, Jeffery Frankel of Harvard University has suggested the elimination of payroll taxes for low-income workers, a cut in deductions for high-income workers, and higher inheritance taxes. Universal pre-school education would enhance long-term growth, as would a much greater emphasis on lifetime adult education (my addition), possibly via online courses. Carbon taxes would help mitigate global warming while raising considerable revenues. 

In accepting Piketty’s premise that inequality matters more than growth, one needs to remember that many developing-country citizens rely on rich-country growth to help them escape poverty. The first problem of the twenty-first century remains to help the dire poor in Africa and elsewhere. By all means, the elite 0.1% should pay much more in taxes, but let us not forget that when it comes to reducing global inequality, the capitalist system has had an impressive three decades.


Copyright: Project Syndicate, 2014.
www.project-syndicate.org







  

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Jun 12th 2021
EXTRACT: "China’s recently published census, showing that its population has almost stopped growing, brought warnings of severe problems for the country. “Such numbers make grim reading for the party,” reported The Economist. This “could have a disastrous impact on the country,” wrote Huang Wenzheng, a fellow at the Center for China and Globalization in Beijing, in the Financial Times. But a comment posted on China’s Weibo was more insightful. “The declining fertility rate actually reflects the progress in the thinking of Chinese people – women are no longer a fertility tool.” "
Jun 12th 2021
EXTRACT: " I remember recounting fellow leaders of the story of a Rwanda schoolboy caught up in the genocide of the 1990s and now immortalized in the Kigali Genocide Memorial museum, where, in a section devoted to children, one can find his photograph and a plaque that reads: ----- David, age 11 ...... Ambition: to be a doctor ...... Favorite sport: football ...... Favorite hobby: making people laugh ...... Death: by mutilation ...... Last words: the UN are coming to save us ----- In his idealism and innocence, David believed the international community would save him and his mother. We didn’t. "
Jun 8th 2021
EXTRACT: " While many conservative Republicans opposed Trump and saw that he posed a danger to their party and democracy itself, they were hesitant to buck the mass movement they had created, fearing that it would turn against them. Some of these same conservatives assumed that with Trump's defeat, the horror of January 6th, and the former president's banishment from social media, the time had come to restore sanity to their party. But the GOP leadership’s continued cowering in the face of what they now call "Trump's base" has caused them to circle the wagons and purge their ranks of those who call for sanity. "
May 26th 2021
Editor's Note: This article is about the Federal Reserve, inflation in the 1970's, and possible similarities to today.
May 25th 2021
EXTRACT: "Netanyahu claims to be acting in the name of the Jewish people. He certainly is not. Many Jews around the world, including me, despise Netanyahu’s racist politics. As an American, I am also deeply troubled by the US government’s knee-jerk support of Israel. Fortunately, I am not alone in this view. A growing number of Democratic Congressmen, Jews and non-Jews alike, have called on the United States to stop supporting Israel’s lawlessness. The truth is that the US government’s uncritical support for Israel has come to depend more on evangelical Christians, such as former US Secretary of State Michael Pompeo, than on American Jews, who are deeply divided by Netanyahu’s actions. And the evangelicals’ real interest in Zionism is not Jews’ security, but Armageddon, the end of the world, which they believe will come only when all Jews are in Israel."
May 18th 2021
EXTRACT: "This period in US history could go down as the moment when America’s democratic system for electing a president – the most consequential duty of US citizens – was broken, perhaps for good."
May 16th 2021
EXTRACT: "While reading Human Rights Watch’s (HRW) monumental report “A Threshold Crossed,” I felt a range of emotions. It also left me with one big question. I was deeply impressed by the report’s rigorous scholarship. At the same time, it brought to the surface feelings of anger and profound sadness. It’s an extraordinarily complete study detailing not only the many ways Israel has violated a broad range of Palestinian human rights, but the ideology of racial superiority and entitlement that Israel has used to justify its repression." ..... "My advice to both Israel’s defenders and weak-kneed liberals is​, “Read the damn report.” "
May 16th 2021
EXTRACTS: .... "He transformed a transitioning market economy into a stable statist project that rests on an alliance of his inner circle," ..... "He transformed Russia from a respected member of the international community into a rogue state" .... ". He energized NATO by providing it with the adversary it lacked after the end of the cold war," ..... "He befriended hopelessly corrupt, dysfunctional, and unstable dictatorships..." ..... "He forged a quasi-alliance with China, thereby enhancing Russia’s dependence on the one country that might have reason to appropriate those Russian territories inhabited by Chinese."
May 15th 2021
EXTRACT: "On the face of it, the latest escalation of violence is following the template of all inter-ethnic wars. Muslims observing Ramadan shouted nationalist slogans and clashed with Israeli right-wing groups chanting “Death to the Arabs.” The Israelis haughtily marched with their national flag on Jerusalem Day, marking Israel’s capture in 1967 of East Jerusalem and the Temple Mount, the site of the biblical Second Temple, and of Al-Aqsa, completed in the year 705. Battles in and around the Al-Aqsa compound erupted, with worshipers inside throwing stones at the Israeli police, who responded by firing rubber-tipped bullets and other projectiles, wounding hundreds."
May 13th 2021
"Regardless of how the current and future violent conflicts between Israel and the Palestinians in Jerusalem will end, there will be no Israeli-Palestinian peace unless East Jerusalem becomes the capital of a Palestinian state while the city remains united."
May 7th 2021
EXTRACT: " Would the United States be prepared to risk a catastrophic war with the People’s Republic of China to protect the Republic of China, better known as Taiwan? "
May 5th 2021
EXTRACT: "Human history, ancient and contemporary, is replete with instances of genocide – that is, the effort to eradicate a people, erase their history, denigrate their culture, and destroy their physical presence. Many of these atrocities have been recognized by the victims and other nations who support them. But, with the notable exception of the German acknowledgment of the Holocaust, rarely have the perpetrators of these crimes accepted responsibility and offer recompense "
May 2nd 2021
EXTRACT: "The best way to defend liberal democracy is to practice it at home and abroad with the “courage and self-confidence” that Kennan touted at the dawn of the Cold War. This is also the best way to ensure the survival of our own conception of human freedom. And survive it will."
May 1st 2021
EXTRACT: "Ann Arbor (Informed Comment) – Sammy Roth at the LA Times/ Boiling Point Newsletter reports that California’s main power grid was powered for several hours last Saturday by 90% renewables. For just four seconds that day, the grid, which covers 4/5s of the state, reached 94.5% generation by green energy. California is the world’s fifth largest economy. The main grid does not cover Los Angeles County. On the other hand, these figures do not include the electricity generated by the Diablo Canyon nuclear plant, which is not counted as renewable but which is also very low-carbon."
Apr 23rd 2021
EXTRACT: "It is no accident that there has been an economic divergence in Central and Eastern Europe. Those countries that have joined the European Union have improved their economic governance, and GDP has begun to converge with Western Europe. Between 2014 and 2019, Hungary, Poland, and Romania grew at an annual average rate of 3.9%, 4.1%, and 4.7%, respectively. Meanwhile, Belarus and Ukraine experienced minimal growth during this period, and Russia’s economy expanded at an average annual rate of just 0.7%. Though Russia had a higher per capita GDP (in terms of purchasing power parity) than Croatia, Poland, Romania, and Turkey as recently as 2009, all of these countries have since overtaken it. Russians today are shocked to learn that they are worse off than Romanians and Turks. Among EU member states, only Bulgaria is still poorer than Russia. With its close proximity to the EU single market, Russia could have had higher growth if it had pursued sound economic policies. Instead,..... "
Apr 22nd 2021
EXTRACT: "As far as anyone can tell, the US military is not on the verge of an internal breakdown, let alone primed to stage a coup d’état. But few predicted anything like the US Capitol riot before protesters equipped with body armor, stun guns, and zip-ties breached the building. Before the US is blindsided again, its leaders must act resolutely to root out extremism in the military."
Apr 17th 2021
EXTRACT: "The new report on 2020 by the International Renewable Energy Agency reveals that the world’s renewable energy generation capacity increased by an astonishing 10.3% in 2020 despite the global economic slowdown during the coronavirus pandemic." .... "In 2020, the global net increase in renewables was 261 gigawatts (GW). That is the nameplate capacity of some 300 nuclear power plants! There are actually only 440 nuclear power plants in the whole world, with a generation capacity of 390 gigwatts. So let’s just underline this point. The world put in 2/3s as much renewable energy in one year as is produced by all the existing nuclear plants!"
Apr 16th 2021
EXTRACT: "When we examined the development of nations worldwide since 1820, we found that among rich Western countries like the United States, the Netherlands and France, improvements in income, education, safety and health tracked or even outpaced rising gross domestic product for over a century. But in the 1950s, even as economic growth accelerated after World War II, well-being in these countries lagged.
Apr 11th 2021
EXTRACT: "Some presidents indulge in the “Mount Rushmore syndrome” making an obvious effort to achieve greatness. Normally soft-spoken and apparently modest Biden is making his own bid for immortality."
Apr 9th 2021
EXTRACT: "New ways of thinking about the role of government are as important as new priorities. Many commentators have framed Biden’s infrastructure plan as a return to big government. But the package is spread over eight years, will raise public spending by only one percentage point of GDP, and is projected to pay for itself eventually. A boost in public investment in infrastructure, the green transition, and job creation is long overdue."