Return of the Rentiers

15. 3. 2017

An interview with Thomas Piketty by Maciej Nowicki

The contemporary world resembles the 19th century more than we might suspect. What we are witnessing now is a comeback of inequalities in their brutal and archaic forms—says Thomas Piketty in an interview with Maciej Nowicki.

You are the creator of Francois Hollande’s most famous campaign proposal: the 75% tax for people earning over EUR 1 million a year. This is, at the same time, the most harshly criticized project on the agenda for the new president.

People frequently try to depict me as a tax hardliner. This is a misunderstanding. I’m perfectly aware that raising taxes, especially at the era of the crisis, does not seem to be a wise move. However, irrespective of what the people say, I do fight for cutting taxes for the majority: for the poor and for the middle class. The European Union would only profit from this. After all, how many people in Poland or in the Czech Republic earn more than EUR 1 million a year? I presume not too many. And who earns less than EUR 8,000 a month? I suspect, almost everyone. And it’s their taxes that I would like to see reduced.

For a long time the Left deluded itself, believing that the present crisis would lead by itself to a relative reduction of inequality. And indeed, in 2008 the income of the top 1% earners in the USA dropped considerably.

Indeed, this was the case for the moment, but the crisis had no impact whatsoever on the longterm trend. In the USA, the UK or France, bonuses for bankers and the income of the financial sector and of the 1% of the richest people, returned to their previous pre-2008 level long time ago. In 2010 the income of the top 1% of earners in the US increased by 11.6%, whereas the income of the rest went up by a mere 0.2%, which is a staggering 60 times lower rate of increase. The reason is that any critical tendency can never change on its own. What counts are only political reactions to it.

Take one of the biggest crises in the 20th century: the Great Depression of 1929. In the 30’s Roosevelt introduced high taxes for people with indecently high earnings and those who earned over USD 200,000 a year (which today is about USD 1 million) had to pay up to 91% in taxes. This was never the case either in Sweden or in the USSR. New institutions were established and new laws were passed. This gigantic political-economic transformation considerably alleviated inequalities and its consequences were felt for as long as until the 60’s. We cannot count on the trend to change of its own accord. We need politics to enter the game.

That’s tough. All the developed countries have been reacting to the crisis very slowly. In 1929 the situation was incomparably more dramatic. Today, we are still far away from a cataclysm; the social security system has been cushioning the shock. People have not been left to their own devices.

But the situation actually is dramatic! Of course not all inequalities are wrong but this is not the point. The problem is that today we are facing a radical questioning of the idea of meritocracy which forms the basis of our societies. The invisible hand of the market affects everyone except for the 1% of top earners who are getting as much as they feel like.

Specifically, for the top 1%, the rules of competition just don’t work for them. The CEOs of big companies are people who frequently fix their remuneration on their own. Since the beginning of the 90’s, real wages of 99% of the population in developed countries have hardly moved. Whereas the earnings of the 1% have just soared. In the first decade of 21st century, in the USA three-quarters of the income growth went to the wealthiest 1%. Between 2002 and 2007 the income of 0.1% of the richest went up by 95%!

Thus, what we are seeing here is an economic problem. There is something particularly naive about the model put forward by economists, which says that pay always depends on productivity. Let’s assume you have 100 workers on an assembly line. You can roughly calculate the increase in productivity if you add one more worker. But this logic simply does not work in case of a CEO or a Financial Director of a company. Those are not reproducible functions and so we don’t have the slightest idea what the productivity of a particular CEO is. Still, we cannot force the company to operate without a boss for ten years, only to check the results afterwards.

You have recently written that there are no more obstacles for capitalism to be like it was in the 19th century, when one of Balzac’s characters explained that work and studies are just a waste of time, whereas the only sensible way of social advancement is to inherit a fortune. Do you really believe we are coming back to a rentier society?

A comeback to considerable inequalities caused by inherited capital or real estate is a dominant and by far the most important tendency in each developed society. For a long time people in the West believed that economic growth and development would result in “capitalism without capital”, in which the money would be replaced by human capital and inequalities would only be caused by labor and differences with respect to skills. But the dream of capitalism without capitalists proved to be completely preposterous. What we are witnessing now is a comeback of inequalities in their brutal and archaic forms.

In the 50’s, 60’s or even 70’s, the inherited capital had no major importance in comparison with the capital generated by labor. Those generations would not inherit much so they felt they were shaping their future on their own.

But this was right after the war, which acted like a steamroller, when a significant part of private equity was destroyed. What can be possibly positive about it?

I don’t miss the 50’s and I’m not saying everything was rosy back then. I only want to underline the fact that today we are facing a situation when the inherited capital counts much more than economic growth. Our social structure is a bit closer to meritocracy and is based to a larger extent on individual freedom and justice than in the past. Still, the contemporary world resembles the 19th century more than we might suspect. And all developed states are heading in the same direction. This is not 19th-century capitalism. Rather, it’s something in between 19th-century capitalism and the post‑war period.

What indicates this?

The figures. In the time of Balzac the income generated by financial capital and real estate constituted 35% to 40% of national income. After the war this was 10%. Today, this percentage has reached 25–30%. In the 50’s, fortunes inherited by the French equaled a yearly rate of GDP. Today this makes up six times the GDP: the same amount as in the beginning of 20th century.

That’s not all. In the post-war reconstruction years, economic growth amounted to 5–6%. Today, it’s back to its historical standard value of 1–2%, whereas the profit generated by capital makes up 4 to 5%. To put it briefly, inherited capital counts more when economic growth is anemic, meaning “normal”. In global terms, the fortunes held by millionaires go up by 6–7% a year. If you confront this figure with the economic growth of 1% it becomes clear, what we are heading for. What we are witnessing is the birth of two classes: the class of “inheritors” and the one of “non-inheritors”.

And one more thing: since the era of Margaret Thatcher and Ronald Reagan, we have been hearing that low taxes for the rich are a blessing for the economy. Whereas, in fact, the statistics show that cutting taxes for the rich is by no means conducive for economic growth. Since the 70’s, in the USA and in the UK, where taxes were decreased, the pace of development was no faster than in Germany or Denmark.

For countries like Poland or the Czech Republic this is not that important. First, we had the war, then communism. Either way, no one inherited much.

Additionally, your economic growth is higher. This is a machine which destroys the past and keeps replacing it with a new reality, without end. China is the perfect example. Economic growth for the last 30 years has continued to be 8–10%. It’s labor that counts, not any inherited fortune. A similar situation could be observed in the USA during the presidency of Bill Clinton, when quick economic growth concealed a growing rift between the wealthiest 1% and the rest.

The reconstruction of rentier capitalism takes a considerable amount of time. The problem is that when this tendency begins to dominate, you can hardly reverse it. Any change requires exorbitant determinations and is hard to carry out. We must bear in mind that all vital changes in tax systems are connected with major political shifts, such as the American or the French Revolutions.

Your works inspired the economic agenda of Barack Obama in 2008. I read then in the “New York Times” a sentence saying: “If you want to understand Obama, read Piketty”. The Occupy Wall Street Movement used some of the ideas from your work. But Obama has changed his direction in the end, and the Wall Street protests have burnt out. Why?

In the USA we have seen the rich taking over politics. Democracy is being slowly replaced by plutocracy. Just take a look at the Republicans’ fortunes, like Mitt Romney’s, whose yearly income amounts to USD 40 million. And actually, the same applies to Democrats. The American Congress is not made up of the top 1%, but of the top 0.1%. These people have nothing in common with the rest of the country. Moreover, 50% of American voters do not vote, these are mostly the poor. In the past, the USA was a considerably egalitarian state. The very idea of high taxes for the superrich was born there. Today, the USA resembles Europe under the Ancien Regime more and more, which contradicts its history.

And one more thing: all this is to some extent the economists’ fault. American economists are arrogant and very self-confident, even though they don’t have too many reasons to feel proud. Their earnings in the last 30 years have soared, which to a considerable extent explains their fundamentally liberal approach. Today, the profession of economists in the USA is utterly corrupt.

But nowadays it’s Europe that’s trailing behind. The Eurozone’s trouble is the most serious threat for the world’s economy at the moment.

Indeed, we are wasting loads of time due to European political institutions, which are taking virtually no steps. After all, Greece makes up only 2% of the European GDP. It’s as if in the USA a crisis broke out in Montana and for the next years people tried to alleviate it, in vain. This is really far from normal.

Europe’s fragmentation used to be an asset. Many historians believed that competition among certain European states fuelled development. Today, it’s becoming evident that fragmentation has turned into the top problem for the EU. Presumably, China’s strength is connected with the fact that, thanks to its size, it can negotiate with other markets on equal terms. Whereas we, in Europe, are fighting with the globalized market and we know just one solution: to return to economic nationalism.

I am an advocate of the EU acting as a political platform and allowing meritocracy to return to power and contain frantic capitalism. Despite those negative experiences, I remain optimistic. However, for this purpose, we need to harmonize fiscal regulations at the European level.

Europe is the world’s largest economic zone. Private equity held by Europeans is 20 times greater than the Chinese foreign exchange reserves and 5 times greater than the sovereign debt of all EU states. We do have enough means at our disposal to solve all our problems.

We all know what harmonization of fiscal systems means for countries such as Poland or the Czech Republic. This would namely entail the increase of corporate taxes and the loss of our competitive position.

I am perfectly aware of this temptation to entice investors with very low taxes. But the case of Ireland shows that this is a zero-sum game. In case each state decided to adopt 0% tax, in practical terms this would mean that the whole welfare system would need to be financed exclusively by income and consumption taxes. Since companies would not contribute a penny.

You’re pushing it to the extreme. Besides, before Poland decided to reduce corporate taxes in 2000, it had experienced a drastic economic slowdown.

Sure, but if we do not take any measures at the European level, your 19% will in ten years’ time drop to 10% and in 20 years, to 0%. There is absolutely no limit for fiscal competition among the states. From the European point of view there is only one end scenario: initially someone wins, but in the end everyone loses. If we don’t realize that, everyone will drown.

But Poland would lose much sooner than others if it raised taxes to the French level now. Let’s leave this aside. We are being told frequently that in the face of Chinese competition, a less skilled workforce has lost its position. To what extent has globalization led to an increase in inequality?

It’s not China that poses a problem, but tax havens. We have no control over them whatsoever. They manage exorbitant assets worth USD 10,000 billion. Whenever a toxic food product comes up, it will be withdrawn from the market immediately. However, this does not apply to toxic financial products; they can be circulated globally without limits. For example, there is no procedure guaranteeing the flow of information. Today, the French tax office can obtain information from the Swiss or from the Island of Jersey only if they have gathered sufficient evidence of tax evasion. This is ridiculous.

The problem will remain unsolved as long as we don’t impose an embargo. The EU should send a clear message: “if you don’t submit all the information, we will stop the exchange. If you don’t respect the rules of a collective existence, you must become self-sufficient”. Tax havens have nothing in common with the market economy. These companies profit from organized theft and robbery of their neighbors’ tax base. Therefore, they should be treated as thieves.

Maciej Nowicki

Maciej Nowicki is Deputy Editor In Chief of Aspen Review.

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