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GLOBAL INEQUALITY
The Piketty story
&
INEQUALITY IN FINANCIAL CAPITALISM
My own story
Master HDFS
Pasquale Tridico
Roma Tre University
[email protected]
Piketty book
•
Piketty’s work is fascinating for the historical data, empirical results and policy
solutions.
•
He charts the evolution of a ‘rentier society’ with rising levels of wealth inequality
up to 1914 (particularly in Europe and to a lesser degree the US) and its
subsequent destruction due to 2 world wars and the rise between the 1930s and
the 1970s of progressive taxation and the welfare state.
•
He then discusses how income inequality has risen again since the early 1980s due
to a combination of
a gradual retreat from progressive taxation,
• declining trade union bargaining power,
• and the rise of a highly paid ‘supermanager elite’ against a backdrop of increasingly
globalised and liberalised markets, facilitated by new communications technologies.
•
Inequality ignored in mainstream
economics
•
Largely because mainstream economists didn’t pay enough attention to capital
accumulation—the process of saving, investing, and building wealth which
classical economists, such as David Ricardo, Karl Marx, and John Stuart Mill, had
emphasized
•
Inequality is irrelevant for macroeconomics balances
•
It can be even useful/functional, as it drives economics growth
•
The dominant view was: initially countries growth with increasing inequality rates,
and then inequality decreases. Hence it is part of the takeoff process of
development (The famous Kuznets curve)
•
Inequality it may increase because of skills and education (neoclassical
“justification”  labour/wage inequality)
Per capita
GDP
(euros 2012)
In details
World
Europe
incl. European Union
incl. Russia/Ukraine
America
incl. United
States/Canada
incl. Latin America
Africa
incl. North Africa
incl. Subsaharan Africa
Asia
incl. China
incl. India
incl. Japan
incl. Other
Equivalent per
capita monthly
income
(euros 2012
10100
24000
27300
15400
21500
760
1800
2040
1150
1620
40700
10400
2600
5700
2000
7000
7700
3200
30000
7600
3050
780
200
430
150
520
580
240
2250
570
World GDP, estimated in
purchasing power parity, was
about 71 200 billion euros in
2012.
World population was about
7.050 billion inhabitants, hence
a per capita GDP of €10 100
(equivalent to a monthly
income of about €760 per
month).
Sources: see
piketty.pse.ens.fr/capital21c.
Figure –The distribution of world output, 0-2012
100%
90%
80%
Asia
70%
60%
America
50%
40%
Africa
30%
20%
Europe
10%
0%
1
0
2
.
1000
3
4
1500
1700
5
6
1820
7
1870
Europe's GDP made 47% of world GDP in 1913, down to 25%
in 2012. Sources and series: see piketty.pse.ens.fr/capital21c
8
1913
9
1950
10
1970 1990
11
2012
Figure - Global inequality 1-2012: divergence then convergence?
250%
Per capita GDP (% of world average)
225%
200%
175%
150%
125%
100%
75%
Europe-America
World
Asia-Africa
50%
25%
0%
0
1000
1500
1700
1820
1870
1913
1950
1970
Per capita GDP in Asia-Africa went from 37% of world average in 1950 to 61%
in 2012. Sources and series: see piketty.pse.ens.fr/capital21c.
1990
2012
Figure - The distribution of world population 1-2012
100%
90%
80%
Asia
Asia
70%
60%
50%
Africa
Africa
40%
30%
America
America
20%
Europe
Europe
10%
0%
0
1000
1500
1700
1820
1870
1913
Europe's population made 26% of world population in 1913, down to
10% in 2012. Sources and series: see piketty.pse.ens.fr/capital21c.
1950
1970
1990
2012
The growth rate of world population
from Antiquity to 2100
2,0%
Observed
growth rates
1,8%
World population growth rate
1,6%
1,4%
UN projections
(central scenario)
1,2%
1,0%
0,8%
0,6%
0,4%
0,2%
0,0%
0-1000
1000-1500
1500-1700
1700-1820
1820-1913
1913-1950
1950-1970
1970-1990
1990-2012
2012-2030
2030-2050
2050-2070
The growth rate of world population was above 1% per year from 1950 to 2012 and should return toward 0% by the end of the 21s t century.
Sources and series: see piketty.pse.ens.fr/capital21c.
2070-2100
5,0%
The growth rate of world output
from Antiquity until 2100
Projections
(central
scenario)
4,5%
Observed
growth rates
Growth rate of world GDP
4,0%
3,5%
3,0%
2,5%
2,0%
1,5%
1,0%
0,5%
0,0%
0-1000
1000-1500
1500-1700
1700-1820
1820-1913
1913-1950
1950-1990
1990-2012
2012-2030
2030-2050
2050-2070
2070-2100
The growth rate of world output surpassed 4% from 1950 to 1990. If the convergence process goes on it will drop below 2% by
2050. Sources and series: see piketty.pse.ens.fr/capital21c.
The growth rate of world per capita output
since Antiquity until 2100
3,5%
Projections (central
scenario)
Growth rate of per capita GDP
3,0%
Observed
growth rates
2,5%
2,0%
1,5%
1,0%
0,5%
0,0%
0-1000
1000-1500
1500-1700
1700-1820
1820-1913
1913-1950
1950-1990
1990-2012
2012-2030
2030-2050
2050-2070
The growth rate of per capita output surpassed 2% from 1950 to 2012. If the convergence process goes on, it will surpass 2,5% from
2012 to 2050, and then will drop below 1,5%.
Sources and series : see piketty.pse.ens.fr/capital21c.
2070-2100
The growth rate of per capita output
since the industrial revolution
5,0%
4,5%
Growth rate of per capita GDP
4,0%
3,5%
Western Europe
North America
3,0%
2,5%
2,0%
1,5%
1,0%
0,5%
0,0%
1700-1820
1820-1870
1870-1913
1913-1950
1950-1970
1970-1990
1990-2012
The growth rate of per capita output surpassed 4% per year in Europe between 1950 and 1970, before returning to American levels.
Sources and series: see piketty.pse.ens.fr/capital21c
Capital definition and motivation in
Piketty book
•
Any asset that generates a monetary return. It encompasses physical capital, such
as real estate and factories; intangible capital, such as brands and patents; and
financial assets, such as stocks and bonds.
•
The popular model of economic growth developed by Robert Solow aims to show
how the economy progresses along a “balanced growth path,” with the shares of
national income received by the owners of capital and labor remaining constant
over time.
•
This doesn’t matches with modern reality.
•
In the United States, for example, the share of income going to wages and other
forms of labor compensation dropped from sixty-eight per cent in 1970 to sixtytwo per cent in 2010—a decline of close to a trillion dollars
New debates
•
Inequality can’t be understood independently of politics
•
There are circumstances in which incomes can converge and the living standards
of the masses can increase steadily—as happened in the so-called Golden Age,
from 1945 to 1973.
•
However, the “forces of divergence” can at any point regain the upper hand, as
seems to be happening now, at the beginning of the twenty-first century”
•
And, if current trends continue, the consequences for the long-term dynamics of
the wealth distribution are potentially terrifying.
Rich and poor
•
In 1950, the average American chief executive was paid about 20 times as much as the
typical employee of his firm.
•
Today the pay ratio between the corner office and the shop floor is more than 500 to 1, and
many C.E.O.s do even better.
•
In 2011, Apple’s Tim Cook received 378 million dollars in salary, stock, and other benefits,
which was 6258 (sixty-two hundred and fifty-eight) times the wage of an average Apple
employee (60.000$).
•
A typical worker at Walmart earns less than 25000 $ a year; Michael Duke, the retailer’s
former chief executive, was paid more than 23 million dollars in 2012.
•
According to a recent report by Oxfam, the richest 85 people in the world—the likes of Bill
Gates, Warren Buffett, and Carlos Slim—own more wealth than the roughly 3.5 billion
people who make up the poorest half of the world’s population.
Ratio between manager’s compensation and
average wages of blue-collar workers, US 2003-2007
Source: ILO 2010
A patrimonial society (1)
•
The return of a “patrimonial society” (of the time of Balzac and Austin): a small
group of wealthy rentiers lives lavishly on the fruits of its inherited wealth, and the
rest struggle to keep up. For the United States, in particular, this would be a cruel
and ironic fate.
•
The egalitarian pioneer ideal has faded into oblivion and the New World may be on
the verge of becoming the Old Europe of the twenty-first century’s globalized
economy.
A patrimonial society (2)
•
the richest 0.1 per cent in the United States is taking an ever-larger slice of the
economic pie
•
the share of the top income percentile is bigger than it was in South Africa in the
nineteen-sixties and about the same as it is in Colombia, another deeply divided
society, today
•
In terms of income generated by work, the level of inequality in the United States
is higher than in any other society at any time in the past, anywhere in the world
•
the richest 0.1 is not “superstar”, rather “supermanagers,” who account for20-25%
of total income. Rising income inequality is largely a corporate phenomenon.
The share of top percentile in total income rose since the 1970s in all Anglo-saxon
less in Europe and Japan. Sources and series: see piketty.pse.ens.fr/capital21c.
Income inequality in Anglo-saxon countries, 1910-2010
Income inequality: Continental Europe and Japan, 1910-2010
U.S.
24%
U.K.
22%
20%
18%
16%
Share of top percentile in total income
22%
Share of top percentile in total income
24%
Canada
20%
Australia
18%
14%
10%
10%
8%
8%
6%
6%
0%
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Sweden
Japan
14%
12%
2%
Germany
16%
12%
4%
France
4%
2%
0%
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Expressed in 2013 purchasing power, the hourly minimum wage rose from €2.1 to
€9.4 in France between 1950 and 2013. and from $3.8 to $7.3 in the U.S.
Sources and series: see piketty.pse.ens.fr/capital21c.
10,00 €
$12,00
Minimum wage in 2013 dollars
9,00 €
$10,80
Minimum wage in 2013 euros
Minimum wage in current
dollars
$9,60
8,00 €
Minimum wage in current euros
$8,40
7,00 €
$7,20
6,00 €
$6,00
5,00 €
,
,
$4,80
4,00 €
$3,60
3,00 €
$2,40
2,00 €
$1,20
1,00 €
$0,00
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
0,00 €
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Income inequality: Northern and Southern Europe, 1910-2010
24%
22%
Share of top percentile in total income
20%
France
Denmark
Italy
Spain
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
As compared to Anglo-saxon countries, the top percentile income share barely increased in Northern and Southern Europe since the 1970s.
Sources and series: see piketty.pse.ens.fr/capital21c
2010
Inequality of total income (labor and capital) has dropped in France during the 20th century, while
wage inequality has remained the same. In Usa is dramatically increased
Sources and series: see piketty.pse.ens.fr/capital21c
Income inequality in France, 1910-2010
High incomes and high wages in the U.S. 1910-2010
50%
40%
35%
30%
25%
Share of top income
decile in total income
Excl. capital gains
Share of top wage decile
in total total wage bill
Share of top
income decile in
total income
Share of top
wage decile in
total wage bill
Share of top decile in total (incomes or wages)
45%
Share of top decile in total (incomes or wages)
50%
45%
40%
35%
30%
25%
20%
20%
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
.
Supermanagers today as before
landowners/rentiers (1)
•
Defenders of big pay packages like to claim that senior managers earn their vast
salaries by boosting their firm’s profits and stock prices. They are unique! Talent!
•
But it is hard to measure the contribution (the “marginal productivity”) of any one
individual in a large corporation. The compensation of top managers is typically
set by committees comprising other senior executives who earn comparable
amounts.
•
It is only reasonable to assume that people in a position to set their own salaries
have a natural incentive to treat themselves generously
Supermanagers today as before
landowners/rentiers (2)
•
Many C.E.O.s receive a lot of stock and stock options.
•
Over time, they and other rich people earn a lot of money from the capital they
have accumulated: it comes in the form of dividends, capital gains, interest
payments, profits from private businesses, and rents. Income from capital has
always played a key role in capitalism.
• When the rate of return on capital (r) —the annual income it
generates divided by its market value—is higher than the
economy’s growth rate (g), capital income will tend to rise faster
than wages and salaries, which rarely grow faster than G.D.P.
Strong forces of divergences in US
Main arguments from Piketty
•
The observation that income inequality is rising across the world economy is not a
new one. This phenomenon has been analysed in major reports by the OECD, the
IMF and International Labour Organisation.
•
Piketty’s explanation, however, is that this is an inexorable trend if left unchecked
by policy or major shocks like the two world wars.
•
His argument rests on a number of empirical hypotheses, which challenge
conventional economic thinking. The evidence he presents is very challenging,
powerful and robust, although not conclusive, and it will certainly be a stimulus to
more research in these areas.
1 - Strong forces of divergences
r>g
• Modern capitalism has an internal law that leads, not
inexorably but generally, toward less equal outcomes. The law
is simple r>g
• When r the rate of return on capital (the annual income it
generates divided by its market value) is higher than the
economy’s growth rate g, capital income will tend to rise
faster than wages and salaries
• If the rate of growth exceeds the rate of return, wages and
salaries will grow more rapidly than income from capital, and
inequality will fall. That’s what happened in much of the
twentieth century at world level.
Rate of return vs. growth rate at the world level, from Antiquity until 2100T
the rate of return to capital (pre-tax) has always been higher than the world growth rate, but the gap was reduced during the
20th century, and might widen again in the 21st century.
Annual rate of return or rate of growth
6%
5%
4%
Pure rate of return to capital r (pre-tax)
3%
Growth rate of world output g
2%
1%
0%
0-1000
1000-1500
1500-1700
1700-1820
1820-1913
1913-1950
Sources and series: see piketty.pse.ens.fr/capital21c
1950-2012
2012-2050
2050-2100
In other words…pro-rich growth
•
With r>g no problem… if ownership of capital were distributed equally. We’d all
share the rise in profits and dividends and rents.
•
But in the United States (and to some extent also in UE) in 2010, for
example, the richest 10% of households owned 70% of all the country’s
wealth (a good proxy for “capital”), and the 1% of households owned 35%
per cent of the wealth.
•
By contrast, the bottom 50% of households owned just 5%. When income
generated by capital grows rapidly, the richest families benefit disproportionately.
•
Since 2009, corporate profits, dividend payouts, and the stock market have all
risen sharply, but wages have barely budged. As a result, almost all of the income
growth in the economy between 2010 and 2012 (95% of it) accrued to the top 1%.
2 - elasticity of substitution between
capital and labour > 1
• He argues that the elasticity of substitution between capital
and labour is significantly greater than 1 (maybe around 1.5).
• This it implies that a rising capital-income ratio will only be
partly offset over time by a declining real rate of return on
capital (r).
• This overturns the familiar result of stable labour and capital
shares of national income, modelling of long-term growth and
many other similar studies.
• Usually r declines for the well know mainstream principle of
declining marginal productivity when K increases
3 - after 2050
Piketty also projects that global growth (g) will decelerate
significantly in the long run, particularly after 2050 when
the catch-up process will be much closer to being
complete for the large emerging economies like China
and India.
He therefore argues that r > g will continue even more
during the next century (particularly after 2050), which
will tend to push up the capital-income ratio and the
share of capital in national income.
4 - The larger the richer
• He also argues that the rate of return on capital (r) will
generally be higher on average for larger portfolios, thus
accentuating the trend towards ever greater wealth
inequality.
• Evidence on returns on US university endowment proves
this.
• As we said: in US (and to some extent also in UE) in 2010, for
example, the richest 10% of households owned 70% of all
the country’s wealth…and the 1% of households owned 35%
per cent of the wealth.
Between I and II WW and immediately after
•
In Europe, two World Wars and the progressive tax policies that were needed to
finance them did enormous damage to the old estates and great fortunes: many
rich people, after paying their income and inheritance taxes, didn’t have enough
money left to replenish their capital.
•
During the postwar era, inflation ate away at their savings.
•
Meanwhile, labor-friendly laws enabled workers to bargain for higher wages,
which raised the proportion of income that labor received.
•
And the task of rebuilding after the wartime destruction made for the rapid
expansion of G.D.P. This helped to keep the growth rate above the rate of return
on capital, fending off the forces of divergence.
The capital/income ratio in Europe, 1870-2010
800%
700%
500%
400%
300%
200%
100%
1870
Market value of private capital (% national income)
600%
Germany
Aggregate private wealth was
worth about 6-7 years of
national income in Europe in
1910, between 2 and 3 years
in 1950, and between 4 and 6
years in 2010.
France
United Kingdom
Sources and series: see
piketty.pse.ens.fr/capital21c.
1890
1910
1930
1950
1970
1990
2010
National capital is worth about 7 years of national income (including 3-4 in
agricultural land and 1 invested abroad).
Sources and series: see piketty.pse.ens.fr/capital21c
Capital in Britain, 1700-2010
Net foreign capital
Value of national capital (% national income)
700%
600%
Other domestic capital
Housing
700%
600%
Agricultural land
500%
500%
400%
400%
300%
300%
200%
200%
100%
100%
0%
1700 1750 1810 1850 1880 1910 1920 1950 1970 1990 2010
Capital in France, 1700-2010
800%
Value of national capital (% national income)
800%
Net foreign capital
Other domestic capital
Housing
Agricultural land
0%
1700 1750 1780 1810 1850 1880 1910 1920 1950 1970 1990 2000 2010
.
Public debt surpassed 2 years of national income in 1950 (in Britain).
In 1950, public capital in France is worth almost 1 year of national income, vs. 2 years for private capital.
Sources and series: see piketty.pse.ens.fr/capital21c
Private and public capital in France, 1700-2010
Public wealth in Britain, 1700-2010
250%
100%
50%
Public assets
800%
700%
Public debt
600%
500%
400%
300%
200%
100%
0%
-100%
National, private and public capital (% national income)
150%
Public assets and debt (% national income)
200%
900%
National capital (private +
public)
Private capital
Public capital
0%
-200%
1700 1750 1810 1850 1880 1910 1920 1950 1970 1990 2010
1700 1750 1780 1810 1850 1880 1910 1920 1950 1970 1990 2000 2010
The market value of slaves was about 1.5 years of U.S. national income around 1770 (as much as land).
National capital is worth 6.5 years of national income in Germany in 1910 (incl. about 0.5 year invested abroad).
Sources and series: see piketty.pse.ens.fr/capital21c.
Net foreign capital
Other domestic capital
700%
Value of capital (% national income)
Housing
Slaves
600%
Agricultural land
500%
Capital in Germany, 1870-2010
800%
Net foreign capital
700%
Value of national capital (% national income)
Capital and slavery in the United States
800%
Other domestic capital
600%
Housing
Agricultural land
500%
400%
400%
300%
300%
200%
200%
100%
100%
0%
1770 1810 1850 1880 1910 1920 1930 1950 1970 1990 2010
.
0%
1870
1890
1910
1930
1950
1970
1990
2000
2010
In Italy, private capital rose from 240% to 680% of national income between 1970 and 2010, while
public capital dropped from 20% to -70%. Sources and series: see piketty.pse.ens.fr/capital21c.
Figure 5.5. Private and public capital in rich countries, 1970-2010
800%
U.S.
Japan
Germany
France
U.K.
Italy
Canada
Australia
Value of capital (% national income)
700%
600%
500%
400%
300%
200%
Public
capital
Private
capital
100%
0%
-100%
1970
1975
1980
1985
1990
1995
2000
2005
2010
According to simulations (central scenario), the world capital/income ratio could be near to
700% by the end of the 21st century. Sources and series: see piketty.pse.ens.fr/capital21c.
The world capital/income ratio, 1870-2100
800%
Projections
(central
scenario)
Value of private capital (% national income)
700%
600%
Observed
series
500%
400%
300%
200%
100%
1870
1890
1910
1930
1950
1970
1990
2010
2030
2050
2070
2090
In US the story was less dramatic in terms
of collapse of capital ratio but similar.
•
The Great Depression wiped out a lot of dynastic wealth, and it also led to a policy
revolution.
•
During the 1930-40s, Roosevelt raised the top rate of income tax to 90% and the tax on
large estates to more than 70%.
•
The federal government set minimum wages, and it encouraged the growth of trade
unions.
•
In the decades after the war, it spent heavily on infrastructure, such as interstate
highways, which boosted G.D.P. growth.
•
Fearful of spurring public outrage, firms kept the pay of their senior executives in check.
•
During the period from the New Deal era of the mid-1930s to the late 1970s, average real
GDP per capita growth in the US was similar to, or even slightly higher than, in the
following 30 years
Sources and series: see piketty.pse.ens.fr/capital21c.
Top inheritance tax rates, 1900-2013
Top income tax rates, 1900-2013
90%
U.S.
90%
80%
U.K.
70%
Germany
60%
France
80%
70%
60%
50%
50%
40%
30%
20%
10%
Top marginal tax rate applying to the highest inheritances
100%
Marginal tax rate applying to the highest incomes
100%
U.S.
40%
U.K.
30%
Germany
20%
France
10%
0%
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
0%
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
.
Since the end of 1970s
• Inequality started to rise again only when Margaret Thatcher and
Ronald Reagan led a conservative counter-revolution that:
1. slashed tax rates on the rich,
2. decimated the unions,
3. and sought to restrain the growth of government
expenditures.
Politics and income distribution are two sides of the same coin.
Figure 9.7. The top decile income share: Europe and the U.S., 1900-2010
50%
U.S.
U.K.
Germany
France
Sweden
Share of top decile in total income
45%
40%
35%
30%
25%
20%
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
In the 1950s-1970s, the top decile income share was about 25-35% of total income in Europe in the U.S. 45%
Sources and series: see piketty.pse.ens.fr/capital21c.
2010
Two ways out (possible without policy
intervention) alternative to tax intervention
1.
G.D.P. growth will approach, or even exceed, the rate of return on capital. If it
does, the coming decades could look more like the middle of the twentieth
century than like the nineteenth century. With the rise of the Internet,
biotechnology, robots, and other scientific advances, it is at least conceivable
that productivity growth will shift to a permanently higher rate, and that G.D.P.
will rise with it.
2.
A second possible escape route is for the return on capital to fall, closing the gap
with the growth rate. That’s what traditional economic theory would predict. As
the stock of physical and financial capital gets bigger, the principle of
diminishing returns suggests that the rate of profit and interest should decline.
Policy issues – a global approach to
progressive taxation
• Turning from analysis to policy, Piketty sees the need for a
regulated form of capitalism to put some limits on the rising
inequality seen over the past 30 years.
• He recognises the value of the free market economy and is not
advocating widespread renationalisation or protectionism, but
he does argue for stronger social protection for lower income
groups.
• He sees progressive taxes on wealth and unearned income in
particular as the fairest way to fund this provision.
Tax intervention
•
1.
Given that inequality is a worldwide phenomenon, a worldwide solution is needed:
a global tax on wealth
combined with
2. higher rates of tax on the largest incomes.
•
How much higher? the optimal top tax rate in the developed countries is probably
above 80%
•
Such a rate applied to incomes greater than five 500.000 or 1 million dollars a year
not only would not reduce the growth of the US economy but would in fact
distribute the fruits of growth more widely while imposing reasonable limits on
economically useless (or even harmful) behavior.
Annual (global) property/wealth tax
•
A wealth tax would force individuals who often manage to avoid other taxes to
pay their fair share; and it would generate information about the distribution of
wealth, which is currently opaque.
•
A new wealth tax would be like an annual property tax, but it would apply to all
forms of wealth.
•
Households would be obliged to declare their net worth to the tax authorities, and
they would be taxed upon it.
•
1% for households with a net worth of between 1 million and 5 million dollars;
•
2% for those worth more than 5 millions.
•
Or a more steeply progressive tax on large fortunes (for example a rate of 5 to 10
percent on assets above 1 billion euros)
Global coordination for tax
•
Governments could only do this on a co-ordinated international basis with much
greater financial transparency to prevent the flight of wealth (and wealthy people)
to lower tax regimes.
•
Taxing the rich more unilaterally, as the French government has tried to do in
recent years, is risky (to fail).
•
All in all: rich people do not work, so why then to tax so much labour and nothing
the wealth?
Mainstream criticisms - 1
•
His book largely focusses on Europe and the United States. At the global level, substantial
progress has been made in dragging people out of destitution, and extending their lives.
•
In 1981, according to figures from the World Bank, about 2 in 5 members of humanity were
forced to subsist on roughly 1 dollar a day. Today, the figure is down to about 1 in 7.
•
In the early 1950s, the average life expectancy in developing countries was 42 years. By
2010, it had risen to 68 years. “
•
Life is better now than at almost any time in history,” Angus Deaton, a Princeton
economist, wrote in his 2013 book, “The Great Escape: Health, Wealth, and the Origins of
Inequality.”
•
“More people are richer and fewer people live in dire poverty. Lives are longer and parents
no longer routinely watch a quarter of their children die.”
But:
…
Mainstream criticisms -2
•
Economists such as John Hawksworth, Andrew Sentence argue that the Piketty
story may make sense as an analysis of the 18th and 19th centuries, when land and
physical capital were the main sources of wealth. But it does not make sense for
the 21st century. High earners in modern western society are generally exploiting
skills and technology – intangible capital – rather than the accumulation of
physical capital. They have to invest their high income somewhere – so rich people
do have large holdings of land and other physical assets. But the ultimate driver of
inequality has little to do with the accumulation of physical wealth.
•
His book is just a throwback to old Marxist ideas from the 19th century. One could
dismiss all of Piketty's specific tax suggestions and advocate to combat inequality
boosting early years education for lower income families to increased building of
affordable housing and paying a decent living wage.
Mainstream criticisms - Punitive taxation
• Mainstream economists call Piketty’s suggestions as
Punitive taxation which will not help
• According to them, the leading western economies
regenerated themselves in the 1980s and 1990s by
moving away from punitive taxation.
• They prefer (in the most progressive case) a set of
policies targeted on helping raise skill levels, improving
access to basic needs – including housing, and helping
disadvantaged groups in the population.
Conclusion - 1
• Piketty suggests instead that we are going (in US and in some EU
countries) in the direction where it is not worth to study in order to
achieve wealth, since this is accumulated mostly by inheritance,
financial sector speculation, lobby, and ultimately top education
institutions where only the already rich can study.
• This is a similar phenomenon of what happened in France and in UK in
the 19th century described in the Balzac/Austin books of the time).
Conclusion – 2
•
His main thesis is in fact that there is an inherent tendency to the
accumulation of wealth in fewer and fewer hands because the returns to
capital exceed economic growth. He is also assuming that wealth
accumulates as it is passed on through the generations.
•
Thomas Piketty has done us a great service by writing a book on rising
inequality of income and wealth. His translator, Arthur Goldhammer, also
deserves a lot of credit. His translation has contributed greatly to the
readability of the book in English in particular among Anglo-Saxon countries
where inequality is rising the most.
INEQUALITY IN FINANCIAL CAPITALISM
Welfare and Financial Capitalism during Globalisation (the Roots of
Inequality and Poorer Economic Performance)
The context:a Trilemma
Financialisation,
2. Globalisation,
3. Welfare
1.
•
Only two of them can cohesist and work (produce better
economic performance)
Pick two of them…but only the right
two
Globalisation
Financialisation
Welfare
The objective of the paper
• Is “the efficiency thesis” functional for economic growth?
(reduce welfare and increase competitiveness in the global
market)
or,
• “The compensation thesis” produces better results in terms of
economic growth? (because of globalisation inequality
increases  SO: To reduce inequality increase welfare state,
and this will create also advantages and competitiveness)
Hypothesis and method
•
The efficiency thesis does not cause economic growth.
•
The tests are conducted in a sample of 42 countries made up of OECD and EU
members.
•
Our econometric exercises indicate that the “compensation thesis” (i.e., regulated
globalisation and an expanded welfare state) is better able to produce higher
economic growth.
•
Performance Index (PI) combines GDP growth and labour market performances
The results
•
A new classification: 1) Welfare Capitalism and 2) Financial Capitalism.
1.
Welfare capitalism  reduces inequality and foster economic growth.
2.
Financial Capitalism  higher inequality and during crisis worse economic
performance (2007-13).
•
Welfare state is not a drain on economic performance and competitiveness or as a
barrier to economic efficiency.
•
The most generous of Europe’s welfare states are also the most efficient and
successful economies as far as they have globalisation without financialisation
Globalisation or Regionalisation (i.e.
Europeanisation)?
•
Globalisation  process intensification of trade, capital mobility, finance, labour,
technology….
or
•
Globalisation  process not only of the intensification of those flows but also of
extensive increase at a planetary level of trade, capital etc. (Hay and Wincott,
2012; Held et al., 1999).
12000000
FDI in Developed countries and in the World
10000000
world FDI inward stock (millions US$)
world FDI outward stock (millions US$)
DevC FDI inward stock (millions US$)
DevC FDI outward stock (millions US$)
8000000
6000000
4000000
2000000
0
1980
1985
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2006
5
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
35
Global trade intensification
30
25
20
15
10
World Imports of goods and services (% of GDP)
World Exports of goods and services (% of GDP)
0
The six changes on the top of it
1.
The political (and ideological) change in the 1980s  Reagan and Thatcher 
“Washington Consensus” by WB and IMF.
2.
The financial deregulation in the USA and in UK and later in other countries
3.
The fall of Berlin Wall in 1989 (and the following dissolution of the Soviet Union
in 1991)
4.
The deepening of the process of integration of the European Union  and the
Maastricht Treaty
5.
The tremendous challenges posed by the technological progress that brought
about the ICT revolution
6.
The take-off (during the 1980s and 1990s) of emerging economies
Globalisation and growth
•
For Lucas (1993), international trade contributes to stimulate economic growth
•
Baghwati (2004) believed that trade is the engine of economic growth
•
Walsh and Whelan (2000): structural change, R&D  growth
Globalisation and inequality
•
Market integration increases economic inequality and vulnerability (from StolperSamuelson on)  gap increases between North and South
•
Capital outflows from capital-rich countries to LDCs increases inequality in DC
(Ha, 2008; Tsebelis 2002).
•
Tax competition on capital  reducing welfare  outsourcing
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
CAPITAL MOBILITY THREATEN
Fdi in % of World GDP
4,5
4
3,5
3
2,5
2
1,5
1
0,5
0
FDI, net inflows (% of GDP)
Financialisation
•
Dominance of capital financial systems over bank-based financial systems
(Krippner, 2005),
•
The increasing role of financial motives, financial markets, financial actors and
financial institutions in the operation of domestic and international economies
(Epstein 2005: 3-4).
•
In numbers: +2 trillion $ each day of volume of foreign exchange transactions in
2006 (-/+ GDP of France). In 1989, this volume was about 500 billion $ per day (-/+
the GDP of Greece).
ga
l
n
Sw
ed
en
Sw
itz
er
ni
la
te
nd
d
Ki
ng
do
Un
m
ite
d
St
at
es
Sp
ai
Po
rtu
rw
ay
ds
1988
No
la
n
pa
n
Ita
ly
la
nd
Ja
Ire
th
er
Ne
lia
Ca
na
da
De
nm
ar
k
Fr
an
ce
G
er
m
an
y
G
re
ec
e
Au
st
ra
Market Finacialization: 1988-2006 (% of GDP)
2006
350
300
250
200
150
100
50
0
Avg. Growth of GDP per capita in EU and US, 1961-2009
1961-80
5
1981-91
1992-2009
Growth before and during financialisation
4,5
4
3,5
3
2,5
2
1,5
1
0,5
0
Germany
France
Spain
Italy
EU15
USA
US average compensation
Average compensation in the financial sector
Average compensation in the rest of the economy
Expansion and retrenchment of Welfare State
(Public Social Expenditure, % of GDP)
25
23
21
19
17
15
13
11
9
7
5
1960
1965
1970
1975
1980
EU-21
1985
OECD-34
1990
1993
1997
2002
2007
Welfare evolution
•
I used a revised and updated version of the approach used by Esping-Andersen
(1990) who ranks welfare models mainly according to the level of social spending,
to the level of (de)commodification of welfare and to degree of extension of
welfare among citizens (3 groups: Liberal, Continental and Scandinavian models)
•
A new classification, five models: the three above + the Mediterranean group and
the Central and East European Countries (CEEC)
Main features to identify the model
•
Public social spending
•
Financialisation
•
Gini
•
EPL
•
Wage share
The evolution of welfare and the break in 1990
Social spending by welfare models, 1970-2007
40
37
34
Social Spending, % GDP
31
28
Continental
Scandinavian
25
Liberal
Mediterranean
22
CEEC
19
16
13
10
1970
1975
1980
1985
1990
1995
2000
2003
2005
2007
Wage Share 1980-2010 by group of countries
(compensation/VA)
65
60
Wage Share % GDP
55
Continental Europe
Scandinavian countries
50
Anglo-Saxon countries
45
Mediterranean countries
CEEC
40
35
30
1980
1990
2000
2010
Inequality (Gini coeffients) among OECD countries
0,4
0,35
0,3
0,25
0,2
0,15
0,1
0,05
0
1985
1995
2005
2012
INEQUALITY BY WELFARE MODELS
Gini coefficients since 1980s
0,4
0,35
0,3
continental
scandinavian
0,25
liberal
mediterranean
0,2
0,15
1986
1990
1995
2000
2004
2005
2006
2007
2008
2009
2012
Financialisation vs labour flexibility
3
Portugal
Czech Republic
Germany
Slovenia
Italy
Austria
Sweden
France
Korea
Norway
Denmark
Greece
Finland
Spain Israel
epl_2013
2
Poland
Netherlands
Belgium
Australia
Ireland
Japan
1
United Kingdom
Canada
0
United States
0
50
100
financialisation_2012
150
.4
labour flexibility and inequality
.35
United States
gini_2012
United Kingdom
Japan
Australia
Ireland
New Zealand Estonia
.3
Canada
Spain
Greece
Italy
Korea
Poland
France
Netherlands
Germany
Hungary
.25
Austria Sweden
Belgium
Slovak Republic
Finland
Czech Republic
Denmark
Norway
Slovenia
0
1
2
epl_2013
3
.4
Financialisation and inequality
United States
.35
Israel
Portugal
gini_2012
United Kingdom
Australia
Spain
Japan
Greece
Ireland
Canada
Estonia
Italy
New Zealand
Korea
.3
Poland
France
Netherlands
Germany
Hungary
.25
Slovak Republic
Czech Republic
Slovenia
0
50
Sweden
Austria
Belgium
Finland
Denmark
Norway
100
financialisation_2012
150
.5
The role of welfare
Chile
.45
Mexico
.4
.35
Israel
United States
.3
UnitedPortugal
Kingdom
Spain
Greece
Japan
Australia
Ireland
Canada
Estonia
Italy
New Zealand
Switzerland
Poland
France
Netherlands
Luxembourg
.25
gini_2012
Turkey
Norway
10
15
20
25
Public social spending 2012
Germany
Sweden
Austria
Belgium
Finland
Denmark
30
The empirical analysis
Given that a more sophisticated model was tested,
according to the following equation:
42 EU and OECD countries, on a panel between 2007 and 2013
Regression Model on a Longitudinal Panel
Dep Var.: GDP per capita (Log Natural)
Variable
Coeff. (standard errors)
Public Social subsidies (% of GDP)
.0085532 (.0029786)
Education_Expend. (public), % of GDP
.1323674 (.0372624)
Import, % GDP
-.026967 (.0068556)
Export, % GDP
.0223626 (.0061447)
Investment (capital formation), % GDP
-.0041776 (.0034335)
FDI (out), % GDP
-.0008266 (.0005231)
FDI (in), % GDP
-.000998 (.0085615)
Constant
10.34326 (.7078016)
Time dummies (Years 2007, 2008, 2009, 2010, 2011, 2012): YES
R-sq (between) = 0.8097
sd(u_i + avg(e_i.))= .1875238
Number of obs = 240;
Number of groups = 42
P-values
0.008
0.001
0.001
0.001
0.234
0.126
0.908
0.000
Prob > F = 0.0000
Panel (2007-2008-2009-2010-2011-2012)
Between-group effects (BE)
Hausman Test (BE vs FE):
b (BE) = consistent under Ho and Ha; obtained from xtreg
B (FE) = inconsistent under Ha, efficient under Ho; obtained from xtreg
Test: Ho: difference in coefficients not systematic
chi2(12) = (b-B)'[(V_b-V_B)^(-1)](b-B) =
Hausman Test (BE vs RE):
138.73
b (BE) = consistent under Ho and Ha; obtained from xtreg
B (RE) = inconsistent under Ha, efficient under Ho; obtained from xtreg
Test: Ho: difference in coefficients not systematic
Prob>chi2 =
0.0000
General results
•
Best performing countries are those that rely on a corporative socio-economic
model rather than on a liberal competitive model.
•
This means that countries that managed to keep higher levels of public
expenditure and higher levels of welfare state are better off today in the global
economy. The empirical analysis focused on the period of the crisis that started in
2007.
Stronger welfare and “mercantilist” globalisation
•
As the regression table suggests, social subsidies and education expenditures,
both with positive and significant coefficients, are functional to higher GDP.
•
Positive coefficients and significance are noted for the variable Export (as a
percentage of GDP), while a negative significant coefficient is noted for the
variable Import (as a percentage of GDP)
•
 the corporative socio-economic model
The winner is…
•
the supremacy of the “compensation hypothesis” is confirmed: regulated
globalisation and an expanded welfare state are better able to produce higher
GDP per capita.
•
In other words, countries that perform the best during this period (2007-13),
results suggest, invested more in welfare state (social subsidies and public
education expenditures) and adopted mercantilist policies, importing less and
exporting more without being as open towards FDIs.
•
These countries do not properly represent an orthodox model of liberal capitalist
economy. On the contrary, they represent a corporative or social market economy
model
best-performing countries are Continental and Scandinavian European
economies
0
continental
scandinavian
liberal
-2
-4
-6
-8
-10
-12
-14
-16
Performance Index (g+n) - U
average 2007-2013
CEEC
mediterranean
Lessons to be learned – 1: during the
crisis
•
In the years of the crisis (2007-13): countries that had better performance are
those that managed not to retrench the welfare state under the process of
globalisation and therefore reached the eve of the crisis in 2007 better equipped in
terms of the welfare state.
Lessons 2 – welfare evolution
.3
Liberal2010
Mediterranean2010
Liberal1990
.3
GINI
Continental2010
Mediterranean1990
Continental1990
Scandinavian2010
.25
Scandinavian1990
.2
20
25
30
SOCIAL_SPENDING
35
40
Lesson 3 - from the trilemma:
globalisation and welfare
•
Winners in globalisation: did not embrace tout court financialisation and did not
retrench welfare.
•
Investing in social dimensions is the best policy option not only because it reduces
inequality but also because it produces better performance (GDP and labour
market).
•
Hence, from the trilemma (globalisation, welfare and financialisation), it is better
to adopt globalisation and welfare because any other solution would contribute to
poorer socio-economic performance.
Lesson 4 : a new classification
•
evolution of welfare states leads us toward a new classification of only 2 socioeconomic models among advanced economies quite polarised
1.
Financial Capitalism regime
2.
Welfare Capitalism regime
Welfare Spending (% GDP)
Very high
Very high
Financialisation
(market
capitalisation middle
index, % GDP)
Very low
Middle
Very low
Liberal Model
Scandinavian Model
Continental Model
Mediterranean Model
Poles apart: Welfare Capitalism and Financial Capitalism (data 2010)
Conclusion 1
•
Countries that reacted to globalisation challenges by the implementation of the
efficiency thesis, did not achieve better economic performance and during the
crisis suffered the most (Liberal and Mediterranean models).
•
Their income distribution worsened and inequality ↑.
•
On the contrary, econometrics exercises show that the “compensation thesis” was
better able to produce higher economic growth along with better labour market
performance and better income distribution.
Conclusion 2
•
A new classification emerged on the basis of welfare spending, financialisation
and inequality:
1.
Welfare Capitalism (Continental /Scandinavian)
2.
Financial Capitalism (Liberal/Mediterranean)
•
Welfare Capitalism shows a better Performance Index and lower inequality;
•
On the contrary, countries of the Financial Capitalism have lower Performance
Index and higher inequality.