GV4D4 - week 11

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These are my notes from December 05 for GV4D4 at the London School of Economics for the 2017-2018 school year. I took this module as part of the one-year Inequalities and Social Science MSc program.

The usual disclaimer: all notes are my personal impressions and do not necessarily reflect the view of the lecturer.

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Can the Inequality Trend Be Reversed?

Readings

Capital in the Twenty-First Century by Thomas Piketty (chapters 13-16)

Chapter 13: A Social State for the Twenty- First Century

advocates a progressive global tax on wealth, which would have the side effect of making capital ownership more transparent
- he recognises how utopian this is, though, and acknowledges regional (e.g., EU) alternatives as a stepping stone
on the response of govts to financial crisis: he seems to think they did a good job (contrasted to Hoover’s liquidationist response to the Great Depression)
- otoh, the aftermath did not result in a more progressive tax code this time, which he thinks is necessary this time around
graph of tax revenue (% NI) since 1870: obviously increased a lot (as the state has grown), stabilising after 1980
public spending split between services (edu, healthcare) and transfers/replacement income (pensions, benefits)
- pensions account for most of the latter (2/3 to 3/4)
- thus growth of fiscal state mostly due to growth of social state
on moral justification of inequality: briefly mentions Rawls’ difference principle + Sen’s capabilities framework
on challenges for further welfare state growth:
- lower growth than during the Golden Ages means it’s harder to get support for tax increases (he seems to be assuming that a radically more progressive tax is out of the question)
on social mobility
- high tuition fees for higher education as a bottleneck
- though even if that were eliminated, it wouldn’t fix everything; grade inflation could just occur, and other filters would be used (cites Bourdieu)
on the problem with pay-as-you-go pension schemes due to ageing pop + falling growth rates
- he suggests that reforming the pension system is hard but never goes into the (imo obvious) alternative of better public services to alleviate the need for a high pension …
in developing countries: much smaller social states, partly as a result of externally-foisted liberalisation

Chapter 14: Rethinking the Progressive Income Tax

the progressive income tax as the major fiscal innovation of the 20th century
types of taxes:
- capital flow, or capital stock (real estate etc)
- (non-capital) income tax
- consumption tax (indirect since it’s not on income)
- social insurance contributions
today, many tax systems are regressive on top (even worse when you consider that wealth is taxed less than income)
- suggests that a progressive tax is necessary to shield those who lose out from globalisation (otherwise they’ll turn against it)
- (unfortunately it’s now too late)
most advanced countries had developed some sort of progressive tax systems before WWI, though top incomes were still taxed at very low rates (skyrocketed during the war)
- mostly falling after the 80s though
suggests that very high tax brackets (70%) aren’t actually primarily intended to raise further revenue
- rather, it’s to put an end to such extreme concentrations, albeit in a liberal-approved way (not direct expropriation)
- concurs that decreasing these top tax rates doesn’t actually lead to increased revenue (pace the Laffer curve)
  - in the UK/US, didn’t stimulate productivity; instead, incentivised top execs and others with some degree of control over salaries to get paid more
- proposes that optimal top tax rate in advanced countries is >80% (better redistribution without limiting growth)
  - easier to implement this in a large country like the US rather than a small, European one (less chance of flight)

Chapter 15: A Global Tax on Capital

requires international cooperation (but that could be done in stages, starting with regional)
thinks this is better than protectionism + capital controls
basic proposal: a progressive annual tax on global wealth (above a certain threshold, and including all types of assets)
if implemented, would require transparency about who owns how much wealth and where, which would facilitate more accurate discussions of fiscal policy
- even if the level of tax is very low, it’s worth carrying out just for the detailed reporting side effect
- suggests an automated system (pre-populated forms) rather than asking for full declarations
- first step: automated transmission of banking data to relevant authorities (which is already technically feasible)
  - already occurs in some jurisdictions, and there’s no real acceptable justification for the (tax shelters) that refuse to share
  - example of this already occurring: FATCA in the US (not ambitious enough though, and doesn’t include institutions that don’t do business in the US)
he thinks there needs to be 3 types of progressive taxes (3 pillars): income + estate need to be supplemented by a tax on capital
- reason: declared income doesn’t necessarily match actual increases in capital accumulation (since most of it isn’t needed for immediate spending and thus isn’t paid out as dividends or whatever)
- thus capital tax ensures they actually contribute to the tax system in a way proportional to their true wealth
- need to find a balance between incentive logic (taxing capital stock to encourage productive investment) and insurance logic (taxing the flow to insure against unpredictable returns)
- suggests linking tax rates to the observed rates of return in previous years
- he sees this as a more palatable alternative to the Marxist approach (abolishing private ownership of the means of production)
on China, which has implemented capital controls (an approach he does not encourage) as well as a progressive tax schedule
on “petroleum rents” (oil resources in the Middle East) leading to distributional injustice due to the arbitrariness of national borders
on immigration to rich countries, which he correctly characterises as only a temporary, bandaid-like solution (in the long run, you need a strong social state with progressive taxes)
- suggests that global inequality will be mitigated by his global wealth tax (since capital flight from the developing world is a huge problem)

Chapter 16: The Question of the Public Debt

advanced countries are richer, but also greater levels of debt
- indicating that the problem of public debt is a distributional one (between public/private), not a matter of absolute wealth levels
three main solutions to reduce debt:
- raising taxes (esp on capital)
- inflation (which he says could work if the former doesn’t, but less predictable distributional consequences)
- austerity (which he sees as the worst solution)
European public debt is mostly owned by European households (at least, the ones that own any assets)
summarises Milton Friedman’s monetarist theory on the Great Depression
- the New Deal was unnecessary; everything could have been fixed via Federal Reserve policies alone
on the power of central banks to create money by making loans
- theoretically no limits on their balance sheets—if they wanted, and had the right mandate, they could expand them significantly and (say) finance transition to renewable energy
- the problem is that they are not democratically accountable and so (in his opinion) it’s best to limit their scope
on financial opacity as a barrier to collecting more tax revenue, which can force govts to turn to austerity and similar destructive policies (see Greece, Cyprus)
on the problems unique to the ECB (as the central bank for a monetary union without a political union, administering a stateless currency)
- recall that it can’t purchase new govt debt on its own; can only facilitate private bank lending & then buy the bonds on the secondary market
- another useful avenue for cooperation: stabilising corporation tax across nations (centralised reporting/collection)
- the arbitrariness of the Maastricht treaty deficit/debt levels (3% and 60% of GDP, respectively)
capital saturation strategy: get r=g such that all capital needs to be reinvested in order to maintain capital stock
- eventually results in the euthanasia of the rentier
- but of course this could take forever, and who knows what it’ll require to get there
- also depends on demographic growth: if the population doesn’t increase, it’s tricker
a (very) few pages devoted to climate change and its potential for damaging growth in some way (meaning we need to discount r accordingly)
on the need for democratic control of capital in order to attain democratic control of capitalism, via financial transparency

Inequality by Anthony B. Atkinson (chapters 9-11)

Chapter 9: Shrinking the Cake?

we should redistribute even if that means less total efficiency (but it doesn’t have to mean that)
on the efficiency gains of a higher minimum wage (obvious)
an analysis of unemployment benefits from a fairly mainstream economics perspective (assuming work is good and we need to make sure people are incentivised to pursue it)
using comparative politics to show that redistribution doesn’t necessarily impede growth

Chapter 10: Globalisation Prevents Action?

on the birth of the postwar Western welfare state as complementary to achieving economic growth
he’s trying to counter the classic neoliberal argument that globalisation has reduced ability of state to raise high tax revenues
- drawing on Laffer curve
- e-commerce, global labour market, and international tax competition
pretty tame chapter that just asks us to question whether the market-determined distibution of resources is fair (I’m already there …)

Chapter 11: Can We Afford It?

Lecture

can inequality trends be reversed? (a shift from looking at the past to looking at the future)
right after the financial crisis, there was a lot of glee from the left who predicted the imminent collapse of neoliberalism
- obviously, that hasn’t happened
- instead, neoliberalism was somehow empowered?
- and the far-right was arguably empowered as well
it’s worth remembering that our world today is one of abundance
- any perceived scarcity is due solely to distributional decisions
on automation
- it’s been happening since the industrial revolution
- on the other hand, the current pace is possibly unlike ever before
- it will result in the shifting around of labour on a unprecedented scale
  - will be costly both economically and psychologically (since work is such a big part of identity)
- technological change is both a risk and an opportunity
  - in the short term, more power and money accrues to capital, not labour (reducing wages, number of jobs)
  - otoh, if either capital is appropriately taxed, OR technology is publicly owned, that could move us to a post-work world with universal basic services
  - we could, say, reduce working hours (to zero, for some) even while maintaining productivity levels
  - so it’s a political struggle, not an economic one
- we should also keep in mind the role of the state in spurring technological innovation in the past (see the book The Entrepeneurial State)
on weaknesses of mass movements like Occupy to really confront neoliberalism (I wonder if he’s read Inventing the Future)
on the Kuznets curve
- theory behind it: human capital was more equally distributed post-Industrial rev, thus decreasing inequality (kinda a simplistic explanation, better one in SO478 week 4
- contrast with Piketty’s theory, which posits that the period of falling inequality was a historical anomaly (instead, due to post-war welfare policies)
embedded liberalism as social democracy + coordinated, regulated financial system
- financial crises can be seen as the inevitable result of deregulated finance
- anti-elite, populist backlash then follow from crises
on the limits of democracy for bringing about redistribution(pace Meltzer-Richard)
- requires some degree of ethnic/national cohesion, organised labour, and a culture of solidarity over the individual
  - the latter can take the form of Christian democracy, or more Scandic-type social democracy
- democracy by itself is not enough
open Q: is an external shock necessary for sparking the move toward redistribution?
- either war, or revolution (some sort of violence)
- recall that the growth during the Golden Ages was partly the result of Bretton Woods (fixed exchange rates, capital controls) and financial repression
capitalism constrains democracy, through the fear of capital strike (not investing) or mobility or tax avoidance
Q: how is it that in a democracy, we can still cling onto failed neoliberal policies?
- organised combat and winner-takes-all politics meaning that the level of democracy isn’t quite what we’d hope
- (plus, false consciousness probably plays a role)
in 94, Blair committed to removing state control over the means of production immediately after the Labour leadership election
- which means that the only major UK party you’d expect to oppose neoliberalism … fully bought into it
- since then, opposition to neoliberalism has been mostly regressive (nationalist, racist, hostility to elites etc) w/o international solidarity
reasons: there are some fundamental failures immanent to democracy as a way of representing the masses
- cartel parties (Katz and Mair 1995), where parties retreat into the state and become less democratic, colluding with other parties to protect privileges; paid experts over activists
- iron law of oligarchy (from the 20s) as a tendency in political organisations, away from true representation
- path dependency/feedback loop as voters and party members recognise this lack of democracy, and thus stop voting or paying membership dues
the rise of the cartel party isn’t solely due to tendencies inherent in electoral systems—also connected to the liberalisation of the market
- means the party in power can’t actually do much to protect from the market (as they’ve limited their own powers, and lack the mandate to increase them)
- then the populace has increasingly diminished expectations, which the party perpetuates via a discourse of helplessness and (feigned or otherwise) inability to intervene
- so cartel parties take the risk-averse strategy where they compete on marginal social issues of identity
- after all, centre-left parties don’t really have anything else to offer—they can’t change the fundamental nature of the economy
- cough Dems cough
- the result is welfare state retrenchment, market liberalisation, anti-Keynesian policies
open questions:
- are there cycles of mobilisation? or is the mid-20th century unique (as Piketty would argue)
- how do we build cross-class, cross-national coalitions?

Seminar

on Piketty’s global wealth tax
- I wonder if the transparency aspect would backfire, by sparking revolution that could lead us to beyond what Piketty envisioned
  - once people realise just how concentrated wealth really is, that could plunge us into a whole new level of legitimation crisis
  - he’s just trying to save capitalism but maybe his suggestions would reveal why it’s not worth saving
- (it’s kind of funny how he makes it sound utopian when really it’s so limited in imagination, just an attempt to keep the system from breaking down)
- incentives for national govts to cooperate: based on citizen’s mass mobilisation (not within the tax havens themselves, but within say the UK whose crown territories tend to be tax havens)
  - norway: tax returns are all public (tho who views is also public)
  - things changing lately re: financial transparency and stopping tax evasion/avoidance
- on full globality: how to get like china into this framework
  - otoh, if it was just US and EU that’s over 50% of GDP, and many of the remaining countries, if they’re unwilling to sign up to this, would they even have the institutions for rich ppl to want to put their money there in the first place?
  - also, tax avoidance is a bigger problem in developing countries than advanced so theoretically they’d be happy to sign up
  - those who put money into tax havens dont want to stay there, they want to live in an advanced country (social democracy) because they enjoy the institutions that exist (which they dont contribute to)
- if the problem is the advanced countries, then maybe it’s easier to deal with? we’ve allowed this to happen, not only complicit but drivers
- they think they can get away with it cus they dont think there will be repercussions, can only sustain level of inequality for so long
- to ponder: if corbyn got elected today, would they work on this global tax???
the UK’s structural dependency on not solving the housing crisis: capital flows are what allows us to consume more than we produce every year
- if property is all land then why cant we just tax it (WE NEED POLITICAL WILL, UK budget isnt addressing that)
- political will (including winner-takes-all/organised combat), budget, lower stamp duty, doesnt bother asset prices
- so the Q is, specifically re housing crisis, why doesnt democracy produce a response that works for everyone a la meltzer and richard?
  - me: a combination of false consciousness, lack of political engagement, and being far away from real democracy (which is an asymptote in any case)
  - plus, timing, arbitrary, lucky or unlucky, maybe if the most recent general election had been 2 weeks later … but since elections are usually every few years, there’s a huge almost stochastic element
  - and ofc elderly middle classes are benefiting from rising housing prices
  - undertone to our discussions: M&R theorised that democracy would lead to redistribution (which incidentally they thought was bad) but we’re seeing that it isn’t really true
- otoh, re: lack of democracy, are those limits we just have to accept? that democracy will never be reached so we shouldnt worry?
  - or maybe we’re just a shade off from the acceptable zone and need to keep pushing
  - depending on how we define democracy - lots of leeway? either keeping elected politicians in check or as a way to represent people

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