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Rocking the establishment: Thomas Piketty's challenge to orthodox economics

Rebel, radical,and even rock star – words not usually associated with economists, but they do seem to stick to Frenchman Thomas Piketty, who shot to

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Rocking the establishment: Thomas Piketty's challenge to orthodox economics

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Rebel, radical,and even rock star – words not usually associated with economists, but they do seem to stick to Frenchman Thomas Piketty, who shot to fame with his work Capital in the 21st Century, a lengthy work on inequality. In this edition of Global Conversation Isabelle Kumar speaks to him about his vision of economics and society in an age of austerity.

Point of view

The drama of Europe over the past 10 years is that we've had a lost decade. We're going to end up in 2017 with a GDP level which is barely the level of 2007.

Who is Thomas Piketty?

  • Thomas Piketty is a French economist
  • He specialises in wealth and inequality
  • Piketty has authored numerous books and articles
  • His book Capital in the 21st Century propelled him to worldwide fame
  • He is currently professor at the Paris School of Economics

Isabelle Kumar
“Your discourse on inequality really has hit a nerve and your book ‘Capital’ seems a lot more popular than one could have expected – did that surprise you?”

Thomas Piketty
“I certainly tried to write a book that would be readable by a broad international audience, but of course I could not expect that it would be so successful. We are at over 2 million copies worldwide and what this shows is that there is tremendous interest in inequality these days all over the world, there’s a big concern over whether globalisation is benefiting everyone or is being captured by a small group of the population and what’s new in my book is that we have put together with many researchers from more than 30 countries the largest historical database on income and wealth inequality that has ever been put together. So that’s really what is new. I try to study inequality from a historical perspective.”

Isabelle Kumar
Just a few months ago Pope Francis had tweeted ‘inequality is the root of social evil’ – would you go as far as the Pope, is the Pope more radical than you on these issues?

Thomas Piketty
“I don’t feel very close to what the Pope says in general, but if he’s concerned with inequality that is fine. I am not sure how much the Catholic church has contributed to the reduction of inequality historically. But I think that inequality is a concern not only for people on the left, on the right, people from different religious persuasions, it is a general concern for mankind, we cannot only care about the growth of total GDP we want to know how this is distributed, who is benefiting from it and at what cost for natural resources”

Isabelle Kumar
“This brings me to an interesting point, I would like you to comment on a story that is making headlines. Air France – bare chested executives who were attacked by angry protesters from the group itself, angered at cuts.”

Thomas Piketty
“I am not here to give good and bad points to the different groups of actors, let me simply say that conflict over distributions are often very violent and in some countries, in particular in poorer countries, they can take on a much more violent form than in rich countries like France. I think the lack of transparency about wages, income, ownership – who owns what and who receives what – very often tends to exacerbate these conflicts. So I think generally speaking, having more information, about the distribution of income and wealth is very important for our democratic debate. One of the big limitations today, in particular, if we think of cross border patterns of ownership is that there is a lot of financial opacity. So very often don’t know who owns what, so it’s very difficult to have a reasonable conversation about inequality and taxation.”

Taxing times

Isabelle Kumar “Coming to taxation then, you have argued for a progessive tax, and for the really high earners – for those who earn a million euros or more a year – an 80% tax on their income. We have asked our social media audience to send us in questions for this interview : someone called Thomas Jones asks – “Why do you want to punish people who take risks to create jobs and wealth by higher taxes?”

Thomas Piketty
“It is very difficult because when it comes to inequality and taxation, people get very excited. Let me throw one piece of evidence into the debate. If you take a country like the US between 1930 and 1980 – a very long period of time, half a century – on average the top marginal income tax rate applying to one million dollars of average income was 82% – sometimes it was 91% sometimes it was 70% but if you take the average over the entire 1930-1980 period it was 82%. Now did this destroy American capitalism? Apparently not. If anything, productivity growth and GDP growth were actually higher during the 50s’ 60s, 70s, than they have been since the Reagan years. So since the Reagan years we have a big reduction in top marginal tax rate, in big increase in inequality. You see inequality everywhere, except in the productivity statistics! Many people are not ready for this discussion, partly I think because of historical amnesia, sometimes people don’t know this has already been experimented in the past, and if we look at this period when this was experimented it was not so terrible in terms in terms of productivity so.”

Isabelle Kumar
“Then you must have been quite disappointed that French president François Hollande has seemingly backtracked on his manifesto in which he proposed taxing the rich at 75%.”

Thomas Piketty
“Actually in France, I was not too much in favour of this decision because firstly, we don’t have many people in France who make more than $1 million so in the US, Hollande would have been an excellent president. I think this would have been exactly the type of policy to do in the US. In France you don’t have such a big problem of exploding top marginal compensation, so this policy was more an excuse for not doing more ambitious tax reforms. There are many other issues about more general tax reforms in France that should be addressed.”

Age of austerity

Isabelle Kumar “Since we’re focusing on Europe, let’s have a quick look at this situation in terms of austerity because I know that you are aligning yourself with anti-austerity parties, but can you say hand on your heart that austerity has been a complete failure?”

Thomas Piketty
“You can always do worse of course, but let’s compare the situation on both sides of the Atlantic. The truth of the matter is that Europe has transformed a crisis which initially came from the US – from the private financial sector of the U.S – into a public debt crisis in Europe just because of its bad policy and excessive austerity. Initially if we go back to 2008, public debt in Europe was not higher than in the US, was not higher than in Japan and if we look at the situation in 2015 – now, almost ten years after 2007 – GDP in the US is now back on track, 10 to 15 % higher than was it was in 2007 whereas in Europe, particularly in the eurozone, we still haven’t recovered, we are still at the same level of GDP we were almost ten years ago.”

Isabelle Kumar
“There are new parties in Europe that are presenting new ideas. You’re aligning yourself with those and I’m thinking of ‘Podemos’ that’s led by Pablo Iglesias and new labour leadership in Britain under Jeremy Corbyn. Do they present for you the best chance Europe has – or Europeans have – for a fairer future and can their economic policies actually be viable?”

Thomas Piketty
“I think the elections in Spain in December this year could be very important for the future of Europe. Why is it very important? Because I think this can change the political majority in the eurozone. If Spain turns to the left or to the centre left, this is changing the political majority and potentially I think this can get us to more reasonable budgetary policies in Europe. I think in the end this goes beyond the issue of left or right, I think everybody observing the eurozone from the outside, whether you’re from the left or from the right, can see that the budgetary decisions that have been taken under the direction of Germany and France – because it’s too easy for France just to complain about Germany as it was a joint decision – have not been successful.”

Isabelle Kumar
“But it’s interesting that politically, we see that these parties on the far left, they’re called radical left parties – I don’t know if you agree with that terminology – but they seem to inspire more fear in terms of the EU institutions and European leaders than the leaders of the far right.”

Thomas Piketty
“That would be a big mistake. In the end, it’s much better to have these parties on the left of the left in power than parties which are on the right of the right. In my country, in France, there will be regional elections also in December and possibly the extreme right can win one or two or three regions and then people will realise that this is far more dangerous than ‘Syriza’ and ‘Podemos’ who at least have an internationalist approach. I’m not saying that what they propose is always completely convincing or satisfactory but I think it’s possible to draw them in the right direction.”

Isabelle Kumar
“You talked about Greece and Syriza and obviously Prime Minister Alexis Tsipras has been re-elected, do you think he has a chance of renegotiating austerity measures because his former Finance Minister Yanis Varoufakis has said it’s just continuing an ‘extend and pretend logic’?”

Thomas Piketty
“Europe will have to come with a new plan with Greece. I think what was decided this summer is just a way to gain a little bit of time but in the end, we will have to come to a debt reduction for Greece. The good news is that we’ve had lots of debt restructuring in the past including Germany who had a huge public debt and foreign debt after World War II. The entire European project in the 1950s was actually built on debt forgiveness and the general philosophy was….”

Isabelle Kumar
“…it was a very different context though.”

Thomas Piketty
“This is in some ways comparable. Many governments have made a lot of mistakes in the past and built big public debt. Very big mistakes were made by many governments before the 1950s, particularly in Germany. But the political choice was made in the 1950s to say ‘ok look at the future’. If we look back at the young generations in France or in Germany in the 50s and the young generation in Greece today, when are you going to tell them ‘ok your parents have made mistakes so for the next 40 years you will have to pay’. At some point you have to look at the future – invest in growth, invest in higher education, invest in public infrastructure.”

Isabelle Kumar
“I need to bring in some questions from our social media audience. Haezel Mischael Chandra asks: “What is the key to a sustainable economy?”

Thomas Piketty
“The most important thing for the future is to invest in knowledge and to invest in higher education. Here’s just one number illustrating what we don’t do and what we should do: everybody in Europe likes Erasmus which allows students to go to other countries except that the Erasmus budget right now is only 4 billion euro per year. Just to compare, total interest payment in the eurozone each year is 400 billion euros. So I’m not saying we should exactly invert this number but I think we should go in this direction and this is why we need to have a moratorium on debt repayment in order to invest more in the future.”

Pressure on eurozone

Isabelle Kumar “We’ve been talking about Greece but then there’s also the situation in Britain – two countries which could still leave the EU, and the Eurozone for Greece. There is also the possibility of Catalonia splitting away from Spain. What impact would that have on European economy and for the homegrown economies themselves?”

Thomas Piketty
“I think this shows that the situation, you know the crisis in the eurozone, has far-reaching consequences. So people in Spain today are very unhappy, particularly in Catalonia…

Isabelle Kumar
“You put it down to the economic crisis, these countries potentially leaving the EU and eurozone?”

Thomas Piketty
“Yes, in Britain I understand that people don’t want to join the eurozone or to join further European integration because right now it really isn’t working. So if we want one day for Britain, Sweden or Poland to join the eurozone, we have to make it work.”

Isabelle Kumar
“Exaclty, we’re seeing a Europe that is more polarised than ever. If we continue on the same trajectory how do you see Europe? What’s your vision of Europe say in 15 years time?”

Thomas Piketty
“I want to be optimistic because I think there are solutions to our problem but there is a risk of rising nationalism and selfishness. When people are unable to solve their social and unemployment and domestic problems through peaceful policies, then it is always tempting to blame others. You have political parties who want to blame foreigners, who want to blame foreign workers or you can blame other countries, you can blame Germany, then Germany will blame Greece. You know you can always blame someone else but at some point, if we take a broader European historical perspective, we will realise that what we should do today is invest in growth and the drama of Europe over the past ten years is that we’ve had a lost decade. We’re going to end up in 2017 with a GDP level which is barely the level of 2007.”

A million migrants

Isabelle Kumar “Another issue that Europe is dragging its heels on is migration. Greece is on the frontline of that. We hear that nearly one and a half million people could arrive to Europe by the end of 2016 and we’ve got a question from Kristoffer Nyborg who says: “Would you say that Europe is economically capable of handling that flow of refugees and migrants?”

Thomas Piketty
“The population of Europe is 520 million. Between 2000 and 2010, if you look at the UN statistics, the net flow of migrants into Europe was about 1 million per year and two thirds of the demographic growth of Europe during this period came from net migration so I think we could perfectly return to a much higher migration flow. I think you have different situations in Europe, you have countries like France who have a bit more children, in Germany they have less children and they are more open to migrants. And then you have some countries which don’t want to have children and don’t want migrants either like in Eastern Europe, so they are going to disappear in terms of population if they continue like this. This is very selfish and I think that for economic growth and more generally for prosperity and attractiveness of the European model, we could and should be a lot more open.”

Isabelle Kumar
“The figure that Europe could manage in terms of economic migrants and refugees, you would put at 1 million?”

Thomas Piketty
“I’m not saying that 1 million is a magic number, but the people who are saying that we can’t welcome more migrants don’t look at the historical record.”

Isabelle Kumar
“I would like to change tack now. Your ‘protege’, or so he’s called, Gabriel Zucmanl, has said that some six trillion dollars of assets could be hidden in tax havens. Is that an accurate figure in your opinion?

Thomas Piketty
“Oh yes. It’s very important for us in Europe and in the US, but will be even more important for Africa and emerging and developing countries who are losing much more than us from financial opacity. The estimate of Gabriel Zucman is that in Europe, maybe you have 10% of all financial wealth held in tax havens – that’s a lot – but in Africa, it’s between 30 and 50 % so how do you want a country to develop and develop an equitable tax system if you have a big part of the wealth that’s going away and that’s not paying tax?”

Hidden assets

Isabelle Kumar “If we bring it back to Europe, the European Commission President says he wants to stamp out tax havens. Do you believe him?”

Thomas Piketty
“No, I don’t believe it because at this stage, there is no concrete decision. If we want to change what has happened with corporate taxation in Europe, we need to have a single corporate tax. Maybe not for the whole of Europe if some countries don’t want it but at least the countries, who want to move ahead such as France, Germany, IItaly, Spain, Belgium or whatever group of countries within the eurozone, or maybe other countries who want to do it, should have a common corporate tax. Otherwise the kind of scandal that we had with Luxembourg leaks last year will happen again.”

Isabelle Kumar
“Do you think Jean-Claude Juncker, the European Commission President has adequately defended himself on that?”

Thomas Piketty
“It’s not enough to apologise. It’s not enough to apologise and say ‘I’m sorry, I will not do it again’ because, in fact, this will happen again. This is not a problem of individuals like Jean-Claude-Juncker but the fact that when he was Prime Minister of Luxembourg, he had all these deals with large multinational corporations where they would pay 1 or 2 % in tax as opposed to our small and medium size companies in France or in Germany who are paying 20 to 30% in tax; How do you want to give lessons to Greece about modernisation of the tax system when this is the policy that you conducted in your own country?

Isabelle Kumar
“We began on your book, Capital on the 21st century. Let’s go back to it because you’ve drawn a lot of literary sources for that book and it’s probably what makes it a bit more readable. I would like to bring in this question from our social media. It’s somebody who goes by the name of Mekkus who asks: “What are your three favourite books?”

Thomas Piketty
“That’s complicated. In my book I talk a lot about Balzac ‘Le Père Goriot’, and indeed I think this was such a powerful way to talk about capitalism in the 19th century. Marx was saying in the 1860s that it was by reading Balzac that he learned the most about capitalism. I think this is the same today but you have to switch authors so one my favourite novel recently was the latest novel of Carlos Fuentes ‘La volunta y la fortuna’ which is an incredible novel about capitalism in Mexico. Tancrède Voituriez who is a young French author who recently wrote about ‘the invention of poverty’ (L’invention de la pauvreté), which is a very funny novel about how development economists pretend to save the world and don’t always do so. So you have lot of very powerful novels that put money and capitalism at the centre of their investigation.”

Isabelle Kumar
“And you’re described often as a rock star economist now because of ‘Capital’. Do you recognise yourself in that?”

Thomas Piketty
“I have no problem with the publicity as long as it gets more people to read my book. The success of my book shows that there are many people in many countries who are tired of hearing that this is too complicated for them, who are tired of hearing that economic and financial issues should be left to a small group of experts who have built a sophisticated economic science that the rest of the world can’t understand. This is a big joke, there is no economic science. These are political and social issues, cultural and literary issues.. And everybody should have an opinion.”