If capital is taking over the 21stcentury, what are we to do?
Thomas Piketty’sCapital in the Twenty-First Centuryhas attracted plenty of debate over its thesis—that growing wealth inequality is an inevitable part of capitalism–but even those whofind the arguments compelling aren’t necessarily on board with Piketty’ssolution. Even he concedes that his proposal—new progressivetaxes on net wealth—is a bit utopian. While a tax on wealth is direct, it’s politically fraught, hardto enforce, and depending on your preferred model of the economy, could slow growth.
But just as there is more than one way to skin a cat, there’s more than one way for society to push back against growing inequality. Commentators reacting to Piketty’s thesis have offered up a bevy of policy options they see as more feasible or withfewer unintended consequences.
1) Open the borders.
By intent and necessity, Piketty’s book is focused on wealthy countries, but we know well that emerging markets are only becomingmore important to the global economy. EconomistSuresh Naidu notes that “if we’re aiming for politically hopeless ideas, open migration is as least as good as the global wealth tax in the short run, and perhaps complementary.” More migrationwouldredress global inequality bygiving more earning power to migrants from poor countries, while lowering capital’s share of income in wealthy countries.
2) Get rid of some intellectual property protections.
One of the scary ideas inPiketty’s vision is the rise of a new class of rentiers who earn their money not by working but simply from the capital returns on their assets. One solutionis to get rid of a major source of modern rents—patents on software and pharmaceuticals. The case against software patents has been made, even by software companies, as a way to stop wasteful patent trolling and unleash innovation.For medicines, that an Indian factorycan make the same drugsfar more cheaply than an American factory, with the only difference being patent protection, means there is already pressure on the currentsystem. While drug companies say the research that leads to new cures wouldn’t be possible without restrictive patents, economists wonder if pure competition wouldn’t do the same job.
3) Cut taxes.
This one is actually stolen from Piketty himself, who responds to skeptics of his wealth-tax idea by saying that the US already has a wealth tax. Itvaries from locality to locality, but the average American real-estate owner pays an average property tax of1.38% of a home’s value. Piketty thinks that merely turning this into a tax on “net” and not nominal capital would help reduce inequality:
[The United States]has a property tax which is a pretty big wealth tax.I would prefer it to be a progressive tax that was proportional and I would prefer it to be on net wealth rather than the gross value of real estate—if you take someone whose house is $500,000 and they have a mortgage liability of $490,000, his net wealth is $10,000, I would propose he would pay no property tax, no wealth tax.Right now he is paying as much property tax as someone with no mortgage who inherited his apartment 20years ago.My premise is not to tax to destroy the wealth of the wealthy, it’s to increase the wealth of the bottom and the middle class.
Of course, the missing tax revenue would have to be made up for somehow—higher taxes, less public spending, more public borrowing—elsewhere.
4) Crack down on offshore tax havens.
Many objections to Piketty’s wealth tax include a reference to how hard it would be to tax wealth, becausewealth is so very good at hidingin shell companies and secretive offshore trusts. But that’s a problem already: Perhaps $34 to $109 billion in US-owned financial assets are hidden from the tax man in Caribbean tax havens, just to avoid income on capital gains, a recent study found. The good news from that same study is that a push for tax information exchangesis cutting down on assets hidden overseas. But there’s lots more to be done on that front, whether it’s demanding public registration ofthe true owners of shell companies, or getting morecountries to signtax information exchange agreements.
5) Open upthe city.
One wealthy countries manifest inequality is the high cost of living in largecities. This cost is partly a result of high demand to livethere, but is also the more artificial productof zoning decisions, building codes and nostalgia that prevent the optimal utilization of space. Changing building codes to allow more development of affordable housing, taller buildings and fewer subsidies for cars would help alleviate inequality.
6) Wait for China’s labor costs to catch up.
One big reason wages have stagnated in the American middle class—thus wideningthe gap between them and the rich—is competition with cheaper labor in China and other countries. It haspushed manymanufacturing jobs offshore, or forced US factories to automate faster than they might have otherwise. But wages won’t be low in Chinaforever: Labor costs are already rising there, as low-wage jobs move to other places. It’s not inevitable, but some economists think that the trend could continue, as so-called “catch-up” growth spreads across the world—Africa, perhaps, is next. This growth lifts living standards and makes workers demand raises. On a globe without an obvious source of cheap labor, wages have to rise. Smarter trade rules might help accelerate this process.
7) Unleash antitrust.
Fewer monopolies, lower prices, less inequality—it’s all so simple, right? Economist Dean Baker specifically cites the telecom industryand its push toward consolidation, but there are good arguments that sectors from beer to tech to agriculture have consolidated in ways, sometimes subtle, that hampereconomic growth and competition. Anti-trust rules, aggressively enforced, could improve life for customers, andby forcing companies to compete rather than just sit on their monopolistic laurels, would also lower profit margins for shareholders—tough luck, but good for equality.
8) Punish the financial sector.
A favorite among populists of all stripes. Pruning the banksisn’t easy, as the mixed experience of reformers after the worst financial crisis in most of our lifetimes showed. But the financial sector’s growing share of incomeinwealthy economies still has people on the left and right supporting policy ideas—from financial transaction taxes, to higher capital requirements, to limitson bank sizes—that would make the sector less profitable. That means less money going to annual trading bonuses, and presumably more money invested in the real economy.
9)Create more sovereign-wealth funds.
The key reason inequality tends toincrease, Piketty says,is that investment returns (which go to the rich) will always exceed economic growth. But what ifwe give the public a share ofthoseinvestment returns? One proposal fromeconomist Tyler Cowenis the creation of government-run investment funds. These are already a common tool incountries with massive natural-resource wealth; they serve to diversify the nationalincome stream and make it more sustainable. The US—which is no slouch on the natural resources front itself—could conceivably create a sovereign-wealth fund andshare the dividends.
10) Massive social upheaval and bloody conflict.
Not exactly ideal, but one of the most convincing empirical findings from Piketty’s research is that World War I, the Russian revolution and World War II were the great levelers of the 20th century, wiping out more than a century of capital accumulation and creating the conditions for more equitable growth in their wake.Continent-wide warfaremay not be a pleasant prospect, butit’sprobablya good deal easier to bring about than most of the solutions listed above.Why, there’s a handy little annexation going onin central Europe right about now.
