Celebrity Economists: What causes inequality and how do we fix it?

New Economic Thinking

Thomas Piketty’s book Capital in the 21st Century has been flying off the shelves. It’s full of data indicating that the world is rapidly becoming more and more unequal. But if most people are just trying to make ends meet, who has time to read it? Last night, Piketty participated in a high profile talk with economics Nobel prize winner Joseph Stiglitz at a New Economic Thinking event in Paris.

Piketty’s thesis is that extreme inequality results from the observation that income grows faster than the general economy. Stiglitz agrees that inequality is on the rise. The key difference between the two economists however is that Stiglitz emphasizes the importance of rent-seeking, as the primary source of inequality, as opposed to “capital” in general.

They each propose systemic solutions.

What are the solutions you ask?

 “It’s about the rules of the game… What is driving the growth of inequality? Minor tweaks in the economic system are not going to solve the problem… Yes, it’s important to improve our education system… Yes, it’s important to improve minimum wages… These will make a big difference, but they won’t solve the underlying problem. The underlying problem is the whole structure of our economy, which has been oriented more at increasing rents than increasing productivity and real economic growth that would be widely shared in our society… a tax on land, rents, would actually address some of the underlying problems… leading to a more equal society.”

-Joseph Stiglitz, Nobel Laureate, economics

Stiglitz has a point. Banks and large corporations make a killing out of playing the real estate market. Much of a company’s’ worth is comprised of its speculative land holdings, separate from the profits attained via selling products and services. Those giant Wal-Mart parking lots are not there simply to accommodate customers, although many homeless people are driven to sleep in them. Ray Kroc, the founder of McDonald’s once said: “Ladies and gentlemen, I’m not in the hamburger business. My business is real estate.”

Parents often admonish their children to get on the property ladder as soon as possible. They’re right in giving such advice. Wages have actually decreased in recent years while rents soar; Meanwhile, someone who does not necessarily work can make more money speculating on land than doctors and engineers make as part of their normal wages.

What does Piketty Mean by “Capital”?

On one hand, capital can mean buildings and factory equipment.  Yet, it is often used to refer to money lent to companies to invest in such assets, and more generally as the sum of all economic assets.  If this is how capital is defined, then things like land  and other natural resources are subsumed under that definition too.

Why is that important? Well, if you are trying to bake a cake and you assume that baking soda is just another type of flour, you’re going to end up with a pretty disgusting, globally impoverished, cake. Yet, this is how Piketty defines natural resources, just another type of capital. In Stiglitz’s view, land and natural resources are different from man made buildings and manufacturing equipment.

A Global Tax on Wealth?

Piketty recommends a global tax on all capital, all wealth as he defines it, regardless of type. However there are some practical problems with this solution. One is getting all countries to coordinate all taxation. What if tax havens like Switzerland don’t follow suit with the rest of the world? The rich will simply continue to hide money there. As Stiglitz says in the video above, economic models show that such a tax on global capital would simply be shifted on to the poor, regardless of who was nominally billed. There is however a much deeper problem caused by thinking of resources as mere capital; the difference between what ought to be shared and what ought to be private is rendered arbitrary. It is used to justify bizarre conclusions from those on the left and right alike.

For example,  Nestlé’s CEO  has said that water is not a human right; everyone should pay him for the privilege of drinking. On the other end of the spectrum, communists claim that nearly everything should be collectively owned and managed; even people’s personal possessions, such as pots and pans, were confiscated during China’s “Great Leap Forward.”  Both ideologies base their conclusions on the same faulty assumption -all sources of wealth are the same. If however, we can separate what is earned from what isn’t, and implement a sustainable system around this principle, we have a sound basis for creating a fair, meritocratic, and humane society.

The Earth Belongs to Everyone

We all have an equal right to drink clean water, breathe clean air, enjoy land and Earth’s other natural resources. None of us created the earth, it’s ours to share. Instead of taxing regular people for working and exchanging, we ought to tax earth’s natural resources, both their use and abuse. Chief among these resources is land.

 

tax haven

“Unlike other assets,
land can not be moved to a tax haven.”

 

As stated before, real estate, more precisely land, is a major source of inequality. Unlike other assets, land can not be moved to a tax haven. Thus, realizing the benefits of taxing land value does not require persuading every country in the world to participate in such a tax regime.  Countries that do implement  it  however will see an enormous reduction in inequality.

For a more in depth response to Piketty, and to learn more about how a land value tax would reduce inequality, click here.

 

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