Inequality in the twenty-first century
Are we moving from one man, one vote to one dollar, one vote?
Ever since the publication of Thomas Piketty’s Capital in the Twenty-First Century in 2013, the issue of inequality in wealth and incomes is being debated by economists, sociologists and politicians. Many other economists have pursued the same theme since: Bill Emmott ( The Fate of the West); Jeremy Waldron ( One Another’s Equals); Patrick Deneen ( Why Liberalism Failed); Brink Lindsey and
Steven Seles ( The Captured Economy) and so on. The Economist, which called Piketty “A Modern Marx” after the publication of his book, recently praised a collection of essays, After Piketty: The Agenda for Economics and Inequality. The latest to highlight the issue was Justin Trudeau, Prime Minister of Canada, at the recent Davos conference. To quote from one report about his speech, he said inter alia that “business leaders at the annual WEF meeting in Switzerland have enjoyed an increase in wealth in the past years as a result of rising stock markets” but the Canadian premier asked whether they wanted “to live in gated enclaves while those around them struggle”. He cautioned the participants to tackle inequality or risk failure—but the way many heads of governments were queuing to meet the rich, who had flown in in private planes, makes one wonder whether we are well on the way to moving from one man, one vote to one dollar, one vote.
In a way, the problem of inequality has been exacerbated in the US and UK by the Reagan-Thatcher policies of cutting taxes on the rich; the reasoning being that governments cannot solve any problems because they are the problem. One policy manifestation of this ideology was the belief that if taxes on the rich are reduced, they would invest more, which will create growth and jobs. Yes, they did invest—but in stock markets and hedge funds. (President Trump’s recent budget cutting taxes on the rich and medical benefits for the worse off is the latest example of this).
We in India suffer from the same disease of inequality but happily, in the recent Budget, several measures have been announced to mitigate the problems of the poor: minimum support price (MSP), insurance, housing support etc. In the introduction to his surprising bestseller, Piketty argues “democracy can regain control over capitalism and ensure that the general interest takes precedence over private interests, while preserving economic openness”. Many countries are struggling to create jobs for their people.
Economic theory believes that if someone is unemployed the reason is that she is not accepting the wage she deserves. On the other hand, if one is making a lot of money, that is because of his contribution to the economy/society. What earthly contribution the currency trader who earns millions in bonuses as his share of the trading profits, does to society? On the contrary, his contribution is often negative, taking exchange rates away from their fundamental values, leading to lower growth, job creation etc.
In fact, recent research from the IMF suggests that a liberal capital account increases income inequalities. In an IMF Working Paper (no. WP/15/243) on “Capital Account Liberalisation and Inequality”, Davide Furceri and Prakash Loungani come to the conclusion that, “Using an unbalanced panel of 149 countries from 1970 to 2010, we find that, capital account liberalisation episodes are associated with a statistically significant and persistent increase in inequality.”
In a profile of Harvard economist Dani Rodrik (Finance and Development, June 2016), Prakash Loungani emphasises that “his skepticism about the benefits of unfettered flows of capital across national boundaries is now conventional wisdom”. And, the emphasis on balanced budgets and limits on public debt, hamper government’s ability to redistribute income. The recent advances in artificial intelligence and robotics will surely increase labour productivity. How will the gains be shared between capital and labour? Will income inequality keep growing?
In the second decade of the twentyfirst century, we have two models to limit excessive inequality. One is the social democracies in Europe like Germany, the Netherlands and Sweden. The other is the Chinese model of democracy within the ruling communist party, but no adult franchise.
Fiscal deficits and infrastructure
Richard Koo of Nomura Research Institute recently commented about the Indian economy as follows: “Since this is still a developing country and huge potentials, infrastructure spending in India should be pushed very strongly and then that will attract the private sector.” The finance minister once again committed himself to bringing central government debt to nominal GDP to 40 per cent in the next few years. At whose cost? Social security or investments?