Piqued by Piketty

It seems rather clear that the main theories in French economist Thomas Piketty’s best-seller Capital in the Twenty-First Century are irritating a number of people. Recommendations to increase taxes on wealth seem to be the most disconcerting to many. First, the British Financial Times did its utmost to point out calculation errors in a work which has largely been acclaimed as an important contribution to documenting fortunes: the OECD is even using its databases. A new offensive has been launched in the media to raise doubts in people’s minds. Following on Herbert Grubel, fellow at the Fraser Institute (AtlasOne, May 23, 2014, reprinted in the Winnipeg Free Press, May 26), Pierre Chaigneau, associate researcher at the Institut économique de Montréal (Le Devoir, July 18), is stepping up to the plate to voice his critiques.

While Piketty claims first and foremost that wealth concentrates among those who are already wealthy because returns on capital are systematically higher than the economic growth rate, the two authors reacting to his work evoke various other phenomena.

Both maintain that statistics on the increasing income gap offer an inaccurate picture of economic realities because they don’t reflect the constant mobility of individuals moving up and down the socio-economic ladder. To them, corporate leaders realizing capital gains are but “one-off events”: they are only reaping the belated fruits of past efforts to develop their company. And yet the OECD signals in its study Focus On Top Incomes — 2014 that there is little movement in the richest 1%: not many people enter or exit this select group, year after year. Moreover, how would such movements, if they did occur, change anything to the fact that the gap is widening between income levels?

Here’s another point income inequality deniers like to bring up: the role of new electronic media and globalization in creating a wage gap between top performers and those falling just beneath in terms of abilities. The OECD dubs this explanation for the increased share in income of the 1% the “superstars” theory. If the top performers’ market has gone global and the wage gap it creates is the “main driver” for increased income inequality in English-speaking countries, the OECD claims, the same should be true in all market economies. However, France and Japan are not experiencing the same hike in top income shares.

In a similar vein, another favourite explanation is that the size of multinational companies has grown and the compensation of corporate leaders with it. That doesn’t take into account transformation in CEO’s “compensation”, which now looks a lot more like capital investments.

All in all, according to Professor Chaigneau, these various phenomena call into question the very fact that the income gap is widening. For Professor Grubel, Piketty has it all wrong and, in reality, everyone is getting richer, the poor and the middle class even more quickly than the rich.

With all due respect to these eminent professors, serious studies on the subject have pointed towards a direction quite opposite to theirs. The 2011 OECD study Divided We Stand: Why Inequality Keeps Rising indicates that the gap between the rich and the poor has reached its highest point in over 30 years. An internal report prepared last October by Employment and Social Development Canada and released in February by The Canadian Press signalled that “the wages of middle income workers have stagnated” between 1993 and 2007. The 2011 Conference Board study Is Canada becoming more unequal? came to the same conclusion. The organization points out that the wealthiest have increased their share in total national income to the detriment of the poorest classes and the middle classes.

In its aforementioned Focus On Top Incomes study, the OECD shows that in every country the top percentile managed to “capture” a sizeable share of economic growth over the last three decades. Again, this trend is particularly pronounced in English-speaking countries. Since 1975, the top 1% has taken over 47% of income growth in the United States. In Canada, they’ve taken 37% while the lower 90% of the distribution of income collected only a third of economic gains. Studies by the International Monetary Fund (IMF), Oxfam, and the Canadian Centre for Policy Alternatives have come to similar conclusions.

When all is said and done, the capitalist globalization has boosted economic growth for a certain time, but has by the same token greatly increased income inequalities and exacerbated wealth concentration. Tax breaks for the highest incomes and social spending cuts have intensified the trend. In Canada, for instance, the top marginal income tax rate at the federal level has gone down from 43% in 1981 to 29% in 2010, leaving more room for high-income individuals to accumulate wealth. Worldwide, the situation is so alarming that the World Economic Forum, which can certainly not be suspected of entertaining pinko tendencies, has recognized severe income inequalities to be the main social risk in its 2011 annual report Global Risks.

Thomas Piketty’s theories are obviously subject to debate, but the conclusions which he draws throughout his work and that of his associates don’t come out of left field. On the contrary, they support and enrich our understanding of numerous previous observations. His book’s success might be due to the fact that people are looking for explanations: they are unable to reconcile news of economic performance with their own financial situation, which has never before involved so much debt. For the common good, the trends identified must lead to changes in regulation and in the direction taken by governments in their economic and tax policies. Denial is not a sustainable option.

This article was written by Pierre Beaulne, an associated researcher with  IRIS—a Montreal-based progressive think tank.