French economist’s view of how growth is shared captures attention

Rarely does an economist's work capture the attention that Thomas Piketty's Capital in the 21st Century has.

His careful scholarship torpedoes the comfortable belief that economic growth is the rising tide that lifts all boats.

Just rely on competitive markets, the theory goes, and the result will be a balanced growth path where output, incomes, profits, wages and asset prices all rise at the same sort of pace, so everyone benefits to the same degree.

But there is nothing inevitable about that, Piketty says, and if it seemed empirically well founded for much of the last century, that reflected a combination of exceptional circumstances which no longer holds good.

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The Piketty Phenomenon, which is a collection of essays, mostly by economists, on Piketty's thesis and the lessons it contains for New Zealand, is published today by Bridget Williams Books.

With an awakened political interest in inequality, especially in the United States, Piketty's work is the right book at the right time, writes Hautahi Kingi.

"But to attribute its success entirely to timing is unfair. The data on the distribution and evolution of wealth and income represent an enormous achievement in scholarship, and much has been made of Piketty's outstanding empirical contributions."

Piketty's research leads him to the conclusion that the long-run average growth rate of economic output is generally exceeded, by about 2 percentage points, by the average rate of return on capital (large fortunes particularly) so that the owners of capital can claim an ever-larger share of the economy's output.

The result, as Geoff Bertram puts it, is that: "Simply leaving the logic of the free market economy to work without restraint, Piketty argues, will produce a society with a super-rich patrimonial elite owning the lion's share of the total wealth, and wielding the political power to go with it."

"Patrimonial" here refers to inherited wealth or belonging to what Warren Buffett has called "the lucky sperm club".

This suggests three questions which the 15 contributors to The Piketty Phenomenon address: Does this hold true of New Zealand? If it does, is it a problem? And if it is problematic, what can be done about it?

Unfortunately the data on the distribution of wealth in New Zealand is lousy, mainly because we don't have death duties, or gift duty or any comprehensive capital gains tax.

That itself indicates that what we might call the Piketty effect, to whatever extent it occurs in New Zealand, does so pretty much unimpeded by the tax system.

The best survey data is 10 years old, from a survey Statistics New Zealand has since axed, which found the top 10 per cent have 51.8 per cent of the wealth, the next 40 per cent have 43 per cent, and the bottom half just 5.2 per cent (including those with negative net worth).

"These findings aren't unusual for a developed OECD economy, and if it looks lopsided, the good news is that things used to be a lot more uneven," writes Donal Curtin.

"As Piketty's book demonstrates, what has changed over the past century is the emergence of that 40 per cent, what he calls a 'patrimonial middle class', and which we also have."

While most of the book's contributors think inequality is a problem in New Zealand, Curtin begs to differ: "Sam Morgan makes a bundle from inventing and selling Trade Me? Excellent. Income and wealth inequality are made worse as a result? Certainly. Anyone worried about this? Me neither," he writes.

"I'd happily trade you a tonne of bien pensant outrage over unequal outcomes for an ounce of extra effort put into improving the opportunity for decile 1 school kids."

As it happens Sam Morgan's father, Gareth, has for some time advocated a radical overhaul of the tax system "addressing the fact that our income tax system only recognises regular cash receipts as income, yet capital often produces non-cash (and therefore untaxed) financial returns such as capital gains and in-kind (again untaxed) rewards such as the rent-equivalent of home ownership."

He proposes taxing 1.8 per cent of the value of capital each year, taking account of any income tax already paid on the regular cash returns generated by that capital. This is not a million miles from Piketty's proposed wealth tax.

But Simon Chapple highlights the difficulties New Zealand would face as a small open economy - and, he might have added, one abjectly reliant on importing the savings of foreigners - in imposing any unilateral tax remedy to inequality of income or wealth.

Tim Hazledine was struck not only by Piketty's finding that the top 1 per cent have more than doubled their share of income since 1980 in English-speaking countries but by "the equally striking lack of such an increase in most other large rich countries such as Japan, Germany and France".

That suggests rising inequality is the result of policy choices, in particular "the 1980s counter-Keynesian neoliberal revolution, which celebrated unrestrained greed in an ever-more permissive policy environment".

Both Geoff Bertram and Brian Easton argue the intellectual tide is turning and New Zealand will not be immune from that impact, Easton suggests, with a lag of perhaps a decade or so.

"There is a sea-change coming in the global intellectual climate, and New Zealand will as usual be swept along with it. Most economic policy ideas in this country are imported from the United Kingdom, United States and occasionally Australia, often with little adaptation to local conditions," Bertram writes.

"One may dream of an autonomous local policy realm, but the reality is that the New Zealand policy elite's embedded neoliberalism is threatened more by changing overseas thinking than by the efforts of neoliberalism's critics here."