Thomas Piketty's Capital : Three Australian economists and experts share their thoughts

The panel: Thomas Piketty's Capital

Three Australian economists and experts share their thoughts on the best seller which is taking the political world by storm

Julie Novak, Matt Cowgill, John Quiggin

Julie Novak: "Weakening economic growth means lost opportunities to help people"

Thomas Pikettyʼs new book presents an interesting historical account of aggregate global inequality, but its policy conclusions would spell danger for future economic prosperity.

The basic idea contained in the 696‑page tome is that if returns accrued by capital owners grow faster than general growth in the economy, then this sows the seeds for growing income and wealth inequalities.

For Piketty, the basic corrective for such inequalities should be the implementation of steeply progressive income taxes, and wealth taxes that catch excessive capital returns globally. What seems to have been overlooked in the present debate over the book is the similarities between Pikettyʼs thinking and that of John Rawls, whose 1971 book, The Theory of Justice, enjoyed a similar rock star reception.

Piketty argues that "capitalism and markets should be the slave of democracy and not the opposite." Such descriptions are reminiscent of the "property‑owning democracy" model that Rawls hinted at in his 1971 work, and explained in subsequent literary efforts, which is conceived as compatible with inequality suppression.

However the problem with these approaches is this: if respect for acquisition and disposal of capital is not entrenched within a regime of protections for basic liberties, the state can redistribute capital at will. And if reducing inequality is the prime concern, as Piketty makes it out to be, then the obvious next step is to elucidate a high‑tax policy menu endorsed in Capital in the 21st Century.

Anyone concerned about the material prosperity of all people, including the poor, should be reviled by such grand schemes to impoverish societies. This is because what greater tax burdens do is slow down the rate of economic growth, or in other words stymie our increasing capacity to cooperate in creating value for other people whom we donʼt know intimately.

To express this somewhat differently, weakening economic growth means lost opportunities to feed, clothe, house, transport, educate, heal, and entertain people.

Now, these statements should not be regarded as a call to dismiss inequality out of hand entirely. Classical liberals castigate income and wealth inequalities engendered by governmental tax and regulatory force, or maintained by discriminatory public sector subsidies, as an anathema to the fair and prosperous society we wish to live in.

Unfortunately, though, self‑described socialists such as Piketty fail to see the hypocrisy of tackling inequality by invoking the injustice that is invariably political action itself.

• Julie Novak is a senior fellow at the Institute of Public Affairs, and is presently working on a "social justice and liberalism" book project

Matt Cowgill: "Piketty's patrimonial capital could well be a premonition of the future, but it doesn't have to be"

This is an optimistic, inspiring book.

Piketty lays out a scenario he describes as "terrifying" - the re-emergence of the sort of entrenched, intergenerational inequality we saw in the 1800s and earlier, a class system he dubs "patrimonial capital." He also tells us how this scenario could come to pass, if the incomes of people who own wealth grow significantly faster than the incomes of people who work for a living.

But Piketty doesn't believe the future is pre-determined. The terrifying scenario is but one possible path we could take, and it is within our power to stop it coming to pass.

Inequality fell sharply in the post-war period, Piketty finds, partly because of public policy choices that were made, including progressive income taxation, the taxation of inheritances, and the rise of the welfare state. The increase in inequality over the past three decades has, again, come about partly because of policy choices, including the erosion of the institutions that underpinned the relatively egalitarian post-war years.

Just as the fall and rise of inequality over the past century was partly caused by public policy, so too will policy choices, in large part, determine the sort of future society we inhabit. If we keep flattening the tax system and start shrinking the state, Piketty's patrimonial capital could well be a premonition of the future. But we don't need to go down this path. Piketty's preferred solution, a progressive global wealth tax, is a tad politically implausible. But that doesn't mean all is lost. That's why I say it is an optimistic book – by showing us an almost dystopian scenario, it should help us to understand how to avoid it becoming a reality.

The reaction to the book has been almost as encouraging. Worrying about the effects of high and rising inequality is no longer just a fringe activity, the mark of the un-serious. There's a growing acceptance that high levels of inequality are socially and perhaps even economicallydamaging. Let's hope policymakers are paying attention.

• Matt Cowgill is an economist at the Australian Council of Trade Unions. He writes in a personal capacity

John Quiggin: "Australia's relative success suggests a positive outlook for Piketty's policy program"

Australia is mentioned only briefly in Capital, but Piketty's brief observations have plenty of interest for Australian readers. All the English-speaking countries saw an increase in inequality beginning in the 1980s. However, Australia started out slightly more equal than the others, and the subsequent growth of inequality has been much less severe. As of 2010, according to Piketty's estimates, the "upper centile's (top 1%) share is nearly 20 percent in the United States, compared with 14–15% in Britain and Canada and barely 9–10% in Australia".

Much of the credit for this comparatively benign outcome must go to Bob Hawke and Brian Howe, who between them managed a reform of the Australian tax and welfare system that shielded low income Australians from the worst effects of the market liberal revolution that swept the English speaking world in the 1970s and 1980s. In most countries, policies of financial deregulation, privatisation and microeconomic reform were accompanied by regressive changes to the tax and welfare systems. The same would certainly have happened if Paul Keating, in most respects the dominant figure of the Labor government that ruled from 1983 to 1996, had got his way.

The crucial point at which Australia diverged from the rest of the English speaking world was the Tax Summit of 1984. Keating, who organised the summit, presented it with three options – two of which were designed to be unacceptable. The third, Option C, was a broad-based consumption tax with no exemptions, which was to be used to finance large cuts in income tax. 

In the face of strong opposition from welfare groups, and in the absence of significant support from business, Hawke dumped Option C in favour of Option A, which included the introduction of Capital Gains Tax and Fringe Benefits Tax. The result was to offset the increase in inequality in market incomes that arose from policies like financial deregulation. Of course, we eventually got a consumption tax: the GST introduced by the Howard government. But the exclusion of most food from the tax base, demanded by the Australian Democrats as the price of their support, meant that the GST was much less regressive than the version proposed by Keating.

The second big contribution of the Hawke government was the restructuring of the welfare state, led by Brian Howe. Rather than treating welfare payments and tax policy as separate, the restructuring sought to integrate the two, taking account of the combined impact of means tests and tax policies to optimise the balance between efficiency and redistribution.

These changes weren't sufficient to prevent growth in inequality, and some of them were eroded over time, most notably by the concessional treatment of capital gains introduced by the Howard government. Nevertheless they explain why Australia has avoided the drastic increases in inequality seen in other English speaking countries.

More broadly, Australia's relative success in using tax and welfare systems to spread the benefits of economic growth despite the impacts of financialisation and globalisation suggests a positive outlook for Piketty's policy program, aimed at achieving similar outcomes on a global scale. While there are plenty of difficulties in achieving the necessary international co-operation, Australia's experience belies the claim made on behalf of the 1% that any attempt to offset the growth of inequality must cripple economic growth.

• John Quiggin is an Australian laureate fellow in economics at the University of Queensland

http://www.theguardian.com/commentisfree/2014/may/01/piketty-capital-panel