THE room was already full at Trades Hall in Carlton on a cold Wednesday night in July, but the floors creaked with people still walking in. “I’m not Thomas Piketty,” said Mike Berry, emeritus professor at RMIT, with a wry smile. “I understand some of you were expecting him.”
Piketty, the French economist and author of the best-selling tome, ‘Capital in the Twenty-First Century’, is in great demand – and short supply.
Translated from French this year, his 685-page book sold out all over the English-speaking world. It is already the all-time best selling book for its publisher, Harvard University Press, which ran 24-hour shifts at its warehouse to keep up with orders.
In Melbourne, the independent bookstore chain Readings ordered just ten copies at first; since then, they’ve been selling it hand over fist, re-ordering a hundred at a time. For several weeks, incoming shipments sold out well before they arrived.
So, at the Trades Hall meeting to discuss the book – notwithstanding the absence of the author himself – the audience was particularly attentive. “Every so often a book just catches interest,” said Berry, a professor of public policy. “It’s broken out of the scrum, partly by sheer weight of evidence.
“Piketty shows that capitalism inevitably and remorselessly leads to increasing inequality. In short, unless we do something about it, we’re headed back to the 18th century world of haves and have-nots.”
For his efforts, Piketty has joined the exclusive, counter-intuitive class known as “rockstar economists”. In May the ‘New Yorker’ described the backstage clamour of Nobel Laureates eager to meet him before a public lecture.
But more importantly, inequality is now a global, mainstream concern. Earlier this year, the World Economic Forum – a coterie of large corporations – listed income inequality as chief among 31 risks “threatening social and political stability as well as economic development” in the next decade.
In Australia, too, as debate continues over budget cuts to welfare, health and education, commentators across the political spectrum are warning that our society has become dangerously unfair.
The top decile income share in Anglo-Saxon countries, 1910–2010. http://piketty.pse.ens.fr/en/capital21c2
‘Capital’ is based on fifteen years of Piketty’s research, in collaboration with scholars around the world. He has collected and analysed wealth and income data as far back as he can find it. In France and Britain the records stretch beyond two centuries.
Unusually, he spends little effort analysing the bottom end of the scale, and instead, takes aims at the dynamics of the top. Since the global financial crisis, it has been this research that has turned the world’s glare upon “the 1 per cent”.
This is what his data shows: over the long term, the wealth tied up in capital – assets such as property and finance – accumulates more rapidly than economies grow. In broad terms, that means inheritance trumps merit, and wealth concentrates.
“The past tends to devour the future: wealth originating in the past automatically grows more rapidly… than wealth stemming from work,” Piketty writes.
His research upends an article of faith of neoclassical economics: that inequality will decrease as nations’ incomes continue to rise.
That theory was developed in the mid-20th century, at time when the gap in wealth and incomes had narrowed considerably. Piketty argues this period was an aberration, caused by the century’s great shocks – two world wars and the Great Depression – together with the resulting government policies: tight regulation of financial markets and steeply progressive taxes.
In recent decades those policies have been unwound and economic growth has slowed. Inequality has risen again. We are witnessing “the emergence of a new patrimonial capitalism”, he writes.
Piketty’s data debunks any notion of trickle-down economics. Really, we live in a suck-it-up system : the wealthiest swill the surplus, and leave the poor to take whatever they can get.
On this matter, the Parisian academic is not a lone voice.
Nobel laureate and former chief economist of the World Bank, Professor Joseph Stiglitz recently visited Australia on speaking tour. The ‘Capital’ phenomenon, he says, is no surprise to him. In 2012, Stiglitz’s own book on the subject, ‘The Price of Inequality’, hit the bestseller lists in the United States.
“Inequality has risen to the top of the concerns facing America and most other countries – not that we’ve actually been able to introduce policies that deal with it, so far,” he says.
This April, Stiglitz told a US Senate committee that the American dream was “a myth”. For the last 25 years, median wages have stagnated and lowest wages have fallen, in real terms. Since the global financial crisis, nearly all the gains of the “so-called recovery” have accrued to the top 1 per cent, he said.
His message that day in Washington was scarcely contested by conservatives, he says.
“The International Monetary Fund has now stressed the role of inequality. The IMF is not a radical organisation, so nobody should think of this anymore as a left-wing agenda. You almost have to be radical not to take it onboard.
“Inequality used to be a question about how we were treating the most disadvantaged in our society. Now we’re debating how our whole society is functioning.”
Among the ill effects of inequality, Stiglitz argues, is “worse economic performance, no matter how you measure it”, whether by GDP or more holistic benchmarks of wellbeing and sustainability. In the US, the vast numbers of citizens with diminished incomes and poorer levels of health and education constitute a waste of the country’s “most valuable resource”.
It also feeds a further vicious cycle: a failing political system, which represents the affluent at the expense of the rest. “We have a democracy where most of the citizens think the system is corrupt,” Stiglitz says. “Not corrupt in the sense of stuffed paper envelopes, but in the sense that money has found legal ways influencing the process to get what it wants.”
Yet he is not without hope. Neither he, nor Piketty, accept that rising inequality must be so. It’s a product of public policy – the combined outcome of our schools, healthcare, financial systems, tax laws and corporate regulations.
In ‘Capital’, Piketty advocates for highly progressive income tax (with a top marginal rate set at more than 80 per cent) to prevent accumulation of wealth through soaring salaries, and a progressive global wealth tax, to prevent its further concentration.
“Inequality is not a fact of nature,” Stiglitz says. “It’s a consequence of the policies we put in place.”
In Australia, inequality is not so vast as in the United States, or Europe at the turn of the 20th century. But it is rising.
A new report from The Australia Institute, drawing on ABS data, reveals that the top fifth of households earn five times the income of the bottom fifth, but they hold 71 times the wealth.
It says the richest 7 individuals in Australia – including Gina Rinehart, Frank Lowy and James Packer – hold more wealth than the bottom 1.73 million households.
Meanwhile, the dole continues to fall well below the poverty line. The Australian Council of Social Services estimates that one child in six is living in poverty. Over 100,000 households – the bottom 1 per cent – are living in the red, with negative net wealth.
Yet, like the US and other immigrant societies, Australia has not been shaped by inherited wealth as much as Europe. Inequality has risen significantly since the 1980s, but for other reasons. In his book, ‘Battlers and Billionaires’, ANU economics professor turned federal Labor MP Andrew Leigh attributes the rise in inequality to three forces, in equal measure: higher earnings at the very top, inflated by technology and globalisation; the decline of unions; and less progressive taxation.
Leigh believes that Piketty’s theory is more relevant for our future than our past. Given high savings among the wealthy and a slower growing economy, inequality will worsen, he says.
So what is to be done?
Last year, Richard Denniss, director of The Australia Institute, took part in a televised debate, coordinated by the St James Ethics Centre, on the question: “Should the wealthy pay more tax?”
Income tax cuts introduced since 2006, by both the Howard and Rudd governments, have overwhelmingly favoured high earners, he says. The Institute estimates those cuts have cost the government about $170 billion, of which the top ten percent of earners have received significantly more than the bottom 80 per cent combined.
It hasn’t always been this way. At its peak between 1942-44, the top marginal tax rate in Australia was 93 per cent. Throughout the Menzies prime ministership, the top rate was never lower than 67 per cent. Now, even with the government’s proposed deficit levy, it will temporarily rise to just 49 per cent.
Likewise, tax breaks on capital gains and superannuation overwhelmingly advantage the wealthy.
Super concessions amount to $35 billion in forgone government revenue, Denniss says, most of which goes to the top five percent and none to the bottom fifth. And because women tend to work fewer hours and years in the formal economy, and are under-represented at the upper end of earnings, the super tax breaks also systemically favour men.
“You could only say that increased inequality has been the objective of subsequent governments in Australia, because everything they’ve done has exacerbated it,” Denniss says.
Alongside him in the St James Ethics Centre debate, also for the affirmative – surprisingly – was Geoffrey Cousins: former advisor to Prime Minister John Howard, current member of the Telstra board, and latterly, a high-profile campaigner against the James Price Point gas hub in the Kimberley.
Cousins sits on Telstra’s remuneration committee. In the 2012-13 financial year, the company had eight senior executives whose pay packages topped $1.5 million per year.
Yet, for the audience, Cousins joked that he wanted to wear a t-shirt saying: “I’m rich, tax me”. Afterwards, Denniss had one printed and sent to him, and Cousins swears he wears it – even outside the house. (“I wore it kayaking on Sydney Harbour,” he says.)
He has received a mixed response from well-heeled acquaintances, but if anything, his position has firmed. “I did a lot of research. The information was completely compelling regarding growing inequality around the world, and the fact that wealthy people generally pay a much lower percentage of their income in tax, one way or another,” he says. “It’s not just me: all sorts of wealthy people have said it’s a ridiculous situation.”
He believes the Abbott government’s budget has sharpened the debate in Australia. “There’s a great lack of fairness in what the government is doing and I think most people believe that.”
At the Ethics Centre debate, but on the negative side, was economist and former Liberal Party leader John Hewson. He argued the proposition was too simplistic; comprehensive tax reform is necessary.
But Hewson, too, is deeply concerned about inequality. Last month, he launched a report entitled ‘Advance Australia Fair? What to do about growing inequality in Australia’, which documented the deliberations of a conference held at Parliament House in January.
The participants included a range of civil leaders and academics, from economists to epidemiologists, invited by the non-profit group Australia21. Their report argues the case that more equal societies do better, with higher rates of social cohesion, mental and physical health, and even economic productivity.
Among its many policy recommendations were lifting pensions and benefits to the poverty line, directing more school funding and early childhood education to disadvantaged kids, and implementing significant tax reforms – such as ending tax breaks for superannuation, capital gains and negative gearing.
To the report’s suggestions, Hewson added one of his own: all major policy proposals should be subject to an “inequality impact statement”.
“Our land of ‘the fair go’ is disappearing,” he said.
“There is an urgent need for a mature community debate about how inequality is impacting on our lives, our culture, our economy and our society.”
For now, it seems Australians want to be more egalitarian, even though we may be unaware just how unequal we are. The Australia Institute’s recent survey showed that no matter what people earn, they tend to assume their incomes are about average.
Similarly, research conducted for the Australian Council of Trade Unions in 2011 found that most people vastly underestimate the real level of wealth inequality in society. When asked to describe their ideal distribution, they chose a division of wealth even more egalitarian again, regardless of their own position in the hierarchy.
But arrayed against these preferences, Denniss says, is the force of the business lobby, which describes welfare cuts as fiscal consolidation and derides new taxes as class warfare. So long as unemployment remains low, it’s easy for politicians to ignore entrenched poverty.
“I think inequality is an idea whose time has come,” Denniss says. “But what hasn’t arrived yet is a political party that will do something about it.”
At Trades Hall, the audience was comprised mainly of baby boomers. During the questions, one man stood and commented that Piketty’s book could benefit the rich, if rising inequality is understood as inevitable. “How can we make it help us?” he asked.
“Firstly, you’ve got to read it,” Professor Berry replied (understandably; it is a hefty volume). “And secondly: politics matters.”
To stimulate change, the buzz about ‘Capital’ would have to go beyond the media, he said, and suggested that people could form discussion groups to debate its themes.
Berry is author of ‘The Affluent Society Revisited’, which re-examines the work of economist John Kenneth Galbraith in the context of the global financial crisis.
‘Capital’ is the perfect book for the swirling discontent since the crisis, he says. Then, we found out that financial markets don’t function according to the textbooks. But so far, our approach to governing them hasn’t changed.
“There’s a sense of crisis in popular ideology about what the hell is happening out there in the real economy.
“But the critical thing is that although Piketty identifies remorseless tendencies towards inequality in free-market, freebooting capitalism, they are not laws. There are ways of countering them through political means.
“Policy is not dead, it’s just sleeping.”