Capital in the Twenty-First Century (82 page)

PART FOUR

REGULATING CAPITAL IN THE TWENTY-FIRST CENTURY

{THIRTEEN}

A Social State for the Twenty-First Century

In the first three parts of this book, I analyzed the evolution of the distribution
of wealth and the structure of inequality since the eighteenth century. From this
analysis I must now try to draw lessons for the future. One major lesson is already
clear: it was the wars of the twentieth century that, to a large extent, wiped away
the past and transformed the structure of inequality. Today, in the second decade
of the twenty-first century, inequalities of wealth that had supposedly disappeared
are close to regaining or even surpassing their historical highs. The new global economy
has brought with it both immense hopes (such as the eradication of poverty) and equally
immense inequities (some individuals are now as wealthy as entire countries). Can
we imagine a twenty-first century in which capitalism will be transcended in a more
peaceful and more lasting way, or must we simply await the next crisis or the next
war (this time truly global)? On the basis of the history I have brought to light
here, can we imagine political institutions that might regulate today’s global patrimonial
capitalism justly as well as efficiently?

As I have already noted, the ideal policy for avoiding an endless inegalitarian spiral
and regaining control over the dynamics of accumulation would be a progressive global
tax on capital. Such a tax would also have another virtue: it would expose wealth
to democratic scrutiny, which is a necessary condition for effective regulation of
the banking system and international capital flows. A tax on capital would promote
the general interest over private interests while preserving economic openness and
the forces of competition. The same cannot be said of various forms of retreat into
national or other identities, which may well be the alternative to this ideal policy.
But a truly global tax on capital is no doubt a utopian ideal. Short of that, a regional
or continental tax might be tried, in particular in Europe, starting with countries
willing to accept such a tax. Before I come to that, I must first reexamine in a much
broader context the question of a tax on capital (which is of course only one component
of an ideal social and fiscal system). What is the role of government in the production
and distribution of wealth in the twenty-first century, and what kind of social state
is most suitable for the age?

The global financial crisis that began in 2007–2008 is generally described as the
most serious crisis of capitalism since the crash of 1929. The comparison is in some
ways justified, but essential differences remain. The most obvious of these is that
the recent crisis has not led to a depression as devastating as the Great Depression
of the 1930s. Between 1929 and 1935, production in the developed countries fell by
a quarter, unemployment rose by the same amount, and the world did not entirely recover
from the Depression until the onset of World War II. Fortunately, the current crisis
has been significantly less cataclysmic. That is why it has been given a less alarming
name: the Great Recession. To be sure, the leading developed economies in 2013 are
not quite back to the level of output they had achieved in 2007, government finances
are in pitiful condition, and prospects for growth look gloomy for the foreseeable
future, especially in Europe, which is mired in an endless sovereign debt crisis (which
is ironic, since Europe is also the continent with the highest capital/income ratio
in the world). Yet even in the depths of the recession, in 2009, production did not
fall by more than five percentage points in the wealthiest countries. This was enough
to make it the most serious global recession since the end of World War II, but it
is still a very different thing from the dramatic collapse of output and waves of
bankruptcies of the 1930s. Furthermore, growth in the emerging countries quickly bounced
back and is buoying global growth today.

The main reason why the crisis of 2008 did not trigger a crash as serious as the Great
Depression is that this time the governments and central banks of the wealthy countries
did not allow the financial system to collapse and agreed to create the liquidity
necessary to avoid the waves of bank failures that led the world to the brink of the
abyss in the 1930s. This pragmatic monetary and financial policy, poles apart from
the “liquidationist” orthodoxy that reigned nearly everywhere after the 1929 crash,
managed to avoid the worst. (Herbert Hoover, the US president in 1929, thought that
limping businesses had to be “liquidated,” and until Franklin Roosevelt replaced Hoover
in 1933, they were.) The pragmatic response to the crisis also reminded the world
that central banks do not exist just to twiddle their thumbs and keep down inflation.
In situations of total financial panic, they play an indispensable role as lender
of last resort—indeed, they are the only public institution capable of averting a
total collapse of the economy and society in an emergency. That said, central banks
are not designed to solve all the world’s problems. The pragmatic policies adopted
after the crisis of 2008 no doubt avoided the worst, but they did not really provide
a durable response to the structural problems that made the crisis possible, including
the crying lack of financial transparency and the rise of inequality. The crisis of
2008 was the first crisis of the globalized patrimonial capitalism of the twenty-first
century. It is unlikely to be the last.

Many observers deplore the absence of any real “return of the state” to managing the
economy. They point out that the Great Depression, as terrible as it was, at least
deserves credit for bringing about radical changes in tax policy and government spending.
Indeed, within a few years of his inauguration, Roosevelt increased the top marginal
rate of the federal income tax to more than 80 percent on extremely high incomes,
whereas the top rate under Hoover had been only 25 percent. By contrast, at the time
of this writing, Washington is still wondering whether the Obama administration will
be able in its second term to raise the top rate left by Bush (of around 35 percent)
above what it was under Clinton in the 1990s (around 40 percent).

In
Chapter 14
I will look at the question of confiscatory tax rates on incomes deemed to be indecent
(and economically useless), which was in fact an impressive US innovation of the interwar
years. To my mind, it deserves to be reconceived and revived, especially in the country
that first thought of it.

To be sure, good economic and social policy requires more than just a high marginal
tax rate on extremely high incomes. By its very nature, such a tax brings in almost
nothing. A progressive tax on capital is a more suitable instrument for responding
to the challenges of the twenty-first century than a progressive income tax, which
was designed for the twentieth century (although the two tools can play complementary
roles in the future). For now, however, it is important to dispel a possible misunderstanding.

The possibility of greater state intervention in the economy raises very different
issues today than it did in the 1930s, for a simple reason: the influence of the state
is much greater now than it was then, indeed, in many ways greater than it has ever
been. That is why today’s crisis is both an indictment of the markets and a challenge
to the role of government. Of course, the role of government has been constantly challenged
since the 1970s, and the challenges will never end: once the government takes on the
central role in economic and social life that it acquired in the decades after World
War II, it is normal and legitimate for that role to be permanently questioned and
debated. To some this may seem unjust, but it is inevitable and natural. Some people
are baffled by the new role of government, and vehement if uncomprehending clashes
between apparently irreconcilable positions are not uncommon. Some are outspoken in
favor of an even greater role for the state, as if it no longer played any role at
all, while still others call for the state to be dismantled at once, especially in
the country where it is least present, the United States. There, groups affiliated
with the Tea Party call for abolishing the Federal Reserve and returning to the gold
standard. In Europe, the verbal clashes between “lazy Greeks” and “Nazi Germans” can
be even more vitriolic. None of this helps to solve the real problems at hand. Both
the antimarket and antistate camps are partly correct: new instruments are needed
to regain control over a financial capitalism that has run amok, and at the same time
the tax and transfer systems that are the heart of the modern social state are in
constant need of reform and modernization, because they have achieved a level of complexity
that makes them difficult to understand and threatens to undermine their social and
economic efficacy.

This twofold task may seem insurmountable. It is in fact an enormous challenge, which
our democratic societies will have to meet in the years ahead. But it will be impossible
to convince a majority of citizens that our governing institutions (especially at
the supranational level) need new tools unless the instruments already in place can
be shown to be working properly. To clarify all this, I must first take a look backward
and briefly discuss how taxation and government spending have evolved in the rich
countries since the nineteenth century.

The simplest way to measure the change in the government’s role in the economy and
society is to look at the total amount of taxes relative to national income.
Figure 13.1
shows the historical trajectory of four countries (the United States, Britain, France,
and Sweden) that are fairly representative of what has happened in the rich countries.
¹
There are both striking similarities and important differences in the observed evolutions.

FIGURE 13.1.
   Tax revenues in rich countries, 1870–2010

Total tax revenues were less than 10 percent of national income in rich countries
until 1900–1910; they represent between 30 percent and 55 percent of national income
in 2000–2010.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

The first similarity is that taxes consumed less than 10 percent of national income
in all four countries during the nineteenth century and up to World War I. This reflects
the fact that the state at that time had very little involvement in economic and social
life. With 7–8 percent of national income, it is possible for a government to fulfill
its central “regalian” functions (police, courts, army, foreign affairs, general administration,
etc.) but not much more. After paying to maintain order, enforce property rights,
and sustain the military (which often accounts for more than half of total expenditures),
not much remained in the government’s coffers.
²
States in this period also paid for some roads and other infrastructure, as well
as schools, universities, and hospitals, but most people had access only to fairly
rudimentary educational and health services.
³

Between 1920 and 1980, the share of national income that the wealthy countries chose
to devote to social spending increased considerably. In just half a century, the share
of taxes in national income increased by a factor of at least 3 or 4 (and in the Nordic
countries more than 5). Between 1980 and 2010, however, the tax share stabilized everywhere.
This stabilization took place at different levels in each country, however: just over
30 percent of national income in the United States, around 40 percent in Britain,
and between 45 and 55 percent on the European continent (45 percent in Germany, 50
percent in France, and nearly 55 percent in Sweden).
⁴
The differences between countries are significant.
⁵
Nevertheless, the secular evolutions are closely matched, in particular the almost
perfect stability observed in all four countries over the past three decades. Political
changes and national peculiarities are also noticeable in
Figure 13.1
(between Britain and France, for example).
⁶
But their importance is on the whole rather limited compared with this common stabilization.
⁷

In other words, all the rich countries, without exception, went in the twentieth century
from an equilibrium in which less than a tenth of their national income was consumed
by taxes to a new equilibrium in which the figure rose to between a third and a half.
⁸
Several important points about this fundamental transformation call for further clarification.

First, it should be clear why the question of whether or not there has been a “return
to the state” in the present crisis is misleading: the role of the government is greater
than ever. In order to fully appreciate the state’s role in economic and social life,
other indicators of course need to be considered. The state also intervenes by setting
rules, not just by collecting taxes to pay its expenses. For example, the financial
markets were much less tightly regulated after 1980 than before. The state also produces
and owns capital: privatization of formerly state-owned industrial and financial assets
over the past three decades has also reduced the state’s role in comparison with the
three decades after World War II. Nevertheless, in terms of tax receipts and government
outlays, the state has never played as important an economic role as it has in recent
decades. No downward trend is evident, contrary to what is sometimes said. To be sure,
in the face of an aging population, advances in medical technology, and constantly
growing educational needs, the mere fact of having stabilized the tax bill as a percentage
of national income is in itself no mean feat: cutting the government budget is always
easier to promise in opposition than to achieve once in power. Nevertheless, the fact
remains that taxes today claim nearly half of national income in most European countries,
and no one seriously envisions an increase in the future comparable to that which
occurred between 1930 and 1980. In the wake of the Depression, World War II, and postwar
reconstruction, it was reasonable to think that the solution to the problems of capitalism
was to expand the role of the state and increase social spending as much as necessary.
Today’s choices are necessarily more complex. The state’s great leap forward has already
taken place: there will be no second leap—not like the first one, in any event.