Piketty, Democracy, and Hugo Chavez

One of the cornerstones of Thomas Piketty’s Capital in the Twenty-First Century is that democracy is infallible. From the votes of the crowd will emerge the wisest course of action. This is exactly the opposite conclusion reached by Rory Carroll, the biographer of Hugo Chavez who concludes with “When is democracy not enough?” (see my review of the book).

Piketty points out that when government is huge it can be inefficient, but he never loses faith in democracy. Piketty describes the growth of government:

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.

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.

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

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.

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).

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.

The growing tax bite enabled governments to take on ever broader social functions, which now consume between a quarter and a third of national income, depending on the country. This can be broken down initially into two roughly equal halves: one half goes to health and education, the other to replacement incomes and transfer payments.

the very rapid expansion of the role of government in the three decades after World War II was greatly facilitated and accelerated by exceptionally rapid economic growth, at least in continental Europe.25 When incomes are increasing 5 percent a year, it is not too difficult to get people to agree to devote an increasing share of that growth to social spending

Piketty says that there may be a moral justification for allowing earners to keep something of what they earn:

it is by no means certain that social needs justify ongoing tax increases. To be sure, there are objectively growing needs in the educational and health spheres, which may well justify slight tax increases in the future. But the citizens of the wealthy countries also have a legitimate need for enough income to purchase all sorts of goods and services produced by the private sector—for instance, to travel, buy clothing, obtain housing, avail themselves of new cultural services, purchase the latest tablet, and so on.

But perhaps not more than 1/4 (see below), but on the other hand Piketty is concerned that the government needs some improved processes before it can efficiently spend the money that he thinks government should spend:

there remains the fact that once the public sector grows beyond a certain size, it must contend with serious problems of organization. Once again, it is hard to foresee what will happen in the very long run. It is perfectly possible to imagine that new decentralized and participatory forms of organization will be developed, along with innovative types of governance, so that a much larger public sector than exists today can be operated efficiently.

before we can learn to efficiently organize public financing equivalent to two-thirds to three-quarters of national income, it would be good to improve the organization and operation of the existing public sector, which represents only half of national income

Voters will figure out the fairest tax system and rates once they get enough information:

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 benefit to democracy would be considerable: it is very difficult to have a rational debate about the great challenges facing the world today—the future of the social state, the cost of the transition to new sources of energy, state-building in the developing world, and so on—because the global distribution of wealth remains so opaque. … truly democratic debate cannot proceed without reliable statistics.

For the countries of Europe, the priority now should be to construct a continental political authority capable of reasserting control over patrimonial capitalism and private interests and of advancing the European social model in the twenty-first century.

In an ideal society, what level of public debt is desirable? Let me say at once that there is no certainty about the answer, and only democratic deliberation can decide, in keeping with the goals each society sets for itself and the particular challenges each country faces.

one of the most important issues in coming years will be the development of new forms of property and democratic control of capital. The dividing line between public capital and private capital is by no means as clear as some have believed since the fall of the Berlin Wall. As noted, there are already many areas, such as education, health, culture, and the media, in which the dominant forms of organization and ownership have little to do with the polar paradigms of purely private capital (modeled on the joint-stock company entirely owned by its shareholders) and purely public capital (based on a similar top-down logic in which the sovereign government decides on all investments). There are obviously many intermediate forms of organization capable of mobilizing the talent of different individuals and the information at their disposal. When it comes to organizing collective decisions, the market and the ballot box are merely two polar extremes. New forms of participation and governance remain to be invented.

if we are to regain control of capitalism, we must bet everything on democracy—and in Europe, democracy on a European scale.

only regional political integration can lead to effective regulation of the globalized patrimonial capitalism of the twenty-first century

The world of finance, and government finance in particular, is subject to periodic crises:

prospects for growth look gloomy for the foreseeable future, especially in Europe, which is mired in an endless sovereign debt crisis

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.

However, a one-time tax on wealth will be sufficient to repair governments’ finances worldwide and they will never again indulge in deficit spending:

without an exceptional tax on capital and without additional inflation, it may take several decades to get out from under a burden of public debt as large as that which currently exists in Europe. To take an extreme case: suppose that inflation is zero and GDP grows at 2 percent a year (which is by no means assured in Europe today because of the obvious contractionary effect of budgetary rigor, at least in the short term), with a budget deficit limited to 1 percent of GDP (which in practice implies a substantial primary surplus, given the interest on the debt). Then by definition it would take 20 years to reduce the debt-to-GDP ratio by twenty points.

It takes decades to accumulate capital; it can also take a very long time to reduce a debt.

a progressive tax on capital is not only useful as a permanent tax but can also function well as an exceptional levy (with potentially high rates) in the resolution of major banking crises.

because growth has been fairly slow since 1970, we are in a period of history in which debt weighs very heavily on our public finances. This is the main reason why the debt must be reduced as quickly as possible, ideally by means of a progressive one-time tax on private capital or, failing that, by inflation. In any event, the decision should be made by a sovereign parliament after democratic debate.

Once Europe is debt-free, what should it do with all of the tax dollars still flowing in? Piketty implies that it should be spent on people just like himself, i.e., university professors:

It is reasonable to think that Europe might find better ways to prepare for the economic challenges of the twenty-first century than to spend several points of GDP a year servicing its debt, at a time when most European countries spend less than one point of GDP a year on their universities.

The nations of Europe have never been so rich. What is true and shameful, on the other hand, is that this vast national wealth is very unequally distributed. Private wealth rests on public poverty, and one particularly unfortunate consequence of this is that we currently spend far more in interest on the debt than we invest in higher education. [same information but many pages later in the book]