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CHAPTER 2

The Prelude: Redistribution, Inequality and Debt Crisis

The great attention that Piketty received can be explained for one thing by the contemporary economic situation and its pre-history. In the 1980s there began what was later called the ‘neoliberal age’. Among other things, it involved the redistribution of the tax burden from capital income to wage income and consumption. The concept behind this was lifting the burden from capital in order to promote investments and thus economic growth.

Between states this became noticeable as a competition for investment, in which every country lowered its taxes on capital and business in order to attract capital. This strategy of ‘courting capital’ was regarded as without alternative, since businesses and investors would otherwise leave the country:

Whoever keeps taxes high here shouldn’t wonder if businesses move to countries that are more advantageous tax-wise. What use are nice theories if businesses close or move away? We cannot allow that under any circumstances. Germany must court enterprise capital, since only that guarantees innovations, growth, and jobs.¹

Here are some examples of the consequences of this competition between states in Europe:

•Tax competition. Between 1997 and 2007, the average corporate tax rate in the old EU countries fell from 38 to 29 per cent, in the new EU entry countries from 32 to 19 per cent. Cuts in corporate tax rates started as early as in the 1980s. Between 1980 and 2006 the average company tax rate in the EU-15 (UK) fell from 49 (52) per cent to 30 (30) per cent; for the EU-25 it was only 25 per cent in 2006.² Eurostat: ‘Finally, the EU has by and large become a low-tax area when it comes to statutory corporate tax rates.’³

•At the same time the top personal income tax rate in the EU-15 (UK) went down from an average of 67 (60) per cent in 1980 to 48 (40) per cent in 2006. For the EU-25 it was only 42 per cent.⁴ US President Reagan lowered the top tax rate in 1982, initially from 70 per cent to 50 per cent, and then to 28 per cent.

•Transition to dual income taxation. Profits on interest and from dividends are increasingly subject to a flat tax and no longer to an individual, progressive tax rate. That means that the higher the income, the higher therefore the income tax rate, the more the taxpayer profits from the flat tax upon income from interest.

•A shift from direct to indirect taxation, primarily taxes upon consumption. The main source is the value added tax (VAT). According to EU regulations, the VAT can range between 15 and 25 per cent. In the last few decades, the rate has approached the upper limit. Thus, between 1980 and 2008 the VAT in Germany rose from 13 to 19 per cent, in the UK from 15 to 17.5 per cent, in France from 17.6 to 19.6 per cent, and in Italy from 14 to 20 per cent. In the course of the euro crisis, the VAT has been further increased in many countries. Added to this are rising so-called ecological taxes on energy. Taxes upon consumption disproportionately burden poorer households whose income is spent primarily upon consumption.

•The tax burden on labour in the European Union started growing strongly in the early 1970s and continued to grow. The consequence: a shift in the tax burden. In 2007, within the EU-27, consumption taxes have contributed a third of the total revenue from taxes. Taxes upon employed labour income amount to about 40 per cent of the share. About one-fifth falls upon taxes on capital.

•Part of the competition between states to attract capital was, alongside tax policies, wage policy and the weakening of labour unions, whose negotiating position weakened on the basis of increasing unemployment and tangible repression against organized labour, particularly in the US and Britain. As a consequence, since the 1970s and 1980s, in every single industrial country the share of national income accounted for by wages declined.⁵ The share of income from business activity and wealth rose accordingly. From the 1980s until the 2000s, the share of economic performance allotted to capital income rose by about 11.5 per cent in Germany, 18.7 per cent in Italy, by about 19.4 per cent in France and by about 18.7 per cent in Spain. In the United States and Britain, the increase was almost 8 per cent for both.

Declining taxes on capital, declining wages – the consequence was an increasingly unequal distribution of income and wealth. Since the 1980s on, the gap widened in almost all industrial countries.⁶ Thus in the US, the share of total income of the wealthiest 5 per cent of households grew from 22 per cent to almost 34 per cent between 1983 and 2008.

This development, however, was not regarded as a scandal. It was usually explained as a consequence of ‘globalization’ (that is, the greater reservoir of labour available to business worldwide, which is to say increased competition between workers for jobs) and of ‘technological change’ that gave an advantage to highly skilled workers and exerted downward pressure on the income of low-skilled workers.⁷ This growing inequality was thus regarded first of all as an inevitable consequence of ‘globalization’ and ‘technology’, and secondly as the result of the necessary and growth-promoting competition between countries for capital and investment. Inequality was positively regarded even within social democratic political parties as a spur to performance and thus an engine of growth.⁸ According to the ideology, all would profit from this promotion of growth in accordance with the motto: a rising tide lifts all boats.

This legitimation of inequality encountered difficulties with the financial and economic crisis starting in 2008. The crisis incurred enormous costs – especially for the bank bailouts – which precipitated an increase in public debt. Between 2008 and 2013, the government gross debt for Euro states grew from 70 per cent to 93 per cent of economic output. In the UK, it increased from 52 to 91 per cent of economic output, in the US from 73 to 104 per cent, and even in Japan, where public debt was already at 192 per cent, it increased to 244 per cent.

This increase in public debt was essentially due to the financial crisis.⁹ However, politicians and the majority of economists interpreted it as a problem of state expenditures under the mantra ‘we’ve been living beyond our means’. Financial markets were not regarded as the source of the crisis; conversely, the slogan was put forward that through austerity policies, states would have to win back ‘the trust of the markets’.

The consequence in many countries was a drastic reduction in expenditures and a search by states for new sources of revenue in order to decrease budget deficits. This put the question on the table: who should pay for the costs of the crisis and the bank bailouts? The value added tax was increased in many places, which made consumption more expensive. The crisis and austerity programmes led at the same time to a considerable decline in wages and social benefits. Largely spared, in contrast, were the banks, although they were simultaneously pilloried as the parties responsible for the crisis. The ‘wealthiest’ were also spared, this despite the fact that the share of the wealthiest per centile of the population of total pre-tax income in all industrial countries had risen for decades, thanks also to the developments that had ultimately led to the crisis.¹⁰

With the crisis it also became clear that it was not only public debt that had risen. The debt of private households and businesses had increased for decades. Thus total debt in the US (for both the public and private sector) amounted at the beginning of the 1980s to about 120 per cent of gross domestic product (GDP); but by 2008 it had risen to 240 per cent of GDP. In the eurozone, the ratio of total debt to GDP had risen from 150 to almost 300 per cent, in the UK from 150 to 280 per cent, and in Japan from 250 to almost 400 per cent.¹¹ These obligations on the part of debtors corresponded to the claims of creditors; it thus reflected the rise in private financial wealth.

Crisis, debt, growing inequality and enormous financial wealth – all of that called for an explanation and split the thinking of the economic mainstream, which had been rather unified before the crisis.¹² The still orthodox ‘neoliberals’ among these economists interpreted the crisis as a consequence of the failures of states, in particular of erroneous interest rate policy on the part of central banks. For others, in contrast, the crisis was a consequence of a liberalization of financial markets that had gone too far.

Alongside all this, in the years after the outbreak of the crisis, many scholars and institutions began to also discuss the growing gap between rich and poor as a cause of the crisis. What had earlier been the domain of leftists and critics of capitalism had reached the mainstream. The latter now problematized growing inequality; not, however, primarily as a social problem or a question of justice, but rather as a problem for the economic conjuncture and economic stability. It was pointed out that growing inequality was an important, if not the decisive, reason for the crisis of the financial system. The upturn of the stock exchanges and a tendency towards the decreasing taxation of capital gains had supposedly led to a swelling of financial wealth which discharged in crisis. With a more just distribution of wealth and a stronger tax burden upon wealth, the state could thus contribute to making the economy and the financial system more stable. It could also create new sources of revenue in order to limit or decrease public debt.¹³

The following are a few examples of reconsideration by the mainstream:

•In November of 2010, the IMF published a working paper¹⁴ that pointed out the connection between growing inequality and financial crises. Three years later, a similar paper followed.¹⁵ Income inequality, warned the IMF, could lead to non-sustainable growth, since it is primarily the poorer strata of society that spend their money entirely on consumption. Through that, money flows back into economic circulation. In the period before the crisis, however, poorer households hardly achieved any growth in income. In order to increase or maintain their level of consumption, they often had to resort to credit. Thus, on the one hand, increasing inequality leads poorer households to take on excessive debt according to the IMF. On the other hand, the rich have gotten richer, and have not consumed this growth in income, but rather invested it, which is to say: lent it at interest. That has led, secondly, to a constantly increasing growth in the volume of investment capital. In the quest for profitable investments, capital has been thrown into increasingly risky forms of investment. The result: the wealthy accumulate more and more financial assets covered by loans to the poor, which increases the probability of financial crises.¹⁶

•In April 2011¹⁷ and at the beginning of 2014,¹⁸ the IMF upped the ante: in two investigations, the IMF came to the conclusion that economic growth is more sustainable and stable in economies with a more equal distribution of wealth. In October 2013, the IMF considered a compulsory levy on all wealth in order to increase state revenues and decrease public debt.¹⁹

•In light of the crisis and inequality, the conservative journalist and Margaret Thatcher biographer Charles Moore admitted in July 2011 in the Daily Telegraph: ‘I’m starting to think that the Left might actually be right.’²⁰ A month later, Moore was quoted approvingly by the then publisher of the Frankfurter Allgemeine Zeitung Frank Schirrmacher: ‘It has been shown – as the left has always claimed – that a system that entered the stage to allow the advancement of many has become perverted into a system that enriches the few.’²¹ Also in August 2011, the third-richest man in the world, Warren Buffett, demanded higher taxes for rich and super-rich Americans: ‘My friends and I have been coddled long enough by a billionaire-friendly Congress.’²²

•Between September and November 2011, the Occupy Wall Street movement occupied Zuccotti Park in the financial district of New York City. Their movement slogan: ‘We are the 99%.’ The intent was to protest the power of the richest 1 per cent of the population. Already in May 2011, the US Nobel Prize-winning economist Joseph E. Stiglitz had pointed out the problem in an article for Vanity Fair (its title, ‘Of the 1%, by the 1%, for the 1%’, was a reference to a phrase in Abraham Lincoln’s Gettysburg Address: ‘of the people, by the people, and for the people’) and spoke to Occupy Wall Street. The most prominent member of the Occupy movement, however, is the American anthropologist David Graeber, whose book Debt: The First 5000 Years raised a storm in 2011 and like Piketty’s book haunted the review pages – even if Graeber does not see himself as part of the mainstream. In addition, an above average number of journalistic and scholarly contributions on the topic of inequality were published – not just in Germany – sometimes with very different choices of focus and emphasis.²³

•In November 2013, the new Pope Francis lamented in his first apostolic exhortation: ‘While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation.’²⁴

•In March 2014, the general secretary of the Organisation for Economic Co-operation and Development (OECD), José Ángel Gurría, said that ‘urgent action’ was ‘needed to tackle rising inequality’.²⁵ In May he warned ‘we underline the toll that ever-rising inequality takes on people’s lives and the wider economy’.²⁶ Now other liberal institutions followed: ‘More social justice creates at the same time more wealth and growth’, wrote the Bertelsmann Stiftung,²⁷ and in June even a member of the European Central Bank disclosed that inequality could ‘cause financial instability’.²⁸ Thus, the notion that just societies are better for all – which was greeted with smiles of approval in 2009 when Richard Wilkinson and Kate Pickett presented it in their book The Spirit Level – had reached the mainstream.

So, even before Thomas Piketty’s book, the topic of ‘inequality’ had arrived in the economic mainstream, and with the following line of argumentation: inequality and poverty are no longer regarded so much as a consequence of capitalist economic growth, but rather as a brake on such growth and as a problem for stability. Despite the tendency to speak about this issue in moral terms, the central questions are economic ones: ‘Would the U.S. economy be better off with a narrower income gap?’ asks the rating agency S&P, and the OECD states: ‘inequality hurts economic growth.’²⁹ What stands at the centre of attention are no longer the problems that the poor have with capitalism, but the problems that the poor pose for capitalism and its growth. The demand that follows from this is no longer a fundamental change of economic system, but merely a correction of the existing one – and not a correction of wealth to the benefit of the poor, but a correction of poverty for the benefit of wealth. The goal is not a better life for people – such a better life is only supposed to be a means of making economic growth smoother and faster. This chorus was joined by those who feared a dissolution of ‘social peace’ (in Germany, for example) by the evocation of ‘American conditions’.