Piketty split – why soaking the rich won’t help anyone

It’s not Joe Hockey’s “leaners” Australians need to fear, it’s the new breed of economic “levellers” who believe that to make an economy work better you just need to dial down levels of inequality.

Their worry, enumerated in Capital in the 21st Century by French economist Thomas Piketty, is that inequality is inexorably rising and inherited capital is about to eat our world.

Rather than equality of opportunity, they are fixated on equality of outcome, despite 20th Century experience in a string of communist countries showing this leads to an authoritarian state where fiscal, political and social powers are all used to brutalise the populace as the only way to keep it in a state of uniformity.

Levellers seem to be everywhere in Australia, and across the political spectrum.

The Gonski recommendations were an exercise in improving education not through lifting standards, but by lifting school funding on an “equitable” basis.

The Queensland Government’s “Queensland Plan” has as one of its goals “Increase the wealth of all Queenslanders while achieving Australia’s narrowest gap between the wealthy and the poor.

If this is your mindset this year’s BRW Rich 200 List, would be another proof that Australia’s economic performance is about to tank because the rich appear to be getting richer.

In the 30 years since the first Rich List the minimum net worth required for inclusion has increased from $10M to $250M. That’s a growth of 11.33% compound, outpacing the economy’s nominal average growth in the same period of 6.88%.

There were no billionaires in the first list. Now, adjusting to 1984 dollars there are 10 1984 billionaires, and 39 in 2014 dollars.

It would definitely seem that wealth is being concentrated, but the averages always hide the truth.

Piketty’s primary concern is about “patrimonial” capital. He sees a world of declining growth where wealth is principally inherited and heirs are rentiers.

That’s not the world of the BRW Rich List. Out of the 200 members, only 31 (16%) appear to have inherited their money, with most being self-made.

Rather than showing the inevitability of inherited wealth it demonstrates the importance of good ideas, strong business skills, and financial leverage, not to mention longevity.

Piketty uses a simple model which postulates that investment returns are always higher than growth in the economy, so that investments will always grow to be a larger percentage of the economy, other things being equal.

The lower the growth in the economy, the worse this trend because Piketty presupposes that the return on capital is never much less than 4%.

As he expects world growth to slow, then voila, in 50 years, we have a huge problem.

Piketty has certainly detected a real increase in the concentration of wealth, but he always assumes that this is a bad thing. But what if there is a natural level of inequality, and what if that is beneficial?

Certainly, in the 30 years since 1984, while the pool of assets belonging to the richest 200 Australians has increased substantially, there’s never been a better time in Australia’s history to be poor – the rising tide might manifest differently for different people, but it’s been rising for all.

And there appears to be a valuation effect in the increase in wealth.

Justin Wolfers points out that housing is a substantial store of wealth, and that in the US, house prices have risen while rents haven’t.

Added to that the P/Es on the S&P 500 have never been higher. Between 1885 and 1991 the PE at January 1 each year has been above 20 only 5 times. Since 1992 it has been above 13 times.

So the return which Piketty thinks is so constant varies, aided and abetted at present by quantitative easing driving returns on debt down.

The increase in wealth is real, but it does not cause a real increase in access to resources.

If the analysis of Piketty and the levellers is flawed, the antidote would kill the patient.

Piketty proposes a 5 to 10 per cent annual tax on capital, as well as inheritance taxes. He also proposes a once-off 15% tax on European private wealth to pay back government debt.

These measures would destroy the wealth not of the top 200, or 1% or whoever, but anyone with only modest means. It would make private business virtually impossible, and what business was possible would be unlikely to grow to any significance.

Wealth would then become the business of government, or grey-suited risk averse investment managers.

Would they take the risks and reap the rewards that the BRW Rich 200 and their imitators take? And if not, what impact would that have on our collective wealth, especially the most marginalised?

There is something to be said for letting those who are good at business aggregate more of our national assets so that as they enrich themselves they enrich all of us. There is no ethical basis I can think of where we are justified in taking it away from them.

While superficially attractive, the idea that by enforcing equality of financial means, societies advance, has little empirical, and even less ethical, support.

An edited version of this article appeared in the Australian Financial Review.