hankyoreh

a professor of economics at Japan’s Ritsumeikan University

By Ryu Yi-geun, staff reporter

Professor Lee Kang-kook: I will just give 3 kinds of questions: questions about your book and its issues currently being debated, questions about policy, and questions about Korea’s situation.

Did you expect your book to get this popular? What is the reason your book is so hot these days?

Piketty: This reflects a growing concern for inequality in Korea, in America, and in Europe. Of course, I’m very glad about the success of the book. I tried very hard to write a readable story of money, and to write a readable book on income and wealth inequality. This is an issue that is not technical. It is not an economic, technical book. This is a book that’s trying to tell a lively story. At the end of the day, what I care about are the social groups behind the statistics. I tried to show that to understand the dynamics of inequality, you also need to look at the representations of inequality in the literature. I tried to show that the history of money is economical, political, and social. I think many people want more information on these issues and I’m very glad about the success of the book.

Now each country has different way of looking at inequality and it’s very interesting for me to be here in Korea, and to visit different countries, and to see how the debate on inequality takes a different shape in different countries.

Lee: Your timing was great, many countries are suffering from the same problem- rising inequality. I understand your point. I’m also writing several books and that’s the most difficult thing for us- to write the economic story very easily.

I would like to ask you about the kind of tension between the main argument of your book about inequality dynamics and history of capitalism and the other part- you are emphasizing that politics also matter, right? Inequality dynamics which is related with kinds of laws you mention, but together with that you also emphasize that politics also matter. This inequality dynamics versus politics- there might be some tension in this book.

Piketty: WW1, the great depression, and WW2, had a huge role on the level of inequality, particularly in western countries. Also, politics matter in a more positive and less tragic way through the new policies, the new institutions, new kind of welfare capitalism, educational institutions, and progressive taxation regimes that were adopted in the 20th century, in particular following the shocks. The dynamics of inequality are heavily determined by these changes and this is the same for the most recent period, the time for the big political change in 1980‘s with Regan- had a huge impact on the dynamics of inequality. Financial deregulation had a strong impact. The future really depends on what we choose in terms of institution policy. In order to make the best possible choices, looking at the past dynamics is very useful.

Lee: Dynamics is not so inevitable.

Piketty: There is nothing inevitable in economic dynamics. The story of the economy is the story of the institution and policy we choose.

Lee: Let’s turn to points of debate after your book was published- In my opinion, two important critics are, first, the level of elasticity of substitution is too high from your data compared with other studies, presented by Summers and Longlie. The other is the role of real estate, because the increase of the real estate price played a role in the increase in the capita-income ratio recently. What do you think about these two critics and what is most relevant?

Piketty: Real estate is very important part of the story I am telling in the book. It plays a very important role because- what do we observe in the data?

What we observe is that in many countries, the capital ratio, that is the ratio of the total value of total wealth and capital relative to national income, has increased a lot over the past few decades. Typically, in most developed countries it used to be 2 to 3 years of national income in 1970 and it is now 4 to 7 years of national income. We don‘t have the full data for Korea yet, but it looks as if it could be even higher for Korea- maybe 7 years of national income. And probably it has increased quite a lot in recent decades.

Lee: As an economist, I was really amazed and impressed by your methodology. Because you were oriented to a more political economy perspective, you always try to criticize the mainstream critics. I feel there is a kind of swing in your methodology in your book- because in some parts you are very critical against mainstream methodology, but on the other hand you also use the concept of elasticity of substitution as an explanation. In some sense you are having some confusion in terms of methodology in this book.

Piketty: I don’t think this is confusion. I think this is a choice. And I think this is the right choice. I think the economic model and economic theory can be useful, but it is useful only if we use them with moderation. If we use them together with a lot of economic histories and a lot of facts, theory is useful; if you have a little bit of theory that can explain a lot facts, a lot of history. The problem is that sometimes economists do the opposite, which is that they have a lot of sophisticated theory and very little fact to explain. Sometimes they have no facts at all, they just have pure theory. This is bad. A little bit of theoretical modeling can be useful, at the condition that we all realize the simple mathematical model would never be a satisfactory description of the [entire world]. So, when you take the production function, which economists like a lot, with one good, and you have this elasticity of substitution between capital and labor, of course you are missing a lot of important aspects of the reality, because the reality is multi-dimensional. You have different kinds of assets, and the relative price between these different assets is very important, and it changes a lot.

Lee: I support you. I really like that kind of direction, more historical. Economics should change from now on. Next, let’s turn to policy discussion, getting back to democracy and politics. You, several times in the book, emphasize that politics matter and democracy should regain control over capitalism. However, if you look at the real working of politics and democracy, in the US or even in Korea, still it’s not working well. It‘s so hard for people’s demands to be represented in the political system. Did you see in the City Hall the placard to show yellow ribbons. Do you know what it means?

Piketty: This was for the ferry…

Lee: After the accident, lots of people demand changes of law, democracy, and extensive examination of the accident. Nothing happened yet. But still, the conflict is ongoing. Considering all these problems how do you feel about the argument?

Piketty: I am, just like everyone, sometimes I am more optimistic and sometimes I am more pessimistic. I agree that the history of inequality and democracy and taxation is a history that is not always peaceful, [full] of democracy and equality. Sometimes it takes violent shocks and events to get the right policy reform. If you look at the history of past century it took wars, WW1, the Great Depression, WW2, for the elites in many countries to accept a number of reforms which they refused before those shocks. I can tell you that in France, it was only to pay for WW1 in summer of 1914 that the national assembly accepted to create an income tax. This was not to pay for schools in peaceful times. This was to pay for the war.

Lee: As you mentioned- this is a fight. Not just a natural process. We should think about the agent in this fight. In the past the labor union was very powerful. I think we should not forget their role in the modern age of capitalism with high growth and low inequality. But in your book you didn’t mention labor unions that much?

Piketty: I do mention them, but I agree with you that probably I don’t mention them as much as I should have. [It’s around the last part of the book] where I talk about labor unions, salary scales, minimum wage- and this plays a… I talked about the striking in South Africa and the recent killings. I do talk about this, and certainly the labor movement and also the Bolshevik Revolution, the entire spectrum of political events had a very strong impact of the acceptance of a number of social and political reforms in western countries.

Now, unions are now much weaker than what they used to be- partly for ideological and political reasons, partly also because of the change in the structure of production- so the move from manufacturing to the services makes the same kind of strong unions that we had in the past now weaker. But I think what is really important is to remember that this kind of mass organization played a very [important] role and will have to play a very important role for future mobilization. Even if they take different forms, if they are not exactly the same kind of organization we had in the past, this will very important. Just electoral democracy is only one part of democracy. It takes others forms of mobilization in order to get democracy to respond to the challenge we need to address.

Lee: Actually, I was impressed by your mentions of struggle for democracy. I can understand your point. Let’s turn to Korean issues, maybe most important to our readers. First of all, in Korea your book is creating quite a fuss. But the debate is not so productive because many critics didn‘t read your book and don’t understand what‘s going on.

Piketty: I am a bit sad that it is not productive. I don’t know the Korean language so I’m not truly able to follow what people say. I can imagine that sometime… I think conservatives should be worried about inequality instead of being worried about my book. I did not create rising inequality. I am not responsible for that. Instead of being in a sort of denial strategy, they should open their eyes and look at the facts. I’m trying to put a lot of data. At the end of the day, my main message is that we need more transparency about the economy, about income, about wealth. Then, when we have more data, and more transparency about how the different groups in Korea are doing- how the poor, how the middle class are doing, and we have good statistics on [work]- if we create progressive tax in Korea with a very low tax rate to begin with, at least we will have publicly available information on how the different groups are doing. Then, we can have a more informed debate and adapt our policies. But I think it’s a bit silly to deny that there can be a problem with inequality.

Lee: I think that your argument very relevant to Korean reality. As you said if we can make the Korean economy more dynamic by way of not just reducing r but imposing progressive taxation for really top income then g can be increasing and also if you consider the really serious level of inequality in Korea if we do nothing about that, the g itself could go down. Based on lots of studies after the 90’s serious inequality will lead to negative growth rate. So, sadly if I look at the Korean situation, that vicious cycle of low growth and high inequality is exactly working now after the 1997 financial crisis. That is why lots of Korean people argue for economic democratization including social welfare and high taxes and so on. But nothing much has been done. The current government promised increasing welfare without raising taxes, which doesn‘t make any sense. Recently, the government announced the increase tobacco price, an indirect tax, really unfair in terms of [modern] taxation. What is your suggestion for Korea’s tax policy in that sense?

Piketty: I think Korea could have more progressive tax policy. I think it‘s possible to have a more progressive income tax system in Korea. I think it’s possible to increase public revenue to invest more in education. You need to do it gradually, but you still have growth in Korea, it‘s still quite large because Korea is still catching up to richer countries. This is not going to continue forever because at some point the catch up will be almost complete and will be as large in Korea as in Japan or European counties. At this stage, growth will be much lower than today, but for a number of years growth will remain large and increase gradually. Public revenue, and education, which I think is the best way to promote future growth and make sure that Korea will be prosperous country in the future.

Lee: I really believe that as you said, introducing fair and effective reforms, our people will not say no because they understand the need for taxes.

Finally, let me turn to different a question. China is growing very fast, still the growth rate is rather high, maybe higher than the rate of return on capital. However inside China inequality is rising very fast. What do you think about implication of your work in China and East Asian countries? Because in East Asia, Korea was a paradigm of the East Asian model of so called egalitarian growth. But after 1997 everything is gone and we are falling into the vicious cycle of low growth and high inequality. Considering that, what do you think of China’s future and the current situation?

Piketty: I think the issue of inequality will become increasingly important and increasingly relevant for China. For now, the huge growth performance of China is most important and this is what’s taking a very large [portion] of the population of China out of poverty. This is a great achievement and this is great news.

At the same time, you have some high levels of inequalities in income that are becoming extremely large with very little transparency about income and wealth. I think that China will very soon have to develop more progressive tax system and more transparency about income and wealth. Right now, the Chinese government is focusing on a big anti corruption campaign. This is very useful and corruption is one of the worst forms of inequality and wealth acquisition. But this is not enough. You cannot deal with the regulation of wealth, capital accumulation, of an entire country, simply through anticorruption measures.

Lee: Let’s jump on to a different international question. Many think that your global capital tax is somehow utopian. But at least I can see some development for international cooperation for taxation. Recently OECD announced that they would present new guidelines for taxation of global companies and top rich people more effectively, and other international organizations support it.

Piketty: I think we can make a lot of process in this direction. First let me say, that in terms of property taxation and getting to a more progressive tax system there is a lot that can be done at the national level, in Korea, in China, in France, in Japan… We should not use the problem of international cooperation as excuse to do nothing. Because you can change the property tax system in Korea so that people with big debt pay less tax and people with a lot property pay more tax. You can do that kind of reform on your own. People are not going to flee the country with their property. There is a lot that can be done at the national level.

Now it is true that if you want to tax very high financial wealth then you need international coordination. For the vast majority of the population, for 99% of the population, you can make the system more progressive on your own.

Now for the very top financial order we need international cooperation, but as you were mentioning, we are moving in this direction. The new guidelines, the G20 agenda against tax [havens], in favor of international bank information and automatic transmission of bank information is going in this direction. What‘s important is to build international coalition with clear sanctions against tax havens, and against countries that do not want to cooperate. What’s important is to realize it is not enough to ask politely to tax. You need to have sanctions. If these benefits are very large the sanctions need to be very large. Sometimes they need to be trade sanctions. You cannot have free trade, and free capital [laws] with territories that do not want to cooperate and do not want to transmit the information on cross border assets. We have to get to a more realistic and more pragmatic approach to these and if we do so, the good news is that, usually the tax havens or the uncooperative territories are relatively small economic territories. So, it’s relatively easy to impose sanctions, and if necessary, trade sanctions, in order to get them to cooperate.

Lee: In some ways your idea is utopian.

Piketty: So, your idea is not so utopian.

Lee: Why is inequality really bad?

Piketty: I’m sorry I don’t have a mathematical formula for the tipping point. All that we are, is democratic [], and in order to have an appropriate democratic debate about where is the tipping point we need to have more information about inequality, we need to draw a sense from historical experience. From there we can learn about where is the tipping point. For instance, the lesson of my book is that we don’t need 19th inequality to grow in the 21st century. We don’t want to return to the kind of extreme concentration of wealth that I observe in every European country until WW1. That kind of extreme inequality was not useful for growth so we don’t want to return there. We have to adapt the lessons of history to today‘s world and only [democratic deliberation] can get us to the right [place].