Kenneth Rogoff On Piketty

See Where Is the Inequality Problem? Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. His most recent book, co-authored with Carmen M. Reinhart, is This Time is Different: Eight Centuries of Financial Folly. Excerpts:

"Reading Thomas Piketty’s influential new book Capital in the Twenty-First Century, one might conclude that the world has not been this unequal since the days of robber barons and kings. That is odd, because one might conclude from reading another excellent new book, Angus Deaton’s The Great Escape (which I recently reviewed), that the world is more equal than ever.

Which view is right? The answer depends on whether one looks only at countries individually or at the world as a whole.

"over the last few decades, several billion people in the developing world... escaped truly desperate levels of poverty. The same machine that has increased inequality in rich countries has leveled the playing field globally for billions....he last 30 years have been among the greatest in human history for improving the lot of the poor."

"Piketty’s brilliant book documents within-country inequality," 

"that labor’s share of GDP has been declining globally since the 1970’s."

"However, Piketty and Saez do not really offer a model; nor does this new book. And the lack of a model, combined with a focus on the world’s upper-middle-class countries, matters a lot when it comes to policy prescriptions. Would Piketty’s followers be nearly as enthusiastic about his proposed progressive global wealth tax if it were aimed at correcting the huge disparities between the richest countries and the poorest, instead of between those who are well off by global standards and the ultra-wealthy?"

"Piketty argues that capitalism is unfair. Wasn’t colonialism unfair, too? In any event, the idea of a global wealth tax is replete with credibility and enforcement problems, aside from being politically implausible."

"Piketty is right that returns to capital have increased in the last few decades, he is too dismissive of the wide-ranging debate among economists concerning the causes. For example, if the main driver is the massive influx of Asian labor into globalized trade markets, the growth model put forth by the Nobel laureate economist Robert Solow suggests that eventually capital stocks will adjust and the wage rate will rise."

"Fortunately, there are much better ways to address rich-country inequality while still fostering long-term growth in demand for products from developing countries. For example, a shift to a relatively flat consumption tax (with a large deductible for progressivity) would be a far simpler and more effective way to tax past wealth accumulation."

"A progressive consumption tax is relatively efficient and does not distort savings decisions as much as today’s income taxes do. Why try to move to an improbable global wealth tax when alternatives are available that are growth friendly, raise significant revenue, and can be made progressive through a very high exemption."

"I don’t understand why he assumes that an 80% rate would not cause significant distortions, especially as this assumption contradicts a large body of work by the Nobel laureates Thomas Sargent and Edward Prescott."

"Focusing on the US, Jeffrey Frankel of Harvard University has suggested the elimination of payroll taxes for low-income workers, a cut in deductions for high-income workers, and higher inheritance taxes. Universal pre-school education would enhance long-term growth, as would a much greater emphasis on lifetime adult education (my addition), possibly via online courses. Carbon taxes would help mitigate global warming while raising considerable revenues."

"many developing-country citizens rely on rich-country growth to help them escape poverty. The first problem of the twenty-first century remains to help the dire poor in Africa and elsewhere. By all means, the elite 0.1% should pay much more in taxes, but let us not forget that when it comes to reducing global inequality, the capitalist system has had an impressive three decades."