The Wealth Tax — When Thomas Piketty And Eleanor Shellstrop Agree, It’s Time To Act

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The next time things get slow on your family Zoom call, try breaking out this poll question:  

In 1910; which Western country was MOST unequal in terms of income and wealth?  

(a) France 

(b) Sweden 

(c) United States.  

How do I know the answer?  Because last year, for once, I actually carried out my New Year’s resolution — which was to read Thomas Piketty’s 1,100 page Capital and Ideology. It’s an impressive and impressively dense book, packed with statistics, charts and even anecdotes from Jane Austen novels.  To be completely honest, I needed to borrow a few weeks from 2021 to get it done. 

Two of those weeks were spent in a Covid quarantine hotel in New Zealand where I alternated between finishing the book and binge-watching The Good Place, a Netflix NFLX series about the afterlife, where the main character, Eleanor Shellstrop, strives to keep all of humanity from being condemned to the Bad Place. It struck me that Piketty is like the Eleanor Shellstrop of economics, trying to illuminate a path for us to avoid the unequal and politically unstable world he fears we are entering.

And that’s why it important to know the surprising answer to our Zoom poll: Sweden.

What Changed in Sweden?

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It’s surprising that Sweden was so unequal a century ago because in recent decades it’s been the standard bearer for a relatively egalitarian social democracy.  Piketty’s point is that Sweden’s equality is not some “essential cultural predisposition”, it’s a function of political choices and the economic regime. 

What changed?  Well, for one thing the country was barely a democracy until 1911.  Before then, voting rights were tied to property ownership, meaning that a single large landowner could have more than 50% of the votes in some districts.  If this sounds familiar, it should be – that’s how shareholder voting rights in most companies work today.  

In Sweden, once voting was untethered from property, it rapidly became more equal.  One of Piketty’s beliefs is that for the distribution of capital to become more balanced, corporate control also needs to be at least partially untethered from share ownership.  He points out that this is currently the practice in Germany – where worker representatives have half the votes in large companies – without any obvious loss of competitiveness.

To Anglo-Saxon ears, questioning the link between share ownership and voting seems unfair. But how fair is the current system?  It seems obvious that if political voting rights are skewed heavily in the interests of the wealthy – like 19th century Sweden – then a political system will develop that also favors them.  Piketty argues that the same logic applies to corporations.  The current voting set up favors a few large shareholders and the small group of agents who manage the company on their behalf, enriching themselves along the way.

The U.S. Changed Too

While Sweden was becoming more equal, the U.S. moved in the opposite direction, becoming the least equal western democracy. It’s surprising how progressive the U.S. was a century ago. The statistics Piketty presents on education amazed me — as early as 1840, 80% of the U.S. population was completing primary school, compared to just 30% in Britain, the world’s richest country at the time. A century later the U.S. had virtually universal secondary education while the rate in the U.K. was still only 30-40%. The U.S. was also early in introducing progressive taxation, before being copied in France and Germany.  

However, this wasn’t progressivism as it’s formulated today. The rates of education for blacks in the U.S. were much lower and, after enslavement ended, they were still excluded from the benefits of many progressive social programs. The U.S. thus practiced a form of social-nativism.  This is a political alliance which promotes policies that make society more equal as long as those policies exclude those deemed as outsiders from benefitting. 

In yet another example of change, progressives and nativists have now moved to different ends of the U.S. political spectrum.  But there is no reason this couldn’t shift again.  Indeed, we are currently seeing social-nativist alliances gain power across Eastern Europe. Capitalists worried about protecting their wealth should take note – if the Democrats could jettison identify politics, or Republicans abandon failed trickle-down economics, the forces keeping these two groups apart would dissipate and the social-nativist alliance could reemerge in the US.

Inescapable Inequality?

Piketty’s tour of economic history offers compelling evidence that concentration of wealth and power eventually emerges in modern societies regardless of their economic and political set-up. Communism was established with the explicit goal of creating equality yet ended up concentrating power in the hands of a tiny clique who murdered millions of their own citizens. China evolved from communism to state-controlled capitalism, but has ended up with income inequality on par with the West.  Big, non-European democracies have not fared better despite having more overt social justice goals. India has pursued what we would call affirmative action, yet income inequality there is greater than the U.S.  And the introduction of true democracy into South Africa has not lessened inequality – it’s gotten worse.   

The lesson is that a small initial advantage – whether it’s due to luck, skill, military power or some combination of factors – tends to perpetuate itself. In The Rise Of Carry, a book about the global financial system I co-authored last year, we describe this process of cumulative advantage as being fundamental to most systems and intimately linked to the power structure of society. 

What Would Eleanor Shellstrop Do About Wealth Inequality?

In The Good Place, Eleanor and three friends must save humanity from damnation by convincing the universe’s ultimate judge – who is more interested in watching NCIS than in mankind’s fate – that humans have the capacity to learn and improve if only given a fair chance. The stakes are high. Failure means an eternity of torture — bees with teeth, a New Yorker subscription that can never be cancelled and the Kars 4 Kids jingle playing forever on repeat.

What does The Bad Place look like for capitalists? History provides us some pretty clear clues.  When inequality was brought down in the West from 1920-1980 it was driven by intentional government policy aimed at redistribution – financial repression, inflation, rent control, expropriation and nationalization. Ouch.  

To avoid those outcomes, Piketty suggests a progressive wealth tax, with the money used to fund an endowment of capital given to everyone at age 25. He’s careful to say his aim is to start a debate not suggest an all or nothing agenda. Personally, I believe a wealth tax that started with a modest percentage at a relatively high level of wealth and then grew, would not discourage entrepreneurship. Indeed it’s easy to imagine that putting some amount of capital in the hands of the young and energetic could increase business formation. Equally as important, it would ensure that power itself circulates. The alternative, as I discussed in a recent article on the GameStop GME episode, is a nihilistic generation looking to mess with things

Of course, a lot of people will disagree with this approach. If you do, then take a very close look at the other policies that democracies have used in the past to to deal with inequality. Either capitalism finds a way to reform itself or those things are coming soon. And then we really be in The Bad Place.

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