In 1982, as the UK suffered from its highest unemployment levels in fifty years, the punk band Gang of Four released their song Capital (It Fails us Now).
Thirty-two years later and it’s a different story. Capital overwhelms us now. The lyrics were right about growing consumer debt, but wrong about the imminent failure of capital, or of capitalism.
Since 1990, the pool of global financial capital has tripled and is expected to reach a quadrillion dollars by 2020. There’s so much capital that Bain and Company raised alarms that A World Awash with Money would be characterized by “persistently low interest rates, high volatility and thin rates of return” and more damaging and longer asset bubbles, busts and crises.
It may seem odd for a profession that specializes in the study of capitalism, but economists have paid little attention to the distribution of capital in the economy, even though the 85 wealthiest individuals now control as much financial wealth as half of humanity.
If growing imbalances of capital, household debt and corporate surpluses had received greater attention more economists might have foreseen the recent financial crisis. These growing surpluses of capital also help explain why house prices keep on rising when so many economists consider them overvalued.
The rise of neo-classical economics, which attempted to forge economics into more of a science, meant economics also increasingly ignored its political implications. Keynes himself acknowledged the power of “vested interests” in his General Theory, but claimed the power of ideas were more important. However, the adoption of his ideas by these “vested interests” may have owed more to the threat of Communism than to the simple power of ideas.
The willful blindness of economics towards political power appears to be fading. As countries stumble out of the recession, prominent economists have expressed their frustration with austerity measures slowing economic growth and acknowledge the problems of growing inequality and the influence of political and corporate elites in the persistence of misguided economic policies.
More attention is being paid to the power of capital as well. The most eagerly anticipated book on economics in many years is Thomas Piketty’s Capital in the 21st Century, with advance sales already making it Amazon’s top-selling book on economics.
Mr. Piketty helped reveal the rising inequality of the top 1 per cent, and made it such an issue of public debate around the world. His new book has already garnered rave reviews in the Economist and the New York Times. Former World Bank economist Branko Milanovic hails it as “one of the watershed books in economic thinking”.
His main argument is that the “Golden Age” of capitalism from 1945 to 1975 – with strong economic growth, the rise of the middle class and social progress – was an historical anomaly. We are in danger of returning to the “patrimonial capitalism” prevalent before the 20th century as the return on capital exceeds that of economic growth and wealth becomes increasingly concentrated, subverting democracies and more sensible economic policies.
Lower tax rates on capital have contributed to the growth and increasing concentration of capital and growing inequality. Mr. Piketty’s most prominent solution is to increase taxes on capital and wealth, and he proposes a global tax on capital.
This idea is catching on. The International Monetary Fund recently calculated how much countries could raise by increasing taxes on wealth and top incomes in its “Taxing Times” October Fiscal Monitor. Even prominent billionaire investor Bill Gross of PIMCO recently unequivocally stated that “The era of taxing “capital” at lower rates than “labor” should end.” If the Canadian government eliminated preferential taxes on capital income, it could generate well over $15-billion in additional revenues annually (and another half that for the provinces): more than enough to eliminate the deficit and provide funding for better public services.
But what are the chances of that happening? Zero to negative with the current government in Ottawa.
Conservative Party policy instead calls for the elimination of tax on capital gains. Their proposal to expand Tax Free Savings Accounts could create a gaping hole in the government’s revenue raising ability. Together with income splitting, it would exacerbate inequality and do more harm than good for the economy.
Former U.S. President Bill Clinton’s mantra for his election in 1992 was “It’s the economy, stupid”. Now economists increasingly despair that it’s the power and politics of capital that matter as much as the economics.
Toby Sanger is the senior economist for the Canadian Union of Public Employees, produces its Economy at Work and tweets at @toby_sanger.