The World Inequality Report and Piketty’s fallacies

The World Inequality Report and Piketty’s fallacies

The views of Piketty and Banerjee on what constitutes inequality need not be the last word

Representative Image. Credit: AFP File Photo

Over the last few decades, growing inequality in income has taken a centre stage in public debates and has posed challenges for policymakers as the wealthiest people in most parts of the world have seen their wealth soar relative to that of other sections of society. Recently, the World Inequality Report 2022 was released by the Paris-based World Inequality Lab (WIL). The report gives comprehensive data on global trends in inequality in income and wealth.

The research is based on data compiled and written by leading economists of the world. The report, which includes a foreword by 2019 economics Nobel Prize laureates Abhijit Banerjee and Esther Duflo, was authored by Lucas Chancel and coordinated by French economist Thomas Piketty, among others. Chancel, who works at the Paris School of Economics, claimed that “The Covid crisis has exacerbated inequalities between the very wealthy and the rest of the population. Yet, in rich countries, government intervention prevented a massive rise in poverty. This was not the case in poor countries.” 

The gist of the report is that the richest 10% of the global population currently earns 52% of global income, whereas the poorest half of the population earns 8.5% of it. While an individual from the top 10% of the global income distribution earns $122,100 per year on average, an individual from the poorest half of the global income distribution makes $3,920 per year.

Wealth inequalities are even more pronounced than income inequalities. While the poorest half of the global population barely owns any wealth at all — owning just 2% of the total wealth — the richest 10% of the global population own 76% of all wealth.

The report puts India among the most unequal societies in the world. While the bottom half of the population in India earns Rs 53,610, the top 10% earns 20 times more at Rs 11,66,520. India stands out as a poor and very unequal country, with an affluent elite.

Incidentally, Thomas Piketty, who coordinated the report, wrote the book titled “Capital in the Twenty-First Century” in 2014. The book deals with wealth and inequality in Europe and the United States since the 18th century. The book's central thesis is that there will be concentration of wealth in a few hands when the rate of return on capital is greater than the rate of economic growth over the long term, and this will cause social tensions and economic instability.

Piketty, therefore, recommends a global progressive tax system to help reduce inequality and avoid the vast majority of wealth coming under the control of a tiny minority.

Though income and wealth inequalities have increased in almost every country since the 1980s, the increase has not been uniform, with some countries like the US, Russia and India experiencing remarkable increases in inequality while others like China and European countries experienced relatively smaller increases.

Sadly, the report, just like the report of Oxfam (Oxford Committee for famine relief) focuses on inequalities based on income, which can be misleading. The larger question that needs to be answered is how economies should raise and distribute the incomes they generate. Piketty wants governments to tax the rich heavily and transfer this to the poor through social welfare schemes. In April 2012, Piketty’s socialist leanings were visible when he wrote an open letter along with 42 colleagues in support of the socialist party candidate Francois Hollande in the 2012 presidential elections in France.

The moot point is, should organisations like Oxfam focus on more burning issues and whether fewer people are dying today due to hunger and famine compared with the past.

Being rich and wealthy should not be seen as a vice or a sin as long as the wealth amassed is through legal means. Arthur Laffer, through the Laffer Curve, explained and proved that taxing the rich to increase revenues can be counterproductive since he felt that beyond a certain point, high taxes reduced the incentives for people to work more and earn more and discouraged businesses to invest more and earn more.

The pertinent questions to ask are: Are low-income countries catching up with richer ones? Are racial and gender inequalities falling? Have the life expectancy and literacy rates of people across countries gone up in the last 50 years? Are governments worldwide intervening more and spending more on infrastructure, healthcare and education? Has the growth in global GDP led to increase in income levels of people within and across countries? The rich are getting richer no doubt, but the fact is, the poor are also getting richer.

In the final analysis, the views of Oxfam or World Inequality Lab or economists like Thomas Piketty or Abhijit Banerjee on what constitutes inequality, based on income or wealth, need not be the holy grail or the last word.

(The writer is a chartered financial analyst and a former banker and currently teaches at Manipal Academy of Banking, Bengaluru)

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