Ch. 9: Mitigating Inequality

In 2014, French economist Thomas Piketty released the English version of his book Capital in the Twenty-First Century. A heavy tome on wealth inequality, it became a sensation, selling around 1.5 million copies.

Piketty’s theory was, at heart, a simple one: as the return on wealth is greater than the rate of economic growth, inequality is destined to go up for ever, absent a global tax on wealth or a major destructive event such as a war.

But anything done on a global scale has limited prospects for success these days, and this is especially the case for global wealth tax which would attack the core interests of powerful vested interests in the United Kingdom, the United States, China, and Russia. Besides, any tax on capital is likely to result in less capital accumulation, which would diminish wages over times. To understand this point, consider a simple example: imagine we have a town with one factory and one hundred workers. Now imagine another factory is built; the two factories must now compete for the limited number of workers, which will result in wages increasing over time. If you put a tax on capital, the chances that other factory will be built go down.

Fortunately, one can favour the accumulation of capital without necessarily favouring capital itself. In this chapter, I intend to outline how. But before heading into this, one may wonder why wealth or income inequality is bad from a Metasophist perspective? In fact, there are numerous reasons.

First, where inequality reigns, jealousy rises. Think of the following example: imagine a society where for each increase of 1 percentile in the income distribution, income increases by 1%. So if you are in the top 1 percent, you earn 100,000. If you are at the 90th percentile you earn 90,000; at the 80th percentile, 80,000, and so on down until the point where the welfare system creates a floor. In this society, it doesn’t matter so much if you are at the 80th or 90th percentile, or the 90th and 99th percentile. The difference is only around 10,000 in income. You will therefore be less anxious about making those jumps.

But now imagine a society where there are much greater income differences between the percentiles. So let’s say at the 99th percentile, you earn 300,000; at the 95th, 100,000; at the 90th, 75,000; and at the 80th, 50,000. Here the difference between the 80th and the 90th percentile is 25,000. This is a much more unequal society, and as a consequence, you are likely to devote a lot more effort to trying to get into the higher percentiles.

In such a world, vicious jostling for well-paid positions will take place, and in the fervent competition one can expect less attention to be devoted to long term challenges such as achieving the Imperative. As Peter Turchin indicates in his book Secular Cycles, such fractious behaviour among the elite can lead to instability and an “age of discord”, if members of the aspirant elite who find themselves without wealth or status rally a relatively destitute population to agitate for a more equal distribution of resources.

But even aside from the brutal competition it incentivises, there is another reason why inequality is bad: it causes people to think about money and zero-sum status competitions, rather than the meaning of their lives and the durable positive-sum contributions they can make to society. The common good may be doubly-neglected if a small elite with vast amounts of wealth try to influence political outcomes.

As this situation must be anathema to a Metasophist, inequality must be contained. However, before developing a strategy for achieving this, we must first understand its causes in the modern world.

9.1 Causes of Inequality

Dean Baker notes that the increase in US income inequality is mostly due to strong patent and copyright protection, higher executive remuneration, greater protection for professionals such as doctors, and the financial sector.[129] Talented individuals will thus be attracted into these professions not to produce knowledge, but to enjoy the privilege of the protections afforded to them. Every country has such protected professions, the logic for which is sometimes indecipherable to foreigners. Institutions such as the IMF keep a handy list in secret folders should the opportunity ever arise for “structural reforms.” In any case, this genre of extractive elite varies across country, and does not represent a pan-Western problem as such, so I will not treat them here.

From a global perspective, trade and technological development are of much greater interest. Each shall now be explained in turn.

Trade and Offshoring

The increasing power of the wealthy can be problematic if the interests of the capital-owning class can differ from those of society as a whole. A prime example of this is when production is relocated abroad, a process known as offshoring. It makes perfect sense for the owner: workers abroad can do the same work for a lower wage, leaving room for a larger profit. If the sector is sufficiently competitive, consumers will benefit from cheaper prices; the greater the degree of competition, the greater the decrease in price.

However, the losses to the society of offshoring include higher unemployment, higher expenditure on social welfare, and the loss of skills as people are no longer working. In addition, if people lose their mastery of a particular technology, then they will also lose the ability to innovate in that particular area; outsourcing today can lower innovation tomorrow.

Society only benefits if the gains to the owner and consumer exceed the losses to other citizens; this is unlikely in the short term if the price does not change, as the workers lose the full amount of their salary while the owner must still pay the new workers in the foreign economy. For example, a worker could lose e40,000 in wages, while the employer must pay the new foreign worker e10,000. The net gain to the employer is thus e30,000. Society may gain if the released resources (workers, machinery and buildings) of the company are put to a more productive use, with ensuing higher returns or salaries. The societal loss is also diminished if the decrease in costs is passed onto the consumer. But there is no guarantee of either of these, and the persistent low rate of prosperity in the various rust belts of the West make the first claim slightly dubious.

There is another element to take into account, which is the welfare of the foreign society. Many who advocate such liberal trading policies promote the claim that the poor in the developing world would be lifted out of poverty. This has certainly been the case with regard to the offshoring of activities to China. Whatever the West gained from increased trade, China certainly gained much more in terms of wealth, technology, and power. But China is controlled by a party hostile to the truth and to the West, with open designs for hegemony. We will discuss this further in a later chapter, but for a Metasophist, the rise of Chinese authoritarianism is something to guard against, not to celebrate mindlessly. This is not the case for all developing countries however: it is possible that some developing societies, once developed, could help us attain the Imperative.

To conclude, from society’s perspective our industrial wealth is not being managed optimally. Capital gains, labour suffers, and society can lose. The capital-labour conflict has been with us too long.  How can we finally transcend this old conflict? The answer to such a question is urgent, not least because the divide could be aggravated by the rise of robotics and AI, which we will now discuss.

Robotics and Artificial Intelligence

In three respects, the economic dynamics introduced by accelerating technological growth are identical to those posed by increased trade.

First, the distributive effects are similar. The result is cheaper products, while the profits may be repatriated or invested abroad. Furthermore, even if the country gains in aggregate, the benefits may only accrue to the owner of the new technology if the full cost savings from automation are not passed on to the consumer.

Second, whereas with free trade we increase the power of foreign states, robotics and AI might increase the power of firms with access to large amounts of data and patents. Third, the length of time it would take unemployed individuals to adjust may cause some political instability, especially if technological change becomes a scapegoat for other unrelated economic problems.

The effect are best illustrated with an example. What would happen if robotics and AI subsumed a large sector of the modern economy such as the taxi industry?

Effect on Employment

Initially unemployment would increase. If the taxi drivers re-skill and end up employed in a more productive and profitable occupation, then both they and society generally would have gained. I will allow the reader to form their own judgement on whether such a re-skilling scenario is plausible.

Another scenario would involve the taxi-drivers finding new jobs, but in a less productive occupation, such as retail and hospitality. There are still gains to society, but the majority of them will go to the firm and the consumers if there are decreases in taxi fares.

What about the scenario where the taxi drivers remain unemployed? It is important to note this is not a very likely scenario. Following automation, the firm shareholders and consumers would have greater resources at their disposal. They have to spend or invest this, and the result of such spending or investment will be a growing market in other areas, leading to more jobs. But if such employment were to materialise, there are still gains; the same output occurs but less resources are necessary, and the taxi drivers can now benefit from increased leisure time — assuming they do not suffer from ennui or meaninglessness (a topic we shall discuss in a later chapter).

However, if the taxi drivers benefit from government welfare, the taxpayer must foot the bill. The unambiguous loser is then the person who must pay higher taxes while not benefiting from lower taxi prices or from the increased profits of the company. But if the cost of numerous products and services is reduced due to automation, everyone should benefit from a lower price for at least one product.

Effect on Investment and Inequality

If the profits are reinvested or spent domestically, new jobs will be created. However, if the profits are repatriated away from the country, then the only benefit will be the lower price of the taxi plus perhaps the tax on the profits. Whether this compensates for the lost revenue to taxi drivers and the higher social welfare expenditure occasioned by their unemployment is an open question. It becomes even worse if their profits are routed through tax havens through the use of transfer pricing, as then there is not even any benefit in terms of tax.

In this latter case, the only benefit would come in the form of lower prices. But if AI has a tendency to monopolise, then this might not even occur as the price may not fall. And monopoly is not a phantom menace when it comes to technology: note the ways firms such as Uber have come to occupy a large share of the taxi market even without self-driving cars.

Finally, even if profits are reinvested domestically, there could be the issue of increasing political power of the tech firms and their entrepreneurs. This increased inequality could end up having negative effects on the political system – essentially, by amplifying already existing trends towards oligarchy.

What Reaction?

The great disadvantage labour faces in the match against robots is the fact that labour is taxed but robots are not. If a company wishes to employ a person, they must face all kinds of payroll taxes and regulations. This increases the amount paid by the employer, and reduces the amount received by the worker. In contrast, a robot is counted as tangible capital investment, often allowing a company to claim deductions on its taxes.

As a result, the playing field is biased against human workers. In order to remedy this, the tax on labour should be lowered. Instead, a tax could be placed on immovable factors such as land. While some raise the idea of placing a tax on robots and AI, it is difficult to understand how this would work in practice as any definition of what constitutes robots or AI would include a vast range of products currently in existence. It is also not clear such a tax would be optimal, as it could retard technological progress.

The idea of simply not adopting such technologies can be tempting. However, should the West fail to nurture and master the latest technology, we will become economically and militarily inferior to the rest of the world. There is a precedent in history for such a foolish and self-defeating move. In the 1400s, China had the finest navy in the world, one that was capable of sailing to Africa and back. However, the Chinese later decided to destroy their fleet and cease all expeditions abroad, apparently in fear of the growing power of the merchant class who benefited from foreign trade.[130]

Thus began the stagnation of China, while Europe would go on to colonise large tracts of the world. Ultimately, China itself was invaded and subdued by European powers in 1905 after the Boxer Rebellion. Should the West abdicate its role in world history by choosing to stagnate technologically, a similar fate would await. Such a loss of control over our own destiny is a risk we simply cannot take.

Therefore, simply renouncing technology and trade is not an option. As has been stated, given that the problem is that an excess of the benefits goes to capital, the optimal solution is that we ensure that the ownership of capital is diversified to ordinary workers. We shall now address how this can be done.

9.2 Public Equity Fund

How can we bring about a situation whereby the workers themselves possess wealth? One way would be to set up a Public Equity Fund, in which each citizen would own shares: their own Public Equity Account. Such a fund has already been proposed by many thinkers, such as Nobel Laureate James Meade, Oskar Lange, Rudolf Hilferding, and even Thomas Paine.[131] Such Public Equity Funds, nationally or regionally-based, would in turn be major investor in community assets. Now, we shall outline how such a fund would be capitalised, how it would be governed, and how it would be used.

Capitalising the fund

Seigniorage revenues

The monetary reform outlined in the previous chapter could result in a windfall for the public sector. Under the pessimistic scenario, this would equal just under e10 trillion over 50 years. However, under the optimistic scenario, this could equal around €25 trillion, even before we consider the potential gains from the closure of the shadow banking system. Under either case, this cannot be all spent on redeeming debt, as there are some countries whose debt is particularly low. Any surplus revenues should then be allocated into this new Public Equity Fund.

Investment in Start-ups

When describing the Metasophist Youth Fellowship, we described how it could be used to facilitate the formation of companies. In return for aiding the formation of start-ups, the community should take an equity stake in these very same companies in the range of 50%. This shareholding would then become an asset of the Public Equity Fund. Should these companies then become successful, a large fraction of these benefits would go to the public.

Another alternative to this would be to require a certain amount of compensation or corporate tax (say 1 percent) to be in the form of shares. However, unless they trade their shares on the open market, it would be difficult to determine the worth of the shares, making the value of the public equity account unclear. Therefore, a substantial lightening of regulation for publicly-listed companies would be desirable, so that smaller companies would find it easier to float on the stock exchange.

Budget surpluses

In the United States towards the end of the Clinton administration and the beginning of the Bush Administration, the federal government was running such large budget surpluses that it was looking like the government would soon have to invest it in assets such as equities. The Chairman of the Federal Reserve and one-time libertarian, Alan Greenspan, feared this outcome so much that he endorsed the $1.6 trillion dollar tax cut of the Bush Administration.[132] Since this time, the federal debt has increased from 60pc of GDP to well over 100pc of GDP today, with the deficit growing ever larger due to the Trump tax cuts and the virus-induced crash.

This example illustrates that a surplus can be possible – the critical thing is to know what to do with it. The Public Equity Fund can solve the latter question while avoiding Greenspan’s fear of an overly powerful government. But how do we move to a position where we have a surplus in most Western countries?

A significant barrier to running a surplus is the excessive public expenditure prevalent throughout the West. A typical example of this is the needless consumption of health-care and social welfare. For example, overuse of hospital care has been estimated at around 20% in France, and 33% in Germany.[133]

We need a way to prevent such over-consumption, while not actually restricting healthcare (and other services). One way would be to deduct the cost of healthcare treatments from the Public Equity Account of the individual. If the account has a positive value, then the individual is in essence paying for healthcare – but it is money they would not otherwise have without this Public Equity scheme. If the account is zero, then we return to the status quo regarding health care accessibility which implies little or no restriction on availability as in most European countries.

If spending is successfully contained, then this would increase the budget surplus which would increase the value of the Public Equity Fund. Citizens would see the value of their account go up, and thus may also be more likely to discourage profligate spending by their fellow citizens. We could even go further along this vein, and partly fund government budget deficits using the Public Equity Fund. If people see their Account declining due to a deficit, they will be more likely to question whether the money is being efficiently spent.

There are of course other methods to increase the budget surplus, for example by eliminating tax avoidance and competition. The urgency of this issue cannot be understated. According to researchers at the University of Copenhagen, the average corporate tax has fallen from 49pc to 24pc since 1985.[134] New opportunities for rectification shall soon open in this area. Once the United Kingdom leaves the EU, it will be possible to apply sanctions on UK Overseas Territories which facilitate tax evasion, such as the Channel, Cayman, and Virgin Islands.

What would be the potential revenues from such a move? Gabriel Zucman, an economist at Berkeley, estimates that for Europe the tax loss is at least $75 billion per year.[135] This is similar to the amount the EU spends on development aid annually.

This is before we even take into account corporate tax evasion. According to another Zucman estimate, if corporate profits were taxed according to percentage of sales a company had in each country rather than on the basis of legal residence, then corporate tax yields in Europe could increase by around 25pc.[136] Such a move would of course require the consent of all countries within the EU, including the principal tax havens such as Ireland, the Netherlands, and Luxembourg. It would also mean that countries outside of Europe might move to the same system, meaning that they would start taxing the profits of European multinationals.

This would result in tax losses for the main exporting countries in Europe. For these reasons, such a proposal would probably not get sufficient support to be enacted.

Thankfully, there is another way. A pan-EU corporate tax in the range of around 5pc would partially compensate countries such as France and Italy for the loss in revenues due to tax competition, while not threatening the relative competitive position of countries such as Ireland and the Netherlands. Such a tax would be in addition to the corporate tax levied at national level. Given that company profits equal around 40pc of GDP, this new tax could amount to 2pc of GDP, or e200 billion for the euro area.

Governing the fund

Having described the source of funds for investment, we must now decide on how such funds should be invested and what limits should be placed on their size.

One problem with such a Public Equity Fund would be its power. Such a large fund, exclusively invested in the assets of the country, could be a powerful political player. If under the control of the government, it could be used to stifle political diversity.

The solution to this problem would be to create multiple funds, with the maximum number of shareholders limited to 500,000. For a country like Ireland, this would equate to around eight funds. In addition, it could be forbidden from using its shares to vote.

To prevent such funds from exerting undue influence in their home countries and municipalities, they could be required to invest outside of it. This also makes sense from the perspective of portfolio diversification; if something bad then happens to your region, such as a recession or a natural disaster, at least the value of your equity will not be affected.

9.3 Heralding a New Age of Wealth

The goal of the Metasophist Community would be to create an economy in which self-harming phenomena such as offshoring cannot happen. Of course, it is not always the employer at fault. Equally, it must be our ambition to ensure that employees cannot strangle technological progress.

As Corelli Barnett described, this happened in the UK when employees refused to adopt new methods because they generally had a hostile relationship with employers.[137]

One way to resolve both types of conflict would be if the workers themselves became shareholders in the company. This would be facilitated by the Public Equity Fund; simply put, the current shareholders would exchange their stock for public equity of equal value owned by the employees. To incentivise such exchanges, they could be tax-free, and thus become a useful way for company owners to diversify their wealth.

The result should be that employees would become more interested in the future of the company as a whole, and thus would be more open to changes designed to increase productivity. They would also become less tolerant towards any slacking they observe in their midst.

However, no company owner or entrepreneur should ever be forced to divest from his own company. Such forced divestment could sap the motivation of the entrepreneurs who are the driving force behind new ideas and innovations. Without such a driving force, the company could lapse if the employees do not have the requisite skill-set to strategise and optimise.

Finally, we should note that not all people work for a company; some are self-employed, or work in non-incorporated firms such as coffee shops and restaurants. For them, the above scheme would be of no use. What other uses could the Public Equity Fund then be put to?

Incentivising life milestones

First, the fund could be used to incentivise the early completion of certain life milestones that we would ideally like most people to reach. An example could be that when one has a child, up to half of the equity could be released from their account i.e. it would be sold and the funds given to them, if they wished. A second example could be releasing some equity when one has finished secondary school education.

A problem with this system is that if one grows old with a large amount of equity, they may be tempted to use this by over-availing of healthcare for example. One way to counteract this would be to make public equity inheritable i.e. that when one dies, it is divided among one’s children. This provides an incentive for the elder person to conserve the equity.

Conclusion

The creation of a Public Equity Fund as outlined above could help revolutionise our society’s management of wealth. Instead of the bias towards having public sector deficits, we could have a constituency who would like to see budget surpluses as a way of increasing their Public Equity. In place of bloated public expenditure, we could have individuals voluntarily limiting their own consumption when they do not really need it.

In addition, it would create in all citizens a sense that they have a stake in the future of society. As the value of the fund would depend on the value and success of new companies, societies’ attitude to new companies and innovation generally could become much more positive. It would be easier to gather support to ease the environment for such new and small businesses, as well as for government projects to increase the speed of innovation.

Endnotes

[129] Dean Baker. “The Upward Redistribution of Income: Are Rents the Story?” In: Review of Radical Political Economics 48.4 (2016), pp. 529–543. URL: https://doi.org/10.1177/0486613416655628

[130] Angus Deaton. The Great Escape: Health, Wealth, and the Origins of Inequality. Princeton University Press, 2013, p.11

[131] Matt Bruenig. “A Simple Fix for Our Massive Inequality Problem”. In: The NewYork Times (Nov. 2017). URL: https://www.nytimes.com/2017/11/30/opinion/inequality-social-wealth-fund.html

[132] Alan Greenspan. The Age of Turbulence: Adventures in a New World. The Penguin Press, 2007.

[133] Shannon Brownlee et al. “Evidence for overuse of medical services around the world”. In: 390 (Jan. 2017). DOI: http://doi.org/10.1016/S0140-6736(16)32585-5

[134] Thomas R. Tørsløv, Ludvig S. Wier, and Gabriel Zucman. The Missing Profits of Nations. NBER Working Papers 24701. National Bureau of Economic Research, Inc, June 2018. URL: https://ideas.repec.org/p/nbr/nberwo/24701.html

[135] Gabriel Zucman. “Taxing across Borders: Tracking Personal Wealth and Corporate Profits”. In: Journal of Economic Perspectives 28.4 (Nov. 2014), pp. 121–48. URL: http://www.aeaweb.org/articlesid=10.1257/jep.28.4.121

[136] Thomas R. Tørsløv, Ludvig S. Wier, and Gabriel Zucman. The Missing Profits of Nations. NBER Working Papers 24701. National Bureau of Economic Research, Inc, June 2018. URL: https://ideas.repec.org/p/nbr/nberwo/24701.html

[137] Correlli Barnett. The Audit of War. Faber and Faber, 2011, Location 6056 Kindle