Transcript Crisis of Presidential Legitimacy, Jueteng and

Piketty Inequality
and the Role of the State
in Economic Thinking
Raul V. Fabella
UP School of Economics and NAST
52nd PES Annual Conference 2014
The Context: Clash of Ideologies
• “Property is theft.”
K. Marx / P. Proudhon (1840s)
• “The inherent vice of Capitalism is the
unequal sharing of blessings; the inherent
virtue of Socialism is the equal sharing of
miseries.” -Winston Churchill
• Parasites, Looters, Moochers: the
destroyers of progress:
Ayn Rand’s Atlas Shrugged (1957)
The Context: Clash of Idealogies
• Industrialists / Rational Profit Seekers
are the creators of progress:
Ayn Rand in Atlas Shrugged (1957)
• "...Atlas Shrugged is a celebration of life
and happiness… Creative individual
and undeviating purpose and rationality
achieve joy and fulfillment. Parasites
who purposely avoid either purpose or
reason perish as they should.“
-Alan Greenspan
The Context: Clash of Idealogies
"... Atlas Shrugged is not merely a novel. It is
also… a cogent analysis of the evils that plague
our society... You (A.R.) have the courage to tell
the masses what no politician told them: you are
inferior and all the improvements in your
conditions… you owe to the efforts of men who
are better than you.“
-Ludwig von Mises
(letter to Ayn Rand)
- inspired F. Hayek who mentored M. Friedman
Contemporary Echoes
• To raise or not to raise the tax on
the rich
• To embrace or not the affordable health
insurance
• To reduce or not the coverage of safety
nets such as unemployment insurance
• To impose or not user fees in education
and public goods
• To do or no to do CCT.
The State in Economic Thinking
• First Fundamental Theorem:
Given no-market failures, the welfare
optimum is attained without the state.
• Second Fundamental Theorem of
Welfare: If the Walrasian optimum
violates the socially desired Rawlsian
equity norm, redistribute initial assets
and then let Walrasian tattonnement
attain the preferred welfare optimum.
• Meta-Market Failure vs. Market Failure!
The State in the Kuznets Economy
• By SFTW, the state has a role!
Or has it?
• Enters the Kuznets Inverse U Hypothesis
(1954): In the process of development,
income inequality first rises, reaches a
maximum and finally falls as per
capita income grows.
• Income Inequality is a temporary itch,
part of the life cycle of economic
catch-up – the price of rapid growth.
The State in the Kuznets Economy
• SFTW just a neat existence theorem,
not a serious policy prescription!
• Faster income growth eventually fosters
income equality.
• Redistribution of asset is politically
messy and contentious.
• Growth-enhancing policies are less so –
export-promotion led to higher growth
with lower GINIs in Tiger Economies.
The Berg and Ostry Thesis
• Berg and Ostry (2011): What factors
contribute to sustainability of growth
in developing countries?
• Income inequality shortened the
duration of growth – robustly!
• The downward phase of the Kuznets
Curve may never come!
• The State has a role at least in
developing countries!
The Piketty Thesis
• Enter Thomas Piketty (2014): Capital
• The Piketty Thesis: Income inequality,
measured by the share of top income
decile, relentlessly rises with economic
growth in well-functioning market
economies.
• Nothing to do with ordinary market
failures! It comes from r > g! This is true
of mature high-income economies.
The New Yorker Magazine
By far the best summary
of the Piketty Thesis:
“Piketty Inequality in Six Charts”
Chart 1
Chart 2
Chart 3
Chart 4
Chart 5
Chart 6
The Piketty Thesis
• The Piketty empirics seems robust
against challenges
(e.g., FT’s Giles et al., 2014)
• Piketty’s growth theoretic interpretation
(r > g) plausible but may not be unique
(e.g., Ray, 2014)
The State in the Piketty Economy
• Meta-Market Failure
(the real objection of socialists to
markets) grows relentlessly leading to
• Loss of legitimacy and possible
Armageddon for Capitalism.
• The new role of the state: snatch
Capitalism from the jaws of death!
• SFTW is restored as a policy
prescription!
Piketty, Marx, Schumpeter and Keynes
• Marx’s Kapital:
Capitalism’s demise is a law of
scientific socialism; progressive
impoverishment inevitable;
the state cannot stay its execution.
• Schumpeter Capitalism, Socialism
Democracy: “Can Capitalism survive?
No. I don’t think it can.” (To be fair, JS
referred to Laissez Faire Capitalism)
Piketty, Marx, Schumpeter and Keynes
• JM Keynes General Theory:
The market at times cannot heal itself;
fiscal activism can and must heal it.
• Piketty Capital: The market is headed
towards self-destruction; the state can
and must save it.
• T. Piketty and J.M. Keynes are the true
intellectual soulmates.
Thank You!
Mabuhay Kayo!
Summary of Gil B’s Results
• Between 2012 and 2009: GINI and Shares
Income Gini fell from .345 to .288
Share of lowest income decile rose from
2.0 to 2.9%
Share of the highest decile fell from 35.3
to 30.5%
• Determining Factors
OFW and GDP no impact on lowest
decile share, impacts the 2nd and 3rd
Summary of Gil Beltran’s Results
• CCT raises the lowest decile’s share
• Microfinance raises the shares of the
lowest three deciles
• Lags
GDP growth takes 6 years to impact
shares of the poorer deciles
CCT impacts only after 3 years
Microfinance has immediate positive
impact on shares of lower deciles