Capital in the Twenty-First Century (117 page)

45
. See the online technical appendix.

46
. In the period 2000–2010, the rate of permanent integration (expressed as a percentage
of the population of the receiving country) attained 0.6–0.7 percent a year in several
European countries (Italy, Spain, Sweden, and Britain), compared with 0.4 percent
in the United States and 0.2–0.3 percent in France and Germany. See the online technical
appendix. Since the crisis, some of these flows have already begun to turn around,
especially between southern Europe and Germany. Taken as a whole, permanent immigration
in Europe was fairly close to North American levels in 2000–2010. The birthrate remains
considerably higher in North America, however.

1
. See in particular
Table 3.1
.

2
. If we count assets owned by European households in tax havens, then Europe’s net
asset position vis-à-vis the rest of the world becomes significantly positive: European
households own the equivalent of all that there is to own in Europe plus a part of
the rest of the world. See
Figure 12.6
.

3
. Together with the proceeds of the sale of public financial assets (which no longer
amount to much compared with nonfinancial assets). See
Chapters 3
–
5
and the online technical appendix.

4
. The elimination of interest payments on the debt would make it possible to reduce
taxes and/or finance new investments, especially in education (see below).

5
. For the equivalence to be complete, wealth would have to be taxed in a manner consistent
with the location of real estate and financial assets (including sovereign bonds issued
in Europe) and not simply based on the residence of the owners. I will come back to
this point later.

6
. I will come back later to the question of the optimal level of long-term public
debt, which cannot be resolved independently of the question of the level of public
and private capital accumulation.

7
. Other tax schedules can be simulated with the aid of Supplemental Table S15.1, available
online.

8
. See
Chapter 10
.

9
. On the redemption fund, see German Council of Economic Experts,
Annual Report 2011
(November 2011);
The European Redemption Pact: Questions and Answers
(January 2012). Technically, the two ideas can be perfectly complementary. Politically
and symbolically, however, it is possible that the notion of “redemptions” (which
connotes long and shared suffering by the entire population) may not sit well with
the progressive capital tax, and the word “redemption” may be ill chosen.

10
. In addition to debt reduction through inflation, a major part of Germany’s debt
was simply canceled by the Allies after World War II. (More precisely, repayment was
postponed until an eventual German reunification, but it has not been repaid now that
reunification has occurred.) According to calculations by the German historian Albrecht
Ritschl, the amounts would be quite substantial if recapitalized at a reasonable rate.
Some of this debt reflects occupation fees levied on Greece during the German occupation,
which has led to endless and largely irreconcilable controversy. This further complicates
today’s attempts to impose a pure logic of austerity and debt repayment. See Albrecht
Ritschl, “Does Germany Owe Greece a Debt? The European Debt Crisis in Historical Perspective,”
paper given at the OeNB 40th Economics Conference, Vienna (London School of Economics,
2012).

11
. If GDP grows 2 percent a year and debt 1 percent a year (assuming that one starts
with a debt close to GDP), then the debt-to-GDP ratio will decrease by about 1 percent
a year.

12
. The special one-time or ten-year tax on capital described above might be thought
of as a way of applying primary surplus to debt reduction. The difference is that
the tax would be a new resource that would not burden the majority of the population
and not interfere with the rest of the government’s budget. In practice, there is
a continuum of points involving various proportions of each solution (capital tax,
inflation, austerity): everything depends on the dosage and the way the burdens of
adjustment are shared among different social groups. The capital tax puts most of
the burden on the very wealthy, whereas austerity policies generally aim to spare
them.

13
. Savings from the 1920s were essentially wiped out by the stock market crash. Still,
the inflation of 1945–1948 was an additional shock. The response was the “old-age
minimum” (created in 1956) and the advent of a PAYGO pension system (which was created
in 1945 but further developed subsequently).

14
. There are theoretical models based on this idea. See the online technical appendix.

15
. See in particular the results presented in
Chapter 12
.

16
. The same would be true in case of a breakup of the Eurozone. It is always possible
to reduce public debt by printing money and generating inflation, but it is hard to
control the distributive consequences of such a crisis, whether with the euro, the
franc, the mark, or the lira.

17
. An often-cited historical example is the slight deflation (decrease of prices and
wages) seen in the industrialized countries in the late nineteenth century. This deflation
was resented by both employers and workers, who seemed to want to wait until other
prices and wages fell before accepting decreases in the prices and wages that affected
them directly. This resistance to wage and price adjustments is sometimes referred
to as “nominal rigidity.” The most important argument in favor of low but positive
inflation (typically 2 percent) is that it allows for easier adjustment of relative
wages and prices than zero or negative inflation.

18
. The classic theory of Spanish decline blames gold and silver for a certain laxity
of governance.

19
. Milton Friedman and Anna J. Schwartz,
A Monetary History of the United States, 1857–1960
(Princeton: Princeton University Press, 1963).

20
. Note that there is no such thing as a “money printing press” in the following sense:
when a central bank creates money in order to lend it to the government, the loan
is recorded on the books of the central bank. This happens even in the most chaotic
of times, as in France in 1944–1948. The money is not simply given as a gift. Again,
everything depends on what happens next: if the money creation increases inflation,
substantial redistribution of wealth can occur (for instance, the real value of the
public debt can be reduced dramatically, to the detriment of private nominal assets).
The overall effect on national income and capital depends on the impact of policy
on the country’s overall level of economic activity. It can in theory be either positive
or negative, just as loans to private actors can be. Central banks redistribute monetary
wealth, but they do not have the ability to create new wealth directly.

21
. Conversely, the interest rates demanded of countries deemed less solid rose to extremely
high levels in 2011–2012 (6–7 percent in Italy and Spain and 15 percent in Greece).
This is an indication that investors are skittish and uncertain about the immediate
future.

22
. The sum of gross financial assets and liabilities is even higher, since it amounts
to ten to twenty years of GDP in most of the developed countries (see
Chapter 5
). The central banks thus hold only a few percent of the total assets and liabilities
of the rich countries. The balance sheets of the various central banks are published
online on a weekly or monthly basis. The amount of each type of asset and liability
on the balance sheet is known in aggregate (but is not broken down by recipient of
central bank loans). Notes and specie represent only a small part of the balance sheet
(generally about 2 percent of GDP), and most of the rest consists purely of bookkeeping
entries, as is the case for the bank accounts of households, corporations, and governments.
In the past, central bank balance sheets were sometimes as large as 90–100 percent
of GDP (for example, in France in 1944–1945, after which the balance sheet was reduced
to nothing by inflation). In the summer of 2013, the balance sheet of the Bank of
Japan was close to 40 percent of GDP. For historical series of the balance sheets
of the main central banks, see the online technical appendix. Examination of these
balance sheets is instructive and shows that they are still a long way from the record
levels of the past. Furthermore, inflation depends on many other forces, especially
international wage and price competition, which is currently damping down inflationary
tendencies while driving asset prices higher.

23
. As noted in the previous chapter, discussions about possible changes to European
rules governing the sharing of bank data have only just begun in 2013 and are a long
way from bearing fruit.

24
. In particular, a steeply progressive tax requires information on all assets held
by a single individual in different accounts and at different banks (ideally not just
in Cyprus but throughout the European Union). The advantage of a less progressive
tax was that it could be applied to each bank individually.

25
. In France, the two hundred largest shareholders in the Banque de France were statutorily
entitled to a central role in the governance of the bank from 1803 to 1936 and thus
were empowered to determine the monetary policy of France. The Popular Front challenged
this status quo by changing the rules to allow the government to name bank governors
and subgovernors who were not shareholders. In 1945 the bank was nationalized. Since
then, the Banque de France no longer has private shareholders and is a purely public
institution, like most other central banks throughout the world.

26
. A key moment in the Greek crisis was the ECB’s announcement in December 2009 that
it would no longer accept Greek bonds as collateral if Greece was downgraded by the
bond rating agencies (even though nothing in its statutes obliged it to do so).

27
. Another, more technical limitation of the “redemption fund” is that given the magnitude
of the “rollover” (much of the outstanding debt comes due within a few years and must
be rolled over regularly, especially in Italy), the limit of 60 percent of GDP will
be reached within a few years, hence eventually all public debt will have to be mutualized.

28
. The budgetary parliament might consist of fifty or so members from each of the large
Eurozone countries, prorated by population. Members might be chosen from the financial
and social affairs committees of the national parliaments or in some other fashion.
The new European treaty adopted in 2012 provides for a “conference of national parliaments,”
but this is a purely consultative body with no power of its own and a fortiori no
common debt.

29
. The official version is that the virtually flat tax on deposits was adopted at the
request of the Cypriot president, who allegedly wanted to tax small depositors heavily
in order to prevent large depositors from fleeing. No doubt there is some truth to
this: the crisis illustrates the predicament that small countries face in a globalized
economy: to carve out a niche for themselves, they may be prepared to engage in ruthless
tax competition in order to attract capital, even from the most disreputable sources.
The problem is that we will never know the whole truth, since all the negotiations
took place behind closed doors.

30
. The usual explanation is that French leaders remain traumatized by their defeat
in the 2005 referendum on the European Constitutional Treaty. The argument is not
totally convincing, because that treaty, whose main provisions were later adopted
without approval by referendum, contained no important democratic innovation and gave
all power to the council of heads of state and ministers, which simply ratifies Europe’s
current state of impotence. It may be that France’s presidential political culture
explains why reflection about European political union is less advanced in France
than in Germany or Italy.

31
. Under François Hollande, the French government has been rhetorically in favor of
mutualizing European debts but has made no specific proposal, pretending to believe
that every country can continue to decide on its own how much debt it wishes to take
on, which is impossible. Mutualization implies that there needs to be a vote on the
total size of the debt. Each country could maintain its own debt, but its size would
need to be modest, like state and municipal debts in the United States. Logically,
the president of the Bundesbank regularly issues statements to the media that a credit
card cannot be shared without agreement about how much can be spent in total.

32
. Progressive income and capital taxes are more satisfactory than corporate income
taxes because they allow adjustment of the tax rate in accordance with the income
or capital of each taxpayer, whereas the corporate tax is levied on all corporate
profits at the same level, affecting large and small shareholders alike.

33
. To believe the statements of the managers of companies like Google, their reasoning
is more or less as follows: “We contribute far more wealth to society than our profits
and salaries suggest, so it is perfectly reasonable for us to pay low taxes.” Indeed,
if a company or individual contributes marginal well-being to the rest of the economy
greater than the price it charges for its products, then it is perfectly legitimate
for it to pay less in tax or even to receive a subsidy (economists refer to this as
a positive externality). The problem, obviously, is that it is in everyone’s interest
to claim that he or she contributes a large positive externality to the rest of the
world. Google has not of course offered the slightest evidence to prove that it actually
does make such a contribution. In any case, it is obvious that it is not easy to manage
a society in which each individual can set his or her own tax rate in this way.