Don’t bet against the historians

Every three years, economic historians from across the globe gather in one place to discuss the latest research in our field. And so it was again this year that, in early August, more than 1400 of these interdisciplinary scholars convened at MIT in Boston for the latest rendition of the World Economic History Congress (WEHC). It was hot and humid outside, but inside the conference and classrooms, the discussions were no less heated.

Normally a friendly and somewhat reserved crowd, it is as if the political developments of the last three years has forced economic historians out of their slumber. That classic history cartoon – an old man sitting in his rocking chair saying ‘Those who don’t study history are doomed to repeat it. Yet those who do study history are doomed to stand by helplessly while everyone else repeats it’ – seems more apt than ever. As always, there were papers on esoteric topics such as occupational mobility in early-twentieth century Greenland, wine glasses in China during the eighteenth century, or what pollen data can tell us about market integration in Ancient Greece. But it seemed to me, now at my fourth WEHC, that this year the research questions were more aimed at the big questions of the present: How does globalisation lead to populist pushback? Why are inequalities increasing in rich countries, and what can be done about it? How do entrepreneurs use (abuse) networks to become successful? History offers clues (but no quick-fix answers) to all these questions.

Two plenary sessions exemplified this. On the last day of the conference, Jane Humphries and Claudia Goldin debated the missing role of women in economic history. While Humphries, professor of Economic History at Oxford University, discussed the importance of women to the Industrial Revolution, Goldin, a professor of Economics at Harvard, discussed the more recent transition of women into the labour market. She showed, by using extensive data from Harvard Business School graduates, how the gender wage gap can to a large extent be explained by women’s preferences for flexible work. This, she argued, what can be done to close the gap further: women prospered in teams where their skills are substitutable. Instead of operating as a single physician, for example, female doctors were much more likely to stay in the labour market and work more hours if they worked as part of a team of medical experts.

But the big event of the congress was undoubtedly Thomas Piketty’s plenary session. Piketty, who is professor of Economics at the Parish School and known for his best-seller Capital in the 21^st Century, has now shifted his inequality work to the political realm. He made a compelling case that the expansion of higher education has altered the traditional alliances in politics. Using three case studies – of France, England and the US – he showed that support from the intellectual elite – those with university degrees – has increasingly shifted to the left in all three countries over the last three centuries. For example, in 1948, less than 20% of all voters with a Masters degree voted for the US democratic candidate; in 2016, it was 70%. Why? Remember that the Democratic Party in the US (or the Labour Party in the UK) is more in favour of redistribution than the Republican Party (or the Conservative Party). For that reason, they tend to get most of their support from the poor (or, at least, those that stand to benefit from redistribution). But the poor is not uneducated anymore. In 1948, slightly more than 20% of voters had a tertiary degree, while in 2016, it was more than 50%. By definition, of course, if 50% of voters have a university degree, they cannot all be in the richest 10%. This means that there has become a disconnect between the educated and the rich. That is why, according to Piketty, new political positions become possible; he identifies four groups of almost equal size that have now emerged in his native France: internationalist-egalitarian (pro-migrant, pro-poor), internationalist-inegalitarian (pro-migrant, pro-rich), nativist-inegalitarian (anti-migrant, pro-rich), and nativist-egalitarian (anti-migrant, pro-poor). The success of Emmanuel Macron was that he could appeal to multiple of these groups.

‘Politics has never been a simple poor vs rich conflict’, says Piketty. ‘One needs to look at the multi-dimensional content of political cleavages.’ We also see this play out in the South African context. The ANC is currently a broad church – from the rural poor to the urban sophisticate. But how long can they maintain this delicate balance, when issues such as globalisation, migration and automation will have decidedly negative effects on one part of their electorate while benefiting another? And these clashes may not be along the fault lines of yesteryear. Capital and labour, poor and rich, educated and uneducated are now in flux. As Piketty says, the US might be returning to the 19^th century political alignment, with globalists (high-income, high-education) on one side and nativists (low-income, low-education) on the other. Or it could go the route of the Democratic Party in the US, whose pro-slavery/segregationists introduced poor white policies which also benefited poor blacks. Or we could instead see the re-emergence of a globalist-egalitarian elite like we did in the aftermath of World War II, a system that resulted in the end of colonialism and a global Golden Age of growth.

The high levels of inequality in South Africa would make the continuation of a single, unified ANC seem unlikely in the medium to long run. Rapid globalisation, automation and increasing pressure on immigration are fissures that even a great leader will be unlikely to control. If history (and economic historians) have anything to add, it is that the future is unlikely to be just a continuation of the present.

**An edited version of this article originally appeared in the 30 August edition of finweek.

More knights in shining armour, please: Why we need YOU! to do a PhD in Economics

This morning, Jonathan Jansen, vice-chancellor of Free State University, posted the following message on Facebook: ‘Dear students, your education will be incomplete unless you all read Pikkety’s new book Capital in the 21st century. What he discovers about inequality over time, and how to remedy it, might just save our country from social and economic doom. Required reading!’

Thomas Piketty, and his thesis, has certainly taken the world by storm. Paul Krugman called it ‘an extremely important book on all fronts’, Mervyn King called it a ‘serious, thought-provoking book’, and Tyler Cowen argues that the book aims to ‘answer a basic but profoundly important question’. This is true. Capital in the Twenty-First Century makes an important contribution to our understanding of inequality. But it is also voluminous and, to be honest, translated from the French edition, not wonderfully eloquent. It is a publishing sensation (it reached number one on Amazon!), but I doubt that many will actually finish it, especially given that the main thesis is better explained in the excellent reviews cited above. It will certainly not appeal to the average undergraduate student, given that many struggle to read a 5-page chapter in a textbook. As someone on Twitter noted, ‘Now the Thomas Piketty book has hit the mainstream I’d like to make it clear I knew about it and didn’t read it before you didn’t read it’.

Yet the book addresses one of the most fundamental challenges of our time – inequality. While inequality has reached the global policy agenda only recently (owing to the rapid increases in inequality within countries, even though inequality between countries is on the decline), it is an economic and social problem that South Africa has had to deal with for a long time. Professor Jansen is correct in asserting that we – students of the social sciences – need to spend more time thinking about the economic causes and consequences of inequality, even if it is not entirely to ‘save our country from social and economic doom’. (Mental picture: Knights in shining armour (Servaas, Murray, Haroon?) fighting the dragons of Nkandla.) But here is an alternative suggestion, prof Jansen: Why not recommend your students to study Economics? If we believe that poverty, unemployment and inequality are serious economic issues, why do we not encourage more students to understand (and transform!) the nature of the beast? Why recommend a book written by a French economist when it should be our best and brightest who, given our own long road to (economic) freedom, tell the world about the pitfalls and paradoxes of economic inequality?

South Africa desperately needs more economists – not more people who have read a book about inequality. Economists are trained to not only construct plausible hypotheses but to also test these hypotheses using empirical data and statistical techniques, and to contextualise these results. It is a field that accommodates many interests: development economists think about policies to alleviate poverty, trade economists identify constraints that allow South African businesses to find export markets, macroeconomics attempt to understand the business cycle and prescribes policies to reduce fluctuations around it, and economic historians, like myself, believe, much like Piketty, that the past has useful knowledge that will allow us to make better policies in the present.

We have excellent departments of economics in this country who deliver a steady supply of well-trained economists (who, incidentally, find work with relative ease). But we are not exempt of blame. We often talk to ourselves, mostly in economist-speak, and avoid forums where public opinion takes shape. (For example, how many South African economists can you name? But I’m sure many have heard the names of Paul Krugman, Joseph Stiglitz or Tim Harford.) I am also convinced that we do not do enough to encourage our best students to consider a PhD in Europe or, preferably, the US. On my brief visit to the US last year, I was surprised by the high number of PhD students in Economics from countries much poorer than South Africa. Close to 70% of all economics PhDs awarded at American universities are to foreign-born students. Very few of them, I fear, were South African.

We cannot improve as a discipline if we only train ourselves. (Piketty, even though he is French, studied at the London School of Economics and worked for two years at MIT.) My advice to any (bright) student who wants to tackle South Africa’s greatest challenges is to do a Masters-degree in Economics at a South African institution (preferably with a strong dose of mathematics and econometrics), and then enrol for a PhD at a US university. (Note: this need not be a PhD at an Ivy League university. Even the 50th best US university is likely to deliver a better, or at least different, product than South African universities.)  But these programmes are not for everyone; there is a strong bias towards mathematics. (Piketty warns of its overuse, but in South Africa we are still on the wrong side of this distribution.) And this is not to say that South African PhDs are not worth pursuing: they can be equally valuable (and much more affordable) if they offer students exposure to international networks, workshops and conferences. So, does this PhD-thing sound tempting? There’s some good advice online. Start here, then go here, here and here.

Lindiwe Mazibuko’s decision to do a Masters-degree at Harvard is an excellent example of someone who realises the many positives of a foreign education. She will be an example to many of our brightest students. Let’s hope, to save our country from social and economic doom, some of them return with PhDs in Economics.

Is a wealth tax the pragmatic solution to South Africa’s inequality?

Luxury living: a wealth tax on Clifton houses such as this one could pay for larger social transfers

On Monday night, in a speech delivered at Stellenbosch University’s Department of Economics, Andrew Donaldson, Deputy Director General responsible for Public Finance in South Africa’s National Treasury, suggested the following: that to address the severe and persistent inequality of South African society, a much larger share of the government budget should be devoted to redistribution. Not only is this morally good, he argued, but recent research by the IMF suggests that it is also better for the economy (or, at the minimum, that it does not affect economic growth negatively). Whereas South Africa now redirects about 3% of GDP from the rich to the poor, this could increase substantially. Iran, for example, redistributes 11%.Yes, this is another post on inequality. I’ve written recently about the good and bad of inequality, and about its relationship with capitalism. But Donaldson’s paper, coming from the centre of policy-making in South Africa, suggests that it is a topic that we need to give our full attention. The study of inequality was, for a long time, the preserve of development economists, debating the many ways it could be measured, lamenting its slow change, while the rest of us focused on improving economic growth. Not any more. The rising popularity of more left-leaning policies, both outside and within the ANC, suggests that there is pressure within government to act on the perceived slow economic transformation since 1994; while poverty has declined significantly (thanks to growth and redistribution), inequality has remained stubbornly high.

Donaldson noted that there are several ways the state can help improve the income distribution. The most obvious – and for many economists, the only way – is to improve education. South Africa spends a considerable amount on education, yet education outcomes for a large segment of our population are appalling, to the extent that South Africa is ranked embarrassingly low on international rankings. But it is one thing to say that we ‘need to get the education system right’, and another to actually do it. It is clear our education is failing, and there is no indication that it will improve in the short run. In the meantime, these kids are exiting school and entering the labour market armed with very few skills. And so, because they are unable to partake in the fruits of the market economy, the dreams and aspirations of millions of young South Africans depend on what they can receive from government. Donaldson’s argument is that this growing gap between the educated and uneducated is unsustainable politically and economically. Something’s gotta give, and so one suggestion is to expand the social welfare system, to increase the amount these individuals receive directly from government, which will, hopefully, give them a better chance of participating in the formal economy.

The response from economists would naturally be that greater redistribution will have an adverse effect on economic growth; that increasing the marginal tax rates on the rich will disincentive them to work (or force them to move to other countries), reducing the productive and entrepreneurial capacity of the country, and cause economic stagnation, or decline. But this is not the case, Donaldson argues, citing a recent IMF report. The report, surveying a large number of countries over many years, finds little evidence for a trade-off between redistribution and growth. In fact, the IMF authors suggest redistribution has a benign effect on growth. That implies that governments can increase redistribution considerably without any adverse effects:

We nonetheless see an important positive conclusion from our look at the big picture. Extreme caution about redistribution—and thus inaction—is unlikely to be appropriate in many cases. On average, across countries and over time, the things that governments have typically done to redistribute do not seem to have led to bad growth outcomes, unless they were extreme. And the resulting narrowing of inequality helped support faster and more durable growth, apart from ethical, political, or broader social considerations.

Which is the reason for Donaldson’s question: Is there greater scope for fiscal redistribution? He proposes several ways that Treasury can redirect tax income to the poor: most notably he suggests that a labour subsidy, not only for young people, but across the economy for the lowest income earners, could incentivise businesses to increase employment of unskilled jobs. In reality, this is something like a negative income tax; individuals that earn below R5000 per month, would get an additional state subsidy of R1000, for example. Other tools to redistribute include the more blunt instruments of higher pensions and child support grants.

Of course, someone will have to pay. He suggests increasing marginal rates on income taxes. In a question I posed to him afterwards, I asked whether higher income taxes are not inherently unfair. The reason for South Africa’s skewed income distribution is its centuries of inequality, and of the repressive and discriminatory labour policies of the twentieth century. Surely, then, a wealth tax is more appropriate. Why should a twentysomething (black and white) of the coming decade pay for the mistakes of the past? A wealth tax, in theory, taxes past incomes. He was unimpressed: few wealth taxes have been successfully implemented, he suggested, and they are often administratively expensive. This is true, but I feel slightly justified in my question given that I share this with the author of a book (to be published in about a month) that will have a profound impact on the field of Economics.

At least, that is the claim of Paul Krugman, who recently reviewed Thomas Piketty’s Capital in the Twenty-First Century. South Africa is not the only country to struggle with solving rising inequality. In short, Piketty argues that globally “we haven’t just gone back to nineteenth-century levels of income inequality, we’re also on a path back to ‘patrimonial capitalism’, in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties”. His suggestion to fix this? Wealth taxes! Here’s Krugman’s summary:

Piketty ends Capital in the Twenty-First Century with a call to arms—a call, in particular, for wealth taxes, global if possible, to restrain the growing power of inherited wealth. It’s easy to be cynical about the prospects for anything of the kind. But surely Piketty’s masterly diagnosis of where we are and where we’re heading makes such a thing considerably more likely. So Capital in the Twenty-First Century is an extremely important book on all fronts. Piketty has transformed our economic discourse; we’ll never talk about wealth and inequality the same way we used to.

Maybe Desmond Tutu, in his call for a white wealth tax in 2011 (in a speech at Stellenbosch University) was on to something, even though his emphasis on ‘white’ was perhaps misplaced. More realistically, while a wealth tax may have negative consequences, these may be less severe than the alternative policies. Consider the Promotion & Protection of Investment Bill (which allows the state to claim land and other property without compensation as a ‘custodian’), the Private Security Regulation Amendment Bill (which forces foreign-owned companies to sell 51% to South Africans), and the Employment Equity Amendment Act (which forces firms with more than 150 staff to use national demographics as ‘guide’ for racial targets in employment), to name a few recently proposed bills that aim to transform the South African economy (see more here). It is likely that these will have far greater, perverse and unintended consequences.

A wealth tax, especially if implemented at the global level, may allow government to strengthen the bottom of the income distribution through social transfers without jeopardizing the economy’s ability to produce.