Inequality and Sustainability

Gaël Giraud

AFD,French Development Agency & Energy and Prosperity Chairwith Matheus Grasselli (Mc Master University, Fields Institute, Toronto)

Pretoria, June 1 2017

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I First: growth, second: distribution.“Changes in debt are ‘pure redistributions’ which shouldhave no significant macro-economic effects” (Bernanke,2000, p. 24).

I A perfectly flexible market determines a unique staticequilibrium (Debreu (1970)).

I This static equilibrium is always first-best efficient (Pareto).

I No room for justice?

Moreover...

I With incomplete markets static equilibria may fail to exist ina robust manner... (Momi (2000)).

I There exist only 3 types of equilibria (Giraud - Pottier(2016)):- with inflation and growth- deflation without growth (Irving Fisher)- with speculative bubbles on financial markets

I A crisis like 2008 cannot occur at a static equilibrium (ofonly as a "black swan" (Taleb (2009), Giaud-Pottier (2009)).

I How do we know that South-African economy is already atequilibrium (if any)?

I Banchard (PIIE, 2016):I see the current DSGE models as seriously flawed...

I Romer (2016):For more than three decades, macroeconomics has gonebackwards...

I Kocherlakota (2016):...we simply do not have a settled successful theory of themacroeconomy. The choices made 25-40 years ago -made then for a number of excellent reasons - should notbe treated as written in stone or even in pen.

Need for change in our analytical framework.

Articulation between ecological sustainability / inequality /prosperity.

Main takeaways1) Need to incorporate the dynamics of private debts

2) An increase of income inequality is a signal for a decline ingrowth in the long-run.3) Reduction of inequality does not suffice per se in order toaddress mitigation. Northern countries need to reduce theirstandards of living.

Critics of Piketty (2014)

I First "fundamental law of capitalism" α = rbeta : trivialaccounting equation.

I Second "law’" is false : β = s/g (Stiglitz, Acemoglu,Varoufakis, Taylor, Giraud...)

I rk > g well-known, and so what? (Acemoglu, Mankiw,IMF...). Confusion between r and rk .

I Cambridge controversy about (Varoufakis, Giraud,Taylor...)

I A model without money? Is money neutral? Noendogenous creation of credit by banks?

Debts and credit

Figure: Keen (2017)

Debts and credit

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Figure: Keen (2017)

Debts and credit

Figure: Hogares vs Empresas. Keen (2017)

Debts and credit

Figure: Keen (2017)

Debts and credit

Figure: Keen (2017)

Debts and credit

Figure: China (Keen (2017))

Debts and credit

Figure: UK (Keen (2017))

Matizes

I Poverty is not just an income issue (Multidimensionalpoverty, relational capability, etc.)

I Climate change will mostly affect the Poor (Shock Waves,Banco Mundial).

I Sustainable Development Goals (2015): SDG10... Arethey all consistent?

I Human rights and democracy are not part of the SDGs...!

McIsaac et al. (2016).

McIsaac et al. (2016).

McIsaac et al. (2016).

Suppose our economy is a ball...

The basin of attraction of a "good" equilibrium without climatechange (McIsaac et al. (2016)).

With climate change (McIsaac et al. (2016)).

Properties

I Stock-Flow consistency (Godley-Lavoie (2012)).I Money is non-neutral and endogenous (Diamond-Dybvig,

Tobin, Banco di Inglaterra...)

I Collapses are possible

I Long-run dynamics out-of-equilibrium.

I Multiple equiliibria.

I Key role of private debts.

Giraud-Grasselli (2017)

I In general, there are 3 types of long-run equilibria.

I One equilibrium is not locally stable.

I One stable equilibrium “à la Solow”.g = α+ β + “Golden rule”λ→ NAIRU (Tobin).Inequality remains stable

I One stable equilibrium leads to a collapseInequality explodes.λ→ 0.

Example 1: convergence towards the solovianequilibrium

Figure: ν = 3, ηp = 0.35, γ = 0.8

Example 1: convergence towards the solovianequilibrium

Example 2: convergence towards a debt-deflationarycollapse

Figure: ν = 15, ηp = 0.35, γ = 0.8

Long-run inequality

I If the economy is to converge towards the Solovianequilibrium, inequality must remain (more or less)constant.

I Otherwise Inequalities of income (hence wealth) arefuelled by the private debt of the poor.

I rk > g is a necessary condition for the local asymptoticstability of the deflationary steady-state

I If βk = KYn

increases, the basin of attraction of the collapsegrows...

Long-run inequality

I Giraud-Grasselli (2017) offers an analytical framework ofthe link between inequality and growth in the long-run.

I The classical dichotomy between efficiency and fairness isfalse.

I We need more data on (informal?) private debt of poorpeople.

Inequality and GHG emissions

I Is it true that rich people pollute more?

I OECD (2008): anthropic pressure of consumption increaseswith income.

Roca (2003): rich people can delocalize their own pollution.

Vona et Patriarca (2011): more inequalities means mitigationtechnologies spill over less easily.

I But Berthe et Elie (2015): literature is ambiguous.

Inequality and GHG emissions

I World bank data on income + Milanovicz + Piketty:

Top 1% $135,000 (2014 PPP US $) 72 tCO2e per person perannum.

(Threshold for top 1%: $ 54,000.)

I Suppose elasticity of CO2 emissions are constant acrosscountries and incomes: 0.9 + income= consumption(Chancel-Piketty (2015))

Take the income of the Top 1% and redistribute to the 99%bottom: everybody would get + $1,400

and global emissions would increase by + 9% !

Inequality and GHG emissions

I Global mean income: $ 8,000 per year.

Suppose everybody has the average income (perfectegalitarianism): emissions would be 6.15tCO2epercapitaperyear .

Perfect egalitarianism would lead to a negligible reduction ofGHG emissions.

Inequality and GHG emissions

I Wackernagel (2016): Take Jeff Sachs’s index of SDGs.

It is positively correlated with Ecological footprint.

I Are Sustainable Development Goals sustainable?

I Moran et al. (2008) l UN’s Human Development Index (HDI)and the Ecological Footprint of 93 countries for 2003:

“An HDI of no less than 0.8 and a per capita EcologicalFootprint less than the globally available biocapacity per person[one planet earth] represent minimum requirements forsustainable development that is globally replicable.?(South-Africa : 0.66)

There exists only one country which satisfies this requirement:Cuba.

Inequality and GHG emissions

I Cuba? (Bardi (2017)).

I Fertility 1.61 births per woman. Only Canada’s is lower inAmerica.

I Life expectancy at birth of 79.4 years. This is above the US andonly 1.5 years below Germany.

I Cuba’s mean years of schooling are above Finland’s.

I Only Monaco and Qatar have more doctors per capita thanCuba.

Inequality and GHG emissions

I Average CO2e emission for a consumption between $3,700and $4,300: 3.14 tCO2e per person per year.

I If everyone in the world had that level of emissions, globalCO2e emissions would be cut by half.

I Global Carbon Project, in 2014, The ocean and land carbonsinks respectively removed 27% and 37% of total CO2 (fossilfuel and land use change), leaving 36% of emissions in theatmosphere.

If CO2 emissions were cut by half, all of them would beremoved by the earth’s sinks, and there would be no netaddition of CO2 to the atmosphere.