We develop and calibrate an analytical growth model in the Post-Keynesian tradition with an endogenous wealth distribution
and differential returns to wealth between workers and capitalists. We show that a long-run equilibrium allows for non-zero
wealth owned by workers, even as the model contains the "triumph of the rentier" predicted by Piketty as a special case. The
model's calibration to ten European countries shows that the distribution of wealth is likely to become more unequal in all
cases, barring political countermeasures.
Organised by: European Commission, DG Economic and Financial Affairs
Austrian Institute of Economic Research economist Margit Schratzenstaller's intervention focused on the bigger picture. "Future-proofing
fiscal policies is key to implementing current action plans to address increasing inequality, migration, and global warning",
she said. A reform of the rules is therefore imperative to close the 600 billion € investment gap that the EU currently faces.
A reformed EU budget should finance expenditure that yields more returns when engaged at the EU level, like R&D, and should
be financed with innovative taxes that cannot be properly implemented at national level, like a financial transaction tax
and an airline travel tax. Finally, "we desperately need a harmonisation of tax policy" she said, "to shift the burden away
from labour taxation towards profit taxation, through for instance a minimum corporate tax".
The paper investigates how including the distribution of wealth changes the demand effects of redistributing functional income.
It develops a model with an endogenous wealth distribution and shows that the endogenous rise in wealth inequality resulting
from a redistribution towards profits weakens the growth effects of this redistribution. Consequently, a wage-led regime becomes
more strongly wage-led. A profit-led regime on the other hand becomes less profit-led and there may even be a regime switch
– in this case the short-run profit-led economy becomes wage-led in the long run due to the endogenous effects of wealth inequality.
The paper thereby provides a possible explanation for the instability of demand regimes over time.