Sunday, August 03, 2014

Capital in the 21st Century

I thought of this a few times while reading "Capital in the Twenty-First Century", by Thomas Piketty. In my study of Economics, I have been greatly disappointed in the degree to which it is a science. Piketty follows the basic experimental scientific method: gather a ton of data, and make graphs. Yay! Plus, he makes theories to explain the data. Science! (But he doesn't think so?!?!?)

This book has gotten a lot of press. When I was in the last chapter, @doctorow published his review. I have seen a few other longish reviews in addition, including this one by @NYTimeskrugman. I'm proud to be adding another!

This data was also the basis of @RBReich's movie "Inequality For All".

Piketty is a French economist, a professor at the Paris School of Economics. With his co-authors he has gathered, mostly via tax data, information on the distribution of wealth in various countries:

  • for France, the data does back to the end of the 18th century and the French Revolution. This is the best dataset.
  • for the US, the data goes back to 1913 and the start of federal income tax.
  • for Great Britain, the data goes back to 1903, the start of their income tax.
  • for the rest of Europe and the world, there is mostly only data back to World War 2.
The overall gist of his argument is: distribution of wealth has been largely unchanged for the entire time it has been measured. From Chapter 10:

In all known societies, at all times, the least wealthy half of the population own virtually nothing (generally a little more than 5 percent of the total wealth)' the top decile of the wealth hierarchy own a clear majority of what there is to own (generally more then 60 percent of the total wealth and sometimes as much as 90 percent); and the remainder of the population (by construction, the 40 percent in the middle) own from 5 to 35% of all wealth.
In the 30 years after WW2, (called by the French the "Trente Glorieuses", which translates as "30 Glorious"), maybe due to wage controls on managers and executives during WW2, and the rise of unions - and Keynesian economics, the middle class did indeed carve out at least 15% of the capital normally owned by the 1%. But then, from the 80s on, with Reaganism and Thatcherism, the 1% are mostly taking it all back. Middle class, who needs it? So we are now approaching levels of inequality similar to those of The Gilded Age before WW1, and France before the French Revolution. And, interestingly, the English speaking countries are the one leading the charge: the US is worst, the UK 2nd, then Canada. Meanwhile, Australia looks more like the continental European countries, with maybe only a 5% uptick in what the 1% has reclaimed.

The main thing that creates an engine of increasing inequality is expressed in the inequality "r > g". The return on investment, r, going back to the Roman Empire, typically runs at 4-5%. Meanwhile, g, the growth rate of the economy (the GDP), up until the Industrial Revolution was pretty much 0%. Thereafter it was 1-2%. The 4-5% growth after WW2 was an anomaly due to having to rebuild Europe. The 8% recent growth of China's GDP was an anomaly due to China's catching up w the developed world. Once they (and India?) catch up, their growth will slow to 1 to 2 percent.

So the crux of the matter is, if r, the rate at which old (or new) inherited wealth reproduces itself via collecting dividends, interest, capital gains, and rent, is greater than g, the rate at which new wealth is being created, then the old wealth will win, and dominate the economic (and social and political) systems.

Continental Europe has been less bothered by this probably because of their higher tax rates, which are approximately 50%. There is also a lot less demonization of socialism there, and having the world's highest happiness ratings and lowest crime rates shows that doing the right thing for all citizens is its own reward. A 50% tax rate appears to be about what you need to keep operating a state that lets none of its citizens slip through any cracks. Meanwhile, the US, UK, and Canada have tax rates averaging around 35%. In the US, these are mostly pulled this low by the advantageous tax situation of the 1%, with capital gains and qualified dividend tax rates being capped at 15%.

Pretty scary, yes? So let's go through it from the beginning. The book is just under 1000 pages. It has an Introduction, a Conclusion, and 16 chapters in 4 parts, containing 2, 4, 6, and 4 chapters.

We interrupt this blog post for a 10 day trip (July 7-17) to Eastern Europe to meet my 1st grandson, Samuel Bremer, born early July, 2014 in Zagreb, Croatia. Mother, father and baby all seem to be doing exceptionally well. Here is his 1st picture:
In addition to getting lots of time with our newest family member, we also rented a car and took 3 day trips in Croatia and 3 day trips in Slovenia - I may do a post about these later.
The Introduction gives an overview of the history of economic thought on capitalism and inequality: Malthus, Young, Ricardo, and Marx.

As the Industrial Revolution advanced, "The most striking fact of the day was the misery of the industrial proletariat." The situation of industrial workers living in urban slums was probably worse than the rural misery of feudal days, and this was despite rapidly growing economies. So it is easy to see the source of the pessimism.

This pessimistic attitude changed during the "Trente Glorieuses", to a positively pollyanna outlook:

According to Kuznets’s theory, income inequality would automatically decrease in advanced phases of capitalist development, regardless of economic policy choices or other differences between countries, until eventually it stabilized at an acceptable level. Proposed in 1955, this was really a theory of the magical postwar years referred to in France as the “Trente Glorieuses,” the thirty glorious years from 1945 to 1975.
The problem with all these analyses was that they were based on almost no data, an approach which Piketty intends to remedy, with data and modern tools like the spreadsheet.

Part 1 of the book is titled "Income And Capital" and introduces us to the economic principals the rest of the book will be built on. Chapter 1 is "Income and Output".

  • Rather than working from GDP, he works from "national income": GDP minus depreciation of capital (via wear and tear on infrastructure and equipment, normally around 10%/year) plus net income received from outside the nation's borders. So in the case where foreign interests own most of a country's industries, national income is much less than GDP, and visa versa for a country who owns industries in other countries.
  • capital is defined as excluding human capital.
  • capital is also defined as wealth less land and natural resources.
  • National wealth = private wealth + public wealth
  • One of the key metrics he will use to measure the degree of capitalization in a country is the ratio of accumulated national capital to annual national income, denoted by β.
Putting these concepts together:
For example, if a country’s total capital stock is the equivalent of six years of national income, we write β = 6 (or β = 600%). In the developed countries today, the capital/income ratio generally varies between 5 and 6, and the capital stock consists almost entirely of private capital.
We next get The First Fundamental Law of Capitalism: α = r × β, where β is as above, r is the rate of return on capital, and α is the share of income from capital in national income.
For example, if β = 600% and r = 5%, then α = r × β = 30%. In other words, if national wealth represents the equivalent of six years of national income, and if the rate of return on capital is 5 percent per year, then capital’s share in national income is 30 percent.

The formula α = r × β is a pure accounting identity.

Chapter 1 concludes with a review of capital and inequality world-wide.

Chapter 2 is titled "Growth: Illusions and Realities". It reviews growth of population and of economies. It seems odd to me that he has to define

“the law of cumulative growth,” which holds that a low annual growth rate over a very long period of time gives rise to considerable progress.
But I guess non-scientists don't intuitively understand the power of geometric progressions.

The main conclusion he draws here is that the 5-10% economic growth rates we've seen since WW2 are highly anomalous, and very likely to be dropping back to historical levels of 1-2%.

Inflation is introduced as an important factor in the ongoing discussions.
all the growth rates I have discussed thus far are so-called real growth rates, which are obtained by subtracting the rate of inflation (derived from the consumer price index) from the so-called nominal growth rate (measured in terms of consumer prices).
There is a very interesting discussion re the fact that in the 18th and 19th centuries, there was basically no inflation, and novels like those of Jane Austen and Honore de Balzac contained concrete numbers for the amount of one's estate (capital) that one needed to obtain a certain level of income, given the standard 5% rate of return on capital. This could no longer be done after WW1, when France and Germany both used high inflation rates to get rid of their war debts, a practice that was also used after WW2. Piketty returns to the novels of Jane Austen and Honore de Balzac many times, as examples of a world where capital, in the form of inheritance, was vastly more important than income from labor, and everyone knew it.

Part 2 of the book is "The Dynamics of the Capital/Income Ratio". Chapter 3 is "The Metamorphoses of Capital". Before the Industrial Revolution, over half of total capital was in the form of agricultural land. Agricultural land now forms a very small fraction (< 1%) of total capital, while housing and other (industry) have replaced it. In plots of capital vs time, we first see the "U-shaped curve" - the bottom drops out of the amount of total capital in the period from the start of WW1 to the end of WW2, and then moves back to pre-WW1 levels. Capital is broken down as:

National capital = farmland + housing + other domestic capital + net foreign capital
He also notes that public capital is a small fraction of private capital - unsurprising, if you think about it. And not uncommonly, public debt is around the value of public capital, so the net worth of public holdings is zero or negative.
To a first approximation, public assets and liabilities, and a fortiori the difference between the two, have generally represented very limited amounts compared with the enormous mass of private wealth.
Also worth noting, the wealthy have always had a reason other than tax avoidance for wanting their taxes to be kept low. If the government runs deficits, then rather than take their money as taxes, the government will borrow their money via government bonds and pay them interest on it. This was probably more important in the past as there are now many more attractive investments than government bonds.
Interesting too was that during the "trente glorieuse", many banks and industries in France were nationalized. This lasted from 1945 until 1986, when a wave of privatization began.

Also worth noting, after the Napoleanic Wars and WW2, Britain had debt 2x GDP. In both cases, it did not inflate away the debt as France and Germany did, but rather gradually paid the debt down. In the 19th century, that was probably easy to do with the fat of the British Empire.

Chapter 4 is "From Old Europe to the New World". The data examined for France and Great Britain in the prior chapter is examined for Germany, the US and Canada. Interestingly, despite its huge account balance surplus (1/2 of national income) German capital has a β of only 4, compared to 5 or 6 for the other countries studied.

the lower market values of German firms appear to reflect the character of what is sometimes called “Rhenish capitalism” or “the stakeholder model,” that is, an economic model in which firms are owned not only by shareholders but also by certain other interested parties known as “stakeholders,” starting with representatives of the firms’ workers (who sit on the boards of directors of German firms not merely in a consultative capacity but as active participants in deliberations, even though they may not be shareholders), as well as representatives of regional governments, consumers’ associations, environmental groups, and so on.
So the Germans, have invented a kinder, gentler form of capitalism! And despite their firms being undervalued, they still seem to be kicking ass. Good for them! And recently, they were kind enough to try to get some of it going in the US, with Volkswagen insisting on UAW representation for the workers in their Tennessee plant to fit this model.

As you night expect, the graph of β vs time for the US does not show the huge downturn for WW1 thru WW2 that Europe does.

There's an interesting comment re German vs British fiscal policy, I think directed at current German austerianism.

That is why the following paradoxical situation exists today: Germany, the country that made the most dramatic use of inflation to rid itself of debt in the twentieth century, refuses to countenance any rise in prices greater than 2 percent a year, whereas Britain, whose government has always paid its debts, even more than was reasonable, has a more flexible attitude and sees nothing wrong with allowing its central bank to buy a substantial portion of its public debt even if it means slightly higher inflation
We are reminded of the egalitarian ideals of the Founding Fathers of the US, which by WW1 had been largely subverted.
In 1840, Tocqueville noted quite accurately that “the number of large fortunes [in the United States] is quite small, and capital is still scarce,” and he saw this as one obvious reason for the democratic spirit that in his view dominated there. He added that, as his observations showed, all of this was a consequence of the low price of agricultural land: “In America, land costs little, and anyone can easily become a landowner.” Here we can see at work the Jeffersonian ideal of a society of small landowners, free and equal.
I was very surprised by the data presented about the slave states in the US.
In 1800, slaves represented nearly 20 percent of the population of the United States: roughly 1 million slaves out of a total population of 5 million. In the South, where nearly all of the slaves were held, the proportion reached 40 percent: 1 million slaves and 1.5 million whites for a total population of 2.5 million.

... the total value of slaves ranged between two and a half and three years of national income, so that the combined value of farmland and slaves exceeded four years of national income. All told, southern slave owners in the New World controlled more wealth than the landlords of old Europe.

Maybe my surprise at this is just due to my relative lack of historical knowledge. History was always my least favorite subject - pre Jared Diamond anyway.

Chapter 5 is "The Capital/Income Ratio over the Long Run". This chapter begins

by presenting the dynamic law that allows us to relate the capital/income ratio in an economy to its savings and growth rates.

The Second Fundamental Law of Capitalism: β = s / g

β is the capital/income ratio as above; s is the savings rate; and g is the growth rate, as above.
For example, given a savings rate of 12 percent, if the rate of growth falls to 1.5 percent a year (instead of 2 percent), then the long-term capital/income ratio β = s / g will rise to eight years of national income (instead of six). If the growth rate falls to 1 percent, then β = s / g will rise to twelve years, indicative of a society twice as capital intensive as when the growth rate was 2 percent.
It's pretty intuitive: in countries with high savings rates and/or low growth, capital will pile up, making β go up. It's "an asymptotic law, meaning that it is valid only in the long run". Unlike the 1st Law of Capital, which is an accounting identity, the 2nd Law of Capitalism is "the result of a dynamic process: it represents a state of equilibrium toward which an economy will tend if the savings rate is s and the growth rate g, but that equilibrium state is never perfectly realized in practice".

Note that the capital as discussed here is that which a financial advisor would call "investable wealth"; it does not include durable goods or personal property. It's interesting, that our cars, furniture, TVs, iPhones, etc, don't really count for all that much:

This is of limited importance for my purposes, however, because durable goods have always represented a relatively small proportion of total wealth, which has not varied much over time: in all rich countries, available estimates indicate that the total value of durable household goods is generally between 30 and 50 percent of national income throughout the period 1970–2010, with no apparent trend.
He talks about foundations as representing at most a few % of the total wealth of a country. In addition to the increase of β caused, according to the 2nd law, by high saving and low growth in the period 1970-2010, a part was also played, particularly in Europe, by the privatization of public capital. In some countries, this went from as high as 33% to just a few % today.

We are reminded again of this basic fact re taxes vs deficits, which I think is an under-recognized part of the various means the 1% use to keep the deck stacked in their favor:

Instead of paying taxes to balance the government’s budget, the Italians — or at any rate those who had the means — lent money to the government by buying government bonds or public assets, which increased their private wealth without increasing the national wealth.
Net foreign assets are also identified as being only a small percentage of national capital.

Chapter 6 is "The Capital-Labor Split in the Twenty-First Century" We now get income broken down into its 2 major components: labor income and capital income. The capital income can be easily computed from the 1st Fundamental Law of Capitalism, and is currently around 30%, leaving labor income as 70%. The history of this split is plotted, and Piketty concludes that the overall trend is in favor of increased capital income and decreased labor income.

This chapter also plots the rate of return on capital back to the 18th century. His conclusion:

In any case, this virtual stability of the pure return on capital over the very long run (or more likely this slight decrease of about one-quarter to one-fifth, from 4–5 percent in the eighteenth and nineteenth centuries to 3–4 percent today) is a fact of major importance for this study.
He points out that his data is on pre-tax return on capital, and, in anticipation of the next part of the book, he points out that "a pure return of around 3–4 percent is an average that hides enormous disparities".

Inflation is mentioned again in this discussion.

I am obviously not denying that inflation can in some cases have real effects on wealth, the return on wealth, and the distribution of wealth. The effect, however, is largely one of redistributing wealth among asset categories rather than a long-term structural effect.
He also points out something that I think is part of why so much of the investor class dislikes the loose money and quantitative easing in which the national banks are currently engaging. They want money to be scarce so that there is more demand for their money. I think Krugman said something to the effect that rentiers know in their gut that they deserve a decent return on their capital, even if there is a glut of capital available.
Too much capital kills the return on capital: whatever the rules and institutions that structure the capital-labor split may be, it is natural to expect that the marginal productivity of capital decreases as the stock of capital increases.
The final conclusion of this chapter and section is that while growth, increased productivity, and technology have given return on capital a decent fight in the 2nd half of the 20th century, in the long run return on capital will probably win.

Part 3 is "The Structure of Inequality". So now that we know about capital vs income, the components of capital, and some of the laws governing it, it is time for the meat of the matter: inequality.

Chapter 7 is "Inequality and Concentration: Preliminary Bearings".

in all societies, income inequality can be decomposed into three terms: inequality in income from labor; inequality in the ownership of capital and the income to which it gives rise; and the interaction between these two terms (... to what extent do individuals with high income from labor also enjoy high income from capital?).

The first regularity we observe when we try to measure income inequality in practice is that inequality with respect to capital is always greater than inequality with respect to labor.

As we start to look at the data on inequality, Piketty uses 3 main buckets (which "are quite obviously arbitrary and open to challenge"):
  1. “lower class” (defined as the bottom 50 percent);
  2. “middle class” (the middle 40 percent);
  3. “upper class” (top 10 percent).
A note on terminology, the translation uses the word "centile" where I would probably use "percentile".

The point is made that, as we learned in the first 2 sections, the buckets contain different individuals depending on whether you are looking at income or wealth. This difference is seen in his characterization of the current state of inequality in the United State.

what primarily characterizes the United States at the moment is a record level of inequality of income from labor (probably higher than in any other society at any time in the past, anywhere in the world, including societies in which skill disparities were extremely large) together with a level of inequality of wealth less extreme than the levels observed in traditional societies or in Europe in the period 1900–1910.
He gives the current inequality of wealth in the US, which he states is probably underestimated:
In the United States, the most recent survey by the Federal Reserve, which covers the same years (2010-2011), indicates that the top decile own 72 percent of America’s wealth, while the bottom half claim just 2 percent.
At the other end of the spectrum are those nasty socialist Scandinavian states:
Concretely, the top decile of the income hierarchy received about 25 percent of national income in the egalitarian societies of Scandinavia in the 1970s and 1980s (it was 30 percent in Germany and France at that time and is more than 35 percent now).
The "lower class" is broken down further:
the poorest half of the population will generally comprise a large number of people — typically a quarter of the population — with no wealth at all or perhaps a few thousand euros at most. Indeed, a nonnegligible number of people — perhaps one-twentieth to one-tenth of the population — will have slightly negative net wealth (their debts exceed their assets). Others will own small amounts of wealth up to about 60,000 or 70,000 euros or perhaps a bit more.
There is (or was) some good news - which he later poo-poos???

Basically, all the middle class managed to get its hands on was a few crumbs: scarcely more than a third of Europe’s wealth and barely a quarter in the United States.

1/4 or 1/3 don't seem like "crumbs" to me???

So why is this inequality so bad? The basic answer is, there is surely a point at which inequality becomes so bad that those at the bottom have no choice but to revolt. But Piketty cannot say at what level of inequality this is likely to happen, other than to speculate that if the top 10% have 90% of everything, "it is hard to imagine that those at the bottom will accept the situation permanantly".

There are 2 ways for such inequality to be created, the 2nd one just recently invented right here in the USA!

  1. The first of these two ways of achieving such high inequality is through a “hyperpatrimonial society” (or “society of rentiers”): a society in which inherited wealth is very important and where the concentration of wealth attains extreme levels (with the upper decile owning typically 90 percent of all wealth, with 50 percent belonging to the upper centile alone).
  2. The second way of achieving such high inequality is relatively new. It was largely created by the United States over the past few decades. Here we see that a very high level of total income inequality can be the result of a “hypermeritocratic society” (or at any rate a society that the people at the top like to describe as hypermeritocratic). One might also call this a “society of superstars” (or perhaps “supermanagers,” a somewhat different characterization).
So the 2nd driver of current inequality is our 1st time in history 400x worker CEO and financial manager salaries.

Piketty is somewhat dismissive of simple inequality indices such as the Gini Coefficient, as being too simplistic and opaque.

Chapter 8 is "Two Worlds". The Two Worlds under discussion are France vs the United States.

In France, the share of the top decile (10%) dropped during WW2 from 47% to 30%. After some rebound, since 1990 it has stayed level at around 33%. The drop in France was due to

destruction caused by two world wars, bankruptcies caused by the Great Depression, and above all new public policies enacted in this period (from rent control to nationalizations and the inflation-induced euthanasia of the rentier class that lived on government debt).
By comparison, in the US the share of the decile dropped from 45% to 32% with WW2. It stayed flat from 1950 to 1980, but, since 1980 and Reaganism, it has risen to close to 50%! This is the U-shaped curve that Robert Reich features prominently in his movie. Among the side effects of this runaway inequality:
In my view, there is absolutely no doubt that the increase of inequality in the United States contributed to the nation’s financial instability.
In looking at the composition of the top decile, Piketty notes that is now harder to get into. It is also interesting that capital income becomes greater than labor income only for the top 0.1%. So this is where you find your true non-working rich investor class. The uppermost 0.01% get 70% of their income from capital.

Piketty also chooses at this point to comment on the limitations of his data (tax returns). With more accurate data, the inequality would probably be worse, but the historical trends would be the same.

To a first approximation, therefore, we may assume that accounting for tax avoidance and evasion would increase the levels of inequality derived from tax returns by similar proportions in different periods and would therefore not substantially modify the time trends and evolutions I have identified.

By contrast, there are significant variations in the treatment of capital gains. For instance, capital gains are not fully or consistently reported in French tax data (and I have simply excluded them altogether), while they have always been fairly well accounted for in US tax data. This can make a major difference, because capital gains, especially those realized from the sale of stocks, constitute a form of capital income that is highly concentrated in the very top income groups (in some cases even more than dividends). For example, if Figures 8.3 and 8.4 included capital gains, the share of income from capital in the top ten-thousandth would not be 60 percent but something closer to 70 or 80 percent.

Chapter 9 is "Inequality of Labor Income". Piketty 1st presents the prevailing theory of wage inequality.
Why is inequality of income from labor, and especially wage inequality, greater in some societies and periods than others? The most widely accepted theory is that of a race between education and technology. To be blunt, this theory does not explain everything.
But studies do show that increasingly a college degree (and maybe from a prestigious university) is becoming more and more of a necessity to avoid being a minimum wage worker. Meanwhile, in the US the minimum wage has totally stagnated. At $7.25/hour it is 1/3 of the minimum wage in France.
Textbook economic theory says that the a worker's wage is determined by their "marginal productivity" - the amount of extra product and profit employing this worker will generate for the employer. I doubt a single company with more than 100 employees anywhere in the world can make this calculation, and the problem of the last 30 years is that the extra profit generated has gone to the exorbitant managers' salaries and corporate dividends and stock buybacks.

An interesting historical point that marked a notable improvement in the lives of workers:

The payment of a monthly rather than a daily wage was a revolutionary innovation that gradually took hold in all the developed countries during the twentieth century.
Comparing labor inequality between countries,

As compared to Anglo-Saxon countries, the share of the top percentile barely increased since the 1970s in Continental Europe and Japan.

Numerically, in the US the share of the top 1% has hovered around 18% in recent years; in Britain, it is around 14%; in Canada, it is around 13%. Meanwhile, in the rest of Europe and Japan it is everywhere below 12% and as low as 6%. In the US, the share of the top 0.1% is around 8%; in Britain, it is around 6%; in Canada, it is around 5%. Meanwhile, in the rest of Europe and Japan it is between 2% and 4%. And the rest of the world, notably the developing countries, also have levels of inequality for the 1% less than the US. The only exception is Columbia - thank you, drug lords, I guess?

Piketty calls "bullshit" on the bloated salaries of managers in the US:

it is when sales and profits increase for external reasons that executive pay rises most rapidly. This is particularly clear in the case of US corporations: Bertrand and Mullainhatan refer to this phenomenon as “pay for luck.”
Chapter 10 is "Inequality of Capital Ownership". Well, it's not good for us, but for the rest of the world it is good that gross labor income inequality is mostly an Anglo-Saxon phenomenon. Now for the bad news: gross inequality of capital ownership is a world-wide phenomenon, and has been so throughout all of history. And it is even more unequal than the distribution of labor income. As in the 1st passage quoted way above, the bottom 50% has 5% of wealth or less; the top 10% has between 60% and 90%, leaving 5-30% for the middle class.

For Europe, the high levels of inequality go back as far as the records. For the US, the Gilded Age of the Robber Barons marked the first time we approached European levels of inequality. And in the 3 decades since Reagan, we have passed the Europeans and approaching levels approaching France before the French Revolution.

From today’s perspective, this may seem surprising: we have been accustomed for several decades now to the fact that the United States is more inegalitarian than Europe and even that many Americans are proud of the fact (often arguing that inequality is a prerequisite of entrepreneurial dynamism and decrying Europe as a sanctuary of Soviet-style egalitarianism). A century ago, however, both the perception and the reality were strictly the opposite: it was obvious to everyone that the New World was by nature less inegalitarian than old Europe, and this difference was also a subject of pride.

this fear of growing to resemble Europe was part of the reason why the United States in 1910–1920 pioneered a very progressive estate tax on large fortunes, which were deemed to be incompatible with US values, as well as a progressive income tax on incomes thought to be excessive. Perceptions of inequality, redistribution, and national identity changed a great deal over the course of the twentieth century, to put it mildly.

He then returns to discuss the source of this inequality, by asking, "why is r > g?"
throughout most of human history, the inescapable fact is that the rate of return on capital was always at least 10 to 20 times greater than the rate of growth of output (and income). Indeed, this fact is to a large extent the very foundation of society itself: it is what allowed a class of owners to devote themselves to something other than their own subsistence.

A concatenation of circumstances (wartime destruction, progressive tax policies made possible by the shocks of 1914–1945, and exceptional growth during the three decades following the end of World War II) thus created a historically unprecedented situation, which lasted for nearly a century. All signs are, however, that it is about to end.

The Gilded Age was reined in by the application of progressive income, corporate, and estate taxes. The new Gilded Age has been ushered in by the gutting of these taxes.

Chapter 11 is "Merit and Inheritance in the Long Run". It begins with a summary of the current state of affairs:

The poorest half of the population still owns nothing, but there is now a patrimonial middle class that owns between a quarter and a third of total wealth, and the wealthiest 10 percent now own only two-thirds of what there is to own rather than nine-tenths.
This chapter takes a look at inheritance throughout history. In 19th century France, 20-25% of national income was inheritance flow - an extremely high number, "and it reflects the fact that nearly all of the capital stock came from inheritance". After bottoming out at 5% in 1950, it is now back to 12%, and it will continue to grow while "r > g". His characterization of the expectations of my generation (boomer) vs those of my children definitely agree with my experience:
In 1950–1960, bequests and gifts accounted for just a few points of national income, so it was reasonable to think that inheritances had virtually disappeared and that capital, though less important overall than in the past, was now wealth that an individual accumulated by effort and saving during his or her lifetime.


Yay! More science, a formula! by, the annual economic flow of inheritances and gifts, is defined as:
by = μ × m × β
where μ is the ratio of average wealth at time of death to average wealth of living individuals, m is the mortality rate, and β is as above. This is a pure accounting identity. As an example:
If average wealth at time of death is twice the average wealth of the living, so that μ = 2, then the inheritance flow will be 24 percent of national income (assuming β = 6 and m = 2 percent), which is approximately the level observed in the nineteenth and early twentieth centuries.
After examining the mortality rate (falling) and the death/living wealth ratio (rising), Piketty concludes:
To sum up: inheritance occurs later in aging societies, but wealth also ages, and the latter tends to compensate the former.
Becoming equally important with inheritance in death is gifts made in life.
It is interesting to note that the vast majority of gifts, today as in the nineteenth century, go to children, often in the context of a real estate investment, and they are given on average about ten years before the death of the donor (a gap that has remained relatively stable over time).
Plotting estate and gift capital vs time gives the same U-shaped curve we saw for the share of wealth held by the top 10%, 1%, and 0.1%.

Returning to the 19th century (of the novels), Piketty again raises the issue that "extreme inequality is almost a condition of civilization." In the 19th century, before washing machines, refrigerators, and the other labor and time saving devices of the 20th and 21st century, this may indeed have been true.

Another worrisome argument he raises is that supermanager salaries are perhaps the only thing that can combat this inherited wealth, but he argues against it.

Proponents of such high pay argued that without it, only the heirs of large fortunes would be able to achieve true wealth, which would be unfair.

This kind of argument could well lay the groundwork for greater and more violent inequality in the future. The world to come may well combine the worst of two past worlds: both very large inequality of inherited wealth and very high wage inequalities justified in terms of merit and productivity (claims with very little factual basis, as noted). Meritocratic extremism can thus lead to a race between supermanagers and rentiers, to the detriment of those who are neither.

The idea that unrestricted competition will put an end to inheritance and move toward a more meritocratic world is a dangerous illusion.

The chapter concludes by noting that these phenomenon, for the near future, "will affect mainly Europe and to a lesser degree the United States". There's not yet enough capital built up in the developing world to make a difference.

Chapter 12 is "Global Inequality of Wealth in the Twenty-First Century". The chapter starts by looking at return on capital relative to who holds the capital. Positing an average return of capital of 4%, Piketty states that the largest fortunes have been growing by 6-7% for decades, with a pretty obvious result.

is easy to see that such a mechanism can automatically lead to a radical divergence in the distribution of capital. If the fortunes of the top decile or top centile of the global wealth hierarchy grow faster for structural reasons than the fortunes of the lower deciles, then inequality of wealth will of course tend to increase without limit. ... Thus unequal returns on capital are a force for divergence that significantly amplifies and aggravates the effects of the inequality r > g.
Despite questioning the validity of the data, Piketty looks at the evolution of the Forbes 400 list of the world's richest people, published since 1987. Looking at this data:
Billionaires owned just 0.4 percent of global private wealth in 1987 but more than 1.5 percent in 2013

We then find that the average wealth of this group (the top twenty-millionth of the adult population) has increased from just over $1.5 billion in 1987 to nearly $15 billion in 2013, for an average growth rate of 6.4 percent above inflation.

For the sake of comparison, average global wealth per capita increased by 2.1 percent a year, and average global income by 1.4 percent a year

For a more inclusive data source, he looks at Global Wealth Reports such as the one published by Crédit Suisse; I think I have in the past linked to this report and the one from Cap Gemini, for both of which I strongly recommend at least a cursory review annually. (For example, last year, the net wealth of the world was $241T, the net wealth of the US was $99T. Numbers worth knowing.) Again, he questions the validity of this data, and calls out the world's governments for not providing this information.
Democratic transparency requires it: in the absence of reliable information about the global distribution of wealth, it is possible to say anything and everything and to feed fantasies of all kinds. Imperfect as they are, and until better information comes along, these reports can at least impose some discipline on public debate.
The data in these reports leads to similar conclusions for global wealth as those already reached from the tax data for the available countries:
global inequality of wealth in the early 2010s appears to be comparable in magnitude to that observed in Europe in 1900–1910. The top thousandth seems to own nearly 20 percent of total global wealth today, the top centile about 50 percent, and the top decile somewhere between 80 and 90 percent. The bottom half of the global wealth distribution undoubtedly owns that less than 5 percent of total global wealth.
Using these numbers, Piketty projects what could happen if the apparent differential in return on capital persists.
if the top thousandth enjoy a 6 percent rate of return on their wealth, while average global wealth grows at only 2 percent a year, then after thirty years the top thousandth’s share of global capital will have more than tripled. The top thousandth would then own 60 percent of global wealth, which is hard to imagine in the framework of existing political institutions unless there is a particularly effective system of repression or an extremely powerful apparatus of persuasion, or perhaps both.
Once again we are back to that documentary on the Republican vision for the future - "Hunger Games".

Looking at entrepreneurial earned vs inherited fortunes

it seems fairly clear that inherited wealth accounts for more than half of the total amount of the largest fortunes worldwide. An estimate of 60–70 percent seems fairly realistic
Discussing "The Moral Hierarchy of Wealth", Piketty makes what I think is a critical "bullshit" call.
I think there is an urgent need to move beyond the often sterile debate about merit and wealth, which is ill conceived. No one denies that it is important for society to have entrepreneurs, inventions, and innovations. ... The problem is simply that the entrepreneurial argument cannot justify all inequalities of wealth, no matter how extreme.

Entrepreneurs thus tend to turn into rentiers (as their wealth takes on a life of its own).

Another dataset showing the power of unequal returns on capital is the returns achieved by US college endowments 1986-2010. Their ROI turns out to be proportional to the size of the endowment, topping out with Harvard, Yale and Princeton at 10.1% (I did see something recently where Harvard had in the prior year only gotten 2%). This is attributed to economies of scale in portfolio management.

Ha ha, I had always heard that it took only 3-4 generations of wastrels to burn through an entrepreneurial fortune. But the return generated by large fortunes makes that unlikely. And, as Piketty notes:

Returning to the question of inflation, a bit of debunking is done. It is too bad more wealthy people don't realize this; I have felt that much of the opposition to loose money and stimulus is fear by the investor class that their wealth will be diluted. This is true only if you are sitting on piles of cash (the Scrooge McDuck model, as seen below), which no wealthy person does. The wealthier you are, the more diverse your investment portfolio is, at the highest levels getting into things like hedge funds and unlisted stocks.

Some people think, wrongly, that inflation reduces the average return on capital. This is false, because the average asset price (that is, the average price of real estate and financial securities) tends to rise at the same pace as consumer prices.

To sum up: the main effect of inflation is not to reduce the average return on capital but to redistribute it.

Looking at total world wealth, he answers those who say that the Arab oil exporters or China will wind up owning the world with a resounding "no". For example, looking at China:
In particular, it is important to stress that the currently prevalent fears of growing Chinese ownership are a pure fantasy. The wealthy countries are in fact much wealthier than they sometimes think. The total real estate and financial assets net of debt owned by European households today amount to some 70 trillion euros. By comparison, the total assets of the various Chinese sovereign wealth funds plus the reserves of the Bank of China represent around 3 trillion euros, or less than one-twentieth the former amount.
And the assets of the US are slightly greater than those of Europe. It is the oligarchs we need to worry about, not the Chinese or Arabs.

Finally, again questioning his data, Piketty points out factors which indicate that inequality is even worse than his numbers.

a substantial fraction of global financial assets is already hidden away in various tax havens, thus limiting our ability to analyze the geographic distribution of global wealth.
Discussing global trade balances, which are around -4% for the wealthy countries, which he dismisses as inconsequential (1% of global wealth), we come across an interesting anomaly:
The global balance of payments is regularly negative: more money leaves countries than enters them, which is theoretically impossible.
The explanation?
By comparing all the available sources and exploiting previously unused Swiss bank data, Gabriel Zucman was able to show that the most plausible reason for the discrepancy is that large amounts of unreported financial assets are held in tax havens. By his cautious estimate, these amount to nearly 10 percent of global GDP. Certain nongovernmental organizations have proposed even larger estimates (up to 2 or 3 times larger).
Hmmm. Of course, I doubt anybody involved in hiding 10% or more of the world's wealth is going to do any jail time, but, maybe we could come up with some spectacular fines?

Part 4 is "Regulating Capital in the Twenty-First Century". We now have the problem of runaway inequality and its causes identified, so how do we solve it?

Chapter 13 is "A Social State for the Twenty-First Century". This chapter discusses the rise of the social state - the government "safety net" so hated by conservatives.

He contrasts the Great Recession which started in 2008 with the Great Depression which started in 1929. We weathered the former much better than the latter because the governments - now much more influential than they were 80 years ago - stepped in and propped up struggling financial institutions. In the Great Depression, the opposite was done: "liquidationist" orthodoxy reigned nearly everywhere, and business Darwinists decided to let struggling institutions die, with dire results.

But despite the role that government intervention played in limiting the damage of the 2008 meltdown, there is still controversy in how to proceed today. Conservatives still want to trust to markets and fear the government. Liberals want the opposite.

Both the antimarket and antistate camps are partly correct: new instruments are needed to regain control over a financial capitalism that has run amok, and at the same time the tax and transfer systems that are the heart of the modern social state are in constant need of reform and modernization, because they have achieved a level of complexity that makes them difficult to understand and threatens to undermine their social and economic efficacy.
Looking back to 1870, government tax revenues were under 10% of national income for Sweden, France, Britain and the US. They are now > 50% for Sweden, 50% for France, 40% for Britain, and, of course in last place, 30% for the US. Of the expanded government spending, normally 10-15% of national income is for health and education, and 10-20% is for "replacement and transfer payments", 3/4 of which are pensions. What is the justification for such a massive increase in government income?
Modern redistribution is built around a logic of rights and a principle of equal access to a certain number of goods deemed to be fundamental.
So in addition to "life, liberty, and the pursuit of happiness", education, health care, and retirement in old age are now held as fundamental human rights.

Something that should come as a result of these expanded rights is expanded social mobility. And although before the 20th century the US clearly led Europe in social mobility, that is no longer the case.

Throughout most of the twentieth century, however, and still today, the available data suggest that social mobility has been and remains lower in the United States than in Europe.

One possible explanation for this is the fact that access to the most elite US universities requires the payment of extremely high tuition fees.

But the elite US universities all have need-blind admission policies - admission is supposed to be based solely on merit, with financial aid available to allow everyone admitted to attend. But it really doesn't seem to be working out.
My guess, which I have seen discussed elsewhere, is that the getting into elite universities is so hard that early (Montessori) education, private high schools, tutoring, PCs and other equipment, travel, and parents who are not having to work 2 or 3 jobs to stay afloat have become prerequisites for meeting the grade - prerequisites that are available only to the children of the highest income families.

Looking at the developing world, we find numbers that look like the wealthy countries 100 years ago: tax rates of around 10-15%, and generally trending downward. This is bad news for the building of the social state there.

Chapter 14 is "Rethinking the Progressive Income Tax". This chapter also discusses progressive inheritance taxes. Some basics on taxation:


One usually distinguishes among taxes on income, taxes on capital, and taxes on consumption.

In the twentieth century, a fourth category of tax appeared: contributions to government-sponsored social insurance programs.

a more pertinent criterion for characterizing different types of tax is the degree to which each type is proportional or progressive.

the spectacular decrease in the progressivity of the income tax in the United States and Britain since 1980, even though both countries had been among the leaders in progressive taxation after World War II, probably explains much of the increase in the very highest earned incomes.

Yet another driver of inequality is the fact that despite the progressive income tax, overall tax rates wind up being regressive. For example, based on a study of French taxes in 2020:
The bottom 50 percent of the income distribution pay a rate of 40–45 percent; the next 40 percent pay 45–50 percent; but the top 5 percent and even more the top 1 percent pay lower rates, with the top 0.1 percent paying only 35 percent.
And taxes in the US, with tbe tax rate on capital gains and qualified dividends currently capped at 15%, are even more regressive.

Reviewing the development of the progressive income tax:

It was adopted in a chaotic climate that called for improvisation

Postwar shortages and the recourse to the printing press had driven inflation to previously unknown heights, so that the purchasing power of workers remained below 1914 levels, and several waves of strikes in May and June of 1919 threatened the country with paralysis. In such circumstances, political proclivities hardly mattered: new sources of revenue were essential, and no one believed that those with the highest incomes ought to be spared. The Bolshevik Revolution of 1917 was fresh in everyone’s mind. It was in this chaotic and explosive situation that the modern progressive income tax was born.

It is hard to believe that very highly progressive tax codes were first put in place in the US and Britain. And the purpose was not so much to raise revenue as it was to put the brakes on how much money (and the power it brings) anyone could possess.
it was the United States that was the first country to try rates above 70 percent, first on income in 1919–1922 and then on estates in 1937–1939. When a government taxes a certain level of income or inheritance at a rate of 70 or 80 percent, the primary goal is obviously not to raise additional revenue (because these very high brackets never yield much). It is rather to put an end to such incomes and large estates, which lawmakers have for one reason or another come to regard as socially unacceptable and economically unproductive — or if not to end them, then at least to make it extremely costly to sustain them and strongly discourage their perpetuation.
The Americans of a century ago seemed to really believe in the egalitarianism of Jefferson, and feared becoming like the hyperinegalitarian societies of Europe.
In 1919, Irving Fisher, then president of the American Economic Association, ... chose to devote his presidential address to the question of US inequality and in no uncertain terms told his colleagues that the increasing concentration of wealth was the nation’s foremost economic problem.
Combined with the Great Depression 10 years later, this led the US to adopt top tax rates which grew from 70% to 94% in 1944.

Note, too, that both countries (the US and Britain) distinguished between “earned income,” that is, income from labor (including both wages and nonwage compensation) and “unearned income,” meaning capital income (rent, interests, dividends, etc.).


So where did we here in the US go wrong? I blame the f#cking movie "Wall Street", with Michael Douglas proclaiming "Greed is good!". Piketty ignores the Michael Douglas hypothesis and goes with something more prosaic:
part of the explanation for this difference might be that the United States and Britain came to feel that they were being overtaken by other countries in the 1970s. This sense that other countries were catching up contributed to the rise of Thatcherism and Reaganism. To be sure, the catch-up that occurred between 1950 and 1980 was largely a mechanical consequence of the shocks endured by continental Europe and Japan between 1914 and 1945. The people of Britain and the United States nevertheless found it hard to accept: for countries as well as individuals, the wealth hierarchy is not just about money; it is also a matter of honor and moral values.
I have also seen elsewhere that out-of-control capitalism was accelerated by the breakup and democratization of the USSR and the Eastern Block in the early 1990s. Communism had failed, so capitalists no longer had to fear uprisings of the proletariat. As we've seen, this fear was what led to things like the progressive income tax and grudging acceptance of labor unions in the Western world. With communism discredited, it was "pedal to the metal" for capitalism. I like this quote from David Korten: “Capitalism has defeated communism. It is now well on its way to defeating democracy.”

Part of the effect of the tax cuts that began with Reagan in the 1980s was the exploding CEO salaries documented above. Tax rates > 70% made huge salaries pointless; the high tax rates worked well in limiting inequality. Once they were gone

But results have proven that these salaries are justified, yes? British and US companies greatly outperform countries where where executive pay has remained at more reasonable levels, yes? Productivity and entrepreneurialism thrived, yes? Actually, no.
In contrast to what many people in Britain and the United States believe, the true figures on growth (as best one can judge from official national accounts data) show that Britain and the United States have not grown any more rapidly since 1980 than Germany, France, Japan, Denmark, or Sweden.

it may be useful to recall that the US economy was much more innovative in 1950–1970 than in 1990–2010, to judge by the fact that productivity growth was nearly twice as high in the former period as in the latter

Piketty's final word on sky-high executive pay:
Our findings suggest that skyrocketing executive pay is fairly well explained by the bargaining model (lower marginal tax rates encourage executives to negotiate harder for higher pay) and does not have much to do with a hypothetical increase in managerial productivity
So what should the top tax rate be?
According to our estimates, the optimal top tax rate in the developed countries is probably above 80 percent.

The evidence suggests that a rate on the order of 80 percent on incomes over $500,000 or $1 million a year not only would not reduce the growth of the US economy but would in fact distribute the fruits of growth more widely while imposing reasonable limits on economically useless (or even harmful) behavior.

Piketty does not see such tax rates happening anytime soon - he asks, "Has the US political process been captured by the 1 percent?" - and he ends the chapter on a pessimistic note.
the history of the progressive tax over the course of the twentieth century suggests that the risk of a drift toward oligarchy is real and gives little reason for optimism about where the United States is headed.
Chapter 15 is "A Global Tax on Capital". Piketty points out that the tools of the prior 2 chapters - the social state and progressive income tax - will continue to be important in shaping the future, but he also calls for new tools:
He calls this idea "utopian", but contends that is "less dangerous" than existing approaches: protectionism and capitol controls. At a minimum, it can "serve as a worthwhile reference point, a standard against which alternative proposals can be measured". But he really doesn't want to stop there.

He proposes rates, and emphasizes that the primary purpose is not revenue.

At what rate would it be levied? One might imagine a rate of 0 percent for net assets below 1 million euros, 1 percent between 1 and 5 million, and 2 percent above 5 million.


To generate significant revenue, the tax would have to go down to wealth in the €10M range. But, a more limited version could also serve a important purpose:
An 0.1 percent tax on capital would be more in the nature of a compulsory reporting law than a true tax.
Plus, a tax on all capital encourages free markets! Adam Smith lives!
Each type of capital would be taxed in the same way, with no discrimination a priori, in keeping with the principle that investors are generally in a better position than the government to decide what to invest in.
His final justification:
Last but not least, a capital tax would force governments to clarify and broaden international agreements concerning the automatic sharing of banking data.
It is clear that we cannot address problems like tax havens, or the general "race to the bottom" that countries engage in to attract foreign capital, without transparency. I was surprised that the US is leading the world in this, but then noted that the bill was passed in 2010, when Obama was still able to get some stuff done before Washington gridlocked. But apparently there are lots and lots of loopholes in this law.
To date, the most thoroughgoing attempt to end these practices is the Foreign Account Tax Compliance Act (FATCA) adopted in the United States in 2010 and scheduled to be phased in by stages in 2014 and 2015. It requires all foreign banks to inform the Treasury Department about bank accounts and investments held abroad by US taxpayers, along with any other sources of revenue from which they might benefit.
How in the world would you enforce global transparency requirements? Piketty proposes sanctions.
Very likely the only way to obtain tangible results is to impose automatic sanctions not only on banks but also on countries that refuse to require their financial institutions to provide the required information. One might contemplate, for example, a tariff of 30 percent or more on the exports of offending states.
Piketty speaks harshly of those who take advantages of tax havens and their ilk; in recent news, corporations "inverting" themselves into countries for the purpose of tax avoidance comes to mind as well.
No one has the right to set his own tax rates. It is not right for individuals to grow wealthy from free trade and economic integration only to rake off the profits at the expense of their neighbors. That is outright theft.
One advantage of the tax on capital: the incomes of the very wealthy are normally severely understated, as the bulk of the growth of their capital is funneled into family foundations or other tax-avoidance schemes. Taxing capital directly gets around this.

Ha ha, he also states that a 1-2% tax on capital would provide an incentive to the very wealthy to invest aggressively rather than conservatively (sitting on their money). Free markets ho!

He points out that we already have one form of taxation on capital: property taxes, which primarily (and unfairly) target the homes and other real estate investments of the middle class.

This would replace the property tax, which in most countries is tantamount to a wealth tax on the propertied middle class. The new system would be both more just and more efficient, because it targets all assets (not only real estate) and relies on transparent data and market values net of mortgage debt.
Next he kicks around some of the more aggressive uses of a tax on capital. Nice!
the degree of progressivity can be adjusted to match the evolution of returns to capital and the desired level of wealth concentration. To avoid divergence of the wealth distribution (that is, a steadily increasing share belonging to the top centiles and thousandths), which on its face seems to be a minimal desirable objective, it would probably be necessary to levy rates of about 5 percent on the largest fortunes. If a more ambitious goal is preferred — say, to reduce wealth inequality to more moderate levels than exist today (and which history shows are not necessary for growth) — one might envision rates of 10 percent or higher on billionaires.
The chapter concludes with a discussion of what he identifies as the alternatives to a tax on capital: protectionism and capital controls. He is not big on either. On protectionism, in addition to pointing out that it does nothing to help inequality, he says:
Protectionism does not produce wealth, and free trade and economic openness are ultimately in everyone’s interest, provided that some countries do not take advantage of their neighbors by siphoning off their tax base.
I have lately been disappointed in Democratic candidates proposing protectionist measures to protect American jobs. That horse has left the barn. We should instead be focused on requiring competing countries to treat their workers and the environment fairly.

Of interest in the discussion on capital controls is those that China has in place. In their hearts, they are still somewhat Commies, but I'm sure that will fade with time.

China has also imposed strict controls on both incoming capital (no one can invest in or purchase a large Chinese firm without authorization from the government, which is generally granted only if the foreign investor is content to take a minority stake) and outgoing capital (no assets can be removed from China without government approval).
Following a discussion of how wealth is redistributed in rich oil producing countries, he points out immigration as another way of redistributing wealth.
I find his comments on immigration and the US interesting.
Immigration is the mortar that holds the United States together, the stabilizing force that prevents accumulated capital from acquiring the importance it has in Europe; it is also the force that makes the increasingly large inequalities of labor income in the United States politically and socially bearable. For a fair proportion of Americans in the bottom 50 percent of the income distribution, these inequalities are of secondary importance for the very simple reason that they were born in a less wealthy country and see themselves as being on an upward trajectory.
He also notes that European countries are also becoming lands of immigrants, to a degree perhaps equal to the US.

Chapter 16 is "The Question of the Public Debt". We are again reminded that

Piketty posits that the developed world does indeed have a debt problem, with debt averaging about 1 year of nationsal income, "a level not seen since 1945". Meanwhile, the developing countries have debt at much lower levels, generally only around 30% of a year of national income.

So how do you address debt? He details 4 methods:

  1. An exceptional tax on private capital is the most just and efficient solution.
  4. selling all public buildings, schools, universities, hospitals, police stations, infrastructure and so on
    We saw above that most countries have public capital roughly equal to public debt. So having a fire sale and privatizing all public capital would pretty much get rid of debt. Of course, citizens would then get to pay rent and fees determined by the new owners/rentiers - ugh.
I share the frustration of liberal economists like Krugman with those who continue to push austerity, despite austerity having measurably slowed the recovery from the Great Recession in the US and having pushed several European countries back into recession. If these people are serious about debt, Piketty's capital tax gives an easy way to retire all public debt:
a flat tax of 15 percent on private wealth would yield nearly a year’s worth of national income and thus allow for immediate reimbursement of all outstanding public debt.
Or you could do a 3% tax for five years. National debts gone, no problem!

There was recently an attempt to try a capital tax to resolve the debt/banking crisis in Cyprus. Piketty notes 2 major problems with this attempt:

  1. The tax was not nearly regressive enough. At 6.75% for bank accounts under €100K and 9.9% for those accounts over €100K, it would have placed a harsh burden on small account holders. It was widely opposed by liberals for this reason.
  2. The tax was only on bank deposits. You could easily dodge it by, say, moving your money to a brokerage account.
There is a fairly long discussion on central banks and monetary policy. Conservative economists led by Friedman in the 1970s claimed that a more aggressive expansion of the money supply could have ended the Great Depression without having to create the New Deal - "a costly and useless sham". Piketty points out the limits of monetarism, and finds yet another advantage of the capital tax.
Their strength (central banks and financial authorities) is that they can act quickly; their weakness is their limited capacity to correctly target the redistributions they cause to occur. The conclusion is that a progressive tax on capital is not only useful as a permanent tax but can also function well as an exceptional levy (with potentially high rates) in the resolution of major banking crises.
I think we saw this weakness re "targeting the redistributions" in the US after the 2008 financial crisis, where Wall Street was bailed out, but Main Street was largely left to struggle with crappy mortgages.

He discusses the creation of the euro. It is well known that the Southern European countries (Greece, Italy, and Spain particularly), have been hung out to dry by having adopted the euro: they cannot inflate away their debts as they could if they had their own currencies. Piketty sees greater integration than just the currency as the only solution to Europe's problems.

In addition to pooling debts and deficits, there are of course other fiscal and budgetary tools that no country can use on its own, so that it would make sense to think about using them jointly. The first example that comes to mind is of course the progressive tax on capital.

An even more obvious example is a tax on corporate profits.

A Eurozone tax on corporate profits would not allow countries like Luxembourg and Switzerland to "race to the bottom" with low corporate tax rates.

Piketty next raises a very interesting question: in an ideal world, what would we want β to be? In other words, how much capital should a country or the world want to have on hand? If we want to stop runaway inequality and oligarchy, then we must fix "r > g".

In 1961 Edmund Phelps baptized the equality r = g the “golden rule of capital accumulation.”
It is unlikely that for the long term we can get g, growth, up to r, return on capital, which averages 4-5%. So this implies a very high β.
It is very difficult to say what quantity of capital would have to be accumulated for the rate of return to fall to 1 or 1.5 percent. It is surely far more than the six to seven years of national income currently observed in the most capital-intensive countries. Perhaps it would take ten to fifteen years of national income, maybe even more. It is even harder to imagine what it would take for the return on capital to fall to the low growth levels observed before the eighteenth century (less than 0.2 percent). One might need to accumulate capital equivalent to twenty to thirty years of national income: everyone would then own so much real estate, machinery, tools, and so on that an additional unit of capital would add less than 0.2 percent to each year’s output.
But this is never going to work.
If the golden rule is satisfied, so r = g, then by definition capital’s long-run share of national income is exactly equal to the savings rate: α = s. ...

in order for the golden rule to be satisfied, one has to have accumulated so much capital that capital no longer yields anything. ...

That is what α = s means: all of the return to capital must be saved and added back to the capital stock.

Clearly, then, the golden rule is related to a “capital saturation” strategy.

So we are left with that word so hated by conservatives: taxes.
In practice, there are much simpler and more effective ways to deal with rentiers, namely, by taxing them: no need to accumulate capital worth dozens of years of national income, which might require several generations to forgo consumption.
Getting back to the question of debt, Piketty has "no particular liking for public debt", but refuses to side with austerians.
debt often becomes a backhanded form of redistribution of wealth from the poor to the rich, from people with modest savings to those with the means to lend to the government (who as a general rule ought to be paying taxes rather than lending).

Hence the idea that we are about to bequeath a shameful burden of debt to our children and grandchildren and that we ought to wear sackcloth and ashes and beg for forgiveness simply makes no sense. The nations of Europe have never been so rich. What is true and shameful, on the other hand, is that this vast national wealth is very unequally distributed.

I get greatly annoyed at my Teabagger congressman, who is very, very concerned about leaving debt to his beautiful white, blond daughters, but not so concerned about children now, many of whom are not white and blond, having access to nutrition, health care and a decent education. As a Teabagger, his concern of course stops if taxes are part of a reasonable solution.

But Piketty does want to fix the debt problem now.

Private wealth rests on public poverty, and one particularly unfortunate consequence of this is that we currently spend far more in interest on the debt than we invest in higher education.
We're in the last chapter, and for the first time we get to the greatest problem facing humanity: climate change. He frames his discussion of climate change in terms of "deterioration of humanity’s natural capital in the century ahead"
For (Nicholas) Stern, the loss of global well-being is so great that it justifies spending at least 5 points of global GDP a year right now to attempt to mitigate climate change in the future.
This number looks high. A recent (somewhat embarrassing) report published by a conservative think tank put the cost of addressing climate change at only 0.5% of GDP.

Piketty's final word on climate change vs debt:

He ends the chapter with calls for transparency and questions about what form democratic control of capital would take, and then this statement, which seems obvious if you think about it, but is probably completely inimical to the conservative mindset.
If democracy is someday to regain control of capitalism, it must start by recognizing that the concrete institutions in which democracy and capitalism are embodied need to be reinvented again and again.

We've reached THE CONCLUSION!!! I don't know about you, but I'm definitely ready for it.

Summing up the problem created by "r > g":

We are reminded of how anomalous the "Trente Glorieuses" were in the history of the world's economy, which in many ways only really began in the 18th century.
In the twentieth century, it took two world wars to wipe away the past and significantly reduce the return on capital, thereby creating the illusion that the fundamental structural contradiction of capitalism (r > g) had been overcome.
He cautions against heavy-handed redistribution schemes that might kill the golden goose of entrepreneurism. He sees the capital tax as The Right Solution.
The right solution is a progressive annual tax on capital.

a capital tax schedule with rates of 0.1 or 0.5 percent on fortunes under 1 million euros, 1 percent on fortunes between 1 and 5 million euros, 2 percent between 5 and 10 million euros, and as high as 5 or 10 percent for fortunes of several hundred million or several billion euros.

This would contain the unlimited growth of global inequality of wealth, which is currently increasing at a rate that cannot be sustained in the long run and that ought to worry even the most fervent champions of the self-regulated market. Historical experience shows, moreover, that such immense inequalities of wealth have little to do with the entrepreneurial spirit and are of no use in promoting growth.

He concludes by talking about the discipline of economics. Surprisingly to me, he states
He is critical of "economics as a science", I think taking a fairly harsh swipe at the currently popular DSGE models:

It is possible, for instance, to spend a great deal of time proving the existence of a pure and true causal relation while forgetting that the question itself is of limited interest.


He has an interesting observation re the effect of the Cold War and capitalism vs communism:
The clash of communism and capitalism sterilized rather than stimulated research on capital and inequality by historians, economists, and even philosophers. It is long since time to move beyond these old controversies and the historical research they engendered, which to my mind still bears their stamp
Good luck with that, at least in the US. Republicans still make hay from labeling a Democrat as a "socialist". Of course, Piketty is French, and France is a pretty socialist place. It's a great place to visit (or to live) tho.

And finally, he lays down a challenge to all of us.


Done! Phew, that was definitely a slog. But, I do feel that, with the in-depth review of the material, I understand pretty much everything in the book. None of the concepts in the book is hard; it's mostly simple math.

There's the rub tho. I go into Kroger, Target, Bed/Bath/Beyond, etc and look at all that stuff, and have no doubt whatsoever that there is enough to go around for everyone. I think the math would bear me out. There are, what, 6 empty houses for every homelsss person in the US?

But, to many people, it's not a question of math, it's a question of morals. You can't just give people stuff, that weakens character. They have to earn things. Piketty mentions it: "it is also a matter of honor and moral values".

My belief is that the goal of every society everywhere should be, to maximize the outcome of each and every one of its children. That starts with nutrition, a safe place to live, health care, and a decent education. And, if the social safety net required to provide this for every child occasionally benefits their parents as well, that's fine with me.

"Capital in the 21st Century" gave me hope tho. It is so clear to me that the Economy of Plenty is within our reach. The UN's Millenial Development Goals have been much more successful than I would have expected, with extreme poverty being cut in half worldwide in 13 years.

But, we have to stop letting such a huge amount of the capital of the world ($241T in 2012) sit concentrated in the accounts of the 1%, and particularly the 0.01%. Altho you see some billionaires like Bill Gates and Warren Buffet making an attempt to do some good with their wealth, you see many billionaires, particularly those who have inherited their wealth, happy to sit back and collect their returns. Maybe it's big alpha dogs trying to run up their score, but I also wonder if it is some form of mental illness that makes these people think that they need or deserve so much.

But, maybe that's unfair. For some the attitude is, "I earned this fair and square, you can't have any of it". But, with the current tax code as it is, that's not really true. Why should capital gains and qualified dividends be taxed at a rate lower than wages? I have heard investors say that they deserve the lower rates because of the risk involved in their investments. A priori, that might make some sense, but, a posteriori, the data do not bear this out. If investments were actually failing with any significant frequency, the income of the 1% would not be skyrocketing while everyone else's income stagnates.

Can this go on as is? Will the bottom 90% revolt at some point? Or will there be enough smartphones, TVs, and artisanal beers floating around to keep everyone happy? Or will people opt out of the mainstream economy and instead use grey markets, barter, or a reputation-based economy? Regardless, the current wealth distribution is neither just nor productive.

I often think of Keynes' "Economic Possibilities for our Grandchildren", written in 1930. Based on a 12x increase in productivity, he forecast that in 100 years, we'd all have to be working 15 hour workweeks to maintain full employment. Instead, after 84 years, we have 30x productivity increases, but the majority of the gains have gone to the top.

I saw something recently, I think on Rachel Maddow, about FDR's Secretary of Labor Frances Perkins. When she proposed unemployment insurance and Social Security to FDR, he replied "That's the dole! We can't have the dole!" And "the dole" is still a bad word.

We currently don't seem to have structural unemployment, but, the accelerating progress in automation and AI tells me that at some point we must. Maybe the 15 hour workweek could avoid that. But, on the other hand, if we do reach that point, and somebody decides that they want their life's work to be playing Halo online, why should we really care? There will still be plenty of people wanting more than the dole to keep the economy humming.

There was a Bruce Sterling story in one of the Dozois "Year's Best Science Fiction" anthologies, I can't remember the name. The story was set in a post-scarcity future, and almost everyone was an artist, actor, or some other form of creative. There are a couple of older characters a rich guy maybe and his doctor - who are viewed with embarrassment by everyone else.

So how do we get there? So much money in politics now; the corporations and oligarchs control so many of the politicians. But I think democracy can rein in runaway capitalism, primarily through tax reform, if we can just get the young people to get out and VOTE!

Occupy Wall Street started the national conversation on inequality. I remember at the time, pundits were asking "Where are their demands?", "What is their agenda?". Occupy to me really represented something new in politics: the millennials approach to politics. They identified the problem and got people talking about it.

Now the millennials need to hold their noses and get involved in politics and VOTE. They may have to go through a few iterations of politicians to get ones serious about change, but I think they can find them - look at Elizabeth Warren or Bernie Sanders.

I think that young people are our only hope. But they have to get their 20% election turnout up to that of the old lizards. So, all you 20- and 30-somethings, get out, get involved in politics, and VOTE! It's your future we're talking about here more than mine.

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