Capital in the Twenty-First Century

I was thrilled when I read on the UMass homepage that Thomas Piketty would be the Gamble Lecturer this afternoon. If you haven’t been living under a rock for the past few months, you’ve surely heard about his new book, Capital in the Twenty-First Century, published earlier this year in the United States to great acclaim and perhaps even greater controversy.  The lecture was scheduled to start at 5, so I left my office around 4:30 and walked over to the Student Union Ballroom, where the seats were filling fast.  There was standing room only by the time Provost Katherine Newman and Economics Department Chair Michael Ash introduced the program and the speaker.

Thomas Piketty (his name is pronounced Tome-AH PEEK-a-tee) is the author of ten books and numerous journal articles; a former professor at MIT (1993-1995), he is currently Professor of Economics at the École des hautes études en sciences sociales (EHESS) and professor at the Paris School of Economics.   His scholarly interests are focused on income inequality and wealth distribution; with collaborators Facundo Alvaredo, Anthony B. Atkinson, and Emmanuel Saez, he collects and publishes data for the World Top Incomes Database, which is currently available online to both academic researchers and the general public.

I have not read the book, nor do I have any kind of background in economics, so I don’t think I want to try reproducing his arguments in a thousand-word blog post (not to mention the fact that you can Google “Thomas Piketty Capital in the 21st Century” and get more than 200,000 hits).  The following summary is what I took away from the lecture — kind of like Josh and Chuck’s “fact of the podcast”  (meaning, “some interesting stuff you did not know about before but now you do”).

Piketty’s work is both historical and global in scope, which means that he did a lot of grunt work, poring over decades of tax returns from European countries, the USA, Japan, and other developed economies.  (He mentioned that during the period 1900-1920, many countries began collecting income taxes for the first time.)  Depicted graphically, the most interesting data form a U-shape.Saez-Piketty
I know I shouldn’t include the graph, but it has been reproduced many times, and you are hereby notified that it is protected intellectual property.  By the way, I obtained the image from the Washington Post, where Wonkblog presented it as the “graph of the year.”

So what does this mean?   The graph depicts the share of the national income which goes to the top 10% of the population, over time.  In the 1950s, only a third (30%) went to the top 10%, but in 2012, it was up to 50%.  Piketty asked, “Will this graph stabilize?  What are the forces behind this trend?”  The standard explanation is that there are patterns of supply and demand for skilled labor, and that there is now a premium paid for skilled workers.  However, this explanation does not address the increase at the very top, for the 1% (vs the 10%).

Piketty decided to focus on wealth, rather than income from labor (salaries).  This led him to examine the ratio of capital to income and calculate what those values were over time.  Prior to 1914, the watershed year when the western world convulsed into war, the ratio was quite high, around 600-700%.  The Great Depression and the two world wars brought this number down drastically, but then beginning in the 1950s, the ratio began rising steadily (which is not necessarily a bad thing).  When Piketty and his colleagues looked at private capital in developed countries, they discovered that in the top eight developed economies, aggregate private wealth has risen from about two to three times national income in 1970 to a range of four to seven times today.  Again, we don’t know when these trends will stabilize.

Piketty made three points about these data on wealth.  First, they indicate the return of patrimonial capitalism, which means a situation wherein a person’s current high net worth is basically inherited.  Second, with high r – g, that is, high net-of-tax rate of return minus economic growth rate, wealth inequality is likely to increase.  Third, inequality in America may not be true labor inequality, based on “meritocratic extremism,” meaning that really smart people are making a lot of money, but rather on wealth inequality, meaning that “the already rich are getting richer.”  There is still good news though.  At least in America, wealth concentration is high but it’s less extreme than it was in the past.  Consider this:  the middle 40% of the population now own 20-30% of the nation’s wealth.  The breakdown is roughly this:

% of Population % of Wealth
Top 10
Middle 40
Bottom 50
< 5

But what forces determine the long-term trends in wealth concentration? Theoretically, r, which is is the rate-of-return on your investments (for example, you’d be fortunate to see your 401K grow as much as 10% a year), should keep pace with g, which is economic growth (the number you see on the news as “increase in GDP”). But this has not been happening, because average wealth is increasing much faster than average world income.  The actual numbers are something like a 6-7% increase for r and perhaps 2% for g.

Piketty probably counts himself among the social scientists who have as their motto, “Science serving society,” so he would naturally ask, “Is rising inequality a social problem? Should we do something about it? What should we do?” He pointed out that at one point, the US had an extremely progressive tax structure, with the highest rate at 90% (the thinking was that in America, we did not want to return to a plutocratic society such as was the norm in the Old World for generations). Perhaps the harshest criticism of Piketty’s work (aside from questions about the accuracy of his data and his data collection methodology) has been for its prescriptivist implications. However, I did not think Piketty was dogmatic in the slightest. Besides progressive taxation (or a steep inheritance tax, or both), he mentioned other possible solutions to rising wealth inequality. Industrialized societies could see a return to very high inflation, or there could be massive damage to our infrastructure, or there could be explosive population growth. On the brighter side, our countries could re-examine tax policies, invest in infrastructure, and call for more transparency with respect to ownership of capital.

After the lecture, I went up to the group of students and faculty clustered around Piketty in order to take a snapshot, but all you can really see in my photo are the upraised arms of other star-struck groupies taking photos, so I won’t post it here.