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<h1>Piketty in the 21st Century</h2>
Thomas Piketty’s <i>Capital in the Twenty-First Century</i> will unwind your mind and rethread your head. Or it should.
<p><a href="liberalism.html">I've written before</a> about the huge change <LINK> that transformed the US in 1980, and which many people still don't appreciate: the change from liberalism to plutocracy. For nearly fifty years, the country was run for the benefit of the people as a whole: as productivity rose, all classes shared in the benefits. Since then, the country has been run for the benefit of the rich. Productivity is still rising, but the gains entirely go to the top 10%.
<p>What Piketty does is put this change into context— into the story of the past 300 years. Though he doesn't discount political factors, it turns out that the change is not simply a matter of a few bad actors. It's largely a reversion to the historical norm.
<h2>Capital in France</h2>
<p>If the book can be distilled into one chart, I think I'd pick this one.
<center><img src="illo/Piketty-Capital-France.gif"></center>
That's a chart of national capital for France over three centuries. There are a lot of things to notice.
<ul>
<li>The most obvious thing: the U-shaped curve at the right. Capital had been stable at 7 times national income for two hundred years; then it dipped sharply, down to 3 times. And since then it's recovered, and it's well on the way to reaching its historical level.
<br/>
<li>What happened? World Wars I and II happened, and the Great Depression in between. These destroyed much of the capital and the power structures of the European elite, and created an opening for a much more egalitarian sharing of wealth.
<br/>
<li>After WWII came the <i>Trente Glorieuses</i>, the "Thirty Glorious (Years)", a period when growth reached 4% a year and every class increased in income and wealth. Much of French popular opinion since then has been devoted to figuring out what went wrong and how to get the good times back— but in fact those decades were highly unusual. Growth since 1700 is typically 1 to 1.5 % a year. Europe could grow far faster in 1950-80 because it was rebuilding, and catching up technologically to the US. When it had caught up, growth returned to normal.
<br/>
<li>The changing composition of capital. The brown area is agricultural land: once over 2/3 of capital, now insignificant. Housing (including commercial real estate) is now about 2/3 of capital. The red slice above that is other domestic capital— financial instruments such as stocks and bonds.
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<li>The top (white) slice is foreign capital. In 1910, France owned capital in foreign countries worth a year of national income, or 1/7 of its total capital. That right there is the fruits of colonialism. (The proportion was even higher in Britain.) Note the great advantage of quantification here: we can see that France (more precisely the French elite!) profited greatly from foreign investments, but that the profit was only a fraction of French assets. It's not the case that Europeans prospered only because of their colonies. Nor does post-colonialism provide much of total profits today.
<p>(What I'm talking about here is the effect of colonialism <i>on the colonialists</i>. Orwell was (for once) simply wrong when he asserted that everyone in Britain made their living "off the coolees". The picture was different, and of course far less benign, <i>for the colonies</i>. In 1913 Europeans owned 1/3 to 1/2 of the domestic capital of Asia and Africa, and 3/4 of their industrial capital.)
<li>Foreign investment is very small today— and indeed, in many countries it's a slight negative. This may seem surprising, as the news is full of stories of petrodollars and Chinese bondholders taking over everything. But the news highly sensationalizes what are, in relative terms, small numbers. (One caveat: France <i>does</i> own more of foreign countries than the chart suggests… but then, they own more of France. The major nations own big slices of <i>each other</i>, and the shares pretty much cancel out. Another caveat is that some investment is hiding in tax shelters.)
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<li>Finally, the main point of the book: Capital didn't die with WWII. It's back. It's nearly at the level of the Belle Époque, before WWI, and chances are it will go far higher.
</ul>
<h2>Capital in the US</h2>
Now, the chart for US capital looks quite different.
<center><img src="illo/Piketty-Capital-US.gif"></center>
<ul>
<li>First, there's no U-shaped curve. (Not for capital; we'll see it in other things below.) For the last two centuries, US capital has been pretty stable at 5 times national income— <b>less than Europe</b>.
<br/>
<li>The value of agricultural land started out much lower than in Europe. Well, no surprise: land was nearly free!
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<li>The US has never had a big surplus or deficit of foreign capital. Note that it was mostly deficits in the 1800s, corresponding to mostly British investment. The US market has always been big enough to occupy most of our energy.
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<li>If we just looked at the North, we would start from 300% of national income, very low by European standards. Again, very natural for a new nation which has not had time to accumulate wealth.
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<li>For the South alone, almost half of total capital was the value of slaves, larger even than agricultural wealth.
</ul>
<h2>US income</h2>
I said there would be U-shaped curves in the US; here's one.
<center><img src="illo/Piketty-Top-Decile-US.gif"></center>
That's the share of national income taken by the top 10%. Just before the crash in 1929, the top 10% had almost 50% of the total income in the US. Thus plunged to 35% in WWII, largely due to redistributive tax rates, and stayed that way till 1980. Since then their income share has climbed precipitously, reaching 50% again just before the Great Recession. And there is no sign that this will stop.
<p>So, the period of liberalism I described exists, and shows that it is possible to have a more equal distribution of income. But it has to be put in context: the natural tendency of capitalism is to transfer wealth more and more to the capital-owning class. The world wars, the Depression, and the threat of communism all helped to counter this tendency for half a century, but we're heading quickly back to Victorian-style capitalism— high incomes for the few, declining incomes for the many, and the increasing domination of inherited wealth.
<p>(Piketty is full of important nuances, and one is that the situation isn't the <i>same</i> as in 1913. For one thing, the social safety net greatly improves the position of the middle class (those earning more than the median income but less than the 10%). For another, the contemporary rich earn much more from labor income than their 19th century counterparts, who mostly lived on their investments.)
<h2>What Piketty adds</h2>
<p>Now, people knew the story about income before Piketty, but what he brings to the table is threefold:
<ul>
<li>More data. He has the most complete and most global data on all of these topics.
<li>An emphasis on capital, not just income.
<li>A proposal: a worldwide, or at least regional, tax on capital.
</ul>
<h2>r and g</h2>
If you've heard much about Piketty, you've probably heard about r > g. He thoroughly explains this in the book, but here's the gist:
<ul>
<li><i>g</i> is the growth rate of the economy, due to both population and productivity increases. Before the industrial revolution, <i>g</i> was infinitesimal. Since then it's typically 1 to 1.5%.
<br/>
<li><i>r</i> is the rate of return on capital. It varies, but for 200 years it's stayed close to 5%.
<br/>
<li>Labor income— at best— goes up according to <i>g</i>. Even that isn't guaranteed. But if productivity keeps rising, and you're in the lucky 10% that shares in that increase, that's about your annual raise.
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<li>The capitalist, however, gets a 5% return. E.g. rent on a house is about 1/20 of the value of a house. A store of capital will thus increase <i>far faster than income</i>.
<br/>
<li>These numbers compound over time. E.g. over a generation (30 years), the economy grows by 150%, but capital grows by 430%.
</ul>
Thus the possible dystopia of 2100: we all get owned by a small class of capitalists.
<p>By the way, 5% is <i>not</i> a ceiling. The richer you are, the better rates you can get, partly because you can pay for top-rate advisors, partly because higher-yield investments become available to you. (Most shlubs can only get by with the 0.1% rate on their savings. Just as a data point, Harvard, the university with the largest endowment at over $30 billion, is getting a rate of return north of 10%.
<p>Now, we don't <i>always</i> have r > g. During the Trentes Glorieuses, European growth rates were over 4% while the rate of return on capital dipped below 3%. Modern US growth rates tend to be higher than European and Japanese because we have higher immigration, growing the population. For thirty years, China's growth rate has exceeded 11%.
<p>These growth rates, nice as they are, come from catching up to advanced nations, or rebuilding after a war, or massive population growth. We are likely to get high growth rates in the developing world for awhile, but once they catch up, it's over.
<h2>Solutions</h2>
So what do we do?
<p>1. Maybe <b>nothing</b>, which is the current plan. Then the 1% will increasingly own everything that can be owned. As the 1800s show, domination by plutocrats can last for a long, long time. Before you embrace this alternative, perhaps because you worship The Market, consider:
<ul>
<li>As capital dominates, the 1% are increasingly not entrepreneurs, but rentiers. That is, they're dudes who do nothing and contribute nothing; they inherit a fortune and live off the rent. In such a system it's not even worth it to study hard and increase your income as much as possible— it pays much more to just marry into money.
<li>The 1800s were a time of increasing agitation and revolt, as people realized that great wealth was being accumulated, but not by them. There's no reason for the 99% to tolerate a system that has long since ceased to benefit them.
</ul>
<p>2. <b>Hope</b> that things will get better, especially if we don't elect parties that actually propose to <i>give even more money to the rich</i>.
<p>There's something to be said for not letting the Financial Sith Lords dominate <i>completely</i>. There are people who seriously want to dismantle the social safety net, eliminate taxes on income from capital, reduce immigration (so we don't even get that boost to <i>g</i>), reduce working class wages even more, and hand over the savings to the 1%. In other words, they want a shittier world. So it's nice if they don't get everything they want.
<p>But Piketty's inexorable logic, the threat of a world where r > g <i>always</i>, means the problem is much more serious than just defeating the wingnuts. Note that first chart— it's from <i>France</i>, a country that many Americans view as half-socialist already. The logic doesn't depend on capital being evil, or capitalists being evil: they could all be pleasant fellows, but so long as r > g they take over in the long run.
<p>3. Does <b>education</b> help much? In a word, no. Education just allows people to keep up with the increasing demands society makes on them. It may have a slight egalitarian effect, but it's swamped by r > g.
<p>4. We could hope <b>inflation</b> takes care of the problem. Inflation was historically near 0% throughout the 1800s; it varied wildly in the 1900s, and it's less than 2% today. Does this help somehow?
<p>Again, no. Inflation doesn't reduce <i>r</i>, it just adds to it. Rents rise as prices rise. It destroys fortunes stored in mattresses, but that's nothing more than a stupidity tax— your actual rentiers invest their money, they don't just keep it as cash.
<p>What inflation is really good at is reducing government debt. That's nothing to sneeze at— it's basically how Europe paid for the world wars. But it doesn't redistribute income… except perhaps upward; rising home prices may price the poor out of the market.
<p>5. We could return to a highly <b>progressive income tax</b>. That's what gave us a liberal society in the US. (In Europe it was more complicated— tax rates were not quite as high, but the state sector was larger.)
<center><img src="illo/Piketty-Top-Tax.gif"></center>
<p>Piketty thinks this is a good solution, but not the best solution. For one thing, if we don't attend to capital, we're not striking at the complete problem. Plus, capital gains are easy to hide in a global market. Already there's been a race to the bottom in Europe, where countries try to attract investment by lowering taxes on capital gains.
<p>This may be a rare case where Piketty over-emphasizes the French case. The highest marginal tax rate in France has remained close to 60% for seventy years; obviously this hasn't prevented the rise of capital. However, US rates have fallen from 90% to 40%— a huge windfall for the rich that has largely driven the rise of the 1% here. Piketty later suggests that a rate of 80% is probably optimal.
<p>(As a reminder, the top marginal rate is what the richest people pay on <i>increments</i> to their income, after deductions. US rich people today don't pay 40% on their entire income. In fact the effective federal tax rate on the rich is 22.3%.)
<p>As Piketty notes, very high marginal rates do not raise a lot of revenue— because their purpose is to lower the salaries of the rich. That's why US CEOs were paid 50 times the salary of the average worker in the 1960s, rather than the 500 times we see today. I should also note that <i>allowing excessive salaries in the first place</i> allows apologists for the rich to frame taxation as “taking their money”. <b>Why</b> is it “their money”? A company generates billions in revenue, and it's <i>the company's decision</i> to hand a huge fraction of that money to its executives rather than to the workers. And as the salary gap between the US and Europe shows, excessive salaries are hardly pay for extra work or productivity. US executives take the money because they can, and because compensation committees are made up of their pals.)
<p>6. His preferred idea is a <b>global tax on capital</b>. One advantage is simply <i>knowledge</i>: we would learn a lot more about capital, where it is and who has it. He notes that if you look at published reports, you'll find that most nations are losing money to foreigners: the net balance of the planet is negative. This is impossible, as money lost by one person is gained by someone else! The reason is that a fair amount of investment is hidden in tax shelters.
<p>A capital tax need not be large; e.g. he suggests a tax of 1% on fortunes from 1 to 5 million euros, and 2% on larger fortunes.
<p>Taxes on capital are not unprecedented. Indeed, property taxes are an everyday example. During the European crisis, Greece and Italy proposed taxes on capital; the problem is that a single nation which implemented it would simply chase its rich people to another country. A European-wide tax would be a good start, though.
<h2>L'envoi</h2>
<p>As you see, this is one of those book reviews that ends up retelling the book's story. How is it as a book?
Well, I found it formidable. Piketty has found just the right tone, calm and nuanced, which is the best way to hand readers dynamite. Mostly he lets the data speak for itself, letting it casually demolish various more optimistic theories. Note that I've only communicated the gist above; the details and the differences between countries are worth following. Plus there are unexpected digressions into Austen and Balzac.
<p>Plus, there's all sorts of things to learn… for instance, did you know that well into the 20th century the US, far from being a libertarian no-man's land, was <i>more</i> egalitarian than Europe? We had the robber barons, but we didn't have the European aristocracy nor the rentier class, and when income taxes were established our rates were far higher than in Europe.
<blockquote>
<i>Also of note: <a href="http://www.nybooks.com/articles/2014/05/08/thomas-piketty-new-gilded-age/">Paul Krugman's review of the book</a>.
</blockquote>
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<p><i>—January 2016</i>
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