Piketty explains why wealth inequality is challenging, but far from apocalyptic
While the 2013 best-seller illustrated capitalism’s tendency to concentrate wealth over time, Piketty says the key countermeasure is straightforward: invest in people.
Few pieces of economic literature have set the world abuzz quite like the international best seller “Capital in the Twenty-First Century” by Paris School of Economics Professor Thomas Piketty. While theoretical debates about inequality are common, Piketty set his work apart by compiling perhaps the most comprehensive data set ever assembled on the flow of wealth throughout the 21st century.
While Piketty’s work compiling the robust data set was widely praised across the ideological spectrum, his conclusions and recommendations were subject to significant debate — particularly his contention that the economically egalitarian period that emerged in the west between the 1940s and 1980s may have been the exception rather than the rule. And that without significant regulation, an unfettered market economy would inevitably lead to a concentration of wealth among a shrinking few.
Now, five years after the initial publication of his seminal work, Professor Piketty has joined more than a hundred of his colleagues to assemble the 2018 World Inequality Report, which builds on the data set in his book, but on a global scale.
Professor Piketty was on campus to deliver the Wiener Center’s inaugural Stone Lecture in Economic Inequality.
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Transcript
Note: This transcript was automatically generated and only lightly edited.
We hear a lot of talk about income inequality these days. Why do you believe it’s important to focus on wealth inequality more broadly?
First of all both are important and we are of course interested in both. Now wealth arguably is even more important because it commands a longer-run outcome, so wealth has longer-run outcome, so wealth has longer-run consequences and in the sense that it has impact on entire lifetime opportunities or opportunities to invest in education, to create a business to … It has really deep, deep impact on your life opportunities and the long-term structure of inequality, but of course it’s very much related to income as well, because very large inequality of income, very strong concentration of income, especially at the top and in the end does contribute to a bit later to very large concentration of wealth, which itself can be transmitted across generations. It’s really the interaction between the two that’s important, and for a long time the focus was maybe a bit too restricted to income, so indeed part of what we’ve tried to do with many of my colleagues is to refocus a little bit the discussion on both income and wealth.
The big takeaway from your book is that the earning power of capital is always going to outpace the earning power of labor. Is focusing on income inequality then, just a half-measure?
We have to focus on assets generally speaking, so assets include wealth financial assets, but they also include education, human assets and investment in education. I think the big takeaway of our results on inequality trends across the world, and probably one of the main novelty of the World Inequality Report is that we try to go beyond the usual Europe center, North America center, the perspective in inequality we try to compare all regions in the world.
We show that inequality, although it has increased pretty much everywhere in recent decades, there are big differences across countries, so it’s not only that Europe has a trajectory of increasing inequality that is less extreme than the US, it’s also finds that if you compare China and India you have increasing inequality everywhere, but much bigger increase in inequality in India as compared to China. Although you have much bigger growth in China, which shows that more inequality is certainly not always good for growth, and the reason we believe is because investment in assets and particular investment in people through education, health services is the key mechanism that can deliver both more growth and more equality in the end.
Coming back to the case of the US, it’s not enough just to do ex post re-distributions through income tax and transfer. That’s important, but that’s not going to be enough. When you see the kind of collapse of bottom 50% income that we’ve seen in the US in recent years, just to remind you some of the basic figures that we found with my colleagues Emmanuel Saez and Gabriel Zucman, as of 1980 the bottom 50% of the US adult population had about 20% of total income, as compared to less than 10% for the top 1% of the US population.
Now today it’s exactly the opposite, so the bottom 50% has gone from 20% to less than 10%, and the top 1% has gone from less than 10% to more than 20%, so the proportions of the trend are just incredible. When you have half of the US adult population that has twice as less income as 1% of the population, which means by the way that the average income by definition is less than … Well the average income, the top 1% is more than 100 times the income of the bottom 50%.
This is really quite spectacular, and this means that investment in education, investment also in sometime bargaining power through labor market institutions that allow a worker through minimum wage, through collective agreement that allow to bargain higher wages and better quality jobs, you have to turn to the fabric of inequality, you cannot just do ex post transfer to mitigate this kind of evolution, because this kind of evolution is so radical. What are we going to wait? Are we going to wait for the share of the bottom 50% to be 5% of total income and then 2%? This has gone from 20% to 10% in 30 years, so this is … and we’re speaking of a country which for a long time was actually much more egalitarian than Europe.
Inequality in Europe hasn’t risen nearly as fast as in the United States, despite their being somewhat similar.
It is somewhat similar, but it is less extreme in terms of rising inequality, largely because there are institutions in particular universal healthcare, universal funding of education services so that teachers are paid in the same manner, with the same tax manner wherever you live. Well this is an idealistic way of putting it, and it’s not quite like this, but as compared to inequality in excess to high quality education in the US, yes this is a bit more egalitarian in Europe, and this has contributed to the fact that the benefits of growth, the benefits of globalization have been a bit more spread out, a bit less concentrated to the top. There are good news in our work, in my book, in regard … I’m always sad when I hear people who have a very negative or sometimes apocalyptic view of what I am saying, which is not at all my state of mind.
My state of mind is that by making proper historical comparison, and international comparison we can find a better way to address problems, and we can have at the same time growth efficiency and equity, and in fact very often we can have the two together. We can have more efficiency, and more equity together if we have the right policy in the tax domain and the education domain. The reason very often we don’t do it is that we … Of course we have some powerful interests, we want to protect the view of the interest, but you also have some sort of collective inability to have this kind of conversation to economists.
For a long time I’ve been pretending that they have built a science that is so scientific that nobody else can understand, which of course is a big joke you know. I think we know we are all in the social sciences, we know very little we … What I try to do in this research and what we try to do in the World Inequality Report is to bring more people, citizens, of course other social scientists from [inaudible 00:09:24] to participate to this conversation, compare national experiences and find better.
To me the [inaudible 00:09:32] intellectual nationalism, the fact that each country believes to be unique and to have nothing to learn from other countries, and this is something that is sometimes very strong in the US who has a public debate basically, they don’t care at all about the rest of the world, but this is also very strong in my own country in France, this is certainly strong in China. Everybody believes to be unique, and I think there are lots of lessons comparing the inequality experiences in different countries which can be drawn.
Tell us about the World Inequality Report 2018—this was compiled by a team of more than 100 economists. Is this going to be an annual exercise?
Probably every two or three years. We want to make sure we have enough new material to have a report. Of course we have a community as you said of over 100 researchers covering over 70 countries from every continent, and all year long we put online. If you go to The World Inequality database website wid.world we put online new data and new country, but we want to have a report only when there are sufficiently new findings, lessons, so probably the next one will be in two years.
While the report shows wealth inequality rising at very different rates around the world, it was still always rising. Why is that, despite such vast differences across 200+ countries?
It is true that one of our findings in pretty much every world region between 1980 and 2016, 2017 which is when our data stop, you have generally a rise in inequality. Now there are exceptions, but the only major exceptions are countries which have always been at the top of the inequality ladder, so like if you take The Middle East, or Brazil or South Africa, we don’t have rising inequality over this period, but this is because they’ve always been at the very top. It’s more like the other world regions Western Europe, North America, India, China, Russia are sort of moving in this direction, now so if everybody was moving towards sort of the world inequality frontier so to speak. Why is it so? Well there are some common forces, economic, technological, globalization, but our view, our conclusion by examining the historical evidence is that the main common forces are more political.
There was a time roughly between 1950 and 1980, which was a relatively egalitarian period by historical standards, in particular in Western Europe and the US, this was sort of what you could call new deal social democratic coalition, where following the great depression of the ’30s, following World War II, a set of policies were put in place which contributed to a reduction in inequality. The reduction of inequality also was partly due to very dramatic events, particularly in Europe, if you have a lot of destruction of wealth during the war there, then of course you have less inequality–but this is not good news, it is not a good way to reduce inequality. Now it was also partly for … Inequality was reduced through good policies like setting up a social security system, and welfare state or new deal type policy in the post-war era. The communist world, China and Russia in a way was an extreme point of this, with a huge reduction of inequality, probably excessive reduction of inequality, and in any case this came together with a sort of very absurd totalitarian system which was a gigantic failure.
At the end of the period, starting in the 1980s partly due to the failure of communism, which created after the fall of the Berlin Wall, I think this contributed to the fact that we entered a new era of sometime unlimited phase in the central regulation of markets, in financial liberalization. This is also something that started to happen in the 1980s, particularly in the US and the UK, partly because these two countries for internal political reasons were sort of reacting to the new dealer tradition. Partly also because in these countries some people had the feeling that they were being overtaken by Germany, by Japan, by other countries that had lost the war, and they felt they need to renew some kind of entrepreneurial spirit, sort of back to the 19th century capitalism.
You have all sort of story telling that comes with the politics of inequality, and the politics of how you regulate capitalism, and how you regulate markets. Ethnic cleavages after the civil rights movement in the US, with the rise of extra European migration in Britain and later in France and Germany also had a strong impact on the political fabric and the difficulty to have political coalitions putting together more disadvantaged social groups from different origins, voting for the same parties, the same legislative coalitions.
There are all sorts of reason why this sort of legislative coalition that happened between 1950 and 1980 sort of collapsed, or at least gradually weakened starting in the 1980s, 1990s, 2000 and here we are today basically. These are long-term evolution, it’s important to realize that this is not a thing that can change one way, or in the other direction in one or two years. These are long-term trends and so I guess the short answer, why is inequality rising everywhere?
Because regulation of globalization was not really organized in a way that would mitigate the rising inequality, and it’s not that impossible. The fact that we see different countries with very different increase in inequality shows that policy matters, that different policies can deliver different outcomes, and if there was more coordinated policies it would matter even more. I think it’s not very complicated for instance when you have an international agreement on trade liberalization and you say, “Okay, you cannot have a tariff above 1% or 2% of such goods.” You could also say, “Okay, but then we also want to have a minimum tax rate on corporate profits that operate in this area, and this tax rate should not be less than 20% or 30%.”
You have the enforcement capability if the federal government in the US, the European Union government decided to do this together, they could do it, so it’s not technically … there’s nothing that makes it impossible, but this requires new policy tools and new international coalition, which we did not need in the past.
This report is a straight-forward data analysis that doesn’t make any policy recommendations. It says this is necessary because there will always be some level of wealth inequality, and everybody’s going to have different ideas on what the “right” level is. If that’s the case, what do you consider the “right” level of inequality?
Well for me the increasing inequalities that happened still 1980 to … so to speak was unnecessary. The levels of inequality that we had in the ’50s, ’60s, ’70s for whatever reason were sufficient to deliver incentives, growth efficiency and maybe we could have even less inequality [inaudible 00:18:14]. I don’t know, we have to experiment historically, but the argument according to which it was necessary to have this increasing inequality in the ’80s, ’90s to get more innovation, more growth, I don’t see it in the data. When I compare the different countries I try to see you know do you have more stronger increase in equality in the US, do you have more growth? No, for the bottom 50% of the US they didn’t get any growth, so this was not a good deal for them.
I’m trying to be practical, you know we have to … All what we have is this set of historical experience. We don’t have a mathematic formula that’s going to solve the problem for us. This is one of the most complicated political problem we have to solve, and just relying on a mathematical formula, or relying on the principle that whatever the market deliver is the best we can do, is I think very lazy. What we have is this historical material, and my conclusion is that we didn’t need this rising inequality, this happened for all sorts of political, ideological reasons, which we need to better understand if we want to have better outcomes.
This is something we don’t do in the report. This analysis, this sort of ideal inequality level we don’t do it in the report as much as I might try to do it in my book “Capital in the Twenty-First Century” or in future books that I will write, because as you say this will always be controversial, so when there’s only my name on the cover I can do what I want. Yeah, this is a collective project and I try to distinguish between different type of writing and different type of output. I’m very happy to participate with this collective report, to be part of this collective of over 100 researchers in the world, but this means that we restrict ourselves pretty much at as you said telling the facts, describing our data sources, describing what we know, or don’t know from an almost purely factual basis.
