Capital in the 21st Century is interesting for its policy prescriptions, which I shall get to eventually, but its greatest value, I would suggest, is simply as a record of what the economies of the advanced countries have been like over the last two centuries. And what is rather extraordinary is how little things have changed. Growth became faster as a result of the industrial revolution, but for most of the last two centuries it hasn't varied very much, staying at 1-2% per capita for most of that time, with the exception of the period 1946-80 or so. Inequality of wealth and income dropped in the middle decades of the twentieth century but they have rebounded now and are threatening to reach the highest levels ever once again. All of this, Piketty argues convincingly, is driven remorselessly by the nature of capitalism in general and the capital-income ratio in particular, which in turn is a function of of the difference (nearly always positive) between the annual return on capital on the one hand and economic growth on the other. Piketty is in many ways at least as deterministic as Marx, at least with respect to economics, although he is much less so with respect to politics.
I would like to begin today by reviewing some of the most interesting things I learned from the book--all of them very specific data. One of my first shocks related to income disparities between regions. Thus, the United States and Canada lead the world, at present, with a per capita income of 40,000 euros a year. (The dollar has been falling against the Euro, I'm sorry to say, and a euro is now worth $1.38.) But the per capita income in Latin America is only 10,000 euros a year, which is almost exactly the world average. A similar situation prevails in Europe, where the major western European nations--the original EU, before 1989--average 31,000 euros per capita income, while the former Warsaw Pact countries earn just 16,000 euros a year per capita, and Russia and Ukraine only 15,000. North Africans earn an average of 5,700 euros a year, but sub-Saharan Africa trails the field at 2,000. The Japanese are essentially tied with western Europe at 31,000 euros per year, while the Chinese have reached 7,700, making China still considerably poorer than Latin America at this point, and the Indians 1200. In short, despite massive inequality in the United States and the European slump, the nations bordering on the North Atlantic are still more than twice as rich as any other part of the world (except Australasia). Nor is there really any reason to expect most of the world to catch up in the lifetime of any person now alive.
A second staggering set of facts concerns the distribution of income and wealth. To say that the US leads the world with a per capita income of 40,000 euros ($52,000) is true, but extremely misleading. The top 1% of the United States receives 18% of total per capita income today (up from 8% in 1980), and the top .1 % (or "top decile," as Piketty puts it) has almost half of that, 7.5% of the total. The top 10% of the nation receives 45% of annual income; the next 40%, which is the real "middle class" in the United States, receives 35%; and the lowest 50% of the population receives 20% of the total. In other words, as I figure it--correct me if I am wrong--the top 10% is receiving an annual per capita income of 4.5 times the national average, or $234,000 a year; the next 40% is 1/8 below the average of $52,000, that is, about $46,000 per person per year; while the bottom half of the population averages 10% of the total, or $21,000 per capita. Meanwhile, real growth is only 1-2% a year, and crucially, most of the proceeds of that growth are going to the top 10% and increasing inequality, This is the nature of the modern American economy. The situation inthe other most advanced countries of western Europe and Japan is not quite so bad, but it is headed at in the same direction. The situation has deteriorated, from the standpoint of
equality, in recent decades, although there was never a time in which it
was all that much better for the bottom half of the population.
The situation regarding the distribution of wealth--which, to repeat, is increasing faster than income--is even worse. The top 10% of the US population, which, to repeat, earns 45% of total income in the US every year, owns 70% of the wealth, down from an estimated peak of 80% around 1910. (The top 1% owns nearly half of that.) The nest 40% of the population owns the other 30% of the nation's wealth. The bottom half of the population has no significant wealth. They may own cars or household appliances, but they have no significant equity in houses, much less any stocks, bonds, or IRAs. Once again, the situation in the other advanced countries is more equal, but they are headed rapidly in the same direction as the US, and the situation in poorer countries is no better and in some cases even worse. These are huge inequalities, and they are much greater than other inequalities upon which we are often focused, such as those between men and women or between generations.
That is not all. In a truly chilling chapter, Piketty presents pretty good evidence to show that enormous fortunes--those in the billions--tend to increase at least twice as fast as capital on the average, earning as much as 10% a year over most of the last 35 years. This applies not only to large private fortunes like those of Bill Gates, but also to the endowments of Harvard, Yale and Princeton--one of my favorite subjects, as many of you know. Moreover, in one of his most acerbic passages, Piketty notes that between 1990 and 2010, the fortune of Liliane Bettencourt, the l'Oreal cosmetics heiress, who "has never worked day in her life," increased just as quickly as that of Bill Gates, earning a real return of about 11% a year.
What I would like to do now is to reflect a bit on these statistics, and analyze what they say about our current economic debates--before getting either next week or the following week into the question of exactly how things might be improved. These are not questions about which Piketty has too much to say. He is, after all,a Frenchman, not an American, and he speaks with understandable condescension about many aspects of American politics without seeming to know exactly how bad things are at the moment. Nonetheless I will take his remarks as a starting point.
Piketty notes many times that wealthier members of western societies--and particularly of the United States--seem almost desperate to argue that they deserve their greater wealth and income. In my opinion, this results mainly from a bad conscience. I firmly believe, for better or for worse, that within every human being lurks an acute sense of the fundamental equality of us all. That is certainly true of myself and it probably explains why I have been happiest in settings where genuine equality was enforced, such as the U.S. Army (where I served in a non-combatant status.) And thus, the luckier of those among us cannot help but feel some guilt, which they seek to expunge with supposedly rational explanations of their success. Piketty notes that the two favorite explanations of well-to-do Americans are those of greater marginal productivity, which is absolutely impossible to document for managers of firms, or their superior human capital, that is, education and training. That explanation he rejects, on the grounds that managers in other advanced countries seem to do just at their jobs as Americans without receiving such extravagant compensation. Well-to-do Americans, as Theda Skocpol and Vanessa Williamson found in their book about the Tea Party, also like to believe that they are morally superior and attained their wealth through a better work ethic. Lastly, many conservative economists argue that managers and capitalists need their high compensation for the benefit of the rest of us. This, of course, was Ayn Rand's argument in Atlas Shrugged, a dreadful book which I reviewed here at length a couple of years ago, but it is a staple of Republican rhetoric, which attacks any move to tax "job creators" on the grounds that it will hurt us all.
Piketty should explode that myth once and for all, although I am afraid that will not be possible. To put it bluntly, the vast majority of those who accumulate capital do not create jobs. Capital is accumulated more rapidly when economic growth is slow, and thus, it is in the interests of capitalists to keep it slow. That is why, as I shall discuss in a later post, the nation grew more rapidly and shared income more fairly in the era when the federal government taxed its citizens more heavily and put the money into labor intensive enterprises such as dams, schools, the interstate highway system, and yes, even wars. To allow capital to accumulate more rapidly will slow growth still further. That is exactly what has happened since the 1980s. It is incredible that the Republicans ever sold the country on the idea that Reagan launched an era of more rapid growth, when he actually did exactly the opposite, in part, I have no doubt, because he redistributed the tax burden from wealth to income. The critical fact is this: there is absolutely no reason to expect that the economic policies we are now pursuing will give us a better economy than the one we have now. In fact, they will give us a worse one, especially if the Republicans get control of the government and cut taxes still further.
A second critical fact, however, concerns entitlements. As we have seen, roughly half of our population has little or no chance of accumulating significant wealth over its working lifetime. Yet life expectancy is much higher. Thus, rather obviously, Social Security and Medicare are literally the only things allowing half the American people to survive after retirement. Yet the Republican Party wants to privatize or cut both of them. Privatizing them would in some way allow the money that goes into them be used for the accumulation of wealth, which is not now possible. (Although a few doctors have gotten very rich off of Medicare, its reimbursement rates are generally quite low. Indeed, I am convinced, having just crossed the Medicare threshold myself, that the working population subsidizes the elderly by paying more for the same treatments.) That will increase the inequality within our economy still further. The much-touted Ryan plan to turn Medicare into vouchers would almost surely deprive many elderly persons of health care completely. This is the part of the Republican program that is most unpopular among the Tea Party, which is composed largely of elderly Americans, and it is the part that makes the least sense to me. While it's easy to see why corporate interests want to reduce wages and benefits to the lowest possible point in order to accumulate more capital, it's not clear to my why anyone would like to fill the homes of younger Americans with sick and aging relatives who can't support themselves, or turn those elder Americans out into the streets.
Another implication of his ideas which Piketty says almost nothing about relates to the financialization of the American and British economies. The financial industry, it seems to me, is by definition the most capital-intensive activity in our society. It handles enormous amounts of money while employing very few people. As such, to the extent that it is profitable--and it is--it exacerbates the fundamental trend around which Piketty built his book: the way in which the accumulation of capital occurs at the expense of economic growth. Tears nearly come to my eyes when I recall that Larry Rubin and Larry Summers talked Bill Clinton into deregulating the financial industry in order to allow Wall Street to compete globally with other financial markets. From the standpoint of the future of the American economy, that was perhaps the worst thing they could have done. The nation that hosts the largest financial firms is not doing its people any favor.
There is, in short, no reason at all to assume that the course we are on will lead to better things--on the contrary. There is even less reason to see why Republicans would want to make things even worse--but that is what their platform would do. Yet there is another critical dimension to Piketty's book. Things have been somewhat different. Capital has shrunk relative to income, incomes have become more equal (partly, but not wholly, with the help of taxation), and economic growth has been much higher than it has now. In succeeding weeks I shall give you my own analysis of why that was so from the 1930s through the 1970s, and what it would take to bring a similar era back again.