Inequality & Capitalism in the Long-Run

1. Inequality & Capitalism in the Long-Run Thomas Piketty Paris School of Economics Helsinki, November 29th2013

2. This lecture isbaseduponCapital in the 21stcentury(Harvard Univ. Press, March 2014) • This book studies the global dynamics of income and wealth distribution since 18c; it uses historical data collected over the past 15 yearstogetherwith Atkinson, Saez, Postel-Vinay, Rosenthal, Alvaredo, Zucman, and 20+ others. • The book includes four parts: Part 1. Income and capital Part 2. The dynamics of the capital/income ratio Part 3. The structure of inequalities Part 4. Regulating capital in the 21stcentury • In this lecture I willpresentsomeresultsfrom Parts 2 & 3, focusingupon the long-runevolution of capital/income ratios and wealth concentration (all graphs and series are available on line: seehttp://piketty.pse.ens.fr/capital21c )

3. This lecture: three points • 1. The return of capital in the Old World (Europe, Japan). Wealth-income ratios are returning to highlevels in lowgrowth countries: β=s/g ↑ as g ↓ • 2. The future of wealth concentration: withhigh r-g (r = net-of-tax rate of return, g = growth rate), inequalitymightreach or surpass 19c record levels • 3. Inequality in America: is the New World developing a new inequality model thatiseven more extremethan the Old World model? Or isit more merit-based?

4. 1. The return of capital • In textbooks, wealth-income & capital-ouput ratios are supposed to be constant. But the so-called « Kaldor facts » actuallyrely on littlehistoricalevidence. • In fact, we observe in Europe & Japan a large recovery of β=K/Y in recentdecades: β=200-300% in 1950-60s → β=500-600% in 2000-10s Are weheading back to the β=600-700% observed in 18c-19c? • With a flexible production function Y=F(K,L), any K/Y ratio canbe a steady-state (thereis no reason for β to be constant)

7. The simplestway to think about thisis the following: in the long-run, β=s/g with s = (net-of-depreciation) saving rate & g = economy’sgrowth rate (population + productivity) • With s=10%, g=3%, β≈300%; but if s=10%, g=1,5%, β≈600% → capital is back becauselowgrowthis back (pop. growth↓0) Note: β=s/g = truewhatever the combination of saving motives • Whether a rise in βalsoleads to a rise in capital shareα = r βdepends on the K-L elasticity of substitution: if σ>1, then r=FKdeclinesproportionallylessthan β↑, sothatα = r βrises = exactlywhathappenedsince 1970s-80s ; could continue • With a large rise in β, one canget large rise in αwith F(K,L) thatisjust a little bit more substituable than Cobb-Douglas • Maybeσ↑ over devtprocess: more diversified uses for capital

10. 2. The future of wealth concentration • In all European countries (UK, France, Sweden…), wealth concentration wasextremelyhigh in 18c-19c & until WW1: 80-90% of aggregatewealth for top 10% wealthholders 50-60% of aggregatewealth for top 1% wealth-holders • Todaywealth concentration isstillveryhigh, but lessextreme: about 60-70% for top 10%; about 20-30% for top 1% the bottom 50% stillownsnothing (<5%) but the middle 40% nowowns 20-30% of aggregatewealth = the rise of the middle class • How didithappen, and willit last?

15. Key finding: therewas no decline in wealth concentration prior to World Warshocks; wasitjust due to shocks? • Q.: Apartfromshocks, what forces determine the long-runlevel of wealth concentration? • A.: In anydynamic, multiplicative wealth accumulation model withrandomindividualshocks (tastes, demographic,returns, wages,..), the steady-state level of wealth concentration is an increasingfunction of r - g (with r = net-of-tax rate of return and g = growth rate) • Withgrowthslowdown and risingtaxcompetition to attract capital, r - g mightwellrise in the 21c → back to 19clevels • Future values of r alsodepend on technology (σ>1?) • Under plausible assumptions, wealth concentration mightreach or surpass 19c record levels: see global wealthrankings

21. 3. Inequality in America • Inequality in America = a different structure as in Europe: more egalitarian in someways, more inegalitarian in someother dimensions • The New World in the 19thcentury: the land of opportunity (capital accumulated in the pastmatteredmuchlessthan in Europe; perpetualdemographicgrowth as a way to reduce the level of inheritedwealth and wealth concentration)… and the land of slavery • Northern US were in manyways more egalitarianthanOld Europe; but Southern US were more inegalitarian • Westill have the sameambiguousrelationship of Americawithinequalitytoday: in someways more merit-based; in otherways more violent (prisons)

26. The US distribution of income has become more unequalthan in Europe over the course of the 20thcentury; itisnow as unequal as pre-WW1 Europe • But the structure of inequalityisdifferent: US 2013 has lesswealthinequalitythan Europe 1913, but higherinequality of laborincome; in the US, thisissometimedescribed as more merit-based: the rise of top laborincomesmakesit possible to becomerichwith no inheritance (≈Napoleonicprefets) • Pb = thiscanbe the worst of all worlds for thosewho are neither top incomeearnersnor top successors: they are poor, and they are depicted as dump & undeserving (at least, nobodywastrying to depict Ancien Regimeinequality as fair) • Unclearwhetherrise of top incomes has a lot to do withmerit or productivity: sharpdecline in top tax rates & rise of CEO bargaining power are more convincingexplanations

31. Conclusions • The history of income and wealthinequalityisalwayspolitical, chaotic and unpredictable; itinvolves national identities and sharpreversals; nobodycanpredict the reversals of the future • Marx: with g=0, β↑∞, r→0 : revolution, war • My conclusions are lessapocalyptic: with g>0, at least we have a steady-state β=s/g • But with g>0 & small, thissteady-state canberathergloomy: itcaninvolve a very large capital-income ratio β and capital shareα, as well as extremewealth concentration due to high r-g • This has nothing to do with a market imperfection: the more perfect the capital market, the higher r-g • The ideal solution: progressive wealthtaxat the global scale, baseduponautomatic exchange of bank information • Other solutions involvepolitical & capital controls (China, Russia..) or perpetual population growth (US) or some mixture of all

32. Supplementaryslides