r > g Lessons from the history of wealth

1. r > gLessons from the history of wealth Thomas Piketty Paris School of Economics Author of “Capital in the 21st century” TED talk, Berlin, June 23 2014

2. One important lessonfrom the history of wealth: in the long-run, thereis a tendancy for the rate of return to capital to exceed the economy’sgrowth rate ( r > g ), and this tends to lead to high concentration of wealth • In thispresentation, I focus on thiskey force: r > g • Warning: there are manyother forces thatplay an important role in the long rundynamics of income and wealth distribution; and thereisstill a lot of data thatneeds to becollected; we know more thanweused to, but westill know toolittle

4. Fact n°1: in 1900-1910, incomeinequalitywashigher in Europe than in the United States; in 2000-2010, itis a lot higherin the United States • This is due to a mixture of reasons: changingsupply and demand for skills; race betweeneducation and technology; globalization; more unequal to access to skills in the US; unprecedentedrise of top managerial compensation in the US

6. Fact n°2: wealthinequalityisalways a lot higherthanincomeinequality • Fact n°3: wealthinequalityislessextremetodaythan a centuryago, although the total quantity of wealth relative to income has nowrecoveredfrom the 1914-1945 shocks

9. Best model to explainwhywealthissomuch more concentratedthanincome: dynamic model withrandom multiplicative shocks (n. children, rates of return, etc.) • In anysuch model, for a given variance of shocks, the equilibriumlevel of wealthinequalityis a steeplyincreasingfunction of r - g • Intuition: withhigh r – g, initial wealthinequalitiesgetamplifiedat a faster pace • E.g. with r = 5%, g = 1%, wealthholdersonlyneed to reinvest 1/5th of their capital incomeso as to ensurethattheirwealthrises as fast as national income; thismakesiteasier to build and perpetuate large fortunes

10. Duringmost of the history of mankind, r > g wasobvious: g was close to 0%, and r wasgenerallyaround 5% • Typically, annualrentalincome = 5% of land values in traditionalagrariansocieties (to get an annualincomeof 1 000£, one needs a capital of 20 000£: obvious to any Jane Austen reader!) • Modern industrialgrowthdid not change this basic fact as much as one might have expected: g rose from 0% to 1-2%; r rose also • During the 20thcentury, veryunusualcombination of events: low r due to 1914-1945 shocks + unusuallyhigh g duringpostwarperiod (reconstruction + demographic transition: g = 3-4%) • But the long run g seems to becloser to 1-2%, especiallygivenprojected population growthslowdown; and r mightrise due to global competition to attract capital

13. The balance between r and g depends on manyfactorsthat are difficult to predict: technology (capital intensive sectors: real estate, energy, robots,..), savingbehavior, etc. • Scaleeffects in portfolio management, financialcomplexity: higher rates of return for large portfolios • r > g seems to particularlystrong for billionaires and large capital endowments • Maybelesstrueat 10m € thanat 1b € • We know little about currentwealthdynamics: cross border assets, taxhavens, lack of financialtransparency

16. Ideal solution: financialtransparency, international transmission of bank information, global registry of financialassets, global coordination on wealth taxation, sothatwecanadapt progressive wealthtax rates on the basis of reliablewealthstatistics • Otherways to redistribution wealth: inflation, expropriation (China, Russia), wars, etc. • Will the progressive wealthtaxhappen? The history of wealth and taxation is full of surprises