New thoughts on capital in the twenty-first century

French economist Thomas Piketty caused a sensation in early 2014 with his book on a simple, brutal formula explaining economic inequality: r > g (meaning that return on capital is generally higher than economic growth). Here, he talks through the massive data set that led him to conclude: Economic inequality is not new, but it is getting worse, with radical possible impacts.

It's very nice to be here tonight.

So I've been working on the history of income

and wealth distribution for the past 15 years,

and one of the interesting lessons

coming from this historical evidence

is indeed that, in the long run,

there is a tendency for
the rate of return of capital

to exceed the economy's growth rate,

and this tends to lead to
high concentration of wealth.

Not infinite concentration of wealth,

but the higher the gap between r and g,

the higher the level of inequality of wealth

towards which society tends to converge.

So this is a key force that
I'm going to talk about today,

but let me say right away

that this is not the only important force

in the dynamics of income
and wealth distribution,

and there are many other forces that play

an important role in the long-run dynamics

of income and wealth distribution.

Also there is a lot of data

that still needs to be collected.

We know a little bit more today

than we used to know,
but we still know too little,

and certainly there are
many different processes —

economic, social, political —

that need to be studied more.

And so I'm going to focus today on this simple force,

but that doesn't mean that other important forces

do not exist.

So most of the data I'm going to present

comes from this database

that's available online:

the World Top Incomes Database.

So this is the largest existing

historical database on inequality,

and this comes from the effort

of over 30 scholars from several dozen countries.

So let me show you a couple of facts

coming from this database,

and then we'll return to r bigger than g.

So fact number one is that there has been

a big reversal in the ordering of income inequality

between the United States and Europe

over the past century.

So back in 1900, 1910, income inequality was actually

much higher in Europe than in the United States,

whereas today, it is a lot higher in the United States.

So let me be very clear:

The main explanation for this is not r bigger than g.

It has more to do with changing supply and demand

for skill, the race between education and technology,

globalization, probably more unequal access

to skills in the U.S.,

where you have very good, very top universities

but where the bottom part of the educational system

is not as good,

so very unequal access to skills,

and also an unprecedented rise

of top managerial compensation of the United States,

which is difficult to account for
just on the basis of education.

So there is more going on here,

but I'm not going to talk too much about this today,

because I want to focus on wealth inequality.

So let me just show you a very simple indicator

about the income inequality part.

So this is the share of total income

going to the top 10 percent.

So you can see that one century ago,

it was between 45 and 50 percent in Europe

and a little bit above 40 percent in the U.S.,

so there was more inequality in Europe.

Then there was a sharp decline

during the first half of the 20th century,

and in the recent decade, you can see that

the U.S. has become more unequal than Europe,

and this is the first fact I just talked about.

Now, the second fact is more about wealth inequality,

and here the central fact is that wealth inequality

is always a lot higher than income inequality,

and also that wealth inequality,

although it has also increased in recent decades,

is still less extreme today

than what it was a century ago,

although the total quantity of wealth

relative to income has now recovered

from the very large shocks

caused by World War I, the Great Depression,

World War II.

So let me show you two graphs

illustrating fact number two and fact number three.

So first, if you look at the level of wealth inequality,

this is the share of total wealth

going to the top 10 percent of wealth holders,

so you can see the same kind of reversal

between the U.S. and Europe that we had before

for income inequality.

So wealth concentration was higher

in Europe than in the U.S. a century ago,

and now it is the opposite.

But you can also show two things:

First, the general level of wealth inequality

is always higher than income inequality.

So remember, for income inequality,

the share going to the top 10 percent

was between 30 and 50 percent of total income,

whereas for wealth, the share is always

between 60 and 90 percent.

Okay, so that's fact number one,

and that's very important for what follows.

Wealth concentration is always

a lot higher than income concentration.

Fact number two is that the rise

in wealth inequality in recent decades

is still not enough to get us back to 1910.

So the big difference today,

wealth inequality is still very large,

with 60, 70 percent of total wealth for the top 10,

but the good news is that it's actually

better than one century ago,

where you had 90 percent in
Europe going to the top 10.

So today what you have

is what I call the middle 40 percent,

the people who are not in the top 10

and who are not in the bottom 50,

and what you can view as the wealth middle class

that owns 20 to 30 percent

of total wealth, national wealth,

whereas they used to be poor, a century ago,

when there was basically no wealth middle class.

So this is an important change,

and it's interesting to see that wealth inequality

has not fully recovered to pre-World War I levels,

although the total quantity of wealth has recovered.

Okay? So this is the total value

of wealth relative to income,

and you can see that in particular in Europe,

we are almost back to the pre-World War I level.

So there are really two

different parts of the story here.

One has to do with

the total quantity of wealth that we accumulate,

and there is nothing bad per se, of course,

in accumulating a lot of wealth,

and in particular if it is more diffuse

and less concentrated.

So what we really want to focus on

is the long-run evolution of wealth inequality,

and what's going to happen in the future.

How can we account for the fact that

until World War I, wealth inequality was so high

and, if anything, was rising to even higher levels,

and how can we think about the future?

So let me come to some of the explanations

and speculations about the future.

Let me first say that

probably the best model to explain

why wealth is so much

more concentrated than income

is a dynamic, dynastic model

where individuals have a long horizon

and accumulate wealth for all sorts of reasons.

If people were accumulating wealth

only for life cycle reasons,

you know, to be able to consume

when they are old,

then the level of wealth inequality

should be more or less in line

with the level of income inequality.

But it will be very difficult to explain

why you have so much more wealth inequality

than income inequality

with a pure life cycle model,

so you need a story

where people also care

about wealth accumulation for other reasons.

So typically, they want to transmit

wealth to the next generation, to their children,

or sometimes they want to accumulate wealth

because of the prestige, the
power that goes with wealth.

So there must be other reasons

for accumulating wealth than just life cycle

to explain what we see in the data.

Now, in a large class of dynamic models

of wealth accumulation

with such dynastic motive for accumulating wealth,

you will have all sorts of random,

multiplicative shocks.

So for instance, some families

have a very large number of children,

so the wealth will be divided.

Some families have fewer children.

You also have shocks to rates of return.

Some families make huge capital gains.

Some made bad investments.

So you will always have some mobility

in the wealth process.

Some people will move up,
some people will move down.

The important point is that,

in any such model,

for a given variance of such shocks,

the equilibrium level of wealth inequality

will be a steeply rising function of r minus g.

And intuitively, the reason why the difference

between the rate of return to wealth

and the growth rate is important

is that initial wealth inequalities

will be amplified at a faster pace

with a bigger r minus g.

So take a simple example,

with r equals five percent and g equals one percent,

wealth holders only need to reinvest

one fifth of their capital income to ensure

that their wealth rises as fast

as the size of the economy.

So this makes it easier

to build and perpetuate large fortunes

because you can consume four fifths,

assuming zero tax,

and you can just reinvest one fifth.

So of course some families
will consume more than that,

some will consume less, so there will be

some mobility in the distribution,

but on average, they only need to reinvest one fifth,

so this allows high wealth inequalities to be sustained.

Now, you should not be surprised

by the statement that r can be bigger than g forever,

because, in fact, this is what happened

during most of the history of mankind.

And this was in a way very obvious to everybody

for a simple reason, which is that growth

was close to zero percent

during most of the history of mankind.

Growth was maybe 0.1, 0.2, 0.3 percent,

but very slow growth of population

and output per capita,

whereas the rate of return on capital

of course was not zero percent.

It was, for land assets, which was

the traditional form

of assets in preindustrial societies,

it was typically five percent.

Any reader of Jane Austen would know that.

If you want an annual income of 1,000 pounds,

you should have a capital value

of 20,000 pounds so that

five percent of 20,000 is 1,000.

And in a way, this was

the very foundation of society,

because r bigger than g

was what allowed holders of wealth and assets

to live off their capital income

and to do something else in life

than just to care about their own survival.

Now, one important conclusion

of my historical research is that

modern industrial growth did not change

this basic fact as much as one might have expected.

Of course, the growth rate

following the Industrial Revolution

rose, typically from zero to one to two percent,

but at the same time, the rate of return

to capital also rose

so that the gap between the two

did not really change.

So during the 20th century,

you had a very unique combination of events.

First, a very low rate of return

due to the 1914 and 1945 war shocks,

destruction of wealth, inflation,

bankruptcy during the Great Depression,

and all of this reduced

the private rate of return to wealth

to unusually low levels

between 1914 and 1945.

And then, in the postwar period,

you had unusually high growth rate,

partly due to the reconstruction.

You know, in Germany, in France, in Japan,

you had five percent growth rate

between 1950 and 1980

largely due to reconstruction,

and also due to very large demographic growth,

the Baby Boom Cohort effect.

Now, apparently that's not going to last for very long,

or at least the population growth

is supposed to decline in the future,

and the best projections we have is that

the long-run growth is going to be closer

to one to two percent

rather than four to five percent.

So if you look at this,

these are the best estimates we have

of world GDP growth

and rate of return on capital,

average rates of return on capital,

so you can see that during most

of the history of mankind,

the growth rate was very small,

much lower than the rate of return,

and then during the 20th century,

it is really the population growth,

very high in the postwar period,

and the reconstruction process

that brought growth

to a smaller gap with the rate of return.

Here I use the United Nations population projections,

so of course they are uncertain.

It could be that we all start

having a lot of children in the future,

and the growth rates are going to be higher,

but from now on,

these are the best projections we have,

and this will make global growth

decline and the gap between

the rate of return go up.

Now, the other unusual event

during the 20th century

was, as I said,

destruction, taxation of capital,

so this is the pre-tax rate of return.

This is the after-tax rate of return,

and after destruction,

and this is what brought

the average rate of return

after tax, after destruction,

below the growth rate during a long time period.

But without the destruction,

without the taxation, this
would not have happened.

So let me say that the balance between

returns on capital and growth

depends on many different factors

that are very difficult to predict:

technology and the development

of capital-intensive techniques.

So right now, the most capital-intensive sectors

in the economy are the real estate sector, housing,

the energy sector, but it could be in the future

that we have a lot more robots in a number of sectors

and that this would be a bigger share

of the total capital stock that it is today.

Well, we are very far from this,

and from now, what's going on

in the real estate sector, the energy sector,

is much more important for the total capital stock

and capital share.

The other important issue

is that there are scale effects
in portfolio management,

together with financial complexity,

financial deregulation,

that make it easier to get higher rates of return

for a large portfolio,

and this seems to be particularly strong

for billionaires, large capital endowments.

Just to give you one example,

this comes from the Forbes billionaire rankings

over the 1987-2013 period,

and you can see the very top wealth holders

have been going up at six, seven percent per year

in real terms above inflation,

whereas average income in the world,

average wealth in the world,

have increased at only two percent per year.

And you find the same

for large university endowments —

the bigger the initial endowments,

the bigger the rate of return.

Now, what could be done?

The first thing is that I think we need

more financial transparency.

We know too little about global wealth dynamics,

so we need international transmission

of bank information.

We need a global registry of financial assets,

more coordination on wealth taxation,

and even wealth tax with a small tax rate

will be a way to produce information

so that then we can adapt our policies

to whatever we observe.

And to some extent, the fight

against tax havens

and automatic transmission of information

is pushing us in this direction.

Now, there are other ways to redistribute wealth,

which it can be tempting to use.

Inflation:

it's much easier to print money

than to write a tax code, so that's very tempting,

but sometimes you don't know
what you do with the money.

This is a problem.

Expropriation is very tempting.

Just when you feel some people get too wealthy,

you just expropriate them.

But this is not a very efficient way

to organize a regulation of wealth dynamics.

So war is an even less efficient way,

so I tend to prefer progressive taxation,

but of course, history — (Laughter) —

history will invent its own best ways,

and it will probably involve

a combination of all of these.

Thank you.

(Applause)

Bruno Giussani: Thomas Piketty. Thank you.

Thomas, I want to ask you two or three questions,

because it's impressive how you're
in command of your data, of course,

but basically what you suggest is

growing wealth concentration is kind of

a natural tendency of capitalism,

and if we leave it to its own devices,

it may threaten the system itself,

so you're suggesting that we need to act

to implement policies that redistribute wealth,

including the ones we just saw:

progressive taxation, etc.

In the current political context,

how realistic are those?

How likely do you think that it is

that they will be implemented?

Thomas Piketty: Well, you know, I think

if you look back through time,

the history of income, wealth and taxation

is full of surprise.

So I am not terribly impressed

by those who know in advance

what will or will not happen.

I think one century ago,

many people would have said

that progressive income taxation would never happen

and then it happened.

And even five years ago,

many people would have said that bank secrecy

will be with us forever in Switzerland,

that Switzerland was too powerful

for the rest of the world,

and then suddenly it took a few U.S. sanctions

against Swiss banks for a big change to happen,

and now we are moving toward

more financial transparency.

So I think it's not that difficult

to better coordinate politically.

We are going to have a treaty

with half of the world GDP around the table

with the U.S. and the European Union,

so if half of the world GDP is not enough

to make progress on financial transparency

and minimal tax for multinational corporate profits,

what does it take?

So I think these are not technical difficulties.

I think we can make progress

if we have a more pragmatic
approach to these questions

and we have the proper sanctions

on those who benefit from financial opacity.

BG: One of the arguments

against your point of view

is that economic inequality

is not only a feature of capitalism
but is actually one of its engines.

So we take measures to lower inequality,

and at the same time we lower growth, potentially.

What do you answer to that?

TP: Yeah, I think inequality

is not a problem per se.

I think inequality up to a point

can actually be useful for innovation and growth.

The problem is, it's a question of degree.

When inequality gets too extreme,

then it becomes useless for growth

and it can even become bad

because it tends to lead to high perpetuation

of inequality over time

and low mobility.

And for instance, the kind of wealth concentrations

that we had in the 19th century

and pretty much until World War I

in every European country

was, I think, not useful for growth.

This was destroyed by a combination

of tragic events and policy changes,

and this did not prevent growth from happening.

And also, extreme inequality can be bad

for our democratic institutions

if it creates very unequal access to political voice,

and the influence of private money

in U.S. politics, I think,

is a matter of concern right now.

So we don't want to return to that kind of extreme,

pre-World War I inequality.

Having a decent share of the national wealth

for the middle class is not bad for growth.

It is actually useful

both for equity and efficiency reasons.

BG: I said at the beginning

that your book has been criticized.

Some of your data has been criticized.

Some of your choice of data sets has been criticized.

You have been accused of cherry-picking data

to make your case. What do you answer to that?

TP: Well, I answer that I am very happy

that this book is stimulating debate.

This is part of what it is intended for.

Look, the reason why I put all the data online

with all of the detailed computation

is so that we can have
an open and transparent

debate about this.

So I have responded point by point

to every concern.

Let me say that if I was to rewrite the book today,

I would actually conclude

that the rise in wealth inequality,

particularly in the United States,

has been actually higher
than what I report in my book.

There is a recent study by Saez and Zucman

showing, with new data

which I didn't have at the time of the book,

that wealth concentration in the U.S. has risen

even more than what I report.

And there will be other data in the future.

Some of it will go in different directions.

Look, we put online almost every week

new, updated series on the
World Top Income Database

and we will keep doing so in the future,

in particular in emerging countries,

and I welcome all of those who want to contribute

to this data collection process.

In fact, I certainly agree

that there is not enough

transparency about wealth dynamics,

and a good way to have better data

would be to have a wealth tax

with a small tax rate to begin with

so that we can all agree

about this important evolution

and adapt our policies to whatever we observe.

So taxation is a source of knowledge,

and that's what we need the most right now.

BG: Thomas Piketty, merci beaucoup.

Thank you.
TP: Thank you. (Applause)