‘Capital in the Twenty-first Century’ by Thomas Piketty

[Bill USA]

http://www.washingtonpost.com/opinions/capital-in-the-twenty-first-century-by-thomas-piketty/2014/03/28/ea75727a-a87a-11e3-8599-ce7295b6851c_story.html

Just when you thought Karl Marx had finally lost all political and economic relevance, a brilliant French economist has come along to pick up where the German philosopher left off — correcting for many of Marx’s mistakes, updating his analysis in light of subsequent experience and unearthing a bounty of modern economic data to support a theory about capitalism’s inherent and self-destructive contradictions.

The economist is Thomas Piketty, a professor at the Paris School of Economics, who with Emmanuel Saez of the University of California at Berkeley has recently turbocharged the debate about income inequality. Piketty and Saez gathered data from tax returns that confirm the story of stagnant middle-class incomes over the past 30 years while revealing how much the super-rich have pulled away from everyone else.

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Piketty’s prediction of a 21st century of slow growth and extreme inequality is based on historic data and a simple equation. The data, which he assembled with various collaborators in several countries, show that over long periods of time, output per person — productivity — tends to grow at an average of 1 to 1.5 percent. The data also show that average return on investment over long periods of time ranges between 4 and 5 percent.

The problem with these two historic trends, Piketty explains, is that whenever the return on financial capital (investment) is higher than the return on human capital (productivity) for an extended period, it is a matter of simple arithmetic that growing inequality will result. The reason: Those with the highest incomes will save and invest, generating capital income that will allow them to pull away from those relying solely on wages and salaries. It takes only a few generations before this accumulating and accumulated wealth becomes a dominant factor in the economy and the social and political structure.
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Rising wealth-to-income ratios, inequality, and growth - Thomas Piketty, Gabriel Zucman

Reducing inequality is one of the defining challenges of our time. In recent decades much of the discussion has centered on the need to invest in education (Goldin and Katz 2010). Fostering access to education is a powerful way to reduce the dispersion of wages in the long run, but it is not enough.

One issue is that in the US – as in many countries – the rise in income inequality has been driven by the top 1% of income earners, and not by the following 9%, although both groups have the same diplomas (Alvaredo et al., 2013).

An even more important problem is that looking at earned income is not enough. Economists used to believe that the ratio of aggregate wealth to income is constant over time, but it is not.

As we establish in a new paper, the wealth-to-income ratios of rich countries have been increasing since the 1970s (Piketty and Zucman 2013). In the top eight developed economies, according to official national balance sheets, aggregate private wealth has risen from about two to three times national income in 1970 to a range of four to seven times today (Figure 1). Capital is making a comeback. This evolution is not bad in itself, but it has far-reaching implications for inequality and calls for a whole new set of policies.

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The short guide to Capital in the 21st Century

Can you give me Piketty's argument in four bullet points?

<>  The ratio of wealth to income is rising in all developed countries.

<>  Absent extraordinary interventions, we should expect that trend to continue.

<>  If it continues, the future will look like the 19th century, where economic elites have predominantly inherited their wealth rather than working for it.

<>  The best solution would be a globally coordinated effort to tax wealth.

What are Piketty's key concepts?


The main concepts Piketty introduces are the wealth-to-income ratio and the comparison of the rate of return on capital (r in his book) to the rate of nominal economic growth (g). A country's wealth:income ratio is simply the value of all the financial assets owned by its citizens against the country's gross domestic product. Piketty's big empirical achievement is constructing time series data about wealth:income ratios for different countries over the long term.

The rate of return on capital, r, is a more abstract idea. If you invest $100 in some enterprise and it returns you $7 a year in income then your rate of return is 7%. Piketty's r is the rate of return on all outstanding investments. A key contention of the book is that r is about 5 percent on average at all times. The growth rate (g) that matters is the overall rate of economic growth. That means that if g is less than 5 percent, the wealth of the already-wealthy will grow faster than the economy as a whole. In practice, g has been below 5 percent in recent decades and Piketty expects that trend to continue. Because r > g, the rich will get richer

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[rhett o rick]

1. "Tax the wealthy", what a concept. I can bet Ayn is spinning in her grave.

Better not break this news to Greenspan.

The problem is how do we get the wealthy to agree to higher taxes?

[red dog 1]

2. "How do we get the wealthy to agree to higher taxes?"

The wealthy will NEVER agree to higher taxes.

The only way to make them have to pay higher taxes is for the Democratic Party to pick up enough House seats this November to re-take control of the House of Representatives, and pick up 4 or 5 Senate seats as well.....no mean feat..but entirely possible, IMO.

[rhett o rick]

4. You do realize that those Democrats are included in "the wealthy".

We need Democrats that support the 99% and not Wall Street. That's a big task.

[red dog 1]

5. I agree, however...

..the fact remains, if the Democrats don't take back control of the House this November, there will be :
1) NO NEW TAXES ON THE TOP 1 PERCENT
2) NO TAX REFORM TO CLOSE LOOPHOLES THAT BENEFIT THE TOP 1 PERCENT

[Bill USA]

7. Ellizabeth Warren, our Spartacus..

[red dog 1]

3. K&R...Thanks for posting

[RainDog]

6. We need a GLOBAL tax on wealth

The IMF floated the idea of a 10% tax on global wealth (no one gets out by moving elsewhere).

Since capital is no longer bound by national boundaries, such a tax would improve the situation around the world.