On Labor Day in America, let’s take a few minutes to think about how well our socialist / capitalist economy is working for all of us. Here are a few questions that you may not realize you have been wondering about.
- Are wealth and wealth inequality the same as, or related to, income and income inequality?
- How has wealth inequality changed in the US over the past 100 years?
- What can we do to prevent the harshest impacts of the rising gulf between rich and poor?
- What impact did the 2 world wars and the Great Depression have on wealth in the US and around the world?
- What is likely to happen to the distribution of wealth during an era of severe climate change?
In 2013, French economist Thomas Piketty published a long and thorough analysis of capital and its history in Europe and the United States over the past 200 years. The book “Capital in the Twenty-First Century” tells the fascinating history of income and wealth distribution in Europe and the US, where the best records are available. Piketty is especially interested in how the people who have controlled the flow of money over the past few centuries have influenced public policy, including tax policy, and how that has shaped the world we live in today. It’s a long, serious, intimidating, fascinating book. As a non-economist, I was impressed with its accessibility. Piketty explains all his concepts and his data very clearly. As he points out, if we leave the study of economics and the resulting political choices to those who have all the money and power, the decisions they make are not likely to be very helpful to those of us who don’t have any.
The book focuses heavily on the differences between income (what we earn) and wealth (what we own). It’s a macroeconomic study, i.e., it focuses on averages and statistical variances at the national level, not on individual households. Piketty also weighs in on how wealth and income have been and should be taxed at a national and global scale. “Should be” is used here broadly, since what is good for one person’s worldview might not necessarily have the same virtues in another.
And of course, money – capital – is the metric that is used to measure wealth and income – dollars and/or Euros. There is no intrinsic value attached to a da Vinci painting, an apartment building on Fifth Avenue, shares of General Motors stock, or a paycheck from a week’s work in a coal mine other than their worth in cash. It is often hard to discern Piketty’s political persuasion, since the book is based heavily on macroeconomics and statistics. But the wealth inequality that has resulted from centuries of tax policies and political forces in Europe and the US becomes the overriding framework for Piketty’s conclusions.
Piketty deals with wealth and income at the national level - how it’s earned, accumulated, and passed on. National income, which is the sum total of how much money everyone in a given country earns in a year, is easy to understand. And also, it turns out, pretty easy to determine, based on extensive tax records from France, England, and the US over the past several centuries. Wealth on the other hand is easy to define – the sum total of everything that everyone in a given country owns - but harder to measure because wealth has not been taxed, and therefore has not been reported, as meticulously as income. Wealth includes everything of value that a nation’s citizens own, including TV sets, bicycles, land and buildings, shares of stock, and savings accounts. Piketty has managed to use the data available, especially inheritance records, to come up with enough reliable statistics on wealth and its growth to make some interesting observations.
Although Piketty’s perspective is national and global, not individual, he draws examples of his economic models from French and English literature. One character in particular, Vautrin from Balzac’s 1835 novel “Pere Goriot,” poses an important economics lesson that Piketty returns to regularly. In the novel, Vautrin convinces his young friend Rastignac that the path to wealth in nineteenth-century France lies not in pursuit of study, talent, and effort. Instead, he advises his friend to find and marry a wealthy heiress, thereby instantly securing his position in French society and guaranteeing an income far surpassing any he could hope to achieve in any profession on his own merits. Piketty returns to this anecdote qua metaphor many times.
The physical and social devastation in Europe and the collapse of wealth that was associated with the years from 1915 to 1945 and the years of recovery from 1945 to 1980 serve to illustrate many of Piketty’s lessons. Although national wealth in France, England, and the US decreased significantly during the war years, it didn’t take very many years for the wealthiest cohorts to recover most of their lost wealth.
Perhaps the most important conclusion from Piketty’s study is that on a national scale, wealth always reproduces itself faster than incomes rise. Left unregulated, cash generated by earned or inherited wealth will always become the overwhelmingly dominant source of capital in any national culture compared to income generated from labor. The rich will always become richer, the very rich will always become richer faster. And since half of Americans own virtually nothing, this guarantees that the gulf between the poor and the rich (and especially the very rich) will always widen.
The equation that determines the redistribution of wealth reveals that as long as the return on capital investment is greater than the growth of national income, then wealth will move away from the working class toward the wealthy. Piketty estimates that the return on capital across the globe, averaged over decades, has consistently ranged between 4.5 and 5.5 percent annually throughout recorded history. The growth of income on the other hand has been less than 2 percent up until 1950, and below 4 percent since. The difference between these factors ensures that the wealthy have always been able to maintain or increase their share of wealth over time, and are likely to continue.
So those who attack “wealth redistribution” as a “socialist” principle are really supporting a system that automatically redistributes wealth away from the poor and middle class toward the wealthy.
Piketty proposes a progressive annual tax on wealth as the most effective and efficient method of restoring a modicum of fairness to the economies of the developed world. The schedule he has recommended, and which of course will be attacked and argued to death, suggests an annual tax of 0.1-0.5 percent on wealth up to one million Euros (dollars), 1 percent up to 5 million, 2 percent to 10 million, and as much as 5-10 percent per year on hundreds of millions or billions. For most people who are not billionaires, this would have a negligible impact on their pocketbooks. If this tax offsets or replaces an income tax, which doesn’t really address wealth inequality, and especially if consumer (sales) taxes are reduced or eliminated, then most families would see no change or a reduction in their annual tax rate. And lest these rates sound outrageously high for the wealthy, Piketty points out that annual returns on large fortunes are typically much larger.
Of course, there are many issues and obstacles that must be overcome to achieve the complicated goal of creating an equitable economic system. Those with wealth and power will not agree to share their wealth voluntarily regardless of the benefits to society generally. Ironically, many people of limited means oppose any new taxes, even when their own self-interest would benefit. Furthermore, no single country or even a small group of countries can impose a fair and equitable system for taxing wealth as long as other countries provide tax havens that shelter wealth without transparency. Utopias are always hard. And there’s the rub.
But what about that issue of climate change? How will that impact wealth? Using Piketty’s framework, can we estimate how climate change will affect the return on capital investment and the growth of national income? It is conceivable that return on capital will fall due to climate catastrophes, for example if the stock market or real estate market tanks, and that has certainly happened during times of upheaval such as wars and depressions. It is also possible, even likely, that a significant fraction of a nation’s wealth will be destroyed by a changing climate (think rising sea levels, warmer temperatures, hurricanes, floods, fires). But it is also likely that the powers of government will be used to oppose or slow the forces that would limit the growth of capital, by favorable monetary policies, reparations, or industry bailouts.
Income growth will also be affected and the damage is not as easily mitigated. Growth of national income depends on population growth, job creation, and productivity growth. On a planet that is already overpopulated, stabilization or even reduction of the population seems inevitable, either by choice or by forces of nature. While some jobs are likely to be created by climate change (Biden’s “opportunities”), it also seems likely that the impacts of climate change will damage national economies generally, at least temporarily. And productivity growth - while it is possible that it might grow faster than the return on investments, that has rarely happened in recorded history, and then only in underdeveloped or war-ravaged countries that were catching up to the developed world using existing technological tools. As a result, if catastrophic climate change causes job losses and population decrease, income growth is likely to slow or become negative. The resulting redistribution of wealth in a 21st century ravaged by climate change would thus become a race between the destruction of capital, which mostly impacts the rich, and the destruction of income, which mostly impacts the working class. Not a particularly pleasant picture.