Wealth Inequality
A book review of Thomas Picketty’s “Capital in the 21st Century”
I remember being in a book shop in San Francisco when “Capital in the 21st Century” was first published in 2014. It couldn’t have been more timely, following on the heels of Occupy Wall Street and the proposed Buffet Rule. Wealth inequality was the talk of the town.
Written by French economist Thomas Picketty, it’s a book that maps wealth inequality over the past few centuries. Some have said that these early decades of the 21st century feel like the return of the Gilded Age of the Robber Barons, and the numbers support these claims.
One of the core aspects of Picketty’s exploration surrounds a study of wealth inequality in contrast to the growth rate. The growth rate of the economy for much of history has hovered near zero. It picked up during the Industrial Revolution, and maxed out somewhere around 1.6% in the 20th century. This growth rate has been unsustainable, resulting in likely-irreparable social and ecological harm, and it would be foolish to expect anything of the sort for growth in the 21st century.
To my surprise, I learned that the highest known wealth inequality thus far could be found in Europe around 1910, where the top 10% had 90% of the capital, and the top 1% had 50%. Even in the United States today, the numbers stand somewhere around 70% for the top 10%, and 35% for the top 1%. That said, Picketty predicts that, if things don’t change, we’ll be seeing record-setting highs as soon as 2030.
Why is this happening? There are numerous factors—from the ratio of the rate of return on capital to the growth rate, to population growth, to taxation.
One interesting factor demonstrated by college endowments: the more capital you have, the faster it grows. These differences quickly expand, as growth is logarithmic. College endowments managing less than a $100m see annualized returns around 6%. Colleges managing endowments over $10b see returns of 10% per year—almost twice as much! This pattern carries over to other sorts of private wealth as well.
Another fallacy the book dispells: that inflation hurts the wealthy. The vast majority of wealth is held in assets other than cash, which means that inflation is built in to their price. Who holds the most cash as a percentage of their wealth? The working and middle classes. These are the groups hurt most by inflation.
The most striking piece of history I learned was about tax rates. Did you know that, between 1930 and 1980, the average top tax rate in the US was 80%! By comparison, it is 37% today—less than half of what it had been. Even more strikingly, it reached 98% in the UK for extended periods of time (which was a factor in the Beatles’ move to the US).
Inheritance taxes were also much higher than they are today, as well as capital gains. What’s especially notable about this period of high taxes was the it’s also the highest growth period in history. Some small government hawks argue that low taxes encourage economic growth, but these data don’t support such a claim.
The more I learn about taxes, the more I realize that they’re like sleep; it’s about a balance rather than extremes. Some private-property fundamentalists would argue that taxes represent unfair seizure. Those whom are more socially-minded might recognize that money is a commons, and has no value from the perspective of the individual; it’s a collectively held believe. Taxes are necessary for the maintenance of the health of a currency, just as sleep is necessary to maintain the health of a person. Mary Mellor further explores this concept of public money in her 2015 title, Debt or Democracy.
In the United States today we actually have a regressive (as opposed to progressive) tax; the wealthiest citizens don’t pay the highest tax.
All of Picketty’s research leads up to the conclusion that, even if income, property, capital gains, sales, and inheritance taxes were raised, it still wouldn’t be enough; we need a tax on capital.
This is a brilliant idea, and leaves me wondering what kind of activism has sprung up to pursue this aim. I fear that, in the current political climate, such a goal will be exceedingly challenging to achieve. The actual implementation of this tax would take a lot of care—as much capital is of limited liquidity—and would replace the property tax.
This book does not explore the social and environmental dynamics of this subject, which are important and extensive. Even if it doesn’t bring about a tax revolution, this book reminds us of the bizarre nature of our times, and that the financial returns of the 20th century are the outlier rather than the norm.
If you’re interest in seeing more charts from the book, go here.
