Introduction

For GV4D4 week 1 (NEEDS NOTES)

1. Income and Output

For GV4D4 week 1 (NEEDS NOTES)

2. Growth: Illusions and Realities

For GV4D4 week 1 (NEEDS NOTES)

3. The Metamorphoses of Capital

Notes from GV4D4 week 2.

we look at wealth over time in the UK and France, taking a brief detour though literature (Balzac, Austen) to illustrate. Early on, land comprised most of the value of capital, but now it’s mostly housing/industrial/finance. Recall that both the UK and France were imperial powers with large foreign assets, which allowed them to run up trade deficits without larger economic problems. In the UK, with cap-inc ratio of 6:1, public assets are worth one years of NI (slightly less than in France); this is balanced out by public debt so roughly zero net wealth. Thus most wealth is private.

One core difference between the two countries has to do with their treatment of debt. France defaulted on public debt (via inflation?) whereas the UK never did, and instead financed wars (etc) by borrowing from wealthy citizens, thus increasing public debt at the same time as private assets (the result of the British monarchy preferring to borrow money rather than raise taxes). Of course bondholders get paid interest, too. There was some inflation after both wars which lowered the value of public debts, but not to the same extent as in France. Still, this is what prompted Keynes’ famous 1936 claim of the “euthanasia of the rentier”, which was influenced by him seeing a collapse of rentierism as a result of inflation. The UK moved toward a more mixed economy (stronger welfare state and socialist policies like nationalisation) in the post-WWII era, which was influenced partly by the success of the Soviet Union and partly due to suspicions that the economic elite had collaborated with Axis Powers (mostly true). This resulted in both govts owning around 25-30% of their nation’s wealth by 1950s (though since the UK had massive debts, their net public wealth was negative until the 60s/70s). In the 70s, of course, things started to shift: cracks were visible in the Communist bloc, and stagflation + a tricky geopolitical situation paved the way for increasing liberalisation.

4. From Old Europe to the New World

Notes from GV4D4 week 2.

Now we look at Germany, which is slightly different from the two cases above mostly because it had no colonial empire. Its capital consisted mostly of agricultural land. Hyperinflation in the 20s shrank the value of its post-WWI public debts, but of course that experience also had the effect of scarring the nation. During/after the wars, asset losses (mainly foreign) were more significant than physical destruction (revolutionary expropriation, nationalisation like that of the Suez canal). Plus firms went bankrupt during the depression, meaning stock/bondholders lost out, which had the effect of lowering the cap-income ratio and thus inequality.

The US: lots of farmland (which meant value/acre wasn’t very high) + populated mostly by recent immigrants who couldn’t bring much capital with them, so capital low at first. This reflected structural differences in inequality compared to Europe, as landlords and wealth owners had less power in such a large country with plenty of arable land for the taking. After WWII, asset prices remained low, and we saw extremely progressive taxation and lots of government spending (New Deal), but no nationalisation (unlike in Europe—wonder why?). Recall that the US was never a true colonial power (at least not in the same way as the trailblazers over in Europe), and in fact had a negative net foreign capital during the 19th century. Also note the role of slavery in US wealth. Canada was similar to US but slightly different politically due to the legal influence of the UK (no tea partying for us).

5. The Capital/Income Ratio over the Long Run

Notes from SO478 week 1

the capital/income ratio (which Piketty defines as β=s/g, savings over growth). In the golden age years, income was growing faster than wealth, but around the mid-70’s, wealth start to outpace income growth and so it began to pile up, which had the predictable consequence of reversing inequality trends. This chapter is a lot more technical and focused than the other readings (which makes sense, considering it’s a 600+ page book). Some topics covered: asset bubbles, dividends being taxed more than capital gains (providing an incentive to reinvest), foreign asset ownership, and financialization (which he defines by the value of assets rising more than net wealth).

6. The Capital-Labor Split in the Twenty-First Century

Notes from GV4D4 week 2.

mostly on the capital-labour income split in the 21st century. Most salient idea: α=r*β computes the share of income from capital.

7. Inequality and Concentration: Preliminary Bearings

Notes from GV4D4 week 3

• addresses the mistaken concept that growth favours labour over inheritance
  (spoiler: it usually doesn't)
• in 19th century France, labour alone (no matter your profession) was rarely
  enough to compete with inherited wealth
• in the US it was different (inherited wealth mattered little) until the 20th,
  especially due to the slave trade and all the compounding consequences of
  that
• it's important to distinguish between income/wealth inequality for labour,
  and that for capital, because the moral justifications are different
• and the econ/socio/political mechanisms are different
• for labour: market, education, rules and institutions
• for capital: inheritance laws, savings and investment behaviour, real
   estate and financial markets
• income inequality for capital is always more unequal than for labour
• but this is due to political institutions and norms, not nature
• the 20th century saw a huge structural transformation in the distribution of
  wealth in developed countries
• growth of a patrimonial (propertied) middle class)
• coincided with a falling share of wealth held by the upper class
• prediction: by 2030, top decile in US will have 60% of NI
• now let's look at justifications of high inequality:
• in a hyperpatrimonial society (with lots of rentiers), inherited wealth
   plays a huge role and has a tendency to become very concentrated
• this describes Belle Époque Europe (1871-1914) and the Ancien Régime
   (pre-revolution France)
• contemporary society is more "hypermeritocratic", esp in the US (and dw,
   Piketty is well aware that "meritocracies" are smokescreens used for
   justifying unjustifiable distributions of wealth/opportunity)---inequality
   is primarily due to a class of "supermanagers" with high labour income
• ofc, the two models can coexist; the children of supermanagers/superstars
   can become rentiers

8. Two Worlds

Notes from GV4D4 week 3

• fall of inequality in France in 20th century due to the fall of the rentier
  (top incomes from capital fell dramatically)
• the top centile has gone from rentiers to managers (from capital to labour)
• in other words, rentiers fell behind managers ... which didn't necessarily
   make things better for the people at the bottom
• income from capital usually due to financial assets in upper decile
   (stocks, shares, etc)
• though ofc this all comes from tax data---obvious risk of underreporting
• May 1968 France: cultural, political upheaval that changed everything
• soon, minimum wage increased by 20%
• 1970s: min wage indexed to mean wage and was boosted almost every year after
• 1980s: inequality rises again, due to top salaries of exec salaries
• US: more egalitarian at start of 20th but now obviously worse (but in a way
  that is structurally different from the 1900s)
• the financial crisis will not stop the structural increase of
   inequality---slower gains in capital income will not reverse the trend
• obvious link between rising inequality in the US and financial instability
   (households turned to credit to finance their lives)
• between 1977-2007, the top 10% took 75% of the growth; the top 1% took 60%
   of the increase in national income (are these the same thing??)

9. Inequality of Labor Income

Notes from GV4D4 week 3

• today, we have a patrimonial middle class: went from a society of
  superrentiers to a society of mostly managers and a few rentiers
• wage inequality can be partly explained by a race between technology &
   education (at least, relative group position)
• democratisation of educational system in France in 20th century,
   unfortunately did not eradicate inequality (incidentally, I read an
   interesting take on the educational system as an outlet for "hidden
   Keynesianism" in the excellent
   book Does Capitalism Have a Future)
• in the US: high cost of tuition, obvious ramifications (if they invested
   more in accessible education, could potentially reduce inequality for the
   lower deciles, at least until credential inflation catches up ...)
• interesting to compare minimum wage over time in France vs the US
• France: climbing fairly steadily, whereas in the US it's a weird sinuous
   pattern with fits and starts
• disappearance of daily wage in 20th ct: now monthly (or biweekly in some
   places I guess)
• econ arguments for a min wage: workers have too little bargaining power
   usually (esp due to the existence of a reserve army of labour), and if it's
   already below marginal productivity costs, then raising it won't reduce
   employment (at least theoretically, assuming everyone is a rational actor)
• on the supermanager phenomenon
• mostly an Anglo-Saxon phenomenon (though spreading)
• not just technological: there's a ratchet effect inherent in this due to
   high mobility & artificial funnel restrictions (credentials, "we can't
   lower the bar!", etc)
• there's no objective way of measuring how much an exec "deserves" so
   there's always an incentive to try to get paid more
• also reflects the ideology of the context (society, corporation) and
   whether or not there are checks and balances against high exec pay
• "meritocratic extremism": modern societies feel compelled to reward
   "winners" more generously if they give the impression that they
   accomplished what they did through "merit"

10. Inequality of Capital Ownership

Notes from GV4D4 week 3

• France, 1791, after nobility's fiscal privileges were abolished, a tax on
  estates/gifts was set up
• the actual amount was minor; the real goal was to establish a wealth
   registry which would then allow for the preservation of property rights in
   perpetuiry
• France's wealth inequality has been structurally the same throughout
   history (though the actual numbers have fluctuated due to war, etc)
• in the US, wealth was more concentrated around end of 19th century, catching
  up to Europe
• which worried US economists because they were proud of the fact that the US
   had historically been more equal (how times have changed)
• main reason for high wealth concentration pre-WWI: in low-growth societies
  when r > g, returns to capital will ofc compound
• the Q is: why was r > g? Piketty says it's a historical fact but not
   a logical necessity (taxes on wealth played some role)
• otoh, pure r (once you subtract tax and capital losses) briefly fell below
   g during wars (which reduced wealth ineq for some time)
• so r > g depends on existence of policies/instutitions to regulate the
   capital-labour relation, plus exogenous shocks to capital like war
• r has been historically around 4-5% (pre-losses) which is curious
• dynamics of r & g
• if r > g, eventually capital-income ratio rises to unsustainable levels
• in the long run, this will result in a decrease in r (as the general
   economic environment gets so bad that investment opportunities decline ...
   like if everyone is just dying of hunger or people are getting guillotined
   etc. unfortunately, Piketty never goes into specifics, but it's fun to
   imagine)
• historical changes in laws around wealth inheritance: from primogeniture
   (first son/child) to equipartition
• in the long run, we should arrive at an equilibrium---a Pareto distribution
   whose coefficient reflects r-g
• but that's only true for a specific range of r-g. if r > g by too much,
   then there is no equilibrium: capital's share of income will increase
   without limit (until external shocks, at least)
  • this is a bit fishy as a theory because he's basically including anything
    that doesn't arise automatically from the formulas as an "external shock"
    which makes it almost tautological
• reasons wealth ineq is no longer at Belle Époque levels:
• rentiers in interwar years didn't reduce their expenses enough, thus eating
   into their capital (and not just living off income)
• composition of assets vulnerable during wars (mostly foreign assets, esp
   sovereign debt)
• redistribution of wealth in europe after wars: progressive tax,
   nationalisation, etc
• also not enough time has passed since 1945---ineq can still rise quite a
   bit
• structural changes in 20th ct: governments started taxing capital income
   at higher rates
  • the effect was not to reduce the total amount of private wealth but
    rather to change the structure of it
  • more progressive estate taxes esp in 20th ct France
• if demographic growth is negative, inherited wealth could play bigger role in
  developed countries
• summary: wealth being less concentrated today than it used to be is a result
  of both political institutional choices and accidents

11. Merit and Inheritance in the Long Run

Notes from GV4D4 week 3

• main point: when r > g to a significant degree, inheritance will predominate
  over this lifetime's savings
• i.e., the past will begin to deour the future
• so past wealth inequalities will be distorted (worsened) over time
• methodology for tracking inheritance over time:
• economic flow, which takes the product of:
  • μ: average wealth at time of death
  • m: mortality rate
  • β: capital-income ratio but just for private wealth
• this definition is kind of a tautology but it's a useful approximation of
   actual fiscal flow (i.e., real inheritance data)
• ofc μ depends on age profile & consumption patterns (if savings are meant
   to be consumed during retirement or are accumulated to pass on to children)
• basically we can't expect disappearance of importance of inherited wealth
  unless we impose concrete policies to ensure it (like a 100% inheritance
  tax :D)
• on how increased life expectancy affects inherited wealth
• 19th century, average age of inheritance: 30
• 21st century: 50
• basically inheritance occurs later in aging societies
• but ofc wealth ages too (when r > g) and so the effects kind of cancel each
   other out, at least when it comes to the amount (may change dynamics given
   that life at 50 is not the same as life at 30)
• Modigliani triangle theory: wealth increase in anticipation of retirement
  then decreases during retirement
• problems: people don't just accumulate wealth for retirement; they may die
   early, or may be intending to pass on their wealth
• without public pensions, wealth accumulation might be higher than it is
   today
• gifts constitute about half of all present inheritance flows (so v important)
• can explain why regular inheritance is lower now---because some people have
   already passed on a lot of their assets
• projection for 21st ct: inheritance and gifts will both increase,
  proportional to r-g
• today, democracy rests on a "meritocratic hope" but there's no guarantee that
  illusion will remain as inherited wealth dominates more and more
• important to note that rent/inheritance are not just "imperfections" in the
   market; they are core features of capitalism!!!

12. Global Inequality of Wealth in the Twenty-First Century

not required for GV4D4

• acknowledges that r is greater for larger fortunes. using magazines' top billionaires (etc) lists to plot wealth over time & confirm this (6.8% real growth rate at the very top)
• for the bigger picture, uses other estimates from bank reports: inequality similar to ~1900; top 0.1% owns 20%, 1% 50%, 10% 80-90%; bottom half less than 5% of wealth globally
• again he compares Bill Gates and Liliane Bettencourt, whose fortunes grew at similar rates (to similar sizes); Steve Jobs, whom he cites as being "more innovative", saw his fortune grow more slowly
• data qualms: statistical bias where journalists likely underestimate amounts + sampling errors
• inherited wealth accounts for roughly half of top fortunes in Forbes, maybe more; less than during Belle Epoque (most likely due to it being easier to accumulate lots of money now in certain industries + developing countries)
• "Every fortune is partially justified yet potentially excessive. Outright theft is rare, as is absolute merit." (p444) as justification for a blunt global tax (since courts cannot easily distinguish between earned and unearned wealth, in his opinion)
• endowment rates for 800 universities ($400 billion, or less than 1% of household assets). similar results: slightly higher returns to the larger fortunes. unlike households, though, lower chance of "squandering" (since it's more institutional)
• on the impact of inflation: asset prices tend to rise at around the same rate, so its effects are complicated. we can see it as a tax on uninvested cash hoards but that's it. more likely to hurt small savers. distribution of capital becomes more unequal
• access to real estate as a sort of step function, amplifies returns
• on sovereign wealth funds, which are small (1.5% of global assets) but growing esp due to natural resource extraction (oil)
• maybe 10% of world assets are in tax havens, which is why the rich countries appear to be in deficit to the poor but really in surplus (just masked)

13. A Social State for the Twenty-First Century

GV4D4 week 10

• advocates a progressive global tax on wealth, which would have the side effect of making capital ownership more transparent
• he recognises how utopian this is, though, and acknowledges regional (e.g., EU) alternatives as a stepping stone
• on the response of govts to financial crisis: he seems to think they did a good job (contrasted to Hoover's liquidationist response to the Great Depression)
• otoh, the aftermath did not result in a more progressive tax code this time, which he thinks is necessary this time around
• graph of tax revenue (% NI) since 1870: obviously increased a lot (as the state has grown), stabilising after 1980
• public spending split between services (edu, healthcare) and transfers/replacement income (pensions, benefits)
• pensions account for most of the latter (2/3 to 3/4)
• thus growth of fiscal state mostly due to growth of social state
• on moral justification of inequality: briefly mentions Rawls' difference principle + Sen's capabilities framework
• on challenges for further welfare state growth:
• lower growth than during the Golden Ages means it's harder to get support for tax increases (he seems to be assuming that a radically more progressive tax is out of the question)
• on social mobility
• high tuition fees for higher education as a bottleneck
• though even if that were eliminated, it wouldn't fix everything; grade inflation could just occur, and other filters would be used (cites Bourdieu)
• on the problem with pay-as-you-go pension schemes due to ageing pop + falling growth rates
• he suggests that reforming the pension system is hard but never goes into the (imo obvious) alternative of better public services to alleviate the need for a high pension ...
• in developing countries: much smaller social states, partly as a result of externally-foisted liberalisation

14. Rethinking the Progressive Income Tax

GV4D4 week 10

• the progressive income tax as the major fiscal innovation of the 20th century
• types of taxes:
• capital flow, or capital stock (real estate etc)
• (non-capital) income tax
• consumption tax (indirect since it's not on income)
• social insurance contributions
• today, many tax systems are regressive on top (even worse when you consider that wealth is taxed less than income)
• suggests that a progressive tax is necessary to shield those who lose out from globalisation (otherwise they'll turn against it)
• (unfortunately it's now too late)
• most advanced countries had developed some sort of progressive tax systems before WWI, though top incomes were still taxed at very low rates (skyrocketed during the war)
• mostly falling after the 80s though
• suggests that very high tax brackets (70%) aren't actually primarily intended to raise further revenue
• rather, it's to put an end to such extreme concentrations, albeit in a liberal-approved way (not direct expropriation)
• concurs that decreasing these top tax rates doesn't actually lead to increased revenue (pace the Laffer curve)
  • in the UK/US, didn't stimulate productivity; instead, incentivised top execs and others with some degree of control over salaries to get paid more
• proposes that optimal top tax rate in advanced countries is >80% (better redistribution without limiting growth)
  • easier to implement this in a large country like the US rather than a small, European one (less chance of flight)

15. A Global Tax on Capital

GV4D4 week 10

• requires international cooperation (but that could be done in stages, starting with regional)
• thinks this is better than protectionism + capital controls
• basic proposal: a progressive annual tax on global wealth (above a certain threshold, and including all types of assets)
• if implemented, would require transparency about who owns how much wealth and where, which would facilitate more accurate discussions of fiscal policy
• even if the level of tax is very low, it's worth carrying out just for the detailed reporting side effect
• suggests an automated system (pre-populated forms) rather than asking for full declarations
• first step: automated transmission of banking data to relevant authorities (which is already technically feasible)
  • already occurs in some jurisdictions, and there's no real acceptable justification for the (tax shelters) that refuse to share
  • example of this already occurring: FATCA in the US (not ambitious enough though, and doesn't include institutions that don't do business in the US)
• he thinks there needs to be 3 types of progressive taxes (3 pillars): income + estate need to be supplemented by a tax on capital
• reason: declared income doesn't necessarily match actual increases in capital accumulation (since most of it isn't needed for immediate spending and thus isn't paid out as dividends or whatever)
• thus capital tax ensures they actually contribute to the tax system in a way proportional to their true wealth
• need to find a balance between incentive logic (taxing capital stock to encourage productive investment) and insurance logic (taxing the flow to insure against unpredictable returns)
• suggests linking tax rates to the observed rates of return in previous years
• he sees this as a more palatable alternative to the Marxist approach (abolishing private ownership of the means of production)
• on China, which has implemented capital controls (an approach he does not encourage) as well as a progressive tax schedule
• on "petroleum rents" (oil resources in the Middle East) leading to distributional injustice due to the arbitrariness of national borders
• on immigration to rich countries, which he correctly characterises as only a temporary, bandaid-like solution (in the long run, you need a strong social state with progressive taxes)
• suggests that global inequality will be mitigated by his global wealth tax (since capital flight from the developing world is a huge problem)

16. The Question of the Public Debt

GV4D4 week 10

• advanced countries are richer, but also greater levels of debt
• indicating that the problem of public debt is a distributional one (between public/private), not a matter of absolute wealth levels
• three main solutions to reduce debt:
• raising taxes (esp on capital)
• inflation (which he says could work if the former doesn't, but less predictable distributional consequences)
• austerity (which he sees as the worst solution)
• European public debt is mostly owned by European households (at least, the ones that own any assets)
• summarises Milton Friedman's monetarist theory on the Great Depression
• the New Deal was unnecessary; everything could have been fixed via Federal Reserve policies alone
• on the power of central banks to create money by making loans
• theoretically no limits on their balance sheets---if they wanted, and had the right mandate, they could expand them significantly and (say) finance transition to renewable energy
• the problem is that they are not democratically accountable and so (in his opinion) it's best to limit their scope
• on financial opacity as a barrier to collecting more tax revenue, which can force govts to turn to austerity and similar destructive policies (see Greece, Cyprus)
• on the problems unique to the ECB (as the central bank for a monetary union without a political union, administering a stateless currency)
• recall that it can't purchase new govt debt on its own; can only facilitate private bank lending & then buy the bonds on the secondary market
• another useful avenue for cooperation: stabilising corporation tax across nations (centralised reporting/collection)
• the arbitrariness of the Maastricht treaty deficit/debt levels (3% and 60% of GDP, respectively)
• capital saturation strategy: get r=g such that all capital needs to be reinvested in order to maintain capital stock
• eventually results in the euthanasia of the rentier
• but of course this could take forever, and who knows what it'll require to get there
• also depends on demographic growth: if the population doesn't increase, it's tricker
• a (very) few pages devoted to climate change and its potential for damaging growth in some way (meaning we need to discount r accordingly)
• on the need for democratic control of capital in order to attain democratic control of capitalism, via financial transparency

Conclusion

some much-needed bashing of this idea that economics is a science, and an apolitical one as that (he prefers the term "political economy")