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Reflections on Inequality and Capital in the 21 st century

Reflections on Inequality and Capital in the 21 st century. Thomas Piketty Paris School of Economics Cape Town, September 30 2015. This presentation is partly based upon Capital in the 21 st century (HUP, 2014)

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Reflections on Inequality and Capital in the 21 st century

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  1. Reflections on Inequality and Capital in the 21st century Thomas Piketty Paris School of Economics Cape Town, September 30 2015

  2. This presentationispartlybaseduponCapital in the 21stcentury(HUP, 2014) • In this book, I study the global dynamics of income and wealth distribution since 18c in 20+ countries. I use historical data collected over the past 15 yearswith Atkinson, Saez, Postel-Vinay, Rosenthal, Alvaredo, Zucman, and 30+ others. Aimis to put distribution back at the center of politicaleconomy. I attempt to develop a multidimensionalapproach to capital ownership and property relations, and to studybeliefssystems about inequality • Today I willpresent a number of selectedhistoricalevolutions & attempt to drawlessons for South Africa • All seriesavailable at http://piketty.pse.ens.fr/capital21c & the World Top IncomesDatabase: collective, on-goingproject

  3. This presentation: three points • 1. The long-rundynamics of incomeinequality. The end of the Kuznets curve, the end of universallaws.Institutions and policiesmatter: education, labor, tax, etc. • 2. The return of a patrimonial (or wealth-based) society. Wealth-income ratios seem to bereturning to veryhighlevels in rich countries. The metamorphosis of capital. The keyrole of the legal and political system. • 3. The future of wealth concentration. Withhigh r - g during 21c (r = net-of-tax rate of return, g = growth rate), thenwealthinequalitymightreach or surpass 19coligarchiclevels. Need for more transparency about wealth. Need for progressive taxation of net wealth.

  4. Inequality in South Africa • Incomeinequality= extremelyhigh by international and historical standards. Legacy of Apartheid. Top 10% incomeshare≈ 60-65% of total income (vs 30-35% in Europe, 45-50% in US, 55-60% in Brasil). • Wealthinequality= probablyveryhigh as well, but we know verylittle. No access to estatetax data. No annualwealthtax. • Likeother countries, & probablyeven more thanothers, South Africaneeds more transparency about income and wealthdynamics. Progressive wealthtax = powerfulway to produce information & to limit concentration of property. • BEE polices baseduponvoluntarymarket transactions are probably not enough. Progressive wealthtax = equivalent of permanent land reform. Wealth redistribution played a keyrole in successfuldevelopmentexperience in Asia & Europe.

  5. This presentation: three points • 1. The long-rundynamics of incomeinequality. The end of the Kuznets curve, the end of universallaws.Institutions and policiesmatter: education, labor, tax, etc. • 2. The return of a patrimonial (or wealth-based) society. Wealth-income ratios seem to bereturning to veryhighlevels in rich countries. The metamorphosis of capital. The keyrole of the legal and political system. • 3. The future of wealth concentration. Withhigh r - g during 21c (r = net-of-tax rate of return, g = growth rate), thenwealthinequalitymightreach or surpass 19coligarchiclevels. Need for more transparency about wealth. Need for progressive taxation of net wealth.

  6. 1. The long-rundynamics of incomeinequality. The end of the Kuznets curve, the end of universallaws.Institutions and policiesmatter: education, labor, tax, etc.

  7. Threefacts about inequality in the long-run: incomeinequality, wealth-inequality, wealth-income ratios (Piketty-Saez, « Inequality in the long run », Science 2014) • Fact n°1: in 1900-1910, incomeinequalitywashigher in Europe than in the United States; in 2000-2010, itis a lot higher in the United States

  8. The rise in US inequality in recentdecadesismostly due to risinginequality of laborincome • It is due to a mixture of reasons: changingsupply and demand for skills; race betweeneducation and technology; globalization; more unequal to access to skills in the US (risingtuitions, insufficient public investment); unprecedentedrise of top managerial compensation in the US (changingincentives, cuts in top incometax rates); falling minimum wage in the US institutions and policiesmatter

  9. 2. The return of a patrimonial (or wealth-based) society. Wealth-income ratios seem to bereturning to veryhighlevels in rich countries. Intuition: in a slow-growth society, wealthaccumulated in the pastcannaturallybecomevery important. In the very long run, thiscanbe relevant for the entire world. Not bad in itself, but new challenges. The metamorphosis of capital call for new regulations of property relations. The keyrole of the legal and political system. Democratizing capital: workercodetermination, patent laws, etc.

  10. Fact n°2: wealthinequalityisalways a lot higherthanincomeinequality; itisnowhigher in the US than in Europe • Fact n°3: wealthinequalityislessextremetodaythan a centuryago in Europe, although the total capitalization of privatewealth relative to national income has nowrecoveredfrom the 1914-1945 shocks

  11. The metamorphosis of capital • There’snothingbadwithhighwealth-incomeratios (postwar reconstruction, growthslowdown), but thiscreates new policychallenges: financialregulation, real estatebubbles, return of inheritance A multidimensionalapproach to the history of capital and property relations: from land to business assets, foreignassets, real estate, public debt, immaterial capital, etc.

  12. Capital & inequality in America • Inequality in America = a different structure as in Europe: more egalitarian in someways, more inegalitarian in others • The New World in the 19thcentury: the land of opportunity(capital accumulated in the pastmatterslessthan in Europe; perpetual pop. growth as a way to reduce the level of inheritedwealth and wealth concentration)… and also the land of slavery: extremeform of property relation • Northern US were in manyways more egalitarianthan Old Europe; but Southern US were more inegalitarian • Westill have the sameambiguousrelationship of Americawithinequalitytoday: in someways more merit-based; in otherways more violent (« meritocraticextremism »)

  13. Capital & inequality in Germany • Lowermarket values of capital assets in Germany: lower real estateprices, and lower stock marketcapitalization of corporations • Stakeholdercapitalism: shareholders have to share power withworkerrepresentatives, regionalgovt, etc., sothat the market value ismuchlessthan book value of corporation • Apparentlythisdoes not preventGermancompaniesfromproducing good cars • This clearlyillustratesthatmarket and social values of capital candiffer; property relations are socially, legally and historicallydetermined

  14. 3. The future of wealth concentration. Withhigh r - g during 21c (r = net-of-tax rate of return, g = growth rate), thenwealthinequalitymightreach or surpass 19coligarchiclevels. Need for more transparency about wealth. Need for progressive taxation of net wealth.

  15. Conclusions • The history of income and wealthinequalityisdeeplypolitical, social and cultural; itinvolvesbeliefssystems, national identities and sharpreversals • In a way, both Marx and Kuznets werewrong: there are powerful forces pushing in the direction of rising or reducinginequality; which one dominatesdepends on the institutions and policiesthatdifferentsocietieschoose to adopt • High r-gcan push towardhighwealth concentration, but manyother forces are also important • The ideal solution involves a broadcombination of inclusive institutions, including progressive taxation, education, social & laborlaws, financialtransparency, economicdemocracy • Other solutions involveauthoritarianpoliticalcontrols (China, Russia), but thismay not besustainable

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