1 00:00:00,915 --> 00:00:02,880 It's very nice to be here tonight. 2 00:00:02,880 --> 00:00:06,596 So I've been working on the history of income 3 00:00:06,596 --> 00:00:09,915 and wealth distribution for the past 15 years, 4 00:00:09,915 --> 00:00:13,016 and one of the interesting lessons 5 00:00:13,016 --> 00:00:15,517 coming from this historical evidence 6 00:00:15,517 --> 00:00:17,530 is indeed that, in the long run, 7 00:00:17,530 --> 00:00:21,250 there is a tendency for the rate of return of capital 8 00:00:21,250 --> 00:00:23,920 to exceed the economy's growth rate, 9 00:00:23,920 --> 00:00:26,665 and this tends to lead to high concentration of wealth. 10 00:00:26,665 --> 00:00:28,498 Not infinite concentration of wealth, 11 00:00:28,498 --> 00:00:31,289 but the higher the gap between r and g, 12 00:00:31,289 --> 00:00:34,224 the higher the level of inequality of wealth 13 00:00:34,224 --> 00:00:37,431 towards which society tends to converge. 14 00:00:37,431 --> 00:00:40,985 So this is a key force that I'm going to talk about today, 15 00:00:40,985 --> 00:00:42,954 but let me say right away 16 00:00:42,954 --> 00:00:45,284 that this is not the only important force 17 00:00:45,284 --> 00:00:47,757 in the dynamics of income and wealth distribution, 18 00:00:47,757 --> 00:00:49,782 and there are many other forces that play 19 00:00:49,782 --> 00:00:52,763 an important role in the long-run dynamics 20 00:00:52,763 --> 00:00:54,338 of income and wealth distribution. 21 00:00:54,338 --> 00:00:56,307 Also there is a lot of data 22 00:00:56,307 --> 00:00:57,863 that still needs to be collected. 23 00:00:57,863 --> 00:01:00,795 We know a little bit more today 24 00:01:00,795 --> 00:01:03,316 than we used to know, but we still know too little, 25 00:01:03,316 --> 00:01:05,992 and certainly there are many different processes — 26 00:01:05,992 --> 00:01:08,290 economic, social, political — 27 00:01:08,290 --> 00:01:09,717 that need to be studied more. 28 00:01:09,717 --> 00:01:12,697 And so I'm going to focus today on this simple force, 29 00:01:12,697 --> 00:01:14,958 but that doesn't mean that other important forces 30 00:01:14,958 --> 00:01:16,162 do not exist. 31 00:01:16,162 --> 00:01:18,434 So most of the data I'm going to present 32 00:01:18,434 --> 00:01:20,639 comes from this database 33 00:01:20,639 --> 00:01:21,899 that's available online: 34 00:01:21,899 --> 00:01:23,384 the World Top Incomes Database. 35 00:01:23,384 --> 00:01:25,487 So this is the largest existing 36 00:01:25,487 --> 00:01:27,940 historical database on inequality, 37 00:01:27,940 --> 00:01:29,290 and this comes from the effort 38 00:01:29,290 --> 00:01:33,182 of over 30 scholars from several dozen countries. 39 00:01:33,182 --> 00:01:35,960 So let me show you a couple of facts 40 00:01:35,960 --> 00:01:37,105 coming from this database, 41 00:01:37,105 --> 00:01:39,179 and then we'll return to r bigger than g. 42 00:01:39,179 --> 00:01:41,689 So fact number one is that there has been 43 00:01:41,689 --> 00:01:44,740 a big reversal in the ordering of income inequality 44 00:01:44,740 --> 00:01:46,645 between the United States and Europe 45 00:01:46,645 --> 00:01:48,400 over the past century. 46 00:01:48,400 --> 00:01:51,905 So back in 1900, 1910, income inequality was actually 47 00:01:51,905 --> 00:01:54,170 much higher in Europe than in the United States, 48 00:01:54,170 --> 00:01:57,280 whereas today, it is a lot higher in the United States. 49 00:01:57,280 --> 00:01:58,946 So let me be very clear: 50 00:01:58,946 --> 00:02:01,770 The main explanation for this is not r bigger than g. 51 00:02:01,770 --> 00:02:05,267 It has more to do with changing supply and demand 52 00:02:05,267 --> 00:02:08,720 for skill, the race between education and technology, 53 00:02:08,720 --> 00:02:12,300 globalization, probably more unequal access 54 00:02:12,300 --> 00:02:13,906 to skills in the U.S., 55 00:02:13,906 --> 00:02:16,493 where you have very good, very top universities 56 00:02:16,493 --> 00:02:18,735 but where the bottom part of the educational system 57 00:02:18,735 --> 00:02:19,500 is not as good, 58 00:02:19,500 --> 00:02:21,861 so very unequal access to skills, 59 00:02:21,861 --> 00:02:23,780 and also an unprecedented rise 60 00:02:23,780 --> 00:02:26,800 of top managerial compensation of the United States, 61 00:02:26,800 --> 00:02:29,650 which is difficult to account for just on the basis of education. 62 00:02:29,650 --> 00:02:31,604 So there is more going on here, 63 00:02:31,604 --> 00:02:34,213 but I'm not going to talk too much about this today, 64 00:02:34,213 --> 00:02:36,879 because I want to focus on wealth inequality. 65 00:02:36,879 --> 00:02:39,860 So let me just show you a very simple indicator 66 00:02:39,860 --> 00:02:42,210 about the income inequality part. 67 00:02:42,210 --> 00:02:44,664 So this is the share of total income 68 00:02:44,664 --> 00:02:46,452 going to the top 10 percent. 69 00:02:46,452 --> 00:02:48,624 So you can see that one century ago, 70 00:02:48,624 --> 00:02:52,201 it was between 45 and 50 percent in Europe 71 00:02:52,201 --> 00:02:54,939 and a little bit above 40 percent in the U.S., 72 00:02:54,939 --> 00:02:57,210 so there was more inequality in Europe. 73 00:02:57,210 --> 00:02:59,234 Then there was a sharp decline 74 00:02:59,234 --> 00:03:01,765 during the first half of the 20th century, 75 00:03:01,765 --> 00:03:04,128 and in the recent decade, you can see that 76 00:03:04,128 --> 00:03:07,630 the U.S. has become more unequal than Europe, 77 00:03:07,630 --> 00:03:10,300 and this is the first fact I just talked about. 78 00:03:10,300 --> 00:03:14,211 Now, the second fact is more about wealth inequality, 79 00:03:14,211 --> 00:03:17,301 and here the central fact is that wealth inequality 80 00:03:17,301 --> 00:03:19,907 is always a lot higher than income inequality, 81 00:03:19,907 --> 00:03:22,292 and also that wealth inequality, 82 00:03:22,292 --> 00:03:24,945 although it has also increased in recent decades, 83 00:03:24,945 --> 00:03:26,801 is still less extreme today 84 00:03:26,801 --> 00:03:28,680 than what it was a century ago, 85 00:03:28,680 --> 00:03:31,199 although the total quantity of wealth 86 00:03:31,199 --> 00:03:33,224 relative to income has now recovered 87 00:03:33,224 --> 00:03:34,855 from the very large shocks 88 00:03:34,855 --> 00:03:36,880 caused by World War I, the Great Depression, 89 00:03:36,880 --> 00:03:38,099 World War II. 90 00:03:38,099 --> 00:03:40,143 So let me show you two graphs 91 00:03:40,143 --> 00:03:43,000 illustrating fact number two and fact number three. 92 00:03:43,000 --> 00:03:47,390 So first, if you look at the level of wealth inequality, 93 00:03:47,390 --> 00:03:50,548 this is the share of total wealth 94 00:03:50,548 --> 00:03:53,070 going to the top 10 percent of wealth holders, 95 00:03:53,070 --> 00:03:55,779 so you can see the same kind of reversal 96 00:03:55,779 --> 00:03:58,344 between the U.S. and Europe that we had before 97 00:03:58,344 --> 00:04:00,020 for income inequality. 98 00:04:00,020 --> 00:04:03,570 So wealth concentration was higher 99 00:04:03,570 --> 00:04:05,813 in Europe than in the U.S. a century ago, 100 00:04:05,813 --> 00:04:07,647 and now it is the opposite. 101 00:04:07,647 --> 00:04:09,638 But you can also show two things: 102 00:04:09,638 --> 00:04:13,339 First, the general level of wealth inequality 103 00:04:13,339 --> 00:04:15,994 is always higher than income inequality. 104 00:04:15,994 --> 00:04:18,334 So remember, for income inequality, 105 00:04:18,334 --> 00:04:20,662 the share going to the top 10 percent 106 00:04:20,662 --> 00:04:24,960 was between 30 and 50 percent of total income, 107 00:04:24,960 --> 00:04:27,772 whereas for wealth, the share is always 108 00:04:27,772 --> 00:04:29,831 between 60 and 90 percent. 109 00:04:29,831 --> 00:04:31,347 Okay, so that's fact number one, 110 00:04:31,347 --> 00:04:33,273 and that's very important for what follows. 111 00:04:33,273 --> 00:04:34,994 Wealth concentration is always 112 00:04:34,994 --> 00:04:36,873 a lot higher than income concentration. 113 00:04:36,873 --> 00:04:40,259 Fact number two is that the rise 114 00:04:40,259 --> 00:04:43,206 in wealth inequality in recent decades 115 00:04:43,206 --> 00:04:47,492 is still not enough to get us back to 1910. 116 00:04:47,492 --> 00:04:49,269 So the big difference today, 117 00:04:49,269 --> 00:04:51,182 wealth inequality is still very large, 118 00:04:51,182 --> 00:04:54,444 with 60, 70 percent of total wealth for the top 10, 119 00:04:54,444 --> 00:04:56,289 but the good news is that it's actually 120 00:04:56,289 --> 00:04:58,070 better than one century ago, 121 00:04:58,070 --> 00:05:01,441 where you had 90 percent in Europe going to the top 10. 122 00:05:01,441 --> 00:05:03,432 So today what you have 123 00:05:03,432 --> 00:05:05,434 is what I call the middle 40 percent, 124 00:05:05,434 --> 00:05:07,347 the people who are not in the top 10 125 00:05:07,347 --> 00:05:09,120 and who are not in the bottom 50, 126 00:05:09,120 --> 00:05:11,386 and what you can view as the wealth middle class 127 00:05:11,386 --> 00:05:14,529 that owns 20 to 30 percent 128 00:05:14,529 --> 00:05:16,391 of total wealth, national wealth, 129 00:05:16,391 --> 00:05:19,722 whereas they used to be poor, a century ago, 130 00:05:19,722 --> 00:05:22,340 when there was basically no wealth middle class. 131 00:05:22,340 --> 00:05:23,917 So this is an important change, 132 00:05:23,917 --> 00:05:28,532 and it's interesting to see that wealth inequality 133 00:05:28,532 --> 00:05:31,838 has not fully recovered to pre-World War I levels, 134 00:05:31,838 --> 00:05:35,347 although the total quantity of wealth has recovered. 135 00:05:35,347 --> 00:05:37,294 Okay? So this is the total value 136 00:05:37,294 --> 00:05:39,510 of wealth relative to income, 137 00:05:39,510 --> 00:05:41,623 and you can see that in particular in Europe, 138 00:05:41,623 --> 00:05:45,483 we are almost back to the pre-World War I level. 139 00:05:45,483 --> 00:05:47,328 So there are really two 140 00:05:47,328 --> 00:05:49,859 different parts of the story here. 141 00:05:49,859 --> 00:05:50,978 One has to do with 142 00:05:50,978 --> 00:05:53,420 the total quantity of wealth that we accumulate, 143 00:05:53,420 --> 00:05:55,098 and there is nothing bad per se, of course, 144 00:05:55,098 --> 00:05:56,845 in accumulating a lot of wealth, 145 00:05:56,845 --> 00:05:59,713 and in particular if it is more diffuse 146 00:05:59,713 --> 00:06:01,107 and less concentrated. 147 00:06:01,107 --> 00:06:03,852 So what we really want to focus on 148 00:06:03,852 --> 00:06:06,233 is the long-run evolution of wealth inequality, 149 00:06:06,233 --> 00:06:08,533 and what's going to happen in the future. 150 00:06:08,533 --> 00:06:10,558 How can we account for the fact that 151 00:06:10,558 --> 00:06:14,220 until World War I, wealth inequality was so high 152 00:06:14,220 --> 00:06:17,410 and, if anything, was rising to even higher levels, 153 00:06:17,410 --> 00:06:20,737 and how can we think about the future? 154 00:06:20,737 --> 00:06:24,623 So let me come to some of the explanations 155 00:06:24,623 --> 00:06:26,759 and speculations about the future. 156 00:06:26,759 --> 00:06:28,354 Let me first say that 157 00:06:28,354 --> 00:06:30,341 probably the best model to explain 158 00:06:30,341 --> 00:06:32,438 why wealth is so much 159 00:06:32,438 --> 00:06:34,624 more concentrated than income 160 00:06:34,624 --> 00:06:37,736 is a dynamic, dynastic model 161 00:06:37,736 --> 00:06:40,200 where individuals have a long horizon 162 00:06:40,200 --> 00:06:42,956 and accumulate wealth for all sorts of reasons. 163 00:06:42,956 --> 00:06:45,566 If people were accumulating wealth 164 00:06:45,566 --> 00:06:47,569 only for life cycle reasons, 165 00:06:47,569 --> 00:06:49,582 you know, to be able to consume 166 00:06:49,582 --> 00:06:51,169 when they are old, 167 00:06:51,169 --> 00:06:53,542 then the level of wealth inequality 168 00:06:53,542 --> 00:06:55,859 should be more or less in line 169 00:06:55,859 --> 00:06:57,828 with the level of income inequality. 170 00:06:57,828 --> 00:06:59,756 But it will be very difficult to explain 171 00:06:59,756 --> 00:07:01,950 why you have so much more wealth inequality 172 00:07:01,950 --> 00:07:03,434 than income inequality 173 00:07:03,434 --> 00:07:04,710 with a pure a life cycle model, 174 00:07:04,710 --> 00:07:06,741 so you need a story 175 00:07:06,741 --> 00:07:08,429 where people also care 176 00:07:08,429 --> 00:07:10,960 about wealth accumulation for other reasons. 177 00:07:10,960 --> 00:07:12,884 So typically, they want to transmit 178 00:07:12,884 --> 00:07:16,210 wealth to the next generation, to their children, 179 00:07:16,210 --> 00:07:17,978 or sometimes they want to accumulate wealth 180 00:07:17,978 --> 00:07:20,746 because of the prestige, the power that goes with wealth. 181 00:07:20,746 --> 00:07:22,130 So there must be other reasons 182 00:07:22,130 --> 00:07:24,120 for accumulating wealth than just life cycle 183 00:07:24,120 --> 00:07:26,888 to explain what we see in the data. 184 00:07:26,888 --> 00:07:30,234 Now, in a large class of dynamic models 185 00:07:30,234 --> 00:07:32,210 of wealth accumulation 186 00:07:32,210 --> 00:07:35,768 with such dynastic motive for accumulating wealth, 187 00:07:35,768 --> 00:07:38,614 you will have all sorts of random, 188 00:07:38,614 --> 00:07:39,537 multiplicative shocks. 189 00:07:39,537 --> 00:07:41,786 So for instance, some families 190 00:07:41,786 --> 00:07:43,473 have a very large number of children, 191 00:07:43,473 --> 00:07:45,239 so the wealth will be divided. 192 00:07:45,239 --> 00:07:47,129 Some families have fewer children. 193 00:07:47,129 --> 00:07:49,357 You also have shocks to rates of return. 194 00:07:49,357 --> 00:07:51,454 Some families make huge capital gains. 195 00:07:51,454 --> 00:07:53,249 Some made bad investments. 196 00:07:53,249 --> 00:07:55,490 So you will always have some mobility 197 00:07:55,490 --> 00:07:56,928 in the wealth process. 198 00:07:56,928 --> 00:07:59,303 Some people will move up, some people will move down. 199 00:07:59,303 --> 00:08:00,955 The important point is that, 200 00:08:00,955 --> 00:08:01,965 in any such model, 201 00:08:01,965 --> 00:08:04,521 for a given variance of such shocks, 202 00:08:04,521 --> 00:08:06,557 the equilibrium level of wealth inequality 203 00:08:06,557 --> 00:08:11,394 will be a steeply rising function of r minus g. 204 00:08:11,394 --> 00:08:14,263 And intuitively, the reason why the difference 205 00:08:14,263 --> 00:08:16,107 between the rate of return to wealth 206 00:08:16,107 --> 00:08:17,862 and the growth rate is important 207 00:08:17,862 --> 00:08:20,174 is that initial wealth inequalities 208 00:08:20,174 --> 00:08:22,565 will be amplified at a faster pace 209 00:08:22,565 --> 00:08:24,634 with a bigger r minus g. 210 00:08:24,634 --> 00:08:26,108 So take a simple example, 211 00:08:26,108 --> 00:08:29,874 with r equals five percent and g equals one percent, 212 00:08:29,874 --> 00:08:31,982 wealth holders only need to reinvest 213 00:08:31,982 --> 00:08:34,621 one fifth of their capital income to ensure 214 00:08:34,621 --> 00:08:37,354 that their wealth rises as fast 215 00:08:37,354 --> 00:08:39,267 as the size of the economy. 216 00:08:39,267 --> 00:08:40,650 So this makes it easier 217 00:08:40,650 --> 00:08:42,416 to build and perpetuate large fortunes 218 00:08:42,416 --> 00:08:44,371 because you can consume four fifths, 219 00:08:44,371 --> 00:08:46,110 assuming zero tax, 220 00:08:46,110 --> 00:08:47,771 and you can just reinvest one fifth. 221 00:08:47,771 --> 00:08:50,359 So of course some families will consume more than that, 222 00:08:50,359 --> 00:08:52,102 some will consume less, so there will be 223 00:08:52,102 --> 00:08:53,857 some mobility in the distribution, 224 00:08:53,857 --> 00:08:56,703 but on average, they only need to reinvest one fifth, 225 00:08:56,703 --> 00:09:00,472 so this allows high wealth inequalities to be sustained. 226 00:09:00,472 --> 00:09:02,969 Now, you should not be surprised 227 00:09:02,969 --> 00:09:06,505 by the statement that r can be bigger than g forever, 228 00:09:06,505 --> 00:09:08,121 because, in fact, this is what happened 229 00:09:08,121 --> 00:09:10,192 during most of the history of mankind. 230 00:09:10,192 --> 00:09:13,543 And this was in a way very obvious to everybody 231 00:09:13,543 --> 00:09:15,321 for a simple reason, which is that growth 232 00:09:15,321 --> 00:09:17,509 was close to zero percent 233 00:09:17,509 --> 00:09:19,130 during most of the history of mankind. 234 00:09:19,130 --> 00:09:22,662 Growth was maybe 0.1, 0.2, 0.3 percent, 235 00:09:22,662 --> 00:09:24,658 but very slow growth of population 236 00:09:24,658 --> 00:09:26,655 and output per capita, 237 00:09:26,655 --> 00:09:28,539 whereas the rate of return on capital 238 00:09:28,539 --> 00:09:30,395 of course was not zero percent. 239 00:09:30,395 --> 00:09:32,431 It was, for land assets, which was 240 00:09:32,431 --> 00:09:34,240 the traditional form 241 00:09:34,240 --> 00:09:36,641 of assets in preindustrial societies, 242 00:09:36,641 --> 00:09:38,404 it was typically five percent. 243 00:09:38,404 --> 00:09:42,190 Any reader of Jane Austen would know that. 244 00:09:42,190 --> 00:09:45,098 If you want an annual income of 1,000 pounds, 245 00:09:45,098 --> 00:09:46,740 you should have a capital value 246 00:09:46,740 --> 00:09:48,596 of 20,000 pounds so that 247 00:09:48,596 --> 00:09:51,146 five percent of 20,000 is 1,000. 248 00:09:51,146 --> 00:09:53,163 And in a way, this was 249 00:09:53,163 --> 00:09:54,941 the very foundation of society, 250 00:09:54,941 --> 00:09:57,976 because r bigger than g 251 00:09:57,976 --> 00:10:02,100 was what allowed holders of wealth and assets 252 00:10:02,100 --> 00:10:04,790 to live off their capital income 253 00:10:04,790 --> 00:10:07,490 and to do something else in life 254 00:10:07,490 --> 00:10:10,685 than just to care about their own survival. 255 00:10:10,685 --> 00:10:12,845 Now, one important conclusion 256 00:10:12,845 --> 00:10:14,836 of my historical research is that 257 00:10:14,836 --> 00:10:17,547 modern industrial growth did not change 258 00:10:17,547 --> 00:10:20,371 this basic fact as much as one might have expected. 259 00:10:20,371 --> 00:10:22,050 Of course, the growth rate 260 00:10:22,050 --> 00:10:23,858 following the Industrial Revolution 261 00:10:23,858 --> 00:10:28,180 rose, typically from zero to one to two percent, 262 00:10:28,180 --> 00:10:30,110 but at the same time, the rate of return 263 00:10:30,110 --> 00:10:31,755 to capital also rose 264 00:10:31,755 --> 00:10:34,180 so that the gap between the two 265 00:10:34,180 --> 00:10:35,636 did not really change. 266 00:10:35,636 --> 00:10:37,886 So during the 20th century, 267 00:10:37,886 --> 00:10:40,530 you had a very unique combination of events. 268 00:10:40,530 --> 00:10:42,547 First, a very low rate of return 269 00:10:42,547 --> 00:10:45,563 due to the 1914 and 1945 war shocks, 270 00:10:45,563 --> 00:10:47,868 destruction of wealth, inflation, 271 00:10:47,868 --> 00:10:49,848 bankruptcy during the Great Depression, 272 00:10:49,848 --> 00:10:51,513 and all of this reduced 273 00:10:51,513 --> 00:10:53,263 the private rate of return to wealth 274 00:10:53,263 --> 00:10:55,158 to unusually low levels 275 00:10:55,158 --> 00:10:57,497 between 1914 and 1945. 276 00:10:57,497 --> 00:10:59,333 And then, in the postwar period, 277 00:10:59,333 --> 00:11:02,570 you had unusually high growth rate, 278 00:11:02,570 --> 00:11:04,944 partly due to the reconstruction. 279 00:11:04,944 --> 00:11:06,869 You know, in Germany, in France, in Japan, 280 00:11:06,869 --> 00:11:08,420 you had five percent growth rate 281 00:11:08,420 --> 00:11:11,570 between 1950 and 1980 282 00:11:11,570 --> 00:11:13,213 largely due to reconstruction, 283 00:11:13,213 --> 00:11:15,564 and also due to very large demographic growth, 284 00:11:15,564 --> 00:11:17,705 the Baby Boom Cohort effect. 285 00:11:17,705 --> 00:11:20,143 Now, apparently that's not going to last for very long, 286 00:11:20,143 --> 00:11:21,818 or at least the population growth 287 00:11:21,818 --> 00:11:24,586 is supposed to decline in the future, 288 00:11:24,586 --> 00:11:28,242 and the best projections we have is that 289 00:11:28,242 --> 00:11:30,070 the long-run growth is going to be closer 290 00:11:30,070 --> 00:11:31,493 to one to two percent 291 00:11:31,493 --> 00:11:33,439 rather than four to five percent. 292 00:11:33,439 --> 00:11:36,116 So if you look at this, 293 00:11:36,116 --> 00:11:38,257 these are the best estimates we have 294 00:11:38,257 --> 00:11:39,913 of world GDP growth 295 00:11:39,913 --> 00:11:42,272 and rate of return on capital, 296 00:11:42,272 --> 00:11:44,360 average rates of return on capital, 297 00:11:44,360 --> 00:11:45,428 so you can see that during most 298 00:11:45,428 --> 00:11:46,945 of the history of mankind, 299 00:11:46,945 --> 00:11:48,558 the growth rate was very small, 300 00:11:48,558 --> 00:11:50,392 much lower than the rate of return, 301 00:11:50,392 --> 00:11:52,754 and then during the 20th century, 302 00:11:52,754 --> 00:11:54,925 it is really the population growth, 303 00:11:54,925 --> 00:11:57,197 very high in the postwar period, 304 00:11:57,197 --> 00:11:58,797 and the reconstruction process 305 00:11:58,797 --> 00:12:00,370 that brought growth 306 00:12:00,370 --> 00:12:03,441 to a smaller gap with the rate of return. 307 00:12:03,441 --> 00:12:06,964 Here I use the United Nations population projections, 308 00:12:06,964 --> 00:12:09,440 so of course they are uncertain. 309 00:12:09,440 --> 00:12:10,831 It could be that we all start 310 00:12:10,831 --> 00:12:12,937 having a lot of children in the future, 311 00:12:12,937 --> 00:12:15,702 and the growth rates are going to be higher, 312 00:12:15,702 --> 00:12:16,951 but from now on, 313 00:12:16,951 --> 00:12:19,753 these are the best projections we have, 314 00:12:19,753 --> 00:12:21,687 and this will make global growth 315 00:12:21,687 --> 00:12:24,443 decline and the gap between 316 00:12:24,443 --> 00:12:26,446 the rate of return go up. 317 00:12:26,446 --> 00:12:29,308 Now, the other unusual event 318 00:12:29,308 --> 00:12:30,979 during the 20th century 319 00:12:30,979 --> 00:12:32,308 was, as I said, 320 00:12:32,308 --> 00:12:34,624 destruction, taxation of capital, 321 00:12:34,624 --> 00:12:37,359 so this is the pre-tax rate of return. 322 00:12:37,359 --> 00:12:40,338 This is the after-tax rate of return, 323 00:12:40,338 --> 00:12:41,904 and after destruction, 324 00:12:41,904 --> 00:12:43,681 and this is what brought 325 00:12:43,681 --> 00:12:45,369 the average rate of return 326 00:12:45,369 --> 00:12:47,158 after tax, after destruction, 327 00:12:47,158 --> 00:12:49,578 below the growth rate during a long time period. 328 00:12:49,578 --> 00:12:51,252 But without the destruction, 329 00:12:51,252 --> 00:12:53,727 without the taxation, this would not have happened. 330 00:12:53,727 --> 00:12:56,970 So let me say that the balance between 331 00:12:56,970 --> 00:12:59,326 returns on capital and growth 332 00:12:59,326 --> 00:13:01,188 depends on many different factors 333 00:13:01,188 --> 00:13:03,273 that are very difficult to predict: 334 00:13:03,273 --> 00:13:05,388 technology and the development 335 00:13:05,388 --> 00:13:07,972 of capital-intensive techniques. 336 00:13:07,972 --> 00:13:10,991 So right now, the most capital-intensive sectors 337 00:13:10,991 --> 00:13:14,367 in the economy are the real estate sector, housing, 338 00:13:14,367 --> 00:13:17,229 the energy sector, but it could be in the future 339 00:13:17,229 --> 00:13:20,941 that we have a lot more robots in a number of sectors 340 00:13:20,941 --> 00:13:22,830 and that this would be a bigger share 341 00:13:22,830 --> 00:13:24,740 of the total capital stock that it is today. 342 00:13:24,740 --> 00:13:26,734 Well, we are very far from this, 343 00:13:26,734 --> 00:13:28,500 and from now, what's going on 344 00:13:28,500 --> 00:13:30,289 in the real estate sector, the energy sector, 345 00:13:30,289 --> 00:13:32,415 is much more important for the total capital stock 346 00:13:32,415 --> 00:13:33,549 and capital share. 347 00:13:33,549 --> 00:13:35,582 The other important issue 348 00:13:35,582 --> 00:13:37,732 is that there are scale effects in portfolio management, 349 00:13:37,732 --> 00:13:40,151 together with financial complexity, 350 00:13:40,151 --> 00:13:41,601 financial deregulation, 351 00:13:41,601 --> 00:13:44,310 that make it easier to get higher rates of return 352 00:13:44,310 --> 00:13:45,937 for a large portfolio, 353 00:13:45,937 --> 00:13:48,600 and this seems to be particularly strong 354 00:13:48,600 --> 00:13:50,582 for billionaires, large capital endowments. 355 00:13:50,582 --> 00:13:52,872 Just to give you one example, 356 00:13:52,872 --> 00:13:56,205 this comes from the Forbes billionaire rankings 357 00:13:56,205 --> 00:13:59,535 over the 1987-2013 period, 358 00:13:59,535 --> 00:14:02,323 and you can see the very top wealth holders 359 00:14:02,323 --> 00:14:05,440 have been going up at six, seven percent per year 360 00:14:05,440 --> 00:14:07,831 in real terms above inflation, 361 00:14:07,831 --> 00:14:10,203 whereas average income in the world, 362 00:14:10,203 --> 00:14:11,566 average wealth in the world, 363 00:14:11,566 --> 00:14:14,949 have increased at only two percent per year. 364 00:14:14,949 --> 00:14:16,678 And you find the same 365 00:14:16,678 --> 00:14:17,954 for large university endowments — 366 00:14:17,954 --> 00:14:20,222 the bigger the initial endowments, 367 00:14:20,222 --> 00:14:22,290 the bigger the rate of return. 368 00:14:22,290 --> 00:14:23,968 Now, what could be done? 369 00:14:23,968 --> 00:14:26,364 The first thing is that I think we need 370 00:14:26,364 --> 00:14:28,479 more financial transparency. 371 00:14:28,479 --> 00:14:32,320 We know too little about global wealth dynamics, 372 00:14:32,320 --> 00:14:34,220 so we need international transmission 373 00:14:34,220 --> 00:14:35,482 of bank information. 374 00:14:35,482 --> 00:14:38,168 We need a global registry of financial assets, 375 00:14:38,168 --> 00:14:40,659 more coordination on wealth taxation, 376 00:14:40,659 --> 00:14:43,771 and even wealth tax with a small tax rate 377 00:14:43,771 --> 00:14:45,987 will be a way to produce information 378 00:14:45,987 --> 00:14:48,669 so that then we can adapt our policies 379 00:14:48,669 --> 00:14:50,505 to whatever we observe. 380 00:14:50,505 --> 00:14:52,343 And to some extent, the fight 381 00:14:52,343 --> 00:14:53,824 against tax havens 382 00:14:53,824 --> 00:14:55,639 and automatic transmission of information 383 00:14:55,639 --> 00:14:57,490 is pushing us in this direction. 384 00:14:57,490 --> 00:14:59,814 Now, there are other ways to redistribute wealth, 385 00:14:59,814 --> 00:15:02,771 which it can be tempting to use. 386 00:15:02,771 --> 00:15:04,127 Inflation: 387 00:15:04,127 --> 00:15:05,826 it's much easier to print money 388 00:15:05,826 --> 00:15:07,981 than to write a tax code, so that's very tempting, 389 00:15:07,981 --> 00:15:10,101 but sometimes you don't know what you do with the money. 390 00:15:10,101 --> 00:15:11,748 This is a problem. 391 00:15:11,748 --> 00:15:13,611 Expropriation is very tempting. 392 00:15:13,611 --> 00:15:15,872 Just when you feel some people get too wealthy, 393 00:15:15,872 --> 00:15:17,166 you just expropriate them. 394 00:15:17,166 --> 00:15:18,878 But this is not a very efficient way 395 00:15:18,878 --> 00:15:21,711 to organize a regulation of wealth dynamics. 396 00:15:21,711 --> 00:15:24,190 So war is an even less efficient way, 397 00:15:24,190 --> 00:15:26,526 so I tend to prefer progressive taxation, 398 00:15:26,526 --> 00:15:29,100 but of course, history — (Laughter) — 399 00:15:29,100 --> 00:15:30,835 history will invent its own best ways, 400 00:15:30,835 --> 00:15:32,533 and it will probably involve 401 00:15:32,533 --> 00:15:34,267 a combination of all of these. 402 00:15:34,267 --> 00:15:36,133 Thank you. 403 00:15:36,133 --> 00:15:38,270 (Applause) 404 00:15:38,270 --> 00:15:43,829 Bruno Giussani: Thomas Piketty. Thank you. 405 00:15:43,829 --> 00:15:45,708 Thomas, I want to ask you two or three questions, 406 00:15:45,708 --> 00:15:49,567 because it's impressive how you're in command of your data, of course, 407 00:15:49,567 --> 00:15:53,361 but basically what you suggest is 408 00:15:53,361 --> 00:15:54,934 growing wealth concentration is kind of 409 00:15:54,934 --> 00:15:56,858 a natural tendency of capitalism, 410 00:15:56,858 --> 00:16:00,396 and if we leave it to its own devices, 411 00:16:00,396 --> 00:16:02,636 it may threaten the system itself, 412 00:16:02,636 --> 00:16:04,362 so you're suggesting that we need to act 413 00:16:04,362 --> 00:16:07,400 to implement policies that redistribute wealth, 414 00:16:07,400 --> 00:16:09,121 including the ones we just saw: 415 00:16:09,121 --> 00:16:10,592 progressive taxation, etc. 416 00:16:10,592 --> 00:16:12,731 In the current political context, 417 00:16:12,731 --> 00:16:14,722 how realistic are those? 418 00:16:14,722 --> 00:16:16,533 How likely do you think that it is 419 00:16:16,533 --> 00:16:18,277 that they will be implemented? 420 00:16:18,277 --> 00:16:19,488 Thomas Piketty: Well, you know, I think 421 00:16:19,488 --> 00:16:21,269 if you look back through time, 422 00:16:21,269 --> 00:16:23,920 the history of income, wealth and taxation 423 00:16:23,920 --> 00:16:25,522 is full of surprise. 424 00:16:25,522 --> 00:16:28,127 So I am not terribly impressed 425 00:16:28,127 --> 00:16:29,695 by those who know in advance 426 00:16:29,695 --> 00:16:31,326 what will or will not happen. 427 00:16:31,326 --> 00:16:33,030 I think one century ago, 428 00:16:33,030 --> 00:16:34,599 many people would have said 429 00:16:34,599 --> 00:16:36,737 that progressive income taxation would never happen 430 00:16:36,737 --> 00:16:38,257 and then it happened. 431 00:16:38,257 --> 00:16:40,246 And even five years ago, 432 00:16:40,246 --> 00:16:42,598 many people would have said that bank secrecy 433 00:16:42,598 --> 00:16:44,623 will be with us forever in Switzerland, 434 00:16:44,623 --> 00:16:46,411 that Switzerland was too powerful 435 00:16:46,411 --> 00:16:47,900 for the rest of the world, 436 00:16:47,900 --> 00:16:50,861 and then suddenly it took a few U.S. sanctions 437 00:16:50,861 --> 00:16:53,483 against Swiss banks for a big change to happen, 438 00:16:53,483 --> 00:16:55,186 and now we are moving toward 439 00:16:55,186 --> 00:16:56,862 more financial transparency. 440 00:16:56,862 --> 00:17:01,143 So I think it's not that difficult 441 00:17:01,143 --> 00:17:03,612 to better coordinate politically. 442 00:17:03,612 --> 00:17:05,670 We are going to have a treaty 443 00:17:05,670 --> 00:17:08,719 with half of the world GDP around the table 444 00:17:08,719 --> 00:17:10,721 with the U.S. and the European Union, 445 00:17:10,721 --> 00:17:12,847 so if half of the world GDP is not enough 446 00:17:12,847 --> 00:17:15,513 to make progress on financial transparency 447 00:17:15,513 --> 00:17:19,597 and minimal tax for multinational corporate profits, 448 00:17:19,597 --> 00:17:21,261 what does it take? 449 00:17:21,261 --> 00:17:24,884 So I think these are not technical difficulties. 450 00:17:24,884 --> 00:17:26,808 I think we can make progress 451 00:17:26,808 --> 00:17:29,395 if we have a more pragmatic approach to these questions 452 00:17:29,395 --> 00:17:31,296 and we have the proper sanctions 453 00:17:31,296 --> 00:17:34,287 on those who benefit from financial opacity. 454 00:17:34,287 --> 00:17:35,940 BG: One of the arguments 455 00:17:35,940 --> 00:17:37,373 against your point of view 456 00:17:37,373 --> 00:17:38,815 is that economic inequality 457 00:17:38,815 --> 00:17:42,452 is not only a feature of capitalism but is actually one of its engines. 458 00:17:42,452 --> 00:17:45,253 So we take measures to lower inequality, 459 00:17:45,253 --> 00:17:47,660 and at the same time we lower growth, potentially. 460 00:17:47,660 --> 00:17:49,220 What do you answer to that? 461 00:17:49,220 --> 00:17:50,949 TP: Yeah, I think inequality 462 00:17:50,949 --> 00:17:52,838 is not a problem per se. 463 00:17:52,838 --> 00:17:54,878 I think inequality up to a point 464 00:17:54,878 --> 00:17:57,530 can actually be useful for innovation and growth. 465 00:17:57,530 --> 00:17:59,723 The problem is, it's a question of degree. 466 00:17:59,723 --> 00:18:02,267 When inequality gets too extreme, 467 00:18:02,267 --> 00:18:05,156 then it becomes useless for growth 468 00:18:05,156 --> 00:18:06,618 and it can even become bad 469 00:18:06,618 --> 00:18:09,675 because it tends to lead to high perpetuation 470 00:18:09,675 --> 00:18:11,311 of inequality over time 471 00:18:11,311 --> 00:18:13,177 and low mobility. 472 00:18:13,177 --> 00:18:16,463 And for instance, the kind of wealth concentrations 473 00:18:16,463 --> 00:18:19,340 that we had in the 19th century 474 00:18:19,340 --> 00:18:21,265 and pretty much until World War I 475 00:18:21,265 --> 00:18:23,030 in every European country 476 00:18:23,030 --> 00:18:25,124 was, I think, not useful for growth. 477 00:18:25,124 --> 00:18:27,226 This was destroyed by a combination 478 00:18:27,226 --> 00:18:29,567 of tragic events and policy changes, 479 00:18:29,567 --> 00:18:31,839 and this did not prevent growth from happening. 480 00:18:31,839 --> 00:18:35,282 And also, extreme inequality can be bad 481 00:18:35,282 --> 00:18:37,480 for our democratic institutions 482 00:18:37,480 --> 00:18:39,863 if it creates very unequal access to political voice, 483 00:18:39,863 --> 00:18:41,728 and the influence of private money 484 00:18:41,728 --> 00:18:43,730 in U.S. politics, I think, 485 00:18:43,730 --> 00:18:46,270 is a matter of concern right now. 486 00:18:46,270 --> 00:18:49,346 So we don't want to return to that kind of extreme, 487 00:18:49,346 --> 00:18:51,436 pre-World War I inequality. 488 00:18:51,436 --> 00:18:55,110 Having a decent share of the national wealth 489 00:18:55,110 --> 00:18:58,500 for the middle class is not bad for growth. 490 00:18:58,500 --> 00:18:59,781 It is actually useful 491 00:18:59,781 --> 00:19:02,865 both for equity and efficiency reasons. 492 00:19:02,865 --> 00:19:04,530 BG: I said at the beginning 493 00:19:04,530 --> 00:19:06,639 that your book has been criticized. 494 00:19:06,639 --> 00:19:07,880 Some of your data has been criticized. 495 00:19:07,880 --> 00:19:10,346 Some of your choice of data sets has been criticized. 496 00:19:10,346 --> 00:19:12,222 You have been accused of cherry-picking data 497 00:19:12,222 --> 00:19:14,959 to make your case. What do you answer to that? 498 00:19:14,959 --> 00:19:16,886 TP: Well, I answer that I am very happy 499 00:19:16,886 --> 00:19:19,353 that this book is stimulating debate. 500 00:19:19,353 --> 00:19:21,834 This is part of what it is intended for. 501 00:19:21,834 --> 00:19:25,128 Look, the reason why I put all the data online 502 00:19:25,128 --> 00:19:26,974 with all of the detailed computation 503 00:19:26,974 --> 00:19:29,308 is so that we can have an open and transparent 504 00:19:29,308 --> 00:19:30,977 debate about this. 505 00:19:30,977 --> 00:19:32,743 So I have responded point by point 506 00:19:32,743 --> 00:19:34,535 to every concern. 507 00:19:34,535 --> 00:19:37,648 Let me say that if I was to rewrite the book today, 508 00:19:37,648 --> 00:19:39,189 I would actually conclude 509 00:19:39,189 --> 00:19:41,383 that the rise in wealth inequality, 510 00:19:41,383 --> 00:19:43,310 particularly in the United States, 511 00:19:43,310 --> 00:19:45,683 has been actually higher than what I report in my book. 512 00:19:45,683 --> 00:19:48,928 There is a recent study by Saez and Zucman 513 00:19:48,928 --> 00:19:50,520 showing, with new data 514 00:19:50,520 --> 00:19:52,297 which I didn't have at the time of the book, 515 00:19:52,297 --> 00:19:54,824 that wealth concentration in the U.S. has risen 516 00:19:54,824 --> 00:19:56,760 even more than what I report. 517 00:19:56,760 --> 00:19:58,791 And there will be other data in the future. 518 00:19:58,791 --> 00:20:00,942 Some of it will go in different directions. 519 00:20:00,942 --> 00:20:05,041 Look, we put online almost every week 520 00:20:05,041 --> 00:20:07,975 new, updated series on the World Top Income Database 521 00:20:07,975 --> 00:20:09,875 and we will keep doing so in the future, 522 00:20:09,875 --> 00:20:12,181 in particular in emerging countries, 523 00:20:12,181 --> 00:20:15,110 and I welcome all of those who want to contribute 524 00:20:15,110 --> 00:20:17,456 to this data collection process. 525 00:20:17,456 --> 00:20:20,264 In fact, I certainly agree 526 00:20:20,264 --> 00:20:21,878 that there is not enough 527 00:20:21,878 --> 00:20:23,756 transparency about wealth dynamics, 528 00:20:23,756 --> 00:20:25,671 and a good way to have better data 529 00:20:25,671 --> 00:20:27,536 would be to have a wealth tax 530 00:20:27,536 --> 00:20:29,107 with a small tax rate to begin with 531 00:20:29,107 --> 00:20:31,446 so that we can all agree 532 00:20:31,446 --> 00:20:33,010 about this important evolution 533 00:20:33,010 --> 00:20:36,337 and adapt our policies to whatever we observe. 534 00:20:36,337 --> 00:20:38,399 So taxation is a source of knowledge, 535 00:20:38,399 --> 00:20:41,335 and that's what we need the most right now. 536 00:20:41,335 --> 00:20:43,150 BG: Thomas Piketty, merci beaucoup. 537 00:20:43,150 --> 00:20:47,150 Thank you. TP: Thank you. (Applause)