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Okay, so it's very nice to be here tonight.
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So I've been working on the history of income
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and wealth distribution for the past 15 years,
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and one of the interesting lessons
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coming from this historical evidence
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is indeed that, in the long run,
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there is a tendency for the rate of return of capital
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to exceed the economy's growth rate,
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and this tends to lead to high concentration of wealth,
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not infinite concentration of wealth,
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but the higher of the gap between r and g
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and the higher of the level of inequality of wealth
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towards society tends to converge.
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So this is a key force that
I'm going to talk about today,
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but let me say right away
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that this is not the only important force
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in the dynamics of income and wealth distribution,
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and there are many other forces that play
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an important role in the long run dynamics
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of income and wealth distribution.
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Also, you know, there is a lot of data
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that still needs to be collected,
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so, you know, we know a little bit more today
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than we used to know, but we still know too little,
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and, you know, certain there
are many different processes
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— economic, social, political —
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that need to be studied more.
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And so I'm going to focus today on this simple force,
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but that doesn't mean that other important forces
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do not exist.
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So most of the data I'm going to present
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comes from this database
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that's available online:
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the World Top Incomes Database.
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So this is the largest existing
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historical database on equality,
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and this comes from the effort
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of over 30 scholars from several dozen countries.
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So let me show you a couple of facts
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coming from this database,
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and then we'll return to r > g.
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So fact number one is that there has been
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a big reversal in the ordering of income inequality
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between the United States and Europe
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over the past century.
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So back in 1900, 1910, income inequality was actually
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much higher in Europe than in the United States,
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whereas today, it is a lot higher in the United States.
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So let me be very clear:
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the main explanation for this is not r > g.
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It has more to do with changing supply and demand
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for skill, the race between education and technology,
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globalization, probably more unequal access
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to skills in the U.S.,
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where you have very good, very top universities
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but where the bottom part of the educational system
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is not as good,
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so very unequal access to skills,
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and also an unprecedented rise
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of top managerial compensation of the United States,
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which is difficult to account for
just on the basis of education.
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So there is more going on here,
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but I'm not going to talk too much about this today,
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because I want to focus on wealth inequality.
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So let me just show you a very simple indicator
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about the income inequality part.
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So this is the share of total income
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going to the top 10 percent.
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So you can see that one century ago,
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it was between 45 and 50 percent in Europe
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and a little bit over 40 percent in the U.S.,
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so there was more inequality in Europe.
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Then there was a sharp decline
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during the first half of the 20th century,
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and in the recent decade, you can see that
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the U.S. has become more unequal than Europe,
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and this is the first fact I just talked about.
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Now, the second fact is more about wealth inequality,
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and here the central fact is that wealth inequality
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is always a lot higher than income inequality,
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and also that wealth inequality,
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although it has also increased in recent decades,
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is still less extreme today
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than what it was a century ago,
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although the total quantity of wealth
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relative to income has now recovered
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from the very large shocks
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caused by World War I, the Great Depression,
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World War II.
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So let me show you two graphs
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illustrating fact number two and fact number three.
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So first, if you look at the level of wealth inequality,
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so this is the share of total wealth
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going to top 10 percent wealthholders,
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so you can see the same kind of reversal
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between the U.S. and Europe that we had before
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for income inequality.
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So wealth concentration was higher
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in Europe than in the U.S. a century ago,
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and now it is the opposite.
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But you can also show two things:
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first, the general level of wealth inequality
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are always higher than income inequality.
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So remember, for income inequality,
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the share going to the top 10 percent
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was between 30 and 50 percent of total income,
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whereas for wealth, the share are always
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between 60 and 90 percent.
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Okay, so that's fact number one,
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and that's very important for what follows.
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Wealth concentration is always
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a lot higher than income concentration.
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Fact number two is that the rise
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in wealth inequality in recent decades
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is still not enough to get us back to 1910.
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So the big difference today,
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wealth inequality is still very large,
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with 60, 70 percent of total wealth for the top 10,
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but the good news is that it's actually
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better than one century ago,
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where you had 90 percent in
Europe going to the top 10.
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So today what you have
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is what I call the middle 40 percent,
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the people who are not in the top 10
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and who are not in the bottom 50,
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and what you can view as the wealth middle class
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that owns 20 to 30 percent
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of total wealth, national wealth,
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whereas they used to be as poor, a century ago,
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when there was basically no wealth middle class.
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So this is an important change,
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and it's interesting to see that wealth inequality
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has not fully recovered to pre-World War I levels,
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although the total quantity of wealth has recovered.
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Okay? So this is the total value
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of wealth relative to income,
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and you can see that in particular in Europe,
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we are almost back to the pre-World War I level.
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So these are, there are really two
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different parts of the story here.
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One has to do with
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the total quantity of wealth that will accumulate,
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and there is nothing bad per se of course
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in accumulating a lot of wealth,
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and in particular if it is more diffuse
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and less concentrated.
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So what we really want to focus on
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is the long-run evolution of wealth inequality,
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and what's going to happen in the future.
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How can we account for the fact that
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until World War I, wealth inequality was so high
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and if anything was rising to even higher levels,
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and how can we think about the future?
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So let me come to some of the explanations
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and speculations about the future.
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Let me first say that, you know,
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probably the best model to explain
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why wealth is so much
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more concentrated than income
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is dynamic, dynastic models
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where individuals have long horizon
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and accumulate wealth for all sorts of reasons.
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If people were accumulating wealth
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only for life cycle reasons,
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you know, to be able to consume
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when they are old,
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then the level of wealth inequality
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should be more or less in line
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with the level of income inequality.
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But it will be very difficult to explain
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why you have so much more wealth inequality
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than income inequality
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with a pure a life cycle model,
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so you need a story
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where people also care
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about wealth accumulation for other reasons.
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So typically, they want to transmit
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wealth to the next generation, to their children,
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or sometimes they want to accumulate wealth
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because of the prestige, the
power that goes with wealth.
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So there must be other reasons
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for accumulating wealth than just life cycle
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to explain what we see in the data.
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Now, in a [???] of dynamic models
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of wealth accumulation
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with such dynastic motive for accumulating wealth,
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so you will have all sorts of random,
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multiplicative shocks.
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So for instance, you know, some families
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have a very large number of children,
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so the wealth will be divided.
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Some families have fewer children.
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You also have shocks to rates of return.
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You know, some family make huge capital gains.
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Some made bad investments.
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So you will always have some mobility
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in the wealth process.
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Some people will move up,
some people will move down.
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The important point is that,
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in any such model,
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for a given variance of such shocks,
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the equilibrium level of wealth inequality
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will be a steeply rising function of r - g.
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And intuitively, the reason why the difference
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between the rate of return to wealth
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and the growth rate is important
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is that initial wealth inequalities
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will be amplified at a faster pace
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with a bigger r - g.
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So take a simple example,
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with r = five percent and g = one percent,
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wealth holders only need to reinvest
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one fifth of their capital income to ensure
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that their wealth rises as fast
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as the size of the economy. Okay?
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So this makes it easier
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to build and perpetuate large fortunes
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because you can consume four fifths,
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assuming zero tax,
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and you can just reinvest one fifth.
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So of course some families
will consume more than that,
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some will consume less, so there will be
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some mobility in the distribution,
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but on average, they only need to reinvest one fifth,
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so this allows high wealth inequalities to sustain.
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Now, you should not be surprised
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by the statement that r can be bigger than g forever,
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because in fact, this is what happened
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during most of the history of mankind,
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and this was in a way very obvious to everybody
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for a simple reason, which is that growth
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was close to zero percent
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during most of the history of mankind.
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Growth was maybe 0.1, 0.2, 0.3 percent,
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but very slow growth of population
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and output per capita,
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whereas the rate of return to capital
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of course was not zero percent.
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It was, for land assets, which was
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the traditional form
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of assets in pre-industrial societies,
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it was typically five percent.
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So, you know, any reader of [Genostine?]
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would know that.
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If you want an annual income of 1,000 pounds,
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you should have a capital value
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of 20,000 pounds so that
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five percent of 20,000 is one thousand.
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And in a way, this was
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the very foundation of society,
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because this is what r > g
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was what allowed holders of wealth and assets
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to live off their capital income
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and to do something else in life
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than just to care about their own survival.
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Now, one important conclusion
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of my historical research is that
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modern industrial growth did not change
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this basic fact as much as one might have expected.
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Of course, the growth rate
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following the Industrial Revolution
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rose, typically from zero to one to two percent,
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but at the same time, the rate of return
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to capital also rose
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so that the gap between the two
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did not really change.
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So during the 20th century,
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you had a very unique combination of events.
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You know, first, a very low rate of return
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due to the 1914 and 1945 war shocks,
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destruction of wealth, inflation,
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bankruptcy during the Great Depression,
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and all of this reduced
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the private rate of return to wealth
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to unusually low levels
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between 1914 and 1945.
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And then, in the postwar period,
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you had unusually high growth rate,
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partly due to the reconstruction.
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You know, in Germany, in France, in Japan,
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you had five percent growth rate
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between 1950 and 1980
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largely due to reconstruction,
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and also due to very large demographic growth,
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you know, the baby boom effect.
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Now, apparently that's not going to last for very long,
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or at least the population growth
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is supposed to decline in the future,
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and the best projections we have is that
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the long run growth is going to be closer
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to one to two percent
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rather than four to five percent.
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So if you look at this,
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these are the best estimates we have
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of world GDP growth
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and rate of return to capital,
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average rates of return to capital,
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so you can see that during most
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of the history of mankind,
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the growth rate was very small,
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much lower than the rate of return,
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and then during the 20th century,
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it is really the population growth,
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very high in the postwar period,
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and the reconstruction process
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that brought growth
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to a smaller gap with the rate of return.
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Here I use the United Nations population projections,
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so, you know, of course they are uncertain.
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It could be that we all start
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having a lot of children in the future,
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and the growth rates are going to be higher,
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but from now on,
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these are the best projections we have,
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and this will make global growth
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decline and the gap between
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the rate of return go up.
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Now, the other unusual event
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during the 20th century
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was, as I said,
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destruction, taxation of capital,
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so this is the pre-tax rate of return.
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This is the after tax rate of return,
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and after destruction,
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and this is what brought
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the average rate of return
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after tax, after destruction,
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below the growth rate during a long time period.
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But without the destruction,
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without the taxation, this would not have happened.
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Okay? So let me say that the balance between
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returns on capital and growth
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depends on many different factors
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that are very difficult to predict, you know:
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technology and the development
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of capital-intensive techniques.
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So right now, the most capital-intensive sectors
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in the economy are the real estate sector, housing,
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the energy sector, but it could be in the future
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that we have a lot more robots in a number of sectors
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and that this would be a bigger share
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of the total capital stock that it is today.
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Well, we are very far from this,
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and from now, what's going on
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in the real estate sector, the energy sector,
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is much more important for the total capital stock
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and capital share.
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The other important issue
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is that there are scale effects
in portfolio management,
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together with financial complexity,
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financial deregulation,
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that make it easier to get higher rates of return
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for a large portfolio,
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and this seems to be particularly strong
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for billionaires, large capital endowments.
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Just to give you one example,
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this comes from the Forbes billionaire rankings
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over the 1987-2013 period,
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and you can see the very top wealth holders
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have been going up at six, seven percent per year
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in real terms above inflation,
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whereas average income in the world,
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average wealth in the world,
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have increased at only two, two percent per year.
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Okay? And you find the same
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for large university endowments.
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You know, the bigger the initial endowments,
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the bigger the rate of return.
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Now, what could be done?
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The first thing is that I think we need
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more financial transparency.
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We know too little about global wealth dynamics,
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so we need international transmission
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of bank information.
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We need a global registry of financial assets,
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more coordination on wealth taxation,
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and even wealth tax with a small tax rate
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will be a way to produce information
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so that then we can adapt our policies
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to whatever we observe.
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And to some extent, you know, the fight
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against tax havens
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and automatic transmission of information
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is pushing us in this direction.
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Now, there are other ways to redistribute wealth,
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you know, which it can be tempting to use.
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You know, inflation:
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it's much easier to print money
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than to write a tax code, so that's very tempting,
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but sometimes you don't know
what you do with the money.
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This is a problem.
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Expropriation is very tempting.
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Just when you feel some people get too wealthy,
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you just expropriate them.
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But this is not a very efficient way
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to organize a regulation of wealth dynamics.
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So war is an even less efficient way,
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so I tend to prefer progressive taxation,
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but of course, history — (Laughter) —
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history will invent its own best ways,
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and it will probably involve
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a combination of all of these.
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Thank you.
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(Applause)
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Moderator: Thomas Piketty. Thank you.
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Thomas, I want to ask you two or three questions,
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because it's impressive how you're
in command of your data, of course,
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but basically what you suggest is
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growing wealth concentration is kind of
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a natural tendency of capitalism,
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and if we leave it to its own devices,
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it may threaten the system itself,
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so you're suggesting that we need to act
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to implement policies that redistribute wealth,
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including the ones we just saw:
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progressive taxation, etc.
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In the current political context,
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how realistic are those?
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How likely do you think that it is
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that they will be implemented?
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Thomas Piketty: Well, you know, I think
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if you look back through time,
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the history of income, wealth, and taxation
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is full of surprise.
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So I am not terribly impressed
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by those who know in advance
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what will or will not happen.
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I think one century ago,
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many people would have said
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that progressive income taxation would never happen
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and then it happened.
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And even five years ago,
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many people would have said that bank secrecy
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will be us forever in Switzerland,
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that Switzerland was too powerful
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for the rest of the world,
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and then suddenly it took a few U.S. sanctions
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against Swiss banks for a big change to happen,
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and now we are moving toward
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more financial transparency.
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So, you know, I think it's not that difficult
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to better coordinate politically.
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We are going to have a treaty
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with half of the world GDP around the table
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with the U.S. and the European Union,
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so, you know, if half of the world GDP is not enough
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to make progress on financial transparency
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and minimal tax for multinational corporate profits,
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what does it take?
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So I think these are not technical difficulties.
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I think we can make progress
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if we have a more pragmatic
approach to these questions
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and we have the proper sanctions
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on those who benefit from financial opacity.
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Moderator: One of the arguments
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against your point of view
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is that economic inequality
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is not only a feature of capitalism
but is actually one of its engines.
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So we take measures to lower inequality,
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and at the same time we lower growth, potentially.
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What do you answer to that?
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TP: Yeah, I think inequality
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is not a problem per se.
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I think inequality up to a point
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can actually be useful for innovation and growth.
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The problem is, it's a question of degree.
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When inequality gets too extreme,
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then it becomes useless for growth
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and it can even become bad
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because it tends to lead to high perpetuation
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of inequality over time
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and low mobility.
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And for instance, the kind of wealth concentrations
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that we had in the 19th century
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and pretty much until World War I
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in every European country
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was, I think, not useful for growth.
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This was destroyed by a combination
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of tragic events and policy changes,
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and this did not prevent growth from happening.
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And also, extreme inequality can be bad
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for our democratic institutions
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if it creates very unequal access to political voice,
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and the influence of private money
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in U.S. politics I think
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is a matter of concern right now.
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So we don't want to return to that kind of extreme,
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pre-World War I inequality.
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Having a decent share of the national wealth
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for the middle class is not bad for growth.
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It is actually useful
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both for equity and efficiency reasons.
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Moderator: I said at the beginning
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that your book has been criticized.
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Some of your data has been criticized.
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Some of your choice of data sets has been criticized.
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You have been accused of cherry-picking data
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to make your case. What do you answer to that?
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TP: Well, I answer that I am very happy
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that this book is stimulating debate.
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This is part of what it is intended for.
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Look, the reason why I put all the data online
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with all of the detailed computation
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is that so we can have an open and transparent
-
debate about this.
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So I have responded point by point
-
to every concern.
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Let me say that if I was to rewrite the book today,
-
I would actually conclude
-
that the rise in wealth inequality,
-
particularly in the United States,
-
has been actually higher
than what I report in my book.
-
There is a recent study by Saez and Zucman
-
showing with new data
-
which I didn't have at the time of the book
-
that wealth concentration in the U.S. has risen
-
even more than what I report.
-
And there will be other data in the future.
-
Some of it will go in different directions.
-
Look, we put online almost every week
-
new updated series on the
World Top Income Database
-
and we will keep doing so in the future,
-
in particular in emerging countries,
-
and I welcome all of those who want to contribute
-
to this data collection process.
-
In fact, I certainly agree
-
that there is not enough
-
transparency about wealth dynamics,
-
and a good way to have better data
-
would be to have a wealth tax
-
with small tax rate to begin with
-
so that we can all agree
-
about this important evolution
-
and adapt our policies to whatever we observe.
-
So taxation is a source of knowledge,
-
and that's what we need the most right now.
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Thomas Piketty: Thomas Piketty, merci beaucoup.
-
Thank you.
TP: Thank you. (Applause)