Saturday, July 4, 2015

Capital in the 21st Century - Thomas Piketty

When was the last time you read something to understand a viewpoint?  Remember reading a textbook for class that presented historical data analysis to identify trends and then predicted the impact of those trends on the future, ending with recommendations for addressing those future outcomes?  That is, when did you last read something that made you think hard?  This book was a real exercise for my thinking.

I remember taking a class my junior year of college called “Money and Banking”.  It was heavy on economic theory (M1 and M2, as I recall) and pushed the limits of my understanding.  It must have planted a seed though because when I heard of this book I reserved it at the library to see what all the fuss was about.  It has stirred a lot of discussion about the best ways to address the inequalities of wealth in the world.

To start with, you have to accept that there are inequalities (there will always be the poor among us) and that it is something that should be addressed because it leads to conflict.  

I’m all for some having more than others.  It just doesn’t make sense to me that everyone with their individual uniqueness should have exactly equal levels of wealth, as measured by income and capital, so I’m not advocating the dreaded “redistribution of wealth” theory.  

It’s the extremes that I believe should be eliminated, and not just at the bottom of the pile.  “The rich get richer and the poor get poorer” is not inevitable in my way of thinking.  For Piketty, his research indicates it may be and he proposes ways to prevent it.

Specifically, he recommends a global, progressive annual capital tax that would impact the highest income levels. This would be a tax on wealth, i.e., what you own in terms of land (the traditional asset), goods (buildings, houses, companies) and financial investments (stocks, bonds and the like).  The proposal has created a firestorm of controversy that no doubt has others struggling to read this tome, which is a good exercise in my opinion.  His recommendation rests a lot on the assumption of continuing low growth for the foreseeable future, something his critics have pounced on. 

Piketty comes to his recommendation by analyzing income and capital and labor wages and growth rates over the last three centuries, since the beginning of modern industrial civilization or the late 1700’s to the present.  This is no small feat.  There’s lots of scholarly explanation that requires re-reading and breaks from reading to process, sort of like interval running.

There are many more tidbits drawn from his research; I made note of those that struck me and list them for my own reference.  I’m glad I struggled through this book and would recommend it for those looking for a 10K level of reading.

Published: 2014  Read:  June-July 2015  Genre: Non-fiction, Economics

Quotes and notes:

P22 over a long period of time the main force in favor of greater equality has been the diffusion of knowledge and skills.

Capital income ratio – concept that income is a flow of good produced and distributed in a timeframe (usually a year) and capital is a stock, the total wealth owned at a particular time that came from wealth either appropriated or accumulated over time.  The ratio of a nation’s capital to income (he represents with the Greek letter “B”) has historically been that capital is 5 to 6 times greater than income.

Definition of the word “autarky” - the quality of being self-sufficient. Usually the term is applied to political states or their economic systems.

Diffusion of knowledge has been main contributor to global growth and equality.
[This book contributes to that growth]

P 88 according to UN, India will be most populous county in the world by 2020.

P 121 the advantage of owning things is that one can continue to consume and accumulate without having to work

P 224 some people think we’ve gone from a civilization based on capital, inheritance and kinship to one based on human capital and talent…capital has not disappeared.

P 244 Inequality in respect to capital is always greater than inequality in respect to labor (wages).  Income from capital distribution is always greater than income from labor.

P 246 Intergenerational warfare has not replaced class warfare.

P 278 [wealth was concentrated (held by a small % of population) before WWI – WWI and II readjusted playing field due to highly progressive tax on income and inheritance that did not exist before 1920 but it has been re-established almost to the same levels by 2010]    Bottom line is there are more with ridiculous income from labor in 21st century.

P 279 Income from capital rises sharply and income from labor decreases rapidly at top of income levels.

P 290  In U.S. the top 10% share of wealth went from 30-35% of national income to 45-50% from 1970 to 2010.

P 297 In his mind, no doubt that the increase in inequality contributed to the financial crisis of 2008-09.  From 1977-2007, richest 10% in US got 75% of growth.  Top 1% got 60% of the increase in income.  Bottom 90% ratio of income growth was less than 0.5 % per year.  Low growth was a major factor.

P 302 The top 0.1% (centile) of the population by income or wealth consists of top managers (of organizations)

P 307 Over long run, education and technology are decisive determinants of wage levels.

P 333 Change in senior management compensation has played key role in evolution of wage inequality

P 335 phenomenon of “pay for luck” – when sales and profits increase for external [to the organization] reasons, exec pay rises most rapidly.

P 375 Inequality of wealth would not return to 19th century levels because of taxes, decrease in capital’s share of income, the rate of return on capital and income rate of growth compared to 19th century.

P 377 Inheritance will predominate over savings (r > g) because the rate of return on capital is greater than the growth rate

P 406 For cohorts born 1970-1980 inheritance is 22 to 24% of total resources.  Baby boomers had to make it on their own.

P 416 Thinking in the 19th century was that if there had not been a sufficient wealthy minority, no one would have been able to worry about anything but survival.

P 417 Thinking in the 20th century was that without high pay to execs only heirs of large fortunes would be able to achieve true wealth, which is unfair and therefore high pay is a form of social justice.  This is meritocratic extremism, the idea that pay levels are awarded based on merit and contributing to social justice is part of the merit.

P 421 In 1970-80 cohort, 12-14% will receive inheritance equivalent to a lifetime of labor income received by the bottom 50%.

P 444 [recommends] a progressive annual tax on the largest fortunes worldwide [to close inequality gap]

P 453 Inflation is a tax on wealth that is not invested.

P 463 [argues that ownership of a country by other countries is less a threat than ownership by its own and the world’s super rich.]

P 477 Historic increase in government tax revenues during the 20th century were used to pay for the creation of the social state.

P 478 Fiscal revolution of 20th century made possible the social revolutions of access to education, health and security in retirement (public pensions).

P 479 total social spending of 25-35% of national income – reflects constitution [creation] of the social state.

P 480 fundamental social rights – access to education, health and retirement.

P 486 No easy way to achieve real equality of education.

P 489  PAYGO systems [like social security where past generation supports/pays for the present] will continue because converting to other method leaves a generation out.

P 490 One of the most important reforms for 21st century to make is to establish a unified retirement scheme with equal rights for everyone regardless of complexity of career path.

P 512 Skyrocketing exec pay is explained by bargaining model [lower marginal tax rates encourage negotiation for higher pay].

P 514 – the New World may be on verge of becoming the Old Europe of 21st century’s globalized economy [because of trend toward lower progressive income tax].

P 521 Proposes a global progressive annual capital tax fed by automated reporting of all assets, not just income.

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