Weekend Reading: Capital

In Capital in the Twenty-First Century, Thomas Piketty argues that if the rate of return on capital is persistently greater than the rate of economic growth this will cause wealth inequality to increase in the future. The theory is that wealth accumulated in the past grows more rapidly than output and wages.

It’s a great macroeconomics book, rich with data and insight. But it’s still about macroeconomics. So it’s not going to keep you up late into the night turning pages to see what happens.

I came to the book with some base beliefs. I think inequality is a good thing. I believe you should be able to elevate your wealth through hard work and education. That’s the American Dream. (Conversely, I believe your wealth should decrease through a lack of hard work and a lack of education.)

Measurements of inequality are imperfect because the distribution of the have and have-nots changes over time. If you look at the Forbes 400 ranking of the wealthiest Americans from 1987 to 2013, there is a great deal of turnover. New wealth moves up and old wealth is lost through heavy spending, large-scale philanthropy, and bad investing. Only 35 people from the original 1982 list remained on it in 2013. Piketty blows up this belief.

I believe there are two problems with wealth inequality. Obviously too much of a good thing is bad thing. We should not live in a world of lords and peasants. Too much inequality is a problem. Moderate inequality should give you an incentive to strive for more. Stark inequality could lead to a violent political reaction.

The bigger problem with inequality is when the boundaries become impermeable, leaving a person unable to move up on the scale on wealth. Through hard work and education you should be able in increase your wealth. If wealth inequality becomes too extreme that mobility disappears.

There are two elements to wealth: income and capital. Trends in income are relatively easy to obtain data. Income tax filings provide a wealth of information for researchers. Capital is harder to work with because the measurements are bit less reliable.

That has been the sources of some controversy. The Financial Times looked at different data sources and came to a different position on the disparity. Piketty has made his data available: http://piketty.pse.ens.fr/en/capital21c2. He admits that the data is imperfect and incomplete. He is not trying to prove mathematical certainties, but create social science research for open debate.

Piketty’s central thesis is that we should be concerned when the concentration of capital attains extremely high levels and that we are heading towards that concentration. The western countries were approaching high levels of concentration at the beginning of the 20th Century. WWI and WWII annihilated millions of lives. The wars also destroyed accumulated wealth, crushing the accumulated inequality.

Piketty’s data indicates that in the decades since end of WWII wealth is once again concentrating. In the United States the upper decile’s share of the national income increased from 20 to 35 percent in the 1970s to 45-50 percent in the 2000s.

The data is is incomplete because there is no regular accounting of wealth on a regular basis as there is for income with income tax filings. One of the reasons Piketty proposes a tax on capital is so that wealth can be tracked.

A tax on capital is not that unusual. Most people in the United States are already subject to one: real estate property taxes. The government regularly reviews the value of real estate and levies a tax based on the value.

Obviously, a tax on securities and cash is much, much harder to implement since those forms of capital can move so easily and quickly across borders. That means a tax on capital would have to be implemented uniformly across international borders.

One interesting aspect of Piketty’s book is that so many have started reading it but not finished. As I said above, it’s a best selling macroeconomics book, but it’ still a macroeconomics book. An analysis of Amazon Kindle users found that just 2.4% of readers highlighted passages beyond the 26^th page, with the Wall Street Journal proclaiming it the summer’s “Most Unread Book.” I

The first 250 pages are background and macroeconomic analysis that builds his case for the second half of the book. It’s this second half where all of his interesting ideas and analysis occur.

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