Friday, May 16, 2014

Piketty: Global Inequality of Wealth in the 21st Century

Mostly, under advanced capitalism, people get rich by inheritance, writes Thomas Piketty in Capital in the Twenty-First Century.  In other words, inequality of wealth is perpetuated by inheritance. Now he turns to the question of global wealth inequality.  "Is there a danger that the forces of financial globalization" will lead to an unprecedented "concentration of capital"?  Unfortunately we lack global wealth data equivalent to the French record-keeping inspired by the French Revolution, so Piketty will examine global wealth through proxies, like magazine rankings of rich businessmen and fragmentary data on sovereign wealth funds and US university endowments.

You would think that capital is capital, and that "the return on capital is the same for all owners".  But Piketty will show that there are economies of scale in wealth, and that richer capitalists get a bigger return than small capitalists, and that "such a mechanism can automatically lead to a radical divergence in the distribution of capital."  Piketty appeals once again to his r > g inequality.

According to Forbes magazine's annual list of billionaires published since 1987 there were "over 140 billionaires in 1987" but "more than 1,400" in 2013.  A Japanese billionaire led the list in the late 1980s, an American in the late 1990s.  Since 2010 the richest billionaire has been a Mexican.  And those billionaires have been making billions on their billions. Piketty shows a table in which the top wealth holders have made a post inflation 6.8% per year on their money while the average world wealth per adult has gone up 2.1% a year.  So the share of the global richest has been going up.  Where could this end?  How about "impoverishment of the middle class", "explosive trajectories and uncontrolled inegalitarian spirals."

In his analysis of the Forbes rankings Piketty intuits that "all large fortunes" grow at extremely high rates.  Entrepreneur Bill Gates went from $4 billion to $50 billion, and L'Oréal heiress Liliane Bettencourt -- "who never worked a day in her life" -- went from $2 billion to $25 billion.  That's 11% rate of return after inflation.  Beyond a certain size "capital grows according to a dynamic of its own", maybe for decades and "nearly all the income on this capital can be plowed back into investment."

There isn't much data for global wealth, but Piketty estimates that "inherited wealth accounts for more than half of the total amount of the largest fortunes worldwide."  Regardless of "sterile debate about merit and wealth" "fortunes can grow and perpetuate themselves beyond all reasonable limits" and justification in "social utility." An entrepreneur may have amazing ideas at 40, but hardly any at 90, and forget the children.  So a "progressive annual tax on the largest fortunes worldwide" would control a "potentially explosive process."  The return on capital comes partly from "true entrepreneurial labor... pure luck... and outright theft" as suggested by examples from Carlos Slim, Bill Gates, and Lakshmi Mittal.   It is arbitrary.  "[P]roperty sometimes begins with theft, and the arbitrary return on capital can easily perpetuate the initial crime."

It's not just big businessmen that get outsized returns on capital.  The endowments of US universities averaged a real rate of return of 8.2% from 1980 to 2010.  And the biggest earned the most, with Harvard, Yale and Princeton coming in at a return of 10.2%.  The reason the biggest do the best seems to be that they employ more sophisticated investment strategies, "such as shares in private equity funds and unlisted foreign stocks... hedge funds, derivatives," etc. Harvard, with an endowment of $30 billion, spends $100 million a year managing its portfolio.  Of course, the very high returns of 1980-2010 may not continue. But, for Piketty, the institutions have one up on family wealth because of the "ability to choose the right managers."  Families end up sooner or later with the prodigal son.

How does inflation enter into all this?  Probably by helping the people that can afford professional help on their investments, so inflation probably works against the small investor.  But not enough to justify "a return to the gold standard or zero inflation."

Today there are a number of sovereign wealth funds generally in oil-rich states, from Norway with $700 billion in assets to less transparent funds in the Persian Gulf.  According to estimates there is $5.3 trillion in these funds, compared with $5.4 trillion owned by the Forbes billionaires. It is natural to worry that these sovereign wealth funds might end up owning the world, and it is natural for people to fear this, particularly as today's $100 a barrel oil "could rise as high as $200 a barrel by 2020-2030." But these funds have already "begun to limit their foreign investments" and spend money at home.

What about China and India?  Could they end up owning the world?  Probably not, because they "have large populations whose needs... remain far from satisfied."  But imagine China saving 20% of national income until 2100!  Then a large part of the world "could be owned by enormous Chinese pension funds."

Really, the specter of oil and China owning the world is less threatening than "oligarchic" divergence, with countries owned by their own billionaires as the rich pull ahead of the rest.  People in Paris think that "rich foreign buyers" are buying up all the real estate in the city.  Actually, it is rich French buyers.  So it is the spending of the domestic rich that creates a sense of "dispossession" and "helplessness" that could be tapped by the government of the EU.  And don't forget that a substantial fraction of global wealth is hidden away in tax havens.


The problem with Piketty's notion of "divergence," of the rich making money hand over fist forever, is that it fails the sanity test. Capitalists make money by financing world-beating innovations that billions of people want to buy.  When they stop coming up with world-beating innovations they stop making money. Bill Gates became rich because PCs running his operating system on a $2,000 computer could do financial spreadsheets incomparably better than a minicomputer costing $30,000.  But now Microsoft is struggling because people are migrating from the desktop computer to the smartphone and the tablet and Microsoft is left playing catch-up.  There is no rate of return on capital when it is used to finance an idea that fails to deliver.

And as for the idea that university foundations and sovereign wealth funds have a leg up on the rest of us with their top-notch professional managers, what about the geniuses at Fannie and Freddie?  What about the big banks that went bust in 2008?  What about the state government pension funds that lost half a trillion dollars in 2008-09?  And what about a middling sort of capitalist like me?  I just ran the numbers on Quicken and my net worth has increased at 8.75% after inflation from 1987 to 2013.  So I'm doing better than Forbes' loser billionaires and their paltry 6.8%!

The bottom line is that the only way for billionaires to make tons of money -- other than by cronying up to governments -- is by coming up with brilliant ideas that people want to buy. What is Piketty's problem with that?


Part One: Income and Capital

Income and Output

End of Growth

Part Two: The Dynamics of the Capital/Income Ratio

Changes in Capital

New World Capital and Slavery

Capital/income Ratio in the Long Run

Capital's Share of Income

Part Three: The Structure of Inequality

Inequality and Its Concentration

Two Worlds: France and the US

Inequality of Labor Income

Inequality of Capital Ownership

Merit and Inheritance in the Long Run

Global Inequality of Wealth in the 21st Century

Part Four: Regulating Capital in the Twenty-First Century

A Social State for the 21st Century

Rethinking the Progressive Income Tax

A Global Tax on Capital

The Question of the Public Debt


No comments:

Post a Comment