Monday, May 12, 2014

Piketty: Two Worlds: France and the US

Thomas Piketty now takes a look at the fortunes of the top ten percent in two countries, France and the US, in Capital in the Twenty-First Century. First he looks at his native France.

A couple of figures here and here tell the story.  The top ten percent were doing fine from 1910 until the 1930s, taking about 40-45% of national income.  Then, starting in 1936 their share plummeted to 30%.  From 1945 to 1965 the top ten percent clawed their way back to a 37% share, but this dissipated back to 30% in 1968-83, only recovering to 25% gradually after the economic U-turn of the Mitterand presidency in 1983.

If you look at the 1% the trend is even more drastic.  The top 1% took about 20% of total income in 1920 and the share declined to about 17% by 1929.  Then its share declined to 15% in the 1930s and collapsed to 8% by 1945 due to war and invasion.  Basically its income share has been flat ever since.

This collapse is in capital income, because the top ten percent has been getting about 26-27% of wage income all along and the top 1% about 6-8% of wage income all along.  Piketty calls it the "fall of the rentier." (In France, government bonds are called rentes).

The decline in top 10% income came in a series of shocks during the interwar period "when social tensions ran very high."  The top 1% income "plummeted during the Depression" but for the managers in the lower tranche of the top 10% the deflation increased their share of income.  But when the Popular Front came to power in 1936 "workers' wages increased sharply" and franc devaluation and inflation decreased income shares for the top 10%.

After World War II the top 10% did well "in a context of rapid economic growth" but in the riots of 1968 economic policy was reversed and the minimum wage was increased and indexed.  The share of the top 10% declined until the U-turn of the socialist Mitterand government in 1983: "wages were frozen, and the policy of annual boosts to the minimum wage" terminated.  Profits "skyrocketed" and inequalities increased, including the "stunning new phenomenon" of very high top salaries for "top executives of the largest companies and financial firms".

The story of inequality in the United States since 1910 is different from France, and the charts here and here show.  Top 10% income starts at 40% and rises to 45% right through the Depression until World War II.  Then the top 10% share collapses to 33-35% by 1945 and stays there until 1980.  After 1980 the top 10% share steadily increases to 40% by 1990, 45% by 2000 and about 47% in 2010.  The main story is in the top 1%, which took about 17% of total income in 1910-1940 with a peak in the late 1920s boom.  Then the top 1% share dropped to 12% in the 1940s, and 10% in 1950-1970, and to 9% in the 1970s inflation.  But since 1980 top 1% income share has kept increasing, punctuated by troughs after market declines, settling at 20% in 2010.

What about the Crash of 2008?
In my view, there is absolutely no doubt that the increase of inequality in the United States contributed to the nation's financial instability.
You can blame it on the "virtual stagnation of the purchasing power of the lower and middle classes... which inevitably made it more likely that modest households would take on more debt" provided by "unscrupulous banks" that "offered credit on increasingly generous terms."  There is nothing in Piketty's analysis that recognizes the contribution of left-wing politics to the real-estate boom, forcing the financial system to issue mortgages to "sub-prime" borrowers.  But still, "a potentially more important cause of instability is the structural increase of the capital/income ratio... coupled with an enormous increase in aggregate international asset positions."

What about wages?  In the US wage inequality rose in the 1920s, was stable in the 1930s and experienced "severe compression during World War II" when the government "generally approved raises only for the lowest paid workers."  But from the mid 1970s onward, top salaries increased faster than the average wage.  This increase primarily reflects very high salaries and bonuses, including stock options, paid to "supermanagers" at top corporations and financial institutions.


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


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