The French economist Thomas Piketty has a new book coming out soon, Capital in the 21st Century. It is a great work, a fearsome beast of analysis stuffed with an awesome amount of empirical data, and will surely be a landmark study in economics. It also references The Aristocats, a 1970 animated Disney film about some upper-class cats who stand to inherit a fortune.
I'm not joking, and neither is Piketty, who uses the 1970 movie as a way into his general thesis about the character of inequality of wealth. Before WWI, French wealth was spectacularly concentrated:
In Paris, where the Napoleonic Civil Code came into effect in 1804 and where inequality cannot be laid at the door of British aristocrats and the queen of England, the top centile [10 percent of incomes] owned more than 70 percent of total wealth in 1913, even more than in Britain. The reality was so striking that it even found expression in an animated cartoon, The Aristocats, set in Paris in 1910. The size of the old lady's fortune is not mentioned, but to judge by the splendor of her residence and by the zeal of her butler Edgar to get rid of Duchesse and her three kittens, it must have been considerable. [Capital in the 21st Century]
What's responsible for this persistent wealth disparity? Piketty argues that it is a historical fact that for most of human history, the rate of return on capital has been much higher than the rate of economic growth — or, put in simple math terms, r > g. Absent either extremely fast economic growth (historically rare) or confiscatory taxes on wealth and high incomes (politically challenging), inequality of wealth will grow to spectacular levels. And if the difference is large enough, there's almost no end to the divergence:
Note, finally, that if the difference r – g surpasses a certain threshold, there is no equilibrium distribution: inequality of wealth will increase without limit, and the gap between the peak of the distribution and the average will grow indefinitely. The exact level of this threshold of course depends on savings behavior: divergence is more likely to occur if the very wealthy have nothing to spend their money on and no choice but to save and add to their capital stock. [Capital in the 21st Century]
That is how inequality of income can become inequality of wealth.
The Aristocats calls attention to the problem: Adelaide de Bonnefamille obviously enjoys a handsome income [from interest], which she lavishes on piano lessons and painting classes for Duchesse, Marie, Toulouse, and Berlioz, who are somewhat bored by it all. This kind of behavior explains quite well the rising concentration of wealth in France, and particularly in Paris, in the Belle Epoque: the largest fortunes increasingly belonged to the elderly, who saved a large fraction of their capital income, so that their capital grew significantly faster than the economy. [Capital in the 21st Century]
Wait, wouldn't this have to stop eventually? Yes, says Piketty. However...
As noted, such an inegalitarian spiral cannot continue indefinitely: ultimately, there will be no place to invest the savings, and the global return on capital will fall, until an equilibrium distribution emerges. But that can take a very long time, and since the top centile's share of Parisian wealth in 1913 already exceeded 70 percent, it is legitimate to ask how high the equilibrium level would be had the shocks due to World War I not occurred. [Capital in the 21st Century]
This is doubly true, Piketty notes in a different context, when cross-border movement of capital is possible, as it was before WWI and is today. When returns on domestic capital fall, the rich purchase foreign assets that still provide a return. In theory, that process can continue to an odious destination: "In principle, this process always comes to an end — when those who own foreign assets take possession of the entire planet."
What does this bode for the future? Piketty's prognosis for the 21st century is not great; he suggests that it is highly possible for this century to be even more unequal than the 19th, which produced vast fortunes like the one of Madame de Bonnefamille.
However, as Piketty also notes, there is nothing natural or inevitable about the process he has described. Conservatives (and the ultrawealthy themselves) tend to regard the vast inequalities created by our economic system as a natural and just consequence of capitalism and the inherent worthiness of the rich. This, of course, is nonsense. On the contrary, vast inequality is a result of our institutional arrangements — some of which, like taxes on capital gains, high incomes, and inheritances, act to reduce inequality. Through such policies, France has avoided a full return to the inequalities of the pre-WWI era.
But the U.S. has not. Our inequality, both of wealth and income, is about as bad as it ever was before WWI, and getting worse fast. Given the increasing radicalization of the ultrawealthy, and the fact that one of our two political parties has all but sworn a blood oath to further reduce taxes on the rich, our future prospects for broadly shared prosperity don't look good.
On the other hand, people forget sometimes that during the post-WWII era, the U.S. had staggeringly high top marginal tax rates — over 90 percent for decades, which mystifyingly failed to prevent our greatest-ever economic boom. We should always remember that a better world is possible, no matter how steep the political slope is to get there.
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