Must-read: Thomas Piketty: “Capital, Predistribution and Redistribution”

Must-Read: Thomas Piketty: Capital, Predistribution and Redistribution: “In my view, Capital in the 21st Century is primarily a book about the history of the distribution of income and wealth…

…We have been extending to a larger scale the pioneering historical data collection work of Simon Kuznets and Tony Atkinson (see Kuznets, 1953, and Atkinson and Harrison, 1978). My first objective in this book is to present this body of historical evidence in a consistent manner…. Another important objective is to draw lessons for the future and for the optimal regulation and taxation of capital and property relations…. We have too little historical data at our disposal to be able to draw definitive judgments… [but] at least we have substantially more evidence than we used to….

The size of the gap between r and g… can contribute to explaining why wealth inequality was so extreme and persistent in pretty much every society up until World War I…. [But] I do not view r>g as the only or even the primary tool for considering changes in income and wealth in the 20th century, or for forecasting the path of inequality in the 21st century. Institutional changes and political shocks… played a major role in the past, and… will… in the future…. It is obvious that this rise in labor income inequality in recent decades has little to do with r-g….

A higher r-g gap will tend to greatly amplify the steady-state inequality of a wealth distribution that arises out of a given mixture of shocks…. Relatively small changes in r–g can generate large changes in steady-state wealth inequality…. Available micro-level evidence on wealth dynamics confirm that the high gap between r and g is one of the central reasons why wealth concentration was so high during the 18th-19th centuries and up until World War I….

The theory of capital taxation that I present in Capital in the 21st Century is largely based upon joint work with Emmanuel Saez…. We develop a model where inequality is fundamentally two-dimensional: individuals differ both in their labor earning potential and in their inherited wealth…. Optimal tax policy is also two-dimensional: it involves a progressive tax on labor income and a progressive tax on inherited wealth….

In my book, I propose a simple rule-of-thumb to think about optimal annual tax rates on wealth and property. Namely, one should adapt the tax rates to the observed speed at which the different wealth groups are rising over time…. If top wealth holders are rising at 6-7% per year in real terms (as compared to 1-2% per year for average wealth)… and if one aims to stabilize the level of wealth concentration, then one might need to apply top wealth tax rates as large as 5% per year…. Indeed that there is substantial uncertainty about how far income and wealth inequality might rise in the 21st century, and that we need more financial transparency and better information about income and wealth dynamics…. The progressive consumption tax… is in my view a highly imperfect substitute…. Meritocratic values imply that one might want to tax inherited wealth more than self-made wealth, which is impossible to do with a consumption tax alone. Next, and most importantly, the very notion of consumption is not very well defined for top wealth holders….

One of the important findings from my research is that capital-income ratios β=K/Y and capital shares α tend to move together in the long run…. In the standard one-good model of capital accumulation with perfect competition, the only way to explain why β and α move together is to assume that the capital-labor elasticity of substitution σ that is somewhat larger than one…. This is not my favored interpretation…. Maybe robots and high capital-labor substitution will be important in the future. But at this stage, the important capital-intensive sectors are more traditional sectors like real estate and energy. I believe that the right model to think about rising capital-income ratios and capital shares in recent decades is a multi-sector model of capital accumulation, with substantial movements in relative prices, and with important variations in bargaining power over time….

The last chapter of my book concludes: ‘Without real accounting and financial transparency and sharing of information, there can be no economic democracy. Conversely, without a real right to intervene in corporate decision-making (including seats for workers on the company’s board of directors), transparency is of little use. Information must support democratic institutions; it is not an end in itself. If democracy is someday to regain control of capitalism, it must start by recognizing that the concrete institutions in which democracy and capitalism are embodied need to be reinvented again and again’ (p. 570)…

January 4, 2016


Brad DeLong
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