 Good afternoon, everyone. If you could take a seat or a piece of floor or find a way to see the podium. This is an amazing gathering. My name is Katherine Newman. I'm a provost here at UMass. And just delighted to see an audience here to hear about a very important topic. How often do you see a crowd like this assemble to talk about serious issues in economics? It does not happen every day, and we are thrilled to death. I'm going to ask the chair of the economics department, Michael Asch, to introduce this afternoon's speaker. But I want to say that he's a particularly appropriate person to deliver this introduction because he and his colleagues, Tom Herndon and Robert Pollan, exemplify what it means to be an economist whose work matters in the world. Many of you will know about their remarkable paper, Does High Public Debt Consistently Stifle Growth? A critique of Reinhardt and Rogoff, which made the news all over the world and challenged some very long-held views about the relationship between debt and growth. He has been the chief, yes, go go, rock star in training. He has been chair of the economics department since 2011, and along with his colleagues represents a tradition in economics which is not seen all over the globe, especially not in Chicago circles. So we are particularly delighted to have this fantastic heterodox economics department. I can't think of a better context in which to hear this afternoon's speaker. So I give you Michael Asch. Thank you very much, Provost Newman, for your introduction. Welcome colleagues, students and guests. This afternoon, Professor Tomah Piketty will deliver the 2014 Gamble Lecture of the UMass Amherst Department of Economics. The annual Gamble Lecture features a prominent economist. Previous speakers in this series have included eight Nobel Prize winners, including George Akerlof and the late Eleanor Ostrom, as well as other leading lights in the field, including Barbara Bergman, Alan Blinder, Mary Ann Ferber, and John Kenneth Galbraith. The Philip L. Gamble Memorial Lectorship Endowment was established by Israel Rogosa, class of 1942, and other family and friends. In memory of Philip Gamble, a member of the UMass Economics faculty from 1935 to 1971, who chaired the department from 1942 to 1965. And that's almost a quarter of a century I note for my fellow chairs in the audience. We say every year that Professor Gamble was beloved by his students after I met one of them, class of 1968, who 45 years later could describe regular class dinners at Professor Gamble's house in town. I bet you understood how Gamble's commitment to students had earned that love. This afternoon, we are honored by the presence of Marty and Elizabeth Rogosa. Israel's nephew Marty is a 1979 graduate of the Eisenberg School of Management and the steward of our Philip Gamble Memorial Lectorship Endowment. Elizabeth is a 1988 Zoology graduate. Welcome and thank you very much for coming. The Gamble Lectorship is also supported by the Charles L. and Martha S. Gleason Fund. Charles and Martha were economics graduates in 1940 and 1942. Both are now deceased. There are many people at UMass who made this event possible, and the Economics Department is grateful to all of them. I would like to single out for a particular mention Nancy Latinville of the Economics Department, and Jessica Dizek and James Mallet of the College of Social and Behavioral Sciences. They were very hard to make this event possible. Our Gamble lecturer and distinguished guest, Professor Tomas Piketty, is a native of Paris, France. Tomas earned a master's degree in mathematics at the École Normale Supérieure, then fortunately for us, he turned to the social sciences. In 1993, after completing his Ph.D. in economics at the École de Autitude en Sciences Social and the London School of Economics through a European doctoral program in economics, Tomas was appointed at MIT. But he decided, and my apologies to our die-hard Hub fans, that the charms of Paris surpass even those of Boston and Cambridge. Tomas is now Professor of Economics, both at AS and at the new Paris School of Economics, of which Tomas was founding director in 2005 through 2007. The motto of the Paris School of Economics is la science économique à la service de la société, rendered elegantly in English as economics serving society. A far more healthy configuration than the inverse construction apparently taught in many economics departments. Economics serving society is a sentiment we share at UMass. Tomas is the author of more than 10 books and 50 articles that have revolutionized our understanding of the history and state of inequality, both internationally and domestically for many advanced economies. For data aficionados in the audience, and I suspect there may be a few, the fruit of this research is publicly available in the World Top Incomes Database, which Tomas co-founded. For the rest of you, let me translate World Top Incomes into the term which Tomas coined and which has galvanized a global re-examination of economic and social priorities, the 1%. It is no mean feat to examine the extreme upper tail of the income distribution. Among other things very rich people don't like being measured. As an empirical economist, I am awed by Tomas' meticulous research across time and places which has painted a new picture of the form and evolution of wealth generation and income distribution as both an economic and political process. Tomas' extraordinary book, Capital in the 21st Century, elegantly presents these arguments. Jane Austen and Honore de Balzac share the stage with order statistics and capital income ratios as well as with the Ancien Régime, the Belle Époque, the New Deal, the Chant Glorious, and the Great U-Chern. Professor Pététit has received many recognitions and rewards including most recently the 2013 Iro Janssen Prize of the European Economic Association. I expect that there is both more brilliant analysis and further recognition to come. Before I turn over the floor, let me remind you that all are welcome to join the economics department for a reception in this room following the lecture and questions and answers. Now please join me in welcoming the 2014 Gamble Lecturer at the University of Massachusetts Amherst, Professor Tomas Pététit. Thank you, thanks a lot Michael and Catherine. I am very glad to be here at Amherst. I should first apologize for my English as you can see it sounds a lot like French, I hope you can still understand me. So I am very glad finally to discover at Amherst which I had heard of this place for a very long time and I have known some goals in particular for a long time. It has been an important figure in the economics department and I am very glad to have this opportunity today to discover the place and to give this lecture. So in this lecture I am going to talk about my book Capital in the 21st Century. So this presentation is going to be based on the book. So let me tell you quickly what this book is about. So this book came out in France exactly one year ago. It came out in English language last March. And this is really what I have tried to do in this research is to study the global dynamics of income and wealth inequality in over 20 countries since the 18th century. So in my view this is primarily a book about the history of income and wealth solution. So in a way the title is a bit misleading because I sort of pretend that I talk about the future but to be honest I am much better at analyzing the past than the future and I try at the end of the book in part 4 of the book I try to draw conclusions for the future but let me be very clear about the fact that you can disagree with all of my conclusions and still be interested in the historical narrative that is proposed in part 1, 2 and 3 of the book. So most of the book is really about an historical narrative. It is trying to make accessible to everybody a large body of historical data that has been collected over the past 15 years with many other scholars. So let me also make very clear that although the book is a single author book the data that I present I could never have collected it by myself. So I started working on the long run evolution of income and wealth distribution in France about 15 years ago and then I was very fortunate to meet Tony Atkinson, Emmanuel Saez so Tony wrote in particular about the case of Britain and many other countries with Emmanuel Saez, who is at Berkeley. We've been working on the evolution of income and equality in the US and Emmanuel has worked on many other countries as well like Canada and Japan. With Facundo Alvareddo we've been working on Argentina and Spain with Apigip Energy of India, with Nancy Chen of China and you know I cannot quote everyone but this is really a collective data collection project and this is continuing. So this book is just a photography of the data set at one point in time but we put new data online almost every month or even every week and this will continue to be extended to more and more countries. So I guess in the book there's really two set of data that I put together one that is about income distribution, income inequality and the other one that was collected more recently in particular with Postel Viner, Rosenthal, Gabrielle Zutman and others which is more about wealth and the evolution of wealth and equality and to a large extent what the book is trying to do is to try to shift the attention from rising income inequality to rising wealth inequality because I think in the long run wealth inequality might be even more important than income inequality but of course the two are related wealth to a large extent is accumulation from saving and out of income so rising income inequality, rising wealth inequality are very related but wealth is a more complicated object than just saving out of income because you also have inherited wealth that was not saved or at least not by the current generation you also have natural resources, oil that were not saved by anyone which matter a lot for the distribution of wealth property and the concentration of wealth is always a lot more extreme than the concentration of income so it creates even more tensions and political tensions about what's fair and what's not and what's justified and what's not justified so the book is trying to shift the attention from income wealth inequality but it clearly deals about the trade to articulate the two in a consistent manner let me try to describe very quickly the kind of data that I use first for the income database and then for the wealth part of the database so in this presentation I will put on some research from part two and three of the book all graphs and series are available online I'm sorry that I cannot put the book online yet but I'll show at some point if it will be online maybe it is already anyway the graphs are all online and this will give you a good sense of the material that's in the book so let me start with the first part of the database which is the wealth that becomes database so this is also available online so the countries in red are the countries that are already in the database and the countries in blue are about to enter the database although this screenshot is not completely up to date and for instance Korea we put it online a few weeks ago so it should be red and it's not even mentioned so it's not completely up to date so what being in the database means is that we try to collect all the historical data that we have on income inequality so usually the oldest data source on income comes from the income tax so the income tax was created in the US in 1913 in France it was adopted in the summer of 1914 so exactly one century ago and this was adopted really in the case of France not to pay for schools but to pay for the war and finally the French state accepting July of 1914 to put in income tax to pay for the war and it's very sad that it would be nicer to adopt it for other reasons this is part of the story now in some countries it was adopted a bit earlier like in Japan or many German states it was adopted in the 1880s, 1890s and in some countries it was adopted later like in India it was implemented in 1922 by the British so in many countries between 1900 and 1920 there's a creation of income tax which means that we have data on income so it's important to realize that taxation is always more than just taxation it's also a way to produce legal categories statistical categories and it's also a way to produce a source of information about society so that at least we better know what's going on and then we can possibly adapt the policies, adapt the tax rate but if we don't even know what's going on it's difficult to have a quiet discussion about this issue it's always difficult to have a quiet discussion about inequality but if we can have a more informed discussion at least maybe ZMB and maybe Pluma so let me show you an example of what we get from this data set which is relatively well known which is the evolution of income inequality in the United States so this is a very simple indicator of inequality which is the share of total primary income so this is total pre-tax market income labor income and capital income going to the top 10% income all day and so in fact the first and you can see this is a very big decline in equality in the first part of the century a very large increase in the recent decades so the big decline is exactly what Cusnets found in the 1950s so in fact all what we've been doing in this database is really to extend this pioneering work of Cusnets to many more countries and to a longer period and you can see that having a longer period changes quite a bit the general picture so when Cusnets wrote in the 1950s Cusnets was an American economist a Ukrainian born American economist who first computed the first GDP national income series for the United States in the interwar period and then the next step was to compute the first series of income solutions so after computing the national income for the entire country Cusnets thought ok I'm going to use income tax data starting in 1913 with the creation of income tax until 1948 because he was writing around 1950 and I'm going to compute how the share of national income going to top 10 percent which was approximately the fraction of the population paying the income tax since he was in the interwar period how this has changed over time and he came with a very good news which was a big reduction of inequality so when you read Cusnets himself it's clear that he was very much aware that this had a lot to do with the Great Depression with World War II particular wage compression policy during World War II very sharply progressive tax that were put in place at the same time period but during the Cold War period people were very happy to believe in a more optimistic message and more universal reason why income inequality might decline and so at that time starting in the 1950s and 1960s there was this very optimistic interpretation of the so-called Cusnets curve according to which income inequality in advanced stages of development tends to reduce naturally and indeed in the 50s, 60s, 70s as you can see you have a stable share going to the top around one-third of national income is going to the top 10 percent which means that this is also a time of balanced growth this means the fact that there is a stable share means that if you have a growth rate of GDP of 3 percent everybody is getting the same growth rate it means that the average income of the top 10 percent is rising at 3 percent the average income of the bottom 90 percent is rising at 3 percent so it's balanced growth it's sort of an ideal of post-war balanced growth which you have on this table now starting around 1980 you have a very different picture where as you can see I think the orders of many kids are pretty astonishing you go from about one-third to almost one-half of national income going to the top 10 and you have to ask yourself how far is this going to go so some people seem to believe that wherever it goes it will be fine that market forces will push up to the right at a million but at some point the orders of many kids are so strong you have to ask yourself is this going to stabilise right at 50 percent is this going to go to 60 percent of national income to the top 10 70 percent where is this going to stop by the way, here I stopped in 2010 because this is the data I had for the book but we now have the data for 2011-2012 but soon we need to put the data in line for 2013 with MNSS and right now it's even a bit above 50 percent it's 51-52 percent so the curve is still going up so you can see the large cyclical variation have to do with the business cycle so when you are in 2001 this is not a very good time just with the the crash of the internet bubble this is not a very good time to exercise your stock options but then in 2003, 4, 5, 6, 7 this is rising again and not the same thing with the current crisis in 2008, 2009 this was not a good time to get big bonuses but in 2010 and 11, 12, 13 although you don't see it on the graph this is going up again so at the end of the day the financial crisis per se and the business cycle per se doesn't seem to affect too much so what are the forces behind this big rise in top income shares particularly in the US this is a very complex process involved in different mechanisms and I will discuss it in a more detailed manner in the book but let me say that the standard explanation among economists for rising inequality is a change in the pattern of demand and supply for skills in relation to globalization so in other words why would you have an increase in inequality particularly strongly in the US in Europe and Japan you have also a rise in top income shares but it is much less strong than what we have here so in other words the explanation for this particularly big rise in the US would be that the supply of skills in the US has not increased sufficiently fast as compared to demand or skills in other words you would need more investment in education more people going to college and a bigger rate of increase of the proportion of the population going for longer education to reduce inequality and indeed probably part of the explanation for the particularly big rise of labor earnings in equality in the US has to do with the fact that maybe the US educational system is particularly unequal in the sense that you are very very good at top university schools and the bottom 50% schools are not so good that would be the standard explanation for a bigger rise in inequality would be the pattern of supply and demand of skill generating bigger skill premium for high skill as compared to most now that's probably part of the explanation but that's what we have concluded with in particular with my colleague in annual series is that this is not enough to explain why the rise in inequality has been so much concentrated because in fact a very big part of this increase is due not only to the top 10% but in fact most of it is due to the top 1% a very big part of the top 0.1% and a skill based story probably is not going to be enough it's not the average skill of the top 1% or top 0.1% is a lot higher than the next 2 or 3 or 4% so it's difficult to if you want to explain why the rise in inequality has been so much concentrated you really have to talk about why a very top managerial compensation in a very large company has increased so much and I think it will be a bit naive to imagine that when the top managers get a pay increase from 1 to 10 million dollars per year this simply reflects the rise in this relative productivity in some cases we should not be too naive about the invisible hand of the market sometimes it is more the grabbing hand that is able to put the right people in the right compensation committee and it's very difficult to observe individual productivity it's not written on your face and when you are in a large company you're not going to operate the company without a financial officer for 10 years to see the impact on how even if you were to do that the corporate landscape would have changed so fast that you would not learn much so there is a lot of imperfect information and people who are in a position of power tend to exploit this information or asymmetry in their favor if you don't have strong institutions government rules that prevent them from doing so and probably part of the reason that other compensation has been so spectacular in the US as compared to other countries is because as I will show you at the end the US is also one of the countries where you have the biggest cut in top income tax rate and which probably has changed enormously the incentives of top managers to try to put the right people in the right compensation committee and get such large pay increase when the top tax rate in the 50s, 60s was 70, 80% you know of course you always want to have 1 million more but you know if 80% goes directly to the treasury you are less motivated and also your shareholders and subordinates might tell you look this is really costly when you have a top tax rate of 30 or 40% it's a very different kind of game at least this is what we see in the data when we compare different countries over time and try to see where is it that managers increase their revenue power this seems to be much more important effects and differences in the supply of skills anyway this is the first big part of the book is really about trying to explain this evolution of top income tax now as I said before there is a second part of where the book is trying to shift which is to shift attention from rising top income to rising top wealth and from income distribution to wealth distribution and so I'm going to show you another graph which looks a lot like this one but which in fact involves very different mechanism and has a lot more to do with wealth than with income equity so this is a different graph which looks a lot like a U shaped curve like this one is a decline during World War I or World War II the Great Depression and increased in recent decades but in fact these two graphs have very little to do with one another and the first one was about income inequality in the US whereas this one is about the long run evolution of the capital income ratio so what is the capital income ratio this is the ratio between the total market value of wealth that has a private of all in a given country so this includes real estate assets business assets, financial assets minus all debt, minus all liabilities so when I talk about capital or wealth it's always net wealth divided by national income so if you want this to measure how many years of income people have on average in wealth so in all European countries Germany, France, UK on average people had between 6 and 7 years of income in wealth until World War I which corresponds to a sort of very high wealth what I call a patrimonial society with a very large importance of wealth in the 19th century and up until World War I in European societies so this was the time wealth was important and not only in the statistics but also in the literature you know the entire literature of the 19th century is full of wealth everywhere in Belzac in particular and it's not only because of the personal obsessions of the writers which you know Belzac was very in-depth he had to write novels all the time to take back his own debt but it was much more than that it was he played a powerful role in society in particular because wealth was very important so you know when you have a bigger ratio of capital income it means there's more wealth relative to annual flow of new income in society in particular in general it means that inheritance is going to be quite important now following World War I the Great Depression, World War II there was a huge decline of the capital income ratio and you can see that in the starting in fact in the 1950s there was a long process of recovery which you can interpret as new capital accumulation now let me make very clear that there is nothing bad per se in having a high capital income ratio this does not necessarily mean high inequality it could be that you have a rising capital income ratio in a perfectly egalitarian society where everybody will have an equal share in the capital stock because everybody will have an apartment or home of the same size everybody will have the same stake in a gigantic pension fund you could imagine in theory a world where you are very high in rising capital income ratio but with no inequality at all so this is why this graph has very little to do with this one which was really about inequality this one could in principle come without rising inequality now in practice however the inequality of capital ownership is always much larger than the inequality of labor income so when you have an increase in the capital income ratio other things in common this tends to come together also with an increase in total inequality but this could be different and different institutions, different rules in particular in order to spread wealth and access to property could lead to a different outcome so I will come back to this in a minute but the fact that we are higher and higher capital income ratio is not necessarily bad but it's important to be aware of that because sometimes when you open an economic textbook you are being told that the ratio of capital to income or capital output is a constant now as you can see this doesn't look like a constant so you should be careful with economics textbook sometimes in economics when we don't know much about something we assume it's a constant which of course if you have only one data for everything it's a constant in fact there's no reason, there's no theoretical model that tells you that it should be a constant in fact the most standard model of economic growth where you have substitutions in particular labor tell you that any ratio could be an equilibrium, could be a series and certain historical data we see a lot of variation again where is this going to go what are the consequences for the structure of society, the structure of the economy and so these are the issues that I'm trying to document and explain in the okay so here are the three points that I will try to make in the rest of this conference and this looks very organized but I'm not so sure to do everything that's written here so let me summarize each point so that at least you get the sense of what I want to say so the first point I already started to mention it, this is about what I call the return of a patrimonial or west-based society particularly in Europe and Japan and this is an evolution the second curve that I have shown you is particularly strong in Europe and Japan and it's less spectacular in the US you have a little bit of the same evolution of west-to-income ratio in the US but it's less spectacular and particularly in Europe and Japan, west-to-income ratio seem to be returning to very high levels and so that's particularly true in low-growth countries particularly in countries with low population growth so you know a big difference between Europe and Japan and the US is that historically of course population growth has been a lot bigger in this country and also population in the US now it's over 300 million it used to be 3 million at the time of independence not the same country France at the time of the French Revolution it was already almost 30 million and now it's 60 so you know it was divided just by two, you know in two centuries it's very slow growth it's almost the same families and exaggerating a little bit but you can see that it's completely different that's also the reason why although I love America and I certainly believe in American exceptionalism at the same time at the same time I think it's quite unlikely that the population of the world will be multiplied by 100 in the next two centuries so the lessons that one can draw from the history of capital accumulation and inequality in America are very specific and they are difficult to generalize and in a way France is a country with very slow population growth and even population stagnation in the 19th century the first country to stop having babies now France has more babies than Germany and apparently France is going to become more populated than Germany by 2050 which is something everybody is eagerly waiting for in France but anyway France in the 19th century is a nation stagnation which is something that according to the United Nations the entire planet is going to experience in the 21st century so in that sense I think the lessons from France and from a number of European countries in Japan may be more informative for the future of the planet than the lessons from a very very high population growth country like the US even in the past centuries the US has come from 900 million a century ago to 300 million today are you going to be 900 million one century from now yes maybe not but whatever happens we have a very strong impact on the ratio of capital to income because the central intuition here is that when you have a slower growth, in particular slower population growth then wealth accumulated in the past can naturally become very important in the extreme case where you have no growth at all if you keep accumulating you go to infinity in fact you will never go to infinity because at some point capital will become useless and people will stop accumulating but you can go higher for a given saving rate you tend to accumulate bigger quantity of wealth in slow growth economies and countries with much bigger growth and new population coming in so to the extent that in the very long run we will have population growth everywhere and possibly population growth slower than everywhere and possibly productivity growth slower than everywhere this return of a patrimonial society can be relevant for the entire world the second I am going to come back to this in a minute the second point I will try to make more quickly will be about the future of wealth concentration and I will argue that one important force that determines the level of inequality of property in the long run is the gap between R and G where R is the net of tax rate of return to wealth and I will be more specific about that and particularly the net of tax rate of return for large wealth portfolio and G is the gross rate of the economy and to the extent that R minus G will rise in the future both because of population growth slowdown and growth slowdown in general and also because of rising international competition to attract capital investment which tend to lead to higher net of tax rate of return then wealth inequality might reach or even become higher than 19th century levels of course there are other possible evolution in particular depending on the institutions and policies that we choose to adopt so I'm certainly not saying this is the only solution the last point which I will deal much more quickly will be about this new form of inequality which to some extent has developed in the US in recent decades where wealth inequality historically as I was saying has been less important in the US than in Europe and in Europe wealth concentration was a lot bigger in the US partly for the reason I have mentioned but recently a new model of inequality has developed in America with extreme inequality of labor earnings and in particular extremely high levels of top labor income and what I will argue is that the winners of this model tend to argue that this is a much better model that it's based on merit it's based on productivity but the evidence for the relation between 10 million dollars paid for a top manager and the productivity is not so clear so I think this can become this new inequality model particularly if it comes also with the development of higher levels of wealth inequality and the return of some form of patrimonial society can be the worst of all worlds for the loser of the model in the sense that they are losing ground they are losing income shares and at the same time they are being told that this is their fault that this is due to their low productivity so at least in the novels of Balzac or Rothstein nobody is trying to pretend that the servants are being servants because of their fault they just happen to have no wealth but nobody is trying to pretend that this is fake whereas this new form of inequality model is putting much bigger pressures in a way on the losers of the system so this is part of the future this is a big trouble so ok so I'm going to try to make these three points but you are not sure how much I will make so let me start with the first point I'm happy in fact have you the return of a waste based society so I'm not going to spend too much time on this let me show you a couple of graphs so that we can have a more concrete view of what's in the book so this is the evolution of the ratio between capital, private capital and income in a number of countries so you know this includes the top 8 developed economies US, Japan Germany, France, UK, Italy, Canada, Australia so you can see you know that this this is well you can see a number of things first this is a fairly chaotic evolution you can see for instance Japan between 1985 and 1990 where the ratio of private wealth to income goes from 5 years of income in West in 1985 to 7 years in 1990 now of course this is due to a real estate bubble to a very big increase in the price of capital assets and very often you know the short run medium run and sometimes even long run evolution is the ratio of capital to income have a lot to do with the movement in asset prices which are notoriously unstable and which create a lot of fragility for financial system and at the same time a lot of chaotic variation in the ratio of capital to income so you know that's not you cannot get rich so fast simply by saving even with a Japanese saving rate in order to accumulate 2 years of income in 4 years you need to have a saving rate of 50% per year that's not possible so now in the longer run what's interesting is that you know although the timing are different in particular because the bubbles in asset prices are different you have a general upward trend in pretty much every country so these are only 8 countries but these are the top 8 developed economies in the world so that's about 1 half of world GDP so that's an important part of the world and you can see that in 1970 every country was between 2 and 3 and a half years of natural income in private and in 2010 every country is between 4 and 7 so there's clearly a general upward evolution and which again contradicts completely the view that this should be stable now how can you explain this so I already mentioned the gross slowdown part of the explanation which is lower gross you tend to accumulate more waste it's a lot more complicated one important parameter is the rise of real estate prices which has been an important part not only in Japan between 1985 and 1990 but also throughout the period in many countries you know this account for an important part of the evolution another part of the evolution which I would like to mention is that in many countries over this period you have a transfer from public to private wealth so let me compare this evolution of private wealth with the evolution of public wealth so this is the private capital to natural income ratio and this is the public capital so what is public capital well this is defined the same way as private capital which is you take the assets the real estate the financial assets owned by the government federal, state, local government minus public debt so usually we only talk about public debt and we talk a lot about public debt these days but you know we should also look at assets both owned by the public and by the private so as you can see public capital every country has been going down so right now if you take a country like the US or France or Germany the net public capital is very close to zero because the public assets are comparable according to the existing estimates to the public debt so it's about 100% of GDP for both or 90% of GDP for both so the difference between public assets and public debt is very close to zero so this is why at the end of the period most countries are close to zero now in some countries it could be negative so you can see in Italy it's largely negative which means that you know even if the Italian government was selling all the public buildings all the public schools, hospitals it would not be enough to pay back the debt in the US in France it would be just enough to pay back the debt I'm not saying that's good news but so in effect I'm not saying we should do that we will then have to pay rent to the owners of the school in order to use the public schools for our children which will be a bit troublesome but you should be aware of the fact that in a way this is already what we are doing when we pay interest on the public debt whether you pay rent on the public schools owned by private owners or interest to the public debt owners which in effect owns the public assets since the total value of the public debt is comparable to the public assets is not entirely different so anyway what you have throughout the period is a decline in many countries in public assets through privatization in particular and an increase in public debt so if you have less public assets more public debt more decline in public capital and part of the increase in private capital can be accounted in this step so if you take the case of Italy it is one of the countries where the decline in public capital has been the strongest in particular because of a huge increase in public debt and this also the country was increasing private waste has been the strongest and partly because the Italian household had been bailed the public bonds and the privatized public assets by their government so the two are very related of course there are other cases in the world that are even more extreme if we were to look at this graph on public and private capital for Russia and for Eastern Europe you would see a huge decline in public capital a huge increase in private capital and it's not that the Russian oligarchs have saved a lot it was just a transfer of assets from public to private and in developed capitalist countries it's a less spectacular form of this evolution and that's an important part now, is this good news or bad news some of it is bad news but I would like to stress that there is also good news on this graph and more generally on my book because sometimes people seem to have a very pessimistic reading or even depressing reading of my book and this makes me very sad because I have much more optimistic characters than what some people seem to believe and in particular so let me give you this piece of good news the good news is that which countries are rich it is their governments it is their governments which are two, which is a problem which raises a number of problems but in fact, we talk a lot I don't know in the US but certainly in Europe we talk a lot about the public debt and we always say we are going to live to our children more public debt than ever and we should be ashamed and this is very bad so of course we should always be ashamed of what we do but at the same time it's important to realize that the increase in private wealth as a fraction of GDP has been much bigger than the increase in public debt to live to our children more private wealth than ever or at least for those who have wealth to live so of course this raises the issue of inequality, of distribution of institutions of policies but at least this means that the economic fundamentals are much better than what we typically imagine sometimes sometimes again maybe that's particular in France or in Europe but people in France believe that we only have debt we are being owned by the Emir of Qatar or the Bank of China or Californian pensions fund sometimes but in fact European countries have never been as rich not only in absolute terms but even if we take the ratio of wealth to income as I showed you before we need to return to the three world war one period to see such a high ratio of net wealth to income so even after you take away all the debt the net wealth has never been as large for a century so you know it's difficult for the government to get at this wealth because of problems with fiscal cooperation but the economic fundamentals are much better than we typically assume so let me move on a little bit and let me come to not going to present this that will take us too long but let me come to the future of wealth concentration and our wealth inequality in the long run might evolve now if you look at the evolution of wealth concentration over the past century what we see is a transition from what I call a classic patrimonial society which if you want is a world of Austin and Balzac which you also have until you know you have an extreme concentration of wealth with about 90% of the wealth for top 10% wealth and basically the rest of the population has very little whereas today one century later what I call in the book a patrimonial middle class so in the book I define these are very crude definitions and I don't claim that these are the right words it's always complicated but so here I use very precise statistical definitions at least we can make comparisons across countries so I distinguish between the top 10% the bottom 50% and the middle 40% so the people who are not the bottom 50% and this is what I call the patrimonial middle class and the big difference basically between one century ago and today one century ago there was no middle class in the sense that because 90% of the wealth would belong to the top 10 the middle 40 will just be as poor as the poor whereas today the bottom 50% is still very poor typically less than 5% of national wealth and that would be more 2% in the United States but in European countries it's around 5% so it's not that different so the the net wealth is very small so some people in this group might have real estate but they are more engaged or sometimes bigger than the real estate or almost as big the difference today is that the middle 40% own 20-30% of aggregate wealth which is at the same time this is much less than what the top 10% own so the top 10% today will own about 60% of national wealth in Europe over 70% in the US so the middle class although they are 4 times by this definition 4 times more numerals than the top 10 they own 2 or 3 times as less so you can always say that this is not enough of course but at the same time a century ago this was nothing at all so this is a huge improvement in the sense that there has been a massive diffusion of wealth so now you have a large group of society who are not very rich but who are not completely poor who own 100, 200, 300, 400,000 dollars in net wealth and you know who have accumulated some now one of the big questions I am trying to answer is the book is how did it happen, will it last will this patrimonial middle class expand will it shrink so in the US in the recent decades our knowledge of wealth inequality and one of the reasons why I would like to have a progressive wealth tax is because we have better data and we will be better able to follow what's happening to wealth and I am speaking seriously without the income tax we will know much less about income inequality than what we know and because there is no annual wealth tax and we only have wealth survey and we have wealth tax at death through inheritance but it's only for very small fraction of the population in this country and you know you don't have one time in your life so you don't have a lot of information on wealth dynamics apart from this one time but anyway even if the data is imperfect what we have suggested the middle class share in the US has been trending downwards in a quite spectacular way from about 30% to about 20% to date it used to be almost 30% close to 22% to 23% and I refer you to a recent paper by Saez and Yutman which was not available when I wrote this book but I give estimates that are not too different although their estimates are even more sort of alarming in terms of raising concentration so anyway how do we think about the long run level of wealth inequality in society this depends on many mechanisms you know the pattern of saving rate of course and the evolution of income inequality itself has a strong impact on the pattern of saving so when you have a stagnation of median incomes as we've had in the US over the past few decades it's clear that you're not going to have a lot of savings in wealth accumulation you're going to have a lot of accumulation of debt many people believe that this has contributed to the accumulation of debt which has itself contributed to make the financial system more fragile until the financial crisis of 2008 but there are other mechanisms apart from the pattern of savings that determine the long run evolution of wealth and in particular a very important mechanism so I don't have time to show you all this but you can find them online the important mechanism I would now like to emphasize is the following historically we see that a big part of the historical decline in inequality was due to shocks now the question is apart from shocks what forces determine the long run level of wealth concentration and what I'm going to argue now is that in a very large class of theoretical models what you will find is that the steady state level of wealth of generation will be an increasing function of the gap between the rate of return and the gross rate so let me be a bit more concrete if you have a gross rate of one person per year so in other words if output, wages everything is going to say one person per year and if the rate of return to capital so the rental income or the dividend or the interest or the profits coming from your capital correspond to an average rate well this means that if you have you start with wealth then you can consume basically most of the return to your capital in fact you can exactly consume four fifth of the return to your capital and you only need to reinvest one fifth of the twenty percent of the return to your capital to make sure that your wealth and the wealth of your family will rise as fast as the size of the economy and the average wealth of society so of course some families will consume more than that some families will consume less than that some families will have many children some will have too few, some will die too late some will die too early, the life of family is full of complications and you always have wealth, mobility some family goes down, some family goes up but what you can show is that for a given variance of these other shocks when you have a bigger gap between R and G inequality will tend to stabilize at the higher level so it's not that inequality will rise forever I've never said or written that inequality will rise forever, it will stop rising somewhere but when you have a bigger gap R minus G then this will stabilize at the higher level and with less mobility and with more perpetuation of inequality of pro-generation so now in the future because of gross load on perpetuation to attract capital it could well be that the gap R minus G will rise this will also depend on what you can do with the technology so in particular how much you can have different uses for capital you probably all remember the announcement that was made by Amazon at the end of last year that they wanted to replace their delivery workers by drones many people thought it was a joke but it was not a joke and other people said that Amazon is already treating their worker like drones so it would not make much of a difference but in any case that would be an extreme example of what economists would call capital labour substitution and now how much will it be the case in the future nobody knows at this stage certainly real estate capital or capital that's used in the energy sector is much more important than robots and this kind of extreme substitution between capital labour but in the future nobody really knows how far this can go so this will also have a strong impact on future value of the rate of return and I'm certainly not pretending I know what's going to happen but what I know is that small increase in the gap between R and G can easily lead to much higher wealth concentrations than what we have today so to give you an example of what I mean by this comparison by R and G I'm going to conclude with this I don't know how much time I have left maybe I have already so let me show you a very concrete example of R bigger than G if you want so this is data from Forbes ranking of billionaires so let me say right away that this is not really reliable data but you know we have to do with what we have you know we live in a sad time period in a way because you know people have to read magazines to know about wealth and you know I would prefer if people could buy IMF publications or Eurostat publications but they will not find the information you know in particular because the IMF for many years was against automatic transmission of bank information at the international level and also against the global registry of financial assets which could have help to get statistics on wealth so maybe one day we will have more financial transparency and there will be public reliable statistics on wealth but at this stage you know we have to do with what we have and so what we have in particular are these rankings published by magazines so here I start in 1987 because this is when the Forbes started publishing their global ranking of billionaires so each year they have their list of everybody in the world who have more than one billion dollars so usually what people do with this data is just they say ok you have more and more billionaires in the world but you know at the same time in a growing world economy it's not too surprising that you have more and more billionaires so what I do here is a bit more sophisticated although very simple I take a fixed fraction of the population so you know the top one over one hundred billion the top over one over twenty million and I do it for other groups as well and I look at how fast the average wealth of this group has been increasing over this time period so of course these are not the same people over time you know you have some people who go down, some people who go up you have new billionaires from emerging countries back in 1987 the top of the ranking you know was actually Japanese billionaires which everybody has forgotten so you have people going down people going up and that's fine but even if you have people going down going up you know the average wealth of this group in principle in the long run should rise approximately in the same proportion than the average wealth in the planet you know if we were in an equilibrium of the distribution of wealth this is what we should have you know over this time period you know the top has been rising three to four times faster than the average in the sense that you know this is rising at six to seven percent per year whereas average wealth in the world has been rising at about two percent so this is all in real terms so after the reduction of inflation and average income has been rising at one point four while GDP has been rising at three point three percent that's particularly because of China particularly because of emerging countries but you should be aware of the fact that world adult population has been increasing at one point nine percent over this period so that the per capita per adult GDP or per adult income has been rising at only one point four three point three minus one point nine that's very important to realize that a big part of the feeling of growth that we have in the world today still comes from the fact that we have a lot of population growth so this is supposed to go to zero in the future but we are not there yet and even right now in 2014 the world GDP is supposed to rise at about three three point one three point two percent and half of it is population growth and that's particularly due to aging in Asian countries, European countries, North American countries so at some point this is supposed to stop but for now average income in the world over this period has only been rising at one point four percent per year so average wealth has been rising a bit faster two point one percent that's because of the rise in the beta in the wealth to income ratio that I've shown you before so wealth is rising a bit faster than income so average wealth is rising a bit faster than income but you can see at the top it's rising three four times faster so how long is this going to continue how far is this going to go I don't know but you can see if you do simple simulations this can go very far if you continue to have the top rising three four times faster than the average for three decades or four decades asymptotically the share of world wealth that will belong to billionaires will go to one hundred percent so I'm not saying this is going to go to one hundred percent I think this can rise a lot this can be a lot higher than what it is today and I think this should be something that everybody should be concerned about it's important to realize that there are no natural forces in this process that ensures that this will stop at a reasonable level in any meaningful sense so why is it that the rate of return is particularly high for this large portfolio some of it is entrepreneurial wealth some of it has to do with I think you know financial deregulation has probably contributed to an increase in the inequality in access to high return so in other words you know more and more sophisticated financial products sometimes implies that for normal people or with low portfolio you know it's very difficult to get a return above one or two percent but if you have access to very sophisticated financial product financial deregulation you can get return of you know six, seven, eight percent so just to give you an example of this I thought you might be interested in the return to university endowments in the US so I hope I'm not going to depress anyone here but yeah I know but anyway so the only reason why I look at university endowments is because I have a lot more data on university endowments than on the billionaire because you know billionaire you have the form ranking but you don't really have detailed information about the portfolio and the investment strategy whereas at least universities in the US you know they publish financial statements and you can put together this data and so I did this computation with the financial statements you have 850 universities who have endowments so these are the average real annual rate of return over a 30 year long period so this is net of inflation and net of all management fees so this is really the pure rate of return to capital now you can see that this is pretty high for everybody so maybe this was a particularly good period I'm not saying the future is going to be necessary as high but you know this is so high that you know a little bit this is really quite spectacular and you can see that the bigger your initial endowments the bigger your return so what's the explanation for this you know it's very clear from the portfolio strategies and the bigger the return the more sophisticated the financial investment strategy so typically so these people these endowments they don't have public data they have financial derivatives or private equity they have very very sophisticated financial products in particular at the top of the list now I think part of this is simply due to scale effects in portfolio management so when you have a bigger initial endowments you are able to spend to hire more people so if you take the case of Harvard so right now so the Harvard endowments in 2010 was 30 billion dollars and now it's already 40 I think but you know Harvard is spending only 0.3% of their endowments in management fees each year but 0.3% of 30 billion is already almost 100 million and so if you spend 100 million each year in wages you can hire a pretty big team of wealth managers even if they are paid well individually and if this allows you to get a return of 10% rather than 6% then it's definitely worth it and at the end of the day this return of 10% what I found particularly striking in this data is how big this is as compared to the gift made by former students so the gift made by former students of Harvard University to Harvard endowments during this period represents less than 1% of the endowments and closer to 0.5% of the endowments so this really is not relevant well financially speaking this is not relevant in the sense that the main reason why the endowments has gone from 30 billion dollars in 1990 to 30 in 2010 has very little to do with gift of former students so you know this is as long as this is only for universities maybe it is not too bad because Harvard is doing lots of useful things with the money well sometimes they do strange studies from what I have heard but you know as long as they invest the money in science etc we can say it's good for all of us but this can create problem with inequality between universities in this country which I am sure you are all concerned with but now I didn't want to make a statement about universities the point I want to take from this is that if you have this same mechanism at the level of private wealth holders and private billionaires you can see that this creates a very powerful source of divergence in the wealth distribution that is really quite impressive so in other words even if the gap between R and G is not that large on average even if the average rate of return to capital is not that much bigger than the gross rate it could be that the rate of return to very large wealth portfolios is a lot higher and this creates an amplification mechanism for wealth inequality which again nobody knows how far this will go I cannot predict are we going to stop exactly at this level of wealth inequality or not but this can go quite far so let me conclude by saying that the most rational response to this of course will be progressive taxation of income and also of wealth first this will be a way to produce data we will not have to read the Forbes ranking but I think data is not important just for scholars doing research I think data is important for society and if we want to know how we must change our tax rate and tax policy it will be very important to have a reliable public basis so that we know maybe the Forbes ranking are overestimating how far the top is going maybe they are underestimating it will be very surprising given that the gross rate at the top is 3 to 4 times bigger than the average if in fact it was the same so when people are trying to deny the rise in wealth inequality they should publish their wealth rankings but it seems very hard to believe so anyway progressive wealth tax will be the best solution to solve this problem now of course inflation is a way to redistribute wealth now the problem is that it doesn't always go in the right direction but this has been a very important way to redistribute wealth and certainly to get rid of large public debt in the past there are other ways there are countries like Russia where the political power tolerate extremely wealthy oligarchs as long as they don't do politics and when they start doing politics they put them in jail and the Chinese government anti-corruption campaign these days tend to look a little bit similar now this is another way to regulate the distribution of wealth but I think even the Chinese government is starting to realize that this is not a very efficient way to regulate wealth and that they are seriously thinking of introducing some form of property or wealth taxation in particular inheritance taxation which you will need so is this going to happen let me conclude with a graph on the evolution of taxation and what I want you to take from this is that the entire history of income and wealth and taxation is unpredictable and things can change very quickly much more quickly than what is commonly assumed so here you have the evolution of the top income tax rate in four countries US, UK, Germany, France so you can see that the US and the UK in particular the US is really the country that has invented progressive income taxation and that has used the highest level of income tax progressivity in the past century so in particular if you make the average between 1930 and 1980 the average top income tax rate in the US would be 82 percent sometimes it was 90 percent sometimes it was 70 and average it was 82 percent that is not taking into account the state income tax that is a federal income tax apparently this did not destroy American capitalism and if anything the gross rate in the 50s, 60s, 70s were higher than what they have been since 1980 where the gross performance has been in fact quite mediocre in the recent period with the lower top rate so you know these things can change a lot, one century ago many people would have said so there was no income tax one century ago, a little bit than a century ago or very low tax rate in Britain when there was an income tax and many people in particular in this country would have said the progressive income tax would never happen the constitution made it impossible to happen and then things happen things happen all the time which are not predicted initially I think the collective representations of inequality and what is justified and what is not justified in terms of inequality can change very fast and certainly one of the key reasons income tax progressivity became so high in the US in the 1920s and you have the same evolution for the inheritance tax you can see again that this is the US and the UK that have had the biggest level of tax progressivity with top tax rate of 70-80% for large inheritance much bigger than in Germany and France that's partly because in Germany and France the war destruction had done a lot of the redistribution so there was less of a need for taxation but I think it's more than that it's also that in the US a century ago there was a growing concern about equality and the views of the egalitarian ideal of the pioneers was very far and that there was a need for a strong public intervention to try to avoid excessive level of inequality and I think this kind of reaction can happen again in the future let me just conclude by noting that the only time you can see where Germany has a 90% top tax rate is between 1946 and 1948 which is when the tax policy of Germany was set by the Americans so this was I'm serious this was the Allied control council and in practice the Americans were setting the tax policy of Germany and when the Bundesrepublik took its sovereignty back in 1949 they immediately reduced first to 75 and then to 50% because the Germans thought this is completely crazy to have 90% this is a crazy American idea we don't want that now you have exactly the same pattern in Japan the only year where you have a 90% top tax rate in Japan are 1946-1948 and the Americans were not doing that to punish the Germans or the Japanese because they were doing the same at home at the same time so it was in the American view of the time this was part of the civilization package if you want you bring democratic institution and at the same time you bring the fiscal institution that can prevent democracy from becoming plutocracy this was a very strong belief at the time and I know that this can all seem very exotic to you a very distant past but I think this is part of our common history and I'm not saying that things are going to happen exactly the same way nobody really knows but I think all I'm trying to do in this research is to put this issue into this historical and international perspective and because I think this can allow us to better understand some of the challenges of the future so let me stop there so we have time for just a couple of questions and thank you that was wonderful there is time for just a couple of questions if you want to step forward so we can hear them that would be helpful Leopoldo thanks for your stimulating work it's very nice to have an economy's quality in a bad stack that's not usually the case among economists none of us have some critical comments you speak about mainly progressive taxation just to touch, yeah progressive taxation right? but to put it in Marxist categories we have on one hand the ruling class on the other hand the working class and it turns out they are the ones who make policies including the tax rates on the other hand the working class we have unemployment as a discipline device using the famous paper of the title of the paper of Stiglitz often nuclear used to say referring to the working class to make someone to understand something if his or her job depends on the fact he or she does not understand that so how are we going to achieve the dream of the verticality for technicality okay thanks a lot for this question look I think you're perfectly right I mean these things don't come naturally it takes fight it took fight and it will take fight I mean it's not okay the ruling class has not always been in power otherwise we would not see that kind of graph so it's more complicated than just the ruling class is always in power but I certainly agree with you that in the past at least it took major shocks and major political events in order to make this kind of policy change happen so in particular in Europe one more one was really key I think the Bolshevik revolution also had a very strong impact on the evolution of policy I can tell you in France the same political groups that were refusing to adopt the income tax in 1914 even with the tax rate of 2% then in 1920 suddenly they accepted the income tax rate of 60% largely because the Bolshevik revolution had completely changed intellectual and political landscape and a big part of the elite was starting to think well after all maybe it's better to have a progressive tax and expropriation so I think the history of taxation is not a quiet history you know it's full of fight it's full of revolution it's full of so it's not a peaceful electoral history so this I agree with you I would also want to make clear that I certainly don't believe that progressive taxation alone is going to solve everything I think investment in public services education is probably even more important and also I think changing the way properties organize changing the governance in corporations I can tell you this debate can change also more quickly than we sometimes believe look in Germany well I'm not saying this is a model of democracy in German corporations but you know at least workers representatives have a number of seats in the board of large corporations and apparently this does not prevent them from producing good cars and you know the fact that you have more worker involvement so you have lower stock market capitalization you know when you compare the stock market capitalization of German companies to US, UK or even French you have a lower toppings queue as the economy says so the stock market value as compared to the book value is much lower probably because shareholders do not are not the only owners of the company you also have stakeholders you have a representative of workers you have the regional government sometime for instance Voltaigan but you know that's not that's certainly not bad for productive efficiency so you know the market value of capital and the social value of capital are not always the same and I think changing the governance of companies developing new forms of ownership you know you know even in the education sector you know nobody has been proposing to transform Harvard into a shareholder company so I'm not saying the way the government is perfect but I'm just saying that this debate is about ownership and how to organize the ownership of capital you know this debate is certainly not over but in my mind you know it comes together it's complementary with progressive taxation of capital it's not a substitute because progressive taxation of capital also produces transparency about ownership which is necessary for democracy you know in particular if you want to be able to intervene in the board of your company you know it's better to know the company and to have more financial transparency on the accounts of the company so you know I think we should not make an opposition between you know progressive taxation and class struggle on the other hand you know at first it takes class struggle or at least social political fight to impose progressive taxation and progressive taxation and the transparency that comes with it is very much complementary to economic democracy in particular in corporations Can I see are there any any more questions? Just looking around for so many people with questions I'm not an economist and you've given me hope that I can read your book so thank you the question I have has to do with the way that the framing is it feels like you're talking about national economies and national wealth and I'm wondering if the big dips that correspond roughly to the decolonial period and the incorporation of developing countries into our national economies through the transnationalization of corporate corporate wealth how that story plays into this story of national economies and wealth you're perfectly right I didn't have time to show you but there are some graphs about this and in the book I talked a lot about this international dimension of inequality and indeed a big part of the decline in the wealth to income ratio of Britain and France between 1914 and 1950-1960 has to do with the loss of their colonial empire and the loss of their foreign holdings in the rest of the world so just to give you one number in the UK in Britain in 1913-1914 the foreign assets that they own in the rest of the world are equivalent to two years of British GDP, two years of British national income so it's almost one third of the total wealth of Britain the total wealth to income ratio of Britain is six or seven years and out of these six or seven years of national income in wealth two years are in fact the fact that Britain owns a big part of the rest of the world in fact France and Britain own so much of the rest of the world at the time that what they are receiving in capital income from the rest of the world allows them not only to have a permanent trade deficit but to keep buying the rest of the world they are paying rent to your owner and the owner is paying the rest of the building so it's always painful to pay rent to your owner as you know but when it's at the international level you know it becomes really painful and of course this came with political domination and so I think in economic models capital investment in other countries is supposed to be a very smooth affair and a very efficient affair but in the real world being owned by another country is not as smooth and I think yeah we should as of now we don't have examples of countries that own as much in the rest of the world as Britain and France in 1940 but we should not be reassured by that because you know these levels were really extreme and some countries are moving some sovereign funds some countries are moving fast so I think these issues of cross border ownership are issues for the future and not only for the colonial era okay I think we're going to have to close there let me mention that the reception has in fact been set up in the atrium of the of the Student Union Ballroom before we thank our speaker with a poster of his appearance we'll just as soon as we have to go to New York and please let us thank our speaker for a fascinating class