TEDSalon Berlin 2014
Thomas Piketty: New thoughts on capital in the twenty-first century
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French economist Thomas Piketty caused a sensation in early 2014 with his book on a simple, brutal formula explaining economic inequality: r > g (meaning that return on capital is generally higher than economic growth). Here, he talks through the massive data set that led him to conclude: Economic inequality is not new, but it is getting worse, with radical possible impacts.
Thomas Piketty - Economist
Thomas Piketty is an economist and professor at the Paris School of Economics. His 2014 book, "Capital in the Twenty-first Century," caused a sensation upon publication. Full bio
Thomas Piketty is an economist and professor at the Paris School of Economics. His 2014 book, "Capital in the Twenty-first Century," caused a sensation upon publication. Full bio
Double-click the English transcript below to play the video.
00:12
It's very nice to be here tonight.
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So I've been working on the history of income
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and wealth distribution for the past 15 years,
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and one of the interesting lessons
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coming from this historical evidence
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is indeed that, in the long run,
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there is a tendency for
the rate of return of capital
the rate of return of capital
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to exceed the economy's growth rate,
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and this tends to lead to
high concentration of wealth.
high concentration of wealth.
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Not infinite concentration of wealth,
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but the higher the gap between r and g,
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the higher the level of inequality of wealth
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towards which society tends to converge.
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So this is a key force that
I'm going to talk about today,
I'm going to talk about today,
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but let me say right away
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that this is not the only important force
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in the dynamics of income
and wealth distribution,
and wealth distribution,
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and there are many other forces that play
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an important role in the long-run dynamics
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of income and wealth distribution.
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Also there is a lot of data
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that still needs to be collected.
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We know a little bit more today
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than we used to know,
but we still know too little,
but we still know too little,
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and certainly there are
many different processes —
many different processes —
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economic, social, political —
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that need to be studied more.
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And so I'm going to focus today on this simple force,
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but that doesn't mean that other important forces
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do not exist.
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So most of the data I'm going to present
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comes from this database
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that's available online:
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the World Top Incomes Database.
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So this is the largest existing
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historical database on inequality,
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and this comes from the effort
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of over 30 scholars from several dozen countries.
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So let me show you a couple of facts
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coming from this database,
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and then we'll return to r bigger than g.
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So fact number one is that there has been
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a big reversal in the ordering of income inequality
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between the United States and Europe
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over the past century.
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So back in 1900, 1910, income inequality was actually
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much higher in Europe than in the United States,
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whereas today, it is a lot higher in the United States.
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So let me be very clear:
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The main explanation for this is not r bigger than g.
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It has more to do with changing supply and demand
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for skill, the race between education and technology,
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globalization, probably more unequal access
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to skills in the U.S.,
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where you have very good, very top universities
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but where the bottom part of the educational system
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is not as good,
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so very unequal access to skills,
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and also an unprecedented rise
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of top managerial compensation of the United States,
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which is difficult to account for
just on the basis of education.
just on the basis of education.
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So there is more going on here,
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but I'm not going to talk too much about this today,
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because I want to focus on wealth inequality.
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So let me just show you a very simple indicator
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about the income inequality part.
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So this is the share of total income
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going to the top 10 percent.
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So you can see that one century ago,
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it was between 45 and 50 percent in Europe
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and a little bit above 40 percent in the U.S.,
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so there was more inequality in Europe.
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Then there was a sharp decline
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during the first half of the 20th century,
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and in the recent decade, you can see that
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the U.S. has become more unequal than Europe,
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and this is the first fact I just talked about.
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Now, the second fact is more about wealth inequality,
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and here the central fact is that wealth inequality
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is always a lot higher than income inequality,
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and also that wealth inequality,
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although it has also increased in recent decades,
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is still less extreme today
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than what it was a century ago,
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although the total quantity of wealth
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relative to income has now recovered
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from the very large shocks
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caused by World War I, the Great Depression,
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World War II.
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So let me show you two graphs
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illustrating fact number two and fact number three.
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So first, if you look at the level of wealth inequality,
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this is the share of total wealth
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going to the top 10 percent of wealth holders,
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so you can see the same kind of reversal
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between the U.S. and Europe that we had before
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for income inequality.
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So wealth concentration was higher
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in Europe than in the U.S. a century ago,
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and now it is the opposite.
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But you can also show two things:
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First, the general level of wealth inequality
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is always higher than income inequality.
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So remember, for income inequality,
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the share going to the top 10 percent
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was between 30 and 50 percent of total income,
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whereas for wealth, the share is always
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between 60 and 90 percent.
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Okay, so that's fact number one,
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and that's very important for what follows.
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Wealth concentration is always
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a lot higher than income concentration.
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Fact number two is that the rise
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in wealth inequality in recent decades
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is still not enough to get us back to 1910.
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So the big difference today,
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wealth inequality is still very large,
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with 60, 70 percent of total wealth for the top 10,
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but the good news is that it's actually
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better than one century ago,
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where you had 90 percent in
Europe going to the top 10.
Europe going to the top 10.
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So today what you have
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is what I call the middle 40 percent,
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the people who are not in the top 10
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and who are not in the bottom 50,
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and what you can view as the wealth middle class
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that owns 20 to 30 percent
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of total wealth, national wealth,
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whereas they used to be poor, a century ago,
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when there was basically no wealth middle class.
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So this is an important change,
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and it's interesting to see that wealth inequality
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has not fully recovered to pre-World War I levels,
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although the total quantity of wealth has recovered.
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Okay? So this is the total value
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of wealth relative to income,
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and you can see that in particular in Europe,
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we are almost back to the pre-World War I level.
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So there are really two
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different parts of the story here.
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One has to do with
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the total quantity of wealth that we accumulate,
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and there is nothing bad per se, of course,
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in accumulating a lot of wealth,
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and in particular if it is more diffuse
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and less concentrated.
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So what we really want to focus on
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is the long-run evolution of wealth inequality,
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and what's going to happen in the future.
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How can we account for the fact that
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until World War I, wealth inequality was so high
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and, if anything, was rising to even higher levels,
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and how can we think about the future?
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So let me come to some of the explanations
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and speculations about the future.
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Let me first say that
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probably the best model to explain
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why wealth is so much
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more concentrated than income
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is a dynamic, dynastic model
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where individuals have a long horizon
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and accumulate wealth for all sorts of reasons.
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If people were accumulating wealth
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only for life cycle reasons,
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you know, to be able to consume
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when they are old,
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then the level of wealth inequality
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should be more or less in line
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with the level of income inequality.
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But it will be very difficult to explain
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why you have so much more wealth inequality
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than income inequality
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with a pure life cycle model,
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so you need a story
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where people also care
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about wealth accumulation for other reasons.
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So typically, they want to transmit
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wealth to the next generation, to their children,
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or sometimes they want to accumulate wealth
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because of the prestige, the
power that goes with wealth.
power that goes with wealth.
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So there must be other reasons
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for accumulating wealth than just life cycle
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to explain what we see in the data.
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Now, in a large class of dynamic models
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of wealth accumulation
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with such dynastic motive for accumulating wealth,
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you will have all sorts of random,
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multiplicative shocks.
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So for instance, some families
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have a very large number of children,
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so the wealth will be divided.
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Some families have fewer children.
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You also have shocks to rates of return.
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Some families make huge capital gains.
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Some made bad investments.
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So you will always have some mobility
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in the wealth process.
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Some people will move up,
some people will move down.
some people will move down.
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The important point is that,
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in any such model,
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for a given variance of such shocks,
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the equilibrium level of wealth inequality
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will be a steeply rising function of r minus g.
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And intuitively, the reason why the difference
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between the rate of return to wealth
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and the growth rate is important
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is that initial wealth inequalities
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will be amplified at a faster pace
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with a bigger r minus g.
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So take a simple example,
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with r equals five percent and g equals one percent,
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wealth holders only need to reinvest
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one fifth of their capital income to ensure
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that their wealth rises as fast
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as the size of the economy.
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So this makes it easier
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to build and perpetuate large fortunes
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because you can consume four fifths,
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assuming zero tax,
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and you can just reinvest one fifth.
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So of course some families
will consume more than that,
will consume more than that,
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some will consume less, so there will be
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some mobility in the distribution,
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but on average, they only need to reinvest one fifth,
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so this allows high wealth inequalities to be sustained.
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Now, you should not be surprised
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by the statement that r can be bigger than g forever,
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because, in fact, this is what happened
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during most of the history of mankind.
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And this was in a way very obvious to everybody
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for a simple reason, which is that growth
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was close to zero percent
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during most of the history of mankind.
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Growth was maybe 0.1, 0.2, 0.3 percent,
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but very slow growth of population
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and output per capita,
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whereas the rate of return on capital
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of course was not zero percent.
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It was, for land assets, which was
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the traditional form
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of assets in preindustrial societies,
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it was typically five percent.
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Any reader of Jane Austen would know that.
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If you want an annual income of 1,000 pounds,
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you should have a capital value
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of 20,000 pounds so that
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five percent of 20,000 is 1,000.
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And in a way, this was
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the very foundation of society,
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because r bigger than g
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was what allowed holders of wealth and assets
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to live off their capital income
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and to do something else in life
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than just to care about their own survival.
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Now, one important conclusion
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of my historical research is that
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modern industrial growth did not change
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this basic fact as much as one might have expected.
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Of course, the growth rate
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following the Industrial Revolution
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rose, typically from zero to one to two percent,
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but at the same time, the rate of return
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to capital also rose
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so that the gap between the two
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did not really change.
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So during the 20th century,
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you had a very unique combination of events.
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First, a very low rate of return
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due to the 1914 and 1945 war shocks,
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destruction of wealth, inflation,
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bankruptcy during the Great Depression,
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and all of this reduced
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the private rate of return to wealth
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to unusually low levels
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between 1914 and 1945.
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And then, in the postwar period,
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you had unusually high growth rate,
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partly due to the reconstruction.
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You know, in Germany, in France, in Japan,
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you had five percent growth rate
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between 1950 and 1980
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largely due to reconstruction,
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and also due to very large demographic growth,
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the Baby Boom Cohort effect.
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Now, apparently that's not going to last for very long,
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or at least the population growth
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is supposed to decline in the future,
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and the best projections we have is that
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the long-run growth is going to be closer
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to one to two percent
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rather than four to five percent.
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So if you look at this,
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these are the best estimates we have
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of world GDP growth
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and rate of return on capital,
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average rates of return on capital,
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so you can see that during most
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of the history of mankind,
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the growth rate was very small,
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1613
12:00
much lower than the rate of return,
299
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1834
12:02
and then during the 20th century,
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12:04
it is really the population growth,
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2171
12:06
very high in the postwar period,
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2272
12:09
and the reconstruction process
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1600
12:10
that brought growth
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1573
12:12
to a smaller gap with the rate of return.
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3071
12:15
Here I use the United Nations population projections,
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3523
12:18
so of course they are uncertain.
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2476
12:21
It could be that we all start
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1391
12:22
having a lot of children in the future,
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2106
12:24
and the growth rates are going to be higher,
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2765
12:27
but from now on,
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1249
12:28
these are the best projections we have,
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2802
12:31
and this will make global growth
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1934
12:33
decline and the gap between
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2756
12:36
the rate of return go up.
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2003
12:38
Now, the other unusual event
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12:41
during the 20th century
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1671
12:42
was, as I said,
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1329
12:44
destruction, taxation of capital,
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2316
12:46
so this is the pre-tax rate of return.
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2735
12:49
This is the after-tax rate of return,
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2979
12:52
and after destruction,
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1566
12:53
and this is what brought
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1777
12:55
the average rate of return
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1688
12:57
after tax, after destruction,
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1789
12:59
below the growth rate during a long time period.
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2420
13:01
But without the destruction,
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1674
13:03
without the taxation, this
would not have happened.
would not have happened.
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13:05
So let me say that the balance between
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3243
13:08
returns on capital and growth
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13:11
depends on many different factors
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1862
13:13
that are very difficult to predict:
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2085
13:15
technology and the development
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2115
13:17
of capital-intensive techniques.
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2584
13:19
So right now, the most capital-intensive sectors
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13:22
in the economy are the real estate sector, housing,
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3376
13:26
the energy sector, but it could be in the future
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2862
13:29
that we have a lot more robots in a number of sectors
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3712
13:32
and that this would be a bigger share
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1889
13:34
of the total capital stock that it is today.
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1910
13:36
Well, we are very far from this,
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1994
13:38
and from now, what's going on
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1766
13:40
in the real estate sector, the energy sector,
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1789
13:42
is much more important for the total capital stock
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2126
13:44
and capital share.
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1134
13:45
The other important issue
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2033
13:47
is that there are scale effects
in portfolio management,
in portfolio management,
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2150
13:49
together with financial complexity,
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2419
13:52
financial deregulation,
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1450
13:53
that make it easier to get higher rates of return
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2709
13:56
for a large portfolio,
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1627
13:57
and this seems to be particularly strong
352
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2663
14:00
for billionaires, large capital endowments.
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1982
14:02
Just to give you one example,
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2290
14:04
this comes from the Forbes billionaire rankings
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3333
14:08
over the 1987-2013 period,
356
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3330
14:11
and you can see the very top wealth holders
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2788
14:14
have been going up at six, seven percent per year
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3117
14:17
in real terms above inflation,
359
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2391
14:19
whereas average income in the world,
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2372
14:22
average wealth in the world,
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1363
14:23
have increased at only two percent per year.
362
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3383
14:26
And you find the same
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854949
1729
14:28
for large university endowments —
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1276
14:29
the bigger the initial endowments,
365
857954
2268
14:32
the bigger the rate of return.
366
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2068
14:34
Now, what could be done?
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1678
14:35
The first thing is that I think we need
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2396
14:38
more financial transparency.
369
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2115
14:40
We know too little about global wealth dynamics,
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3841
14:44
so we need international transmission
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1900
14:46
of bank information.
372
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1262
14:47
We need a global registry of financial assets,
373
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2686
14:50
more coordination on wealth taxation,
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2491
14:52
and even wealth tax with a small tax rate
375
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3112
14:55
will be a way to produce information
376
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2216
14:57
so that then we can adapt our policies
377
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2682
15:00
to whatever we observe.
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1836
15:02
And to some extent, the fight
379
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1838
15:04
against tax havens
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1481
15:05
and automatic transmission of information
381
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1815
15:07
is pushing us in this direction.
382
895639
1851
15:09
Now, there are other ways to redistribute wealth,
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2324
15:11
which it can be tempting to use.
384
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2957
15:14
Inflation:
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1356
15:16
it's much easier to print money
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1699
15:17
than to write a tax code, so that's very tempting,
387
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2155
15:19
but sometimes you don't know
what you do with the money.
what you do with the money.
388
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2120
15:22
This is a problem.
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1647
15:23
Expropriation is very tempting.
390
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1863
15:25
Just when you feel some people get too wealthy,
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2261
15:27
you just expropriate them.
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1294
15:29
But this is not a very efficient way
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1712
15:30
to organize a regulation of wealth dynamics.
394
918878
2833
15:33
So war is an even less efficient way,
395
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2479
15:36
so I tend to prefer progressive taxation,
396
924190
2336
15:38
but of course, history — (Laughter) —
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926526
2574
15:41
history will invent its own best ways,
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1735
15:42
and it will probably involve
399
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1698
15:44
a combination of all of these.
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1734
15:46
Thank you.
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934267
1866
15:48
(Applause)
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2137
15:50
Bruno Giussani: Thomas Piketty. Thank you.
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938270
5559
15:55
Thomas, I want to ask you two or three questions,
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943829
1879
15:57
because it's impressive how you're
in command of your data, of course,
in command of your data, of course,
405
945708
3859
16:01
but basically what you suggest is
406
949567
3794
16:05
growing wealth concentration is kind of
407
953361
1573
16:06
a natural tendency of capitalism,
408
954934
1924
16:08
and if we leave it to its own devices,
409
956858
3538
16:12
it may threaten the system itself,
410
960396
2240
16:14
so you're suggesting that we need to act
411
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1726
16:16
to implement policies that redistribute wealth,
412
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3038
16:19
including the ones we just saw:
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1721
16:21
progressive taxation, etc.
414
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1471
16:22
In the current political context,
415
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2139
16:24
how realistic are those?
416
972731
1991
16:26
How likely do you think that it is
417
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1811
16:28
that they will be implemented?
418
976533
1744
16:30
Thomas Piketty: Well, you know, I think
419
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1211
16:31
if you look back through time,
420
979488
1781
16:33
the history of income, wealth and taxation
421
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2651
16:35
is full of surprise.
422
983920
1602
16:37
So I am not terribly impressed
423
985522
2605
16:40
by those who know in advance
424
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1568
16:41
what will or will not happen.
425
989695
1631
16:43
I think one century ago,
426
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1704
16:45
many people would have said
427
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1569
16:46
that progressive income taxation would never happen
428
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2138
16:48
and then it happened.
429
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1520
16:50
And even five years ago,
430
998257
1989
16:52
many people would have said that bank secrecy
431
1000246
2352
16:54
will be with us forever in Switzerland,
432
1002598
2025
16:56
that Switzerland was too powerful
433
1004623
1788
16:58
for the rest of the world,
434
1006411
1489
16:59
and then suddenly it took a few U.S. sanctions
435
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2961
17:02
against Swiss banks for a big change to happen,
436
1010861
2622
17:05
and now we are moving toward
437
1013483
1703
17:07
more financial transparency.
438
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1676
17:08
So I think it's not that difficult
439
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4281
17:13
to better coordinate politically.
440
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2469
17:15
We are going to have a treaty
441
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2058
17:17
with half of the world GDP around the table
442
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3049
17:20
with the U.S. and the European Union,
443
1028719
2002
17:22
so if half of the world GDP is not enough
444
1030721
2126
17:24
to make progress on financial transparency
445
1032847
2666
17:27
and minimal tax for multinational corporate profits,
446
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4084
17:31
what does it take?
447
1039597
1664
17:33
So I think these are not technical difficulties.
448
1041261
3623
17:36
I think we can make progress
449
1044884
1924
17:38
if we have a more pragmatic
approach to these questions
approach to these questions
450
1046808
2587
17:41
and we have the proper sanctions
451
1049395
1901
17:43
on those who benefit from financial opacity.
452
1051296
2991
17:46
BG: One of the arguments
453
1054287
1653
17:47
against your point of view
454
1055940
1433
17:49
is that economic inequality
455
1057373
1442
17:50
is not only a feature of capitalism
but is actually one of its engines.
but is actually one of its engines.
456
1058815
3637
17:54
So we take measures to lower inequality,
457
1062452
2801
17:57
and at the same time we lower growth, potentially.
458
1065253
2407
17:59
What do you answer to that?
459
1067660
1560
18:01
TP: Yeah, I think inequality
460
1069220
1729
18:02
is not a problem per se.
461
1070949
1889
18:04
I think inequality up to a point
462
1072838
2040
18:06
can actually be useful for innovation and growth.
463
1074878
2652
18:09
The problem is, it's a question of degree.
464
1077530
2193
18:11
When inequality gets too extreme,
465
1079723
2544
18:14
then it becomes useless for growth
466
1082267
2889
18:17
and it can even become bad
467
1085156
1462
18:18
because it tends to lead to high perpetuation
468
1086618
3057
18:21
of inequality over time
469
1089675
1636
18:23
and low mobility.
470
1091311
1866
18:25
And for instance, the kind of wealth concentrations
471
1093177
3286
18:28
that we had in the 19th century
472
1096463
2877
18:31
and pretty much until World War I
473
1099340
1925
18:33
in every European country
474
1101265
1765
18:35
was, I think, not useful for growth.
475
1103030
2094
18:37
This was destroyed by a combination
476
1105124
2102
18:39
of tragic events and policy changes,
477
1107226
2341
18:41
and this did not prevent growth from happening.
478
1109567
2272
18:43
And also, extreme inequality can be bad
479
1111839
3443
18:47
for our democratic institutions
480
1115282
2198
18:49
if it creates very unequal access to political voice,
481
1117480
2383
18:51
and the influence of private money
482
1119863
1865
18:53
in U.S. politics, I think,
483
1121728
2002
18:55
is a matter of concern right now.
484
1123730
2540
18:58
So we don't want to return to that kind of extreme,
485
1126270
3076
19:01
pre-World War I inequality.
486
1129346
2090
19:03
Having a decent share of the national wealth
487
1131436
3674
19:07
for the middle class is not bad for growth.
488
1135110
3390
19:10
It is actually useful
489
1138500
1281
19:11
both for equity and efficiency reasons.
490
1139781
3084
19:14
BG: I said at the beginning
491
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1665
19:16
that your book has been criticized.
492
1144530
2109
19:18
Some of your data has been criticized.
493
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1241
19:19
Some of your choice of data sets has been criticized.
494
1147880
2466
19:22
You have been accused of cherry-picking data
495
1150346
1876
19:24
to make your case. What do you answer to that?
496
1152222
2737
19:26
TP: Well, I answer that I am very happy
497
1154959
1927
19:28
that this book is stimulating debate.
498
1156886
2467
19:31
This is part of what it is intended for.
499
1159353
2481
19:33
Look, the reason why I put all the data online
500
1161834
3294
19:37
with all of the detailed computation
501
1165128
1846
19:38
is so that we can have
an open and transparent
an open and transparent
502
1166974
2334
19:41
debate about this.
503
1169308
1669
19:42
So I have responded point by point
504
1170977
1766
19:44
to every concern.
505
1172743
1792
19:46
Let me say that if I was to rewrite the book today,
506
1174535
3113
19:49
I would actually conclude
507
1177648
1541
19:51
that the rise in wealth inequality,
508
1179189
2194
19:53
particularly in the United States,
509
1181383
1927
19:55
has been actually higher
than what I report in my book.
than what I report in my book.
510
1183310
2373
19:57
There is a recent study by Saez and Zucman
511
1185683
3245
20:00
showing, with new data
512
1188928
1592
20:02
which I didn't have at the time of the book,
513
1190520
1777
20:04
that wealth concentration in the U.S. has risen
514
1192297
2527
20:06
even more than what I report.
515
1194824
1936
20:08
And there will be other data in the future.
516
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2031
20:10
Some of it will go in different directions.
517
1198791
2151
20:12
Look, we put online almost every week
518
1200942
4099
20:17
new, updated series on the
World Top Income Database
World Top Income Database
519
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2934
20:19
and we will keep doing so in the future,
520
1207975
1900
20:21
in particular in emerging countries,
521
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2306
20:24
and I welcome all of those who want to contribute
522
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2929
20:27
to this data collection process.
523
1215110
2346
20:29
In fact, I certainly agree
524
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2808
20:32
that there is not enough
525
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1614
20:33
transparency about wealth dynamics,
526
1221878
1878
20:35
and a good way to have better data
527
1223756
1915
20:37
would be to have a wealth tax
528
1225671
1865
20:39
with a small tax rate to begin with
529
1227536
1571
20:41
so that we can all agree
530
1229107
2339
20:43
about this important evolution
531
1231446
1564
20:45
and adapt our policies to whatever we observe.
532
1233010
3327
20:48
So taxation is a source of knowledge,
533
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2062
20:50
and that's what we need the most right now.
534
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2936
20:53
BG: Thomas Piketty, merci beaucoup.
535
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1815
20:55
Thank you.
TP: Thank you. (Applause)
TP: Thank you. (Applause)
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4000
ABOUT THE SPEAKER
Thomas Piketty - EconomistThomas Piketty is an economist and professor at the Paris School of Economics. His 2014 book, "Capital in the Twenty-first Century," caused a sensation upon publication.
Why you should listen
Is the global economy accelerating toward a future that’s incompatible with democracy? In this provocative talk about inequality and wealth, economist Thomas Piketty provides new context for his groundbreaking book, Capital in the Twenty-First Century.
More profile about the speakerThomas Piketty | Speaker | TED.com