Irving Fisher was worried. "We may be sure that there will be a bitter struggle over the distribution of wealth until a more or less definite readjustment has been found," Fisher, the president of the American Economic Association [PDF], told his brethren. "Something like two-thirds of our people have no capital except the clothes on their backs and a little furniture and personal belongings, while the major part of our capital is owned by less than two per cent of the population…So much for the distribution and control of wealth." The year was 1919.
Fisher's speech is but a coin in the Scrooge McDuckian motherlode of empirical and historical evidence that is Thomas Piketty's Capital In The Twenty-First Century, a book designed to highlight the global inequality crisis in hard data and plain speaking in a field that by Piketty's own admission has a "childish passion for mathematics and for purely theoretical and often highly ideological speculation."
Nearly 100 years ago, Fisher was concerned that America had become less equal than the continent its founders escaped. Today, Piketty writes, "The United States has become noticeably more inegalitarian than France (and Europe as a whole) from the turn of the twentieth century until now, even though the United States was more egalitarian at the beginning of this period."
How did the Postwar Boom—with its record economic growth and ticky-tacky toeholds for the middle class and high progressive income taxation—turn into the bankrupt, bubble-riddled, billionaire Recessionomy we currently inhabit? And how do we get out?
Piketty's answer is a global tax on wealth. The rate of return on capital will always be higher than the growth rate of income, but he hopes that his unprecedented collection of data show that we can (and must) apply the brakes.
I was struck with how much time you spend in the beginning of the book pounding the concepts of cumulative growth and compound interest into our heads, both with respect to economic and population growth. It reminded me of my Dad explaining how a savings account works.
I think it's important because it seems there is a bit of confusion with the popular perceptions of growth and rates of return. Maybe one way to make these notions more concrete is to look at them not over one year, but over a generation, or one hundred years.
For instance, I think that in Europe but also in the U.S., we still live in the nostalgia of the post-war decades, where growth rates were three, four, five percent per year and it's important to state at the beginning of the book that this cannot go on forever. Even a growth rate of 1% per year that goes on for thirty years or one hundred years—it's already very fast. We have to get accustomed to the fact that we have to live with 1% or 1.5% or 2% and it's already quite fast.
The best way to make people feel this is to look at the law of compound interest and accumulating growth and to look at that growth over a generation. In the first chapter, the main message is that 1% per year as a growth rate is enough to get 30% or 35% or almost half of the economy renewed at each generation, so that's already a major transformation. We can all see that—30 years ago there was no information technology, so there has been a complete renewal of the economy and still it was only a growth rate of 1% per year.
So it's a way to get people to have a more concrete feeling of what a growth rate of 1% means and what a rate of return on capital of 4% or 5% means. Otherwise these are just abstract mathematical notions and many people stop listening. My purpose is to get people to keep listening.
You mention the nostalgia for the post-war period. Roosevelt raised the top income tax rates above 80% and you point out in the book that the average top combined federal and state tax rate in the US from 1932 to 1980 was 81%. If they were part of the prosperity, why aren't progressive income tax rates also part of the nostalgia?
Well, it's a good question. This is the forbidden conversation in US politics. And I'm not sure the country and the media are ready yet for this conversation. People are ready now to ask, was it useful to have this big rise in top managerial income since the 1980s and 1990s? Was it really useful for society as a whole?
But I'm not sure people are really ready to question the fact that this big political choice that was made during the Reagan years, of enormously reducing the top tax rate, should be put under debate. Why not return to these very high top rates that we have in the '50s, '60s, and '70s?
I guess somehow the Reagan term in American politics managed to make people believe that this was part of what was needed to "get America back." The kind of collective trauma following the Carter years, the Vietnam War, the '70s, was so strong that people were ready to believe in a stronger story. The reduction in top tax rates, even though this has nothing to do with Carter, Vietnam, or the end of the Cold War, this became part of an almost consensual national narrative.
Even the Obama administration talks of the Reagan years as transformative years, so we should not question them too much. This is still very much an American taboo. I don't know how long it will last, but it's still very much a taboo.
Now the problem is that this taboo has helped to produce a level of inequality that makes the taboo self-sustaining, because now you have big financial interests at the top of the distribution that are ready to spend a lot of resources to protect this taboo and to make sure we don't question it.
This conversation seems like less of a taboo in France. Conservatives here call your idea of raising taxes "socialist," but what do the actual socialists in France think of your work?
It's a very different debate. Every country has its own debate and its own passionate history with equality and inequality. In France, taxing the top managers making more than €1 million is a very different issue than the US because there are very few such managers.
In a way this proposal to have a 75% tax above €1 million was not really that useful in the context of France, because there are not many out there. In principle it should be more of a debate for the US.
Both in France and the US people have a short memory. Most people on the left and the right tend to buy the story which says that high tax progressivity is a sort of European, Marxist fantasy and the US will not want it. As far as historical facts are concerned, it's exactly the opposite. This was an American invention, this was never applied to such a high extent in Europe.
The main thing the book is trying to do is force people to put the debate into a broader historical and international perspective than they usually do. Usually most people don't know about other countries and they don't know beyond the past 10 years. This book is trying to say, look at the past 100 years, or the past 200 years, or look at other countries.
You prescribe a progressive income tax above 80% and say it acts as a deterrent for exorbitant salaries. What happens to that money when it's not going to the CEOs or top managers? What happened to the money when income taxes were that high during the postwar span?
The money will go into higher wages. Total output will not go down. Output has to go somewhere, and it goes into higher wages for the rest of the workforce. I think the same would happen today.
The basic question is, when you pay a top manager $10 million to you get any extra output, do you get any extra performance? From the data we have it doesn't seem that you get much of this.
If you have roughly the same output and more going to the top, then you have less for the rest of the workers. It's as simple as that. If you were to force down these high salaries, it would leave more for the rest of the workers.
My friend is a Marxist. He started reading your book and said that because it contains much more data than Marx's works, it could be interpreted as an even stronger argument against capitalism itself. One of the central themes of the book is that the rate of return on capital will always be greater than the growth rate. This seems like an immutable flaw. It took two world wars to put capitalism in the position to be at its strongest and most egalitarian form, and that only lasted for 30 years or so. Why not scrap it and start with something new?
No, because we can make it work! I think private property and market forces are good not only because they help produce innovation and growth, but because they are part of what it takes to have personal freedom. Usually in countries where you don't have private property, you also have to question the right to move freely from one city to another. That's a pretty serious threat to personal freedom.
You know, I really believe in private property. But we want to set up the democratic institutions and the fiscal institutions so that private property and capitalistic forces are under control somehow. We use them for whatever they are useful for, but we make sure that they do not take control of the democratic process itself, and of society itself.
The progressive wealth tax is sort of an organized way of questioning property rights on a permanent basis. Basically, you say look, you are the owner of property, but not entirely because you're going to have to pay a certain percentage of the value of your property each year, and if you have billions and if we observe that billionaires are rising much faster than the economic growth rate than the size of the economy, then each year you would have to pay a tax equivalent of a few percent or 5% or maybe more if necessary.
You still have a private property system, but you have a permanent questioning of how far this can go. It's pretty radical when you think of it, but it's not abolishing private property.
Private property in the form of a home has always been an integral part of the American Dream. Do you think real property will continue to be the main way for the middle and lower classes to claw back some share of capital from the upper 10%?
I think there are a number of complimentary ways to move in this direction. Access to private property in the form of home and company shares is one way, but that's not exclusive of other ways. Access to skills and education is of course another way. Maybe it's equally important to consider the development of new forms of ownership and new forms of collective government systems.
We don't believe that shareholder company with full power to shareholders is the only way to organize activity. Nobody wants to transform Harvard University to a shareholder company so the shareholders could do whatever they want. We have the same debate in many of the same industries, including the media. Do you want ways to empower journalists, or third-parties, to make sure shareholders aren't going to do whatever they want?
You don't have to choose between progressive taxation of private property and new forms of property. I think we need both. In a way it's easier to have more democratic governance of private corporations if you also have the financial transparency that goes with progressive taxation of wealth. They're complimentary.
In Germany, workers have seats on company boards, even without any stake in the capital, and apparently this does not prevent these companies from producing good cars and selling them. There are ways to empower people in their own governance that actually work. But for this to work you also need to know who owns what, and you need the kind of financial transparency that progressive taxation of wealth would promote.
A few weeks ago Bill Gates said he supports a progressive tax on consumption [PDF]. What are your thoughts on that compared to a tax on capital?
Was he more specific? Did he say something more precise?
He said that a progressive tax on consumption was better than a progressive tax on income from labor.
It's a very interesting statement. I strongly disagree with this preference for a consumption tax. Let me tell you why. This is the usual defense of people who don't want wealth taxation or who don't want inheritance taxation. They say we should have a consumption tax.
The problem is that when you ask them for specific proposals they don't show you a proposal of a true, progressive consumption tax, where you should tax at much higher tax rates those who consume a lot. At the end of the day you end up with a flat tax on consumption. So it's just a fighting tool against tax progressivity. They don't want to say they're against progressivity so they say this.
The more serious and philosophical problem with a consumption tax is this: what is consumption for Bill Gates? Because when you have a lot of wealth, you're going to consume food but that's not going to get you very far. So what you're gonna do is consume politicians; you're gonna consume academics; you're gonna consume journalists; you're gonna consume whatever there is to consume on Earth.
Now when you want to define consumption, it's very difficult. If Warren Buffett takes his corporate jet to go to a meeting to talk to whoever he has to talk to in New York, is that consumption? That's probably going to be counted as intermediate consumption in his company accounts, that's probably not part of his official personal income.
I think it's much easier and much more transparent to have a tax on wealth. I can see rankings of wealth everywhere in magazines. I don't see rankings of consumption. I think it would be pretty intrusive and pretty difficult to define what the consumption of Bill Gates is.
When you ask academics to come and take a plane to talk to you for thirty salons, and they all come from the other side of the planet to do that, is this consumption? Yeah, I think it's a pretty exciting consumption. You have power over people, you get people to come and talk to you, that's nice. Does he want this to be part of his consumption bundle? Or does he feel like he's investing for the sake of the planet?
I think [a consumption tax] is a pretty hypocritical way of paying a tax. You have some people out there, including Bill Gates, who want to look as if they're very generous, but they always want to keep deciding for themselves how generous they want to be. They don't like the tax system because the tax system is deciding for them how much they have to pay. It kills the possibility for them to decide what they should pay, what should be done, what should we do about education in Africa. Of course he doesn't know anything about that but you know, he wants to decide. At some point you want to consume power.
He's a more visible emblem of wealth but you write, "Wealth is so concentrated that a large segment of society is virtually unaware of its existence, so that some people imagine that it belongs to surreal or mysterious entities." How can you make the idea of wealth more tangible for people to understand?
My book is only one little atom is in this direction. I tried to make it more concrete by showing the entire society's distribution of wealth, from people who only have $10,000 to people who have $200,000 to people who have $2 million, to people who have $2 billion.
The problem is that usually you don't have this complete picture. Either you have the billionaires in the Forbes rankings, but there are so few that we don't really care about them because at the end of the day, if you only take 100 or 200 people even if they are very rich their total aggregate wealth is not going to be that large compared to national wealth.
I'm not saying we should have a perfectly equal distribution of wealth. But right now the bottom 50% of the US owns about 2% of total wealth. The next 40%, what I call the middle class, own about 22-23%. You can do better than 2% for the bottom half and better than less than 25% for the next group.
One way to make it concrete is to say you want more people who are able to make $100, $200, $300, $500,000 dollars than we have today. That's not going to kill the economy. The fact that we have a prosperous middle class is not bad for the economy. It's crazy to argue that the only way for an economy to grow is to have extreme concentration of wealth in the top ten or top 1% or top 0.1%, as we had in most European countries until World War I.
One lesson of history that I show in my book is that we don't need 19th Century inequality for 21st Century growth to happen. You need some inequality, but look, Bill Gates, his net worth, I dunno, is maybe the GDP of Egypt? And maybe he would say that even if it's the GDP of Africa it would not be too much as long as he can decide how to give for education or anything else. At some point it's just too extreme. We have to question that.
Wealth seems pretty concrete here in New York. We have the highest taxes in the country, but at the same time our city continues to become more inegalitarian. What can a city like New York do on its own to stop this? What can municipal governments do to combat inequality?
New York State could make its income tax more progressive and have higher tax rates at the very top. Now for New York City, I understand that this is more complicated, and that this is more a state matter than a city matter.
I think if it was a city matter, I think New York City could do a lot on its own, because New York City is sufficiently big. Of course it's better to have more tax progressivity at the federal levels, but New York City is sufficiently large and sufficiently attractive that it could raise significantly the level of progressivity at the upper end without damaging the economic base of the city.
But if we put that aside, I think a lot can be done through education, investments in education, from kindergarden to universities. I think the public university system—I was very glad to have this event at CUNY last month with Krugman and Stiglitz because it is the City University of New York. For many people it's less prestigious than NYU or Columbia but at the same time, it's a public institution.
It's important to find new ways to combine efficiency with equal opportunity in the university area. The United States has been very good at producing very efficient universities at the very top end of the distribution, but pretty bad at generating equal access of higher education. I think this is getting to become a problem for the US economy as a whole, because you have a very large part of the population that don't have access to the proper skills and the proper education. One way to address that is to invest more in the public university system, like CUNY, but I think it will take more than that.
At some point you need to have a conversation about the admission process in private universities and how transparent they are. The way some people pay for their admission to top schools is something that's very difficult to understand for other parts of the world.
Some people tend to believe that because these are private institutions they can do what they want, but there's a lot of public money in private universities as well, and it's part of our common meritocratic ideal and it's not clear that you want that to happen.
In my book I refer to a number of studies showing that your gifts to your former university tend to be concentrated right at the time that your kids are applying to college. There's very systematic evidence for this pattern. That's weird, because it's a little bit like the gift made by Bill Gates. If these are supposed to be disinterested gifts, real charitable giving, there should not be a counterpart. If you give money to a foundation you should not be president of that foundation. If you give money to a university you should not have your kids admitted in exchange for this.
I don't know how much the City of New York can do about the admission procedures of Columbia University and NYU [laughs]. But at least putting this up for debate about who has access to universities, what are the income and social groups of the children who go to NYU, Columbia, CUNY and other universities and schools of higher learning.
In the long run this issue of unequal access to education really is a central issue.
Our current mayor wanted to pass his universal Pre-K program and pay for it with higher taxes on the richest New Yorkers, but the Governor nixed that idea.
So what are the taxes that the city itself controls?
Very few. Property taxes to a degree because they make the assessment.
Yes, but with these they could make progress. There are two differences between the kind of old-style real estate taxes and property taxes that we have in North America and in Europe and the type of progressive tax on net wealth that I recommend in my book. One difference is that the property tax is proportional and not progressive, so you have more or less the same rate whether you have a $200,000 apartment or $2 million or $20 million, and as you say the values are not often updated and it creates a lot of noise and a lot of inequity. But in any case it's sort of flat with the respect to the value of your property.
The other problem with these taxes is that they don't take into account mortgages, or financial liability, or financial assets. I don't know how much the city can do, but you can transform a property tax as a progressive tax on net wealth. In effect that could mean that all the people who have low net wealth will pay less, typically all people who have a large mortgage. If you have an $800,000 apartment but a $700,000 in mortgage, your net wealth is only $100,000, so you pay less. People with millions will pay more. I don't think that will make everybody flee New York instantaneously. I think there is some room for making the property tax more equitable and to favor access to property for the vast majority of the population that has limited wealth. So that would be my tax program for the City of New York [laughs].
But they still pay the property tax, no?
They do, but they don't pay any of the income taxes that go along with being a resident of New York or New York City.
But their property taxes are still paid. So that's the thing: the property tax could be a way to tax the people who pretend not to be a resident, but actually have a property in New York. You know, maybe that would make real estate prices fall by taxing them more, but actually that's good, that's exactly what you want so other people can buy real estate in New York.
Living wage is minimum wage?
Well, minimum wage isn't enough to really live on. A living wage is actually based on the cost of living.
But is it a state or city function?
The City can tweak it for companies that receive City tax subsidies.
So they cannot pass their own income tax rate, but they can pass their own minimum wage rate?
It's kind of messed up.
At the federal level, minimum wage purchasing power is less than what it was in the 1960s, which is quite surprising, that a country a half a century later has a lower real minimum wage than it used to. I think the minimum wage could be increased quite a lot.
Now, that's complimentary to investments in education, in the sense that it's easier to have a higher minimum wage, but at the same time you invest in skills so that people can access jobs that are indeed more productive than the labor earning minimum wage. You don't want to put all the burden on raising the minimum wage. But if you do it in a balanced manner—education, minimum wage, and progressive taxation of wealth and income are the three pillars of what you can do.
You've been studying inequality for a long time. Are you going to keep at it or pick up something new?
Right now I'm going to move more in the direction of emerging countries and spend a lot of time working on China, India, Latin America, and Africa; trying to get better data for these countries. You know in China, the issue of inequality of wealth is getting really big these days and so far the way the government handles it is mostly on a case by case basis. When some people get very rich they suddenly expropriate them, and the government is starting to realize that this is not the way to regulate the dynamics of capital accumulation, and they are seriously discussing the possibility of introducing some form of property tax or wealth tax.
In the medium-run I plan to work more on the political science side of the question—political perceptions of inequality and less on the statistical side.