Piketty: The Market and Private Property Should Be The Slave of Democracy

Click for Piketty Interview on The RealNews Network

Lynn Fries, The Real News Network hosts interview with Thomas Piketty May 15, 2014 = We look into the history of income and wealth from the 18th century = 3 centuries of data (HUGE DATABASE) into the public domain, so now everybody has access to the history of income and wealth = Who owns what and who earns what?

THE ENEMY:  HOME DEPOT Billionaire Kenneth Langone = Terrified of paying more taxes Compared talk of inequality to Nazi Germany’s imprisonsonment.

Langone said a GOP pivot toward the economic populism of Rand Paul and Ted Cruz would mirror the rise of Adolf Hitler. = “Because if you go back to 1933, with different words, this is what Hitler was saying in Germany.”

Langone’s tepid apology saying the remarks “were intended to discourage pitting one group against another group in a society….I extend my profound apologies to anyone and everyone who I may have offended.” = Other wealthy, white men made similar Nazi analogies or defended those already made. = Langone heads the group Republicans for Cuomo. = He again said he was only “speaking about a democratic process which we have….we never want to put ourselves in a position as a nation where we pit group against group….I only cited the election that took place in 1933. And I only said the product of that election was the election of an evil, horrible human being!” = ???

Thomas Piketty = Professor of Economics at the Paris School of Economics + Author of HISTORIC GROUND-BREAKING BEST SELLER “Capital in the Twenty-First Century.” = Making it easy for us all to understand theoretical work on the distribution of income and wealth. = Long run evolution of Concentration of WEALTH AT IN A VERY FEW HUNDRED HANDS OF ELITISTS. = SOLUTION is TAX WEALTH to SOLVE INEQUALITY.

PIKETTY Objective of book = Consistent documentation to draw conclusions about the future + a detailed history of income and wealth to help everybody draw more conclusions about INEQUALITY = 3 centuries of data

PIKETTY: Sympathy for people born in the 1970s who will see a return of wealth dominated societies, where the total quantity of wealth takes most of the income. = FEW WEALTHY grab most INCOME = Passive Income

Ratio of total wealth to income:

Post war baby boom core = Relatively little inherited Wealth because of Destruction + Inflation + Taxation during World Wars = Working Incomes created a vibrant Middle Class

1980s and beyond = TAXES LOW so Wealth and Inheritance began BUILDING back to NORMAL pre World War I levels  = No real Middle Class a century ago.

Since Reagan and Thatcher LOW TAXES on the RICH = WEALTH BEGAN CONCENTRATING AGAIN AND MIDDLE CLASS has been SHRINKING for Decades! = No sharing and no spreading of wealth = Only DEBT maximized to compensate. = Great for Usury and Rentier Class.

Income inequality by Simon Kuznets in 1950s = First economist to produce an income inequality series. = Found income inequality declined in US between 1913 and 1948 = Great Depression + WW II + High Taxation of Wealthy enacted by FDR.

FACT:  Meritocracies = Built on transitory illusions = Invented a number of fairy tales or nice stories. = Human capital illusion and the war of ages illusion = built on dust spec of truth.

Human capital illusion = All that matters is human capital = Education + Skills + Personal Talent = Meritocracy = Greedocracy = Not Wealth = What we own without debt = real estate, equipment, patents, robots and other non-human assets = Illusion because both human and non-human capital are in comparable proportions.

FACT:   Technology and Robots (Capital) competes (at lower cost) with human capital (driving down wages and income) in favor of CAPITAL (tech + robots) replacing labor!  = Recent trends is capital share of GDP increasing = labor share is down. = More similar to when manual farm labor dominated in 1800s

False Illusion: Assumption that technological change = Triumph of LABOR.

FACT:  Technological change and Robots = Triumph of CAPITAL

False Illusion:  War of ages illusion = With aging and increase in life expectancy = you accumulate a pension for your old age + Then Consume some of pension

FACT:  Pensions have SHRUNK to 20% of total wealth accumulation in every country = INEQUALITY GROWS as WEALTHY ACCUMULATE MOST IN THEIR PENSIONS!

Piketty’s TWO PATTERNS = Income Pattern + Wealth Pattern = U-shaped patterns

PATTERN #1 = % of Total income going to the top income earners.

WW II = Reduction of share to RICH during the war period to 1970 = LOWER INEQUALITY = HIGHER TOP TAX RATE

1970s to 2014 = Large increase of WEALTH to RICH particularly in USA = Rise of CEO and Hedge Fraud Compensation = $10s of MILLIONS/YEAR = CAPTURED MOST INCOME AND WEALTH = NO 91% to 94% TOP TAX RATE like Eisenhower.

PATTERN #2 = More important is the total quantity of wealth VERSUS income.

Up to WW I = In Europe & Japan total AMOUNT of wealth = Very large = 6 X Income

WW I to 1950 = In Europe & Japan total AMOUNT of wealth = Dropped = 2 to 3 X Income

1950 to 2014 = In EU & Japan = Increased back to Pre- WW I Levels

FACT = Problem = Inequality of wealth = MUCH larger than Income inequality

FACT = We can do better = POLICIES = More equal distribution of Wealth = Wealth mobility + Higher access to wealth for people who start with low income.

FACT:  #1 INEQUALITY PROBLEM = WEALTH INEQUALITY because that causes INCOME INEQUALITY = BACK TO 1800s like GILDED AGE!

Main Force pushing concentration of wealth = High rate of return on capital (4% to 5%) = HIGH USURY INTEREST + LOW TAXES ON CAPITAL = Higher than Economic Growth Rate (1% to 1.5%) = Agrarian societies growth rate close to 0%.

UP TO WW I = Rate of return FAR EXCEEDED the growth rate = MASSIVE INEQUALITY

FACT: We saw a complete change in the nature of wealth between the 18th century and 1910 due to the Industrial Revolution = 1800s Land was Wealth but by 1910 land really did not matter much (5% of Wealth) + Real Wealth was financial assets, international investments, industrial capital.

1910 Concentration of wealth = Bit larger than 1800s concentration of land wealth

Explanation for this concentration = A tendency of rate of return to be bigger than the growth rate. = Natural State we in 2014 are Returning to again.

FACT: Growth rate in the future = Population growth rate

Piketty = Demographic projections are for declining Population growth rates

Piketty = Productivity growth rate in post war period – 1950 to 1970s = 4% to 5%

Piketty = Last 30 years Productivity growth rate in Europe/Japan 1% to 1.5%

Piketty = Future productivity growth terms likely in 1% to 1.5% range.

Piketty = The rate of return on capital = 3 to 4 TIMES HIGHER than productivity = Capital Wins = EXTREME CONCENTRATION OF WEALTH IN FEW HANDS = MASSIVE INEQUALITY

Piketty = 20th Century was unusual = war caused BIG decline in rate of Return = destruction, inflation, taxation + BIG increase in growth rate in the post war period because of the recovery and also because of the large population growth.

FACT: 50% of Total GDP growth in the 20th century was Growth of population = OVER now

Piketty = Predicting the future value of growth rate and rate of return are difficult. = Social, demographic, economic, political, financial changes.

Piketty = Says it would be a mistake just to rely on natural forces for the rate of return and the growth rate to equilibrate each other. = No logical reason + No historical reason why growth rate should be as large as the rate of return.

Piketty = Unlikely that growth will be 4% or 5% per year in the future = lots of children = NOT LIKELY

Piketty = So we NEED A PLAN in case the growth rate returns to normal 1% to 2%

PLAN = Set up institutions – fiscal institutions, educational institutions – that allow us to spread the wealth and that allow us to have a balanced distribution of income and wealth in the long run.

Lessons for democratizing wealth

PIKETTY = Main lessons of the 20th century is that wars and Depressions Reduce inequality = Fortunately more peaceful ways for redistributing wealth exist.

PIKETTY = We need to rethink entirely the issue of progressive taxation of Inheritance and Income that was invented in 20th century but abandoned in 1970s for bad reasons.

PIKETTY = We need to analyze progressive taxation of wealth = Taxing Wealth is far more important than taxing income in the 21st century. = We need Both of course.

PIKETTY = Now most developed countries tax wealth through property taxes in proportion to their value = NOT progressive and ignore financial assets/liabilities = Property Taxes were Developed in 19th and early 20th century = Outdated and Wealth has dramatically changed to more financial than land based real estate.

PIKETTY = We must adapt Wealth Taxation to NEW 21st Century wealth structure = Transform property taxes into progessive taxation of net wealth.

PIKETTY = Example if your house is worth $500,000 and your mortgage is $490,000 your net wealth is $10,000 but you pay taxes on the $500,000 = UNJUST! = Horrible way to tax Wealth.

PIKETTY = To limit concentration of wealth at the top = We need to have a progressive tax on net wealth. Lower rate of tax for Bottom 90% of the population + Graduated increasing rate for people have $Millions or $Billions in wealth.

PIKETTY Objective is to keep the same quantity of wealth but to spread it more and to increase the mobility of wealth in society.

PIKETTY: Transparency and sharing of wealth information = Key objective for a rational democratic debate + Public knowledge of who owns what where.

PIKETTY: Primary objective of taxation is to produce more transparency + Democratic accountability.

FACT: When there was no corporate income tax there was no corporate accounts = No way to know the profits of a company

PIKETTY: In order to have a proper wealth tax we need to fight tax havens.

PIKETTY: We need more automatic transmission of information from banks to each country’s government so that we know who owns what where. = A global registry (database) of financial assets so that we have a much better knowledge of cross border assets than we have now.

PIKETTY: With all this automated and collected data Transparency on Wealth our democratic institutions will be better able to decide which tax rates should be adopted. = Over Time we can Adjusted Rates to insure a responsible level of Wealth Equality and Improve transparency.

PIKETTY: Today the top of the wealth distribution is rising three times as fast as the size of the economy = Forbes ranking data suggests that the top of the wealth distribution is rising at 6% to 7% per year in US and Europe. BUT WORLD WEALTH IS RISING AT ONLY 2% = CRISIS is COMPOUNDING

FACT = INEQUALITY CRISIS is COMPOUNDING = The top is rising 3 X as fast as World average = Clearly a 1% or a 2% tax rate at the very top is NOT going to kill the economy.

PIKETTY: As Wealth transparency increases it may show that the top wealth group actually does not rise faster than the average then Taxation rates can be adjusted correspondingly. = Adapt our policy to what we see. = What democracy is all about = SMART DEBATE AND DECISIONS BASED ON ACCURATE SHARED IMPROVING INFORMATION!

PIKETTY: 21st century is characterized by a similar kind of INHERITANCE structure of the 19th century but with different types of assets and wealth.

FACT: 19th century societies were actually based on very large inequality of wealth without universal suffrage.

FACT: 19th century property taxes were not taking into account financial assets and liabilities which are so important today = Now International assets requiring international sharing of Wealth Data.

25% of WORLD GDP = USA
25% of WORLD GDP = EU


Soon China will reach 25%

All have rising concentration of wealth.

China or Russia for that matter are sort of treating their wealthy oligarchs on a case by case basis.

China is realizing they ought to do it in a better way = Debating the replacement of property taxation with Taxation of wealth = More progress than US and EU.

All areas of the world will have to try to adapt their view of taxation and their consideration for a wealth tax to a world of very high wealth to income ratio and very large cross border assets and financial wealth.

PIKETTY: 1900 to 1910 was a time where you had a lot of innovation going on and at the same time a lot of inequality, you know very high concentration of wealth. = Invention of automobile, electricity, radio, airplane = Not Facebook but still important innovations. + 1% to 1.5% growth rate per year. = End of Gilded Age = Inequality was so large it threatened the proper working of our democratic institutions = We could be headed for that again in the near future.

PIKETTY: Technological rationality = NOT EQUAL to democratic rationality.

PIKETTY: Market and private property should be the slave of democracy. = Use the Market System and the Price Discovery System and the Property System to BENEFIT EVERYONE with prosperity in WEALTH and income.

PIKETTY: 1980s agenda set by a few people arguing that all we needed was market competition = Turned Democracy into the slave of Markets and private Interests.

PIKETTY: We need very strong democratic institutions, very strong fiscal institutions, a very strong and inclusive education system. = REQUIRES SMART POLICY DECISIONS! = NOT some technological forces or some market forces.

PIKETTY: Lessons of history are very important = Milton Friedman in the 1960s argued that all that we need basically is a good Federal Reserve, we don’t need government or progressive taxation = I think we still live under this legacy today.

PIKETTY: We must stop relying exclusively (even after 2008 Crisis) on creative monetary policy and actions of the central banks = It is NOT going to be enough. = Too often it creates bubbles that result in even greater wealth concentration = creates huge profits for certain people and a huge loss for others.

PIKETTY: We also need Truly Progressive Taxation + Welfare + Strong education.

NEW Progressive Taxation of All Wealth need the Government to legislate for a NEW tax base + You need to enforce the tax law = More complicated than MONEY out of THIN AIR and DEBT growth. = But at least we know who pays what and who owns what.

PIKETTY: We must rethink the idea of create $Billions of dollars or euros everyday that flows in undocumented ways into unknown hands. = We need to rethink these institutions and what they have brought us in the past and what we need for the future in a new light.