The second crisis of capitalism (part 3)
In last week’s blog, I summarised research published by Thomas Piketty that showed how economic growth was increasingly being diverted into the pockets of the very rich. The result is that inequalities in wealth are now at a level, throughout the Western world, approaching those obtaining at the start of the First World War. Piketty has shown how, even at an average rate of return on investment and with taxes paid, the growth in the wealth of the wealthy will, year by year, outstrip the growth in the wealth of everyone else.
This, in itself, is not new. We all know this intuitively, even if we don’t have Piketty’s statistics to back it up. Money breeds money. What is new is the scale on which it is happening, and the global dispersal of both corporate and individual assets, so that it becomes difficult, if not impossible, for governments to know who has got what where, and – even more impossible – to tax it.
The average rate of return on investment, whether from rents on property or from dividends on investments, is between 4 and 5%. Astonishingly, the rate has been at this average level in every observed country at every period of history. However, averages are only averages. Anyone who’s had their money in a bank deposit account in recent years will have been lucky to get 0.5%. What, Piketty wanted to know, might the super-rich be getting?
On the face of it, this was impossible to find out. It is entirely private information. Even governments don’t have it. Especially not governments. Piketty had the bright idea of looking at the investment performance of the endowed funds of American universities. Like the super-rich, they have very large sums to invest. Like the super-rich, they have access to the best financial advice. Unlike the super-rich, their investments are transparent.
Piketty found that, over a 30-year period, American universities obtained an average real rate of return of 8.2%. The top three (Harvard, Yale and Princeton) obtained an average of 10.2%. He surmises, not unreasonably, that the super-rich are obtaining returns of a similar magnitude.
There is, unfortunately, no comparable way of estimating how much wealth, both corporate and individual, is held offshore. A study of all available data, and more particularly of the discrepancies between data, has led Piketty to endorse Gabriel Zucman’s findings that the equivalent of 10% of the world’s GDP currently resides in tax havens, either lightly taxed or not taxed at all.
If British citizens held a similar share of British GDP offshore (and one might think it would be more); if they were obtaining an average rate of return of 8%; if they were paying the top tax rate on dividend income of 38.1%, they would be contributing about £6 billion towards government expenditure every year from the interest on their investments alone. It seems unlikely that more than the tiniest fraction of this tax is, in practice, paid.
The more one studies Piketty’s research, the more one can see that, while the wealth of the top tenth of the population may be a problem, it is not the main problem, and that while the wealth of the top hundredth of the population may be a bigger problem, that again is not the main problem. It is when you get to the top thousandth of the population that the really jaw-dropping figures occur.
This may sound like a tiny number of people and of course, compared to the total population, it is. But it still amounts to 65,000 people in Britain, and more than a million in the developed world. In total, these 65,000 people take nearly 6% of Britain’s national income, a huge increase from the figure of about 2% in 1980, although still little more than half the figure of 11% before the First World War. In America, the comparable figure is about 8%, in Germany 4% and in France 2.5%.
So, 6% of Britain’s national income goes to the top thousandth of the population (nearly £2 million per head every year). Almost 30% goes to the top hundredth (nearly £1 million per head), and about 70% goes to the top tenth (more than £200,000 per head). In all cases, these ratios are significantly lower than they were in 1914, but substantially higher than at their nadir in the 1970s. And the long-term trend is upwards in every case.
If I am not careful, I will end up writing a précis of Piketty’s entire book, which is not my intention. So I will omit large chunks of his argument, including the relative importance of inherited versus created wealth (inherited much more important, especially in Europe) and generational calculations (interestingly, Piketty dismisses the idea that we are impoverishing our children; he shows that wealth inequalities are much the same within each age group, and that there is not much difference between the age groups). So let us return to the main thrust of his argument.
Inequalities of income and wealth have increased substantially and consistently since 1980. This has been the case especially in America, but nearly as much so in Europe. Different political and tax regimes in different countries during this period have made no appreciable difference to the trend. Whichever index one consults, inequalities were high everywhere at the start of the 20th century. They fell everywhere between 1914 and about 1970. Since then, they have increased everywhere – not to the levels of a century or more ago, but in some cases approaching it. Economically, the long 20th century has been an extended U-curve on every index.
At the same time, the post-war level of growth, especially in continental Europe, can be seen now for what it was: an explainable anomaly. Over the past 40 years – allowing for demographic changes and inflation – real per capita growth has been almost identical in all Western economies. To the disappointment of political zealots, different political regimes in different countries have again made no measurable difference to this. And future growth seems likely to be mediocre.
Piketty’s critics, many of them neo-liberal Americans, mostly choose not to engage with his arguments and hope that he will go away. It’s not a big deal, they say. The market automatically compensates for its own flaws: that’s the beauty of it. Just because things have been going a certain way for 40 years, that doesn’t mean to say they’ll go on going that way.
Piketty himself would agree with that. Time and again, he says that he is in the business of analysing the past, not of predicting the future. But he is entitled to point out that if trends have continued unabated for 40 years, and if no action has been taken to counteract them, and if some of their features are self-multiplying, then at the very least one should consider the possibility that they might continue.
Thomas Piketty may or may not go away (probably not, I would say). Either way, his facts won’t.