APRIL 16, 2014

SPEAKERS: JUSTIN VOGT, COUNCIL ON FOREIGN RELATIONS

THOMAS PIKETTY, ECONOMIST AND AUTHOR

[*] VOGT: Hello. I'm Justin Vogt, deputy managing

editor of Foreign Affairs, and this is Foreign Affairs Focus on Books. This is a new interview

series that we're launching today, and we could not be more pleased than to have as

our first guest, Thomas Piketty, professor of economics at the Paris School of Economics,

and the author of the highly anticipated new book "Capital in the 21st Century," which

is reviewed in the brand-new issue of Foreign Affairs.

Professor Piketty, thank you so much for joining us today.

PIKETTY: Thanks for inviting me.

VOGT: Now, you are best known for your work in demonstrating how in recent decades income

inequality has grown to levels, really, that have brought us to something like a new Gilded

Age, at least in the United States, where we now have the wealthiest 1 percent, or even

the wealthiest 0.1 percent, controlling a proportion of income that we haven't seen

in a century. At the same time, others contend that, well, you know, all boats have risen

during the same amount of time.

And my question for you is, why should this kind of economic inequality be something that

we're worried about? Why should people care about this kind of economic inequality?

PIKETTY: I think inequality is fine, as long as it is in the common interest. The problem

is when it gets so extreme, when it becomes excessive. So the very difficult question,

of course, is, when is it that it becomes excessive and it becomes useless for society?

And let me say right away that, you know, I don't have, you know, a mathematical response

to this question, so what I'm trying to do in this book, you know, is to put a lot of

historical evidence into this debate so that, you know, we -- it's not that we're going

to stop fighting about inequality. You know, people have been fighting about inequality

forever, and this will continue. But at least we will know a little bit more what we are

fighting about.

So the primary objective of this book, which comes from an international research project

where we have been collecting historical data on income and wealth in over 20 countries

since the Industrial Revolution. You know, the primary objective is to try to present

this data, you know, in a consistent manner.

Then at the end of the book, you know, I draw some, you know, conclusion about the future,

but let me make perfectly clear that, you know, even if people disagree entirely about

my conclusion, this is fine. They will still, I think, find some interest in the history

of income and wealth that is presented in part one, two and three of the book.

And, you know, if -- to answer more precisely to your question, I think one of the historical

lesson of the book is that we don't need the kind of inequality that we had in the 19th

century in order to grow. So one of the lessons of the 20th century is that 19th century inequality

was not useful for growth. You know, it was destroyed by the world wars.

It was also changed by policies, progressive taxation, the welfare state, so that European

countries, in particular that are very extreme concentration of wealth until World War I,

had a much more equal distribution of property in the '50s, '60s, and this did not prevent

growth from happening. Quite the opposite. In fact, probably the reduction in wealth

inequality increased mobility, upward mobility. You know, the people in the middle class started

to accumulate wealth. And this was probably good for growth, as well.

So, you know, we should be worried about returning to the kind of extreme inequality that we

had in the 19th century. That doesn't mean that we want full equality, of course, but,

you know, we have to be careful about the fact that the trends, the pure economic forces

can get us, you know, further away from our ideals than we would like it to be. And, you

know, we -- you know, there's no natural force that prevents this from happening again.

VOGT: Your book is built around a simple, but profound insight into, one, economic relationship

and the -- you express this in terms of a formula, R is greater than G, in other words,

the rate of return enjoyed by investors can outstrip the overall growth in the economy,

and that this has the effect of creating the kind of inequality that you are concerned

with.

Can you explain exactly what that means, what R is greater than G means, and why it's such

a powerful dynamic?

PIKETTY: OK, so R bigger than G was obvious to everyone, you know, in traditional societies.

Well, people would not formulate it this way, but it was obvious because growth was basically

equal to zero in traditional agrarian society. You know, population was not rising. Productivity

was rising at very low...

VOGT: I'm sorry. Excuse me.

(BREAK FOR DIRECTION)

VOGT: Your new book is built around a simple, but profound observation about a relationship,

an economic relationship between the rate of growth and the rate of returns enjoyed

by investors. You express as R is greater than G. In other words, the rate of return

enjoyed by investors and capitalists often outstrips the overall growth in the economy.

Can you explain that relationship and also explain why it's such a powerful dynamic?

PIKETTY: OK. So R bigger than G, you know, today can seem paradoxical, but, in fact,

during most of human history, this was really obvious to everyone. Although people did not

formulate it this way, this was obvious because the growth rate was close to zero percent.

You know, population was more or less stagnant. Productivity was -- productivity growth was

very small, you know, less than 0.1 percent per year, so maybe -- you know, say zero percent.

And the rate of return to capital, of course, was positive, so typically, you know, landowners

in traditional societies will get an annual rent to their lands that was of the order

of 4 percent to 5 percent of the value of the land. So, you know, the traditional formula

was, you know, the price of land is the equivalent of 20 or 25 years of annual rent to the land.

And, you know, when you read novels of Jane Austen or, you know, whether -- you will see

that everybody at that time knew that, you know, if you want an annual return of 1,000

pounds, you need a capital of 20,000 pounds. And this was obvious to everyone.

And, in a way, this was even the foundation of society, because this is what allowed group

of landowners or owners of, you know, whatever assets there was to own, to sustain and to

be able to do other things and, you know, just care about their own survival.

VOGT: In other words, the rate of return had to be greater than the rate of growth in order

for there to be a sort of profit incentive.

PIKETTY: For -- well, not a profit incentive. A way to live. You know, they were living

off their rent, and this allowed them, you know, to do different other activities, you

know, maybe, you know, scientific activities. Also, nobility also was supposed to -- you

know, to defend the rest of the population in case of a military attack.

But, anyway, this was -- the foundation of society was that you have a group of owners

that will live off their property. And for this to happen, you need to have a rate of

return bigger than the growth rate. So when the growth rate was zero percent, this was

easy, and this was the foundation of all, you know, traditional wealth-based society.

Now, in the 19th century, with the Industrial Revolution, things changed a little bit, but

not that much, in the sense that growth rate went to 1 percent, 1.5 percent per year, with

the industrial revolution, which is a lot more than zero percent, because over the space

of a generation, over 30 years, it means you increase output by, say, 50 percent, you know,

which is a lot. When you do that over many generations, it has increased a lot our living

standards.

But this did not change the inequality, R bigger than G, that much. And this is why,

you know, at the end of the day, the concentration of wealth that you have in the late 19th century

or the eve of World War I is almost as large as under the (inaudible) regime. So, you know,

in 1900, 1910, you have no middle class in France or in Britain, and you have 90 percent

of the wealth belonging to the top 10 percent. And the central explanation I believe for

this is really R bigger than G.

Then, during the 20th century, a number of very unusual events made this inequality,

R bigger than G, stop being true, and first because between 1914 and 1945, you had huge

capital shocks, capital destruction, inflation that reduced tremendously the return to private

assets. Then the growth rate itself increased a lot in the postwar period partly because

of the recovery after the war and partly because of very large population growth, you know,

the baby boom (inaudible) demographic transition was not over yet, so you had unusually high

rate of economic growth due to these two factors.

And now we are back, you know, starting the 1980s and 1990s, we are back to a situation

where growth rate, you know, at least in the most developed countries are down to lower

levels, in particular because of the decline in population growth, and the rate of return

itself is back to relatively high levels, in particular due to international competition

to attract capital investment.

So we are back to this inequality, R bigger than G, which, you know, we had sort of forgotten,

because during sort of a very long time period, during the 20th century, it ceased to be true,

but it's quite likely that this is going to be with us for a long time, and that's certainly

an important force that tends to push toward rising initial -- wealth disparities tend

to rise, because, you know, if you start with higher wealth, you know, it's easier to grow

that if you start just with your slowly growing labor income.

VOGT: And so here we are in the present day, where we see these really striking inequalities

of wealth. In your book, you put forward two prescriptions for how to deal with this from

a policy point of view. The first is, essentially, raising income taxes to a fairly level, at

the highest bracket, somewhere around 80 percent, even, and then also what you call a global

wealth tax on all kinds of assets. Can you explain why you think those steps would work?

PIKETTY: Well, first of all, you know, the best policy, of course, is to raise the growth

rate. So the first thing that you want to do is to raise the growth rate. The other

thing that you want to do is to raise education, which is the major way to reduce inequality

in earnings.

The question is, is that going to be sufficient? Now, if you look at the risk of very top managerial

compensation in recent decades in the U.S., you know, I think it's not mostly a problem

of lack of education, of people below the top, you know? It has more to do with the

fact that you have a group of very top managers that were able to a large extent to set their

own pay, you know, irrespective of performance, you know?

In the past few decades in the U.S., you have rising inequality, rising top managerial compensation

everywhere except in the growth statistics, you know, because the growth performance of

the U.S. economy since 1980 has not been particularly good, you know? GDP grows -- per capita GDP

growth has been, you know, 1.5 percent per year, a lot less than in the previous decade

prior to 1980. So if you have two-thirds of that growth that goes to the top 1 percent,

you know, you have really very little left for the rest of the population.

So I think one way to keep, you know, this quiet and to make -- to put an end to this

indefinite rise in top managerial compensation is, indeed, to return to very high top tax

rate on very, very large income. And, you know, that's not going to reduce growth. You

know, I think, you know, you have the same growth as in the U.S. in countries like Germany,

Sweden, who didn't have this huge rise in top managerial compensation.

Now, regarding the wealth tax, this is another issue that I talk about in the book, and that

has more to do with the R bigger than G and the rising wealth concentration. And here,

you know, the basic fact is that the top of the wealth distribution in the U.S., but also

in Europe and also at the global level, has been rising three times as fast as the size

of the world economy, you know, over the past few decades, whereas the share of national

wealth going to the middle class has actually been declining.

So in the United States, you know, the share of national wealth going to the bottom 50

percent is just 2 percent. And the next 40 percent, which you can call the middle class,

are getting, you know, about 23 percent, and then you have 75 percent for the top 10. So,

you know, it's very extreme concentration of wealth, and what I'm saying is that we

need to find ways to increase wealth mobility and the opportunities for wealth accumulation

by this group and limit the extreme concentration of wealth at the top.

One way to do that -- that doesn't have to be global. You know, there's a lot that can

be done at the national level, especially in large countries, like the United States.

You know, you could very well transform the property tax into a progressive tax on wealth

so that, in effect, you will reduce the property tax that's paid by the bottom, you know, 90

percent of the population. If you have $500,000 in your house, but if you have a mortgage

of $490,000, you know, you're not rich. You know, your net wealth is $10,000. So in what

I propose, you will not pay any progressive tax on net wealth, and as now you pay as much

property tax someone with no debt.

So that would allow, you know, more people to accumulate wealth, and that will certainly

not reduce the total quantity of wealth. You know, I think one big lesson of the 20th century

is that we don't need to have all the wealth, you know, to the top 10 percent, top 1 percent.

You know, we can have a lot of wealth accumulation from the middle class, and that kind of progressive

tax on net wealth would allow that to happen. You know, more wealth mobility, more accumulation

of wealth by the middle class, and less extreme concentration of wealth in the hands of a