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Piketty's Capital in the 21st Century

(c) 2017/1/19 by Chris Wayan

I just finished Thomas Piketty's controversial book Capital in the 21st Century. Fun! You wouldn't think an economic study could be fun. But it is.

First surprise: "21st Century" is way too limited. The book's as much about past centuries as the present. Piketty's team has been digging out who owned what in traditional societies, to give perspective to our current strangeness. That history is... strange.

Preindustrial growth was just 0-0.1% annually. Real growth in the industrial age soared spectacularly--to 1%! No higher, longterm. He argues recent higher levels just aren't sustainable--can't be, unless you're CERTAIN tech can keep paying off indefinitely, infinitely, cleanly--and blind faith is bad planning. He predicts a general slowdown as world population stabilizes. Even if he's wrong, he's right that we ought to plan for the possibility.

Yes, after World War Two, growth was several percent a year for decades; but it was a freak period with unsustainable growth rates, as both wealth and population climbed back toward prewar levels. But the world future is slow-growth--as our spoiled generation defines it. And history tells us what such eras are like: inherited wealth will dominate us again! Unless we resist.


Piketty sharply distinguishes income from wealth. The popular & governmental focus is all on income, but wealth inequality is worse, in all societies--payscale spreads can be wide but minimum wages are still positive; not so with wealth, where zero or negative wealth is common at bottom, and fortunes obscene at the top... in nearly all societies. Wealth inequality limits lives more severely than income inequality; and it worsens wage inequality, too. Most people can't leave wage slavery to chase their own dreams because they lack capital, even small amounts. And lack of capital depresses wages--if your boss knows most workers can't afford to leave, why pay more?


The US is now the most extreme ever known, anywhere, anywhen. Consequences unknown!

Is it a meritocracy? Well... no. Of the USA's top 1% earners, 2/3 are business managers, high up but not CEOs. Curiously, there's no evidence they benefit their firms anything like their high pay implies. They're neither a technocratic nor an economic phenomenon, but cultural! The grossest overpayments are in the US, the next highest in other English-speaking nations; other wealthy countries produce just as much wealth without paying these guys (and they're nearly all guys) that much. Even American firms with lowerpaid execs/managers do just as well! Anglos, and particularly Americans, just believe unjustifiably in financial mojo men. So a tax surcharge on firms that underpay workers & overpay execs won't hurt those firms--just punishes a superstition costing workers billions.

High pay may be justified for skills in some fields. Doctors do heal, scientists dig out Inconvenient Truths, entertainers draw crowds glad to pay, and inventors actually build (or don't! But even Babbage and Lovelace, who didn't, gave us good value in the long run.) The beneficiaries of skilled labor vote with feet & dollars that their work has real value.

But they're a modest pie-slice of the self-made rich; at least 2/3 are managers, where there's no evidence the skills are real and it's basically small boards overpaying them--out of faith in financial juju. "He looks like he'll save us." Yeah, he's a white male in a suit and he's not drooling. It's a star system borrowed from professions where the expertise IS provable.


Europe is still more stratified than the US... but not for long! The US is worsening fast. But those are details. The big picture: on both continents, a majority has essentially NOTHING. Zero wealth, or even in debt. That's his rough definition of working class. Not income (or lack of it) but zero wealth. 55% of the population!

Still, that's progress. In Jane Austen's England or pre-rev France or modern Afghanistan (or any non-rich modern nation), it's 95-99% with essentially nothing! At least in Europe & the US, a large minority--around 40%--now has hundreds of thousands per capita. Home equity, pensions, savings, investments & businesses. This is Piketty's middle class. Quite like the working class in income; that capital cushion is their chief distinguishing mark. Well, one other: they pay high taxes (both property and income tax).

Piketty's definition of the rich? Over 1-2 million dollars or euros, especially if a lot of it's in liquid investments--those are easier to hide from taxation than, say, a middle-class house. And his rich buy influence to ensure they stay rich: their investments effectively vote for businesses & sectors, and their political bribery shapes policy. Those are his defining marks of the rich: easy tax evasion & political manipulation.


Before the 20th Century, talent, education and hard work got you much less than marrying well. It wasn't just snobbery making the well-off disdain trade--the returns were dismal! Even professionals--scientists, doctors, civil engineers--got way underpaid for their investment in skills & knowledge. Novelists of the period take it for granted that learning didn't pay. Starting a business was hard too--capital was tight and you needed a lot more to get going--ads, transport, bookkeeping, everything was primitive and labor-intensive. Most modern readers assume the snobbery in old novels is sheer prejudice, but it was realistic--in an economy where work didn't pay. Marrying wealth did.

Worse yet: life at the average wage was a horrendous grind, with no free time. Life at 5-10 times the average wage was still hard! Leisure time took servants and 20-30 times the microscopic average wage. So inheritance was an overwhelming force historically; up to a quarter of all annual income was wealth transfer (gifts or inheritance) and among the well-off it was much more--larger than all wages/entrepreneurial profit. Only after 1900 for the first time did education and effort lead to payoffs better than seeking to marry into old wealth!

In the 20th Century, labor, education, entrepreneurship and professionalism actually paid. But now that's waning as inheritances grow again. Yes, the meritocratic window has left a legacy--millions of modest nest eggs outside the cluster of megafortunes that utterly dominated in past centuries. But still inherently unequal; and not meritocratic. Not at all.


What about the bottom? Minimum wage varies a lot globally, even in developed economies. Germany lacks a formal one but it's over $10 in practice; France is about $12, maybe high enough to depress entry-level work. But the US is geographically AND historically low; a rise from current 7.50ish to $10-12 wouldn't hurt jobs at all since every other developed economy does as well in that range (and their poor, much better). The US is huge & patchy, so $15 might hurt depressed states/counties where prevailing wage is unusually low; wisest might be a federal rate of $10-12 in depressed/low-wage regions and as much as $15 in wealthier states or regions. Certainly they need to be allowed to set higher ones. But the argument that any raise costs jobs has no basis in fact--it's just a theory not borne out by actual levels around the world.


Nearly every nation on earth now has a negative balance of payments--more money leaves than enters. Until recently, each national government gloomily assumed "we're not competitive, other nations are doing better," because no one did a global accounting. Piketty has--apparently for the first time. And accounts don't balance by several percent!

His proposed explanations: either Earth is secretly owned by Martians, or 10 or 15% of global flow is siphoning into secret, tax-evading accounts--amount uncertain, but it has to be way more than what's detected--if all of it were detected there'd be no point. Whatever the figure is, it's huge.

Rather than bemoan the bloodsucking, he sees its potential as a massive source of revenue to fund New Deal societies--and conservatives can't easily defend financial vampires. Nor does enforcement need broad social consensus--governments can and should get more aggressive NOW about vampire-hunting. There's serious gold in them thar Swiss hills.


Return on big capital? The historical AVERAGE was just 5% for centuries. But do big hoards do better? Astonishingly little data--because capital's not tracked for tax purposes, and the rich prefer to hide that info.

But Piketty found one big, reliable database: US college endowments are required to report details. Hundreds of multimillion-dollar fortunes. They form a pattern--a startling one. The oldest and biggest get extraordinary returns. Harvard gets 10+% on $30 billion, Stanford & Yale get 9% on half that, a couple billion gets you 8%, and on down... to small colleges with $10M getting just 5%. Harvard spends $100M on analysts to find those highest yields. Smaller fortunes can't.

Piketty thought--and I'd have guessed too--that once you have millions and hire serious wealth managers, piles of cash would all grow at about the same rate. Nope! Really monstrous private fortunes grow FASTER than midsize. Ominous.


Piketty's lesser, easier proposal: go after the massive tax evasion he's uncovered. A big chunk of the world economy's untaxed. With money recovered, fund the social programs known to boost economic & social growth--health & education. His focus is tighter than Occupy movement's focus on the richest 1%; he aims to raise income tax for the top 0.1%, or even 0.01%.

His bigger, harder proposal: a worldwide tax on capital, not just income--0% or at most 0.1% on wealth under $1M, up to 1% on $1-5M, slowly scaling up to 5-10% annually on billionaires. Four benefits:

  1. Having ordinary people report capital (even though they pay no tax) will give governments a clear overview of who owns what--how widely capital's distributed and how that changes. Now they operate in ignorance, just guessing--and that costs us all in bad policy.
  2. Revenue, quite a lot of it.
  3. Fairness. The rich really do underpay. Why should middle-class capital pay so heavily (property taxes!) if we don't tax the stocks and private ventures the super-rich invest in (and hide)?
  4. Shrinking megafortunes. He argues they do more harm than good--corroding politics, manipulating media, silencing critics. I'd agree.
Piketty argues it'd be technically easy to have institutions report capital just as they do income. After all, to calculate income they start from your holdings! And in fact, we already DO this routinely for property tax--the biggest wealth tax we have. But prop tax hits the middle class and petty rich the hardest, not billionaires. Their money's liquid, intangible. You have to go after it specifically... and aggressively.

Problem: small countries couldn't enforce a wealth tax unilaterally. In Europe, the rich would just sneak their capital over the nearest border, & change legal residence if pushed... You'd need hard sanctions against tax havens who don't report wealth stashed by your citizens. Europe will have to integrate more politically to do it; rich states now compete to offer lower rates and attract capital (e.g. Ireland's tax break on artistic royalties, and that's small potatoes compared to scofflaws like Switzerland), just like poor countries compete to offer the cheapest labor by union-busting and tax breaks. Races to the bottom of this sort require regional and preferably world action. Piketty thinks the US and China are such big cohesive markets they could act today without Europe or world cooperation. But can they, will they?

He admits change isn't politically easy anywhere--the mega-rich are already so influential. But the alternative is that in a few decades a handful of billionaires, and more likely billionheirs who didn't even earn it, will own EVERYTHING--and bribe governments to get their way. Until they provoke revolution.

We saw such extremes a century ago, and that's exactly what happened. Do we want 1914 again? 1917?


My own capital history confirms Piketty's warning that the modern economy favors capital returns over wages. My health has been poor, so I've never earned much; in INCOME terms I'm lower-working-class. But I lived cheaply and saved compulsively, invested it all in social funds (nonmilitary firms with good ecological & labor & consumer track records), and LEFT it invested longterm, not trying to outsmart the market. (I didn't know this approach had been independently invented by Graham Alexander and popularized by his grad student Warren Buffett. I just made it up.) Did it work? I retired at 36, after a single decade of wage work. My co-workers focused on promotions & bonuses--income. They earned more but saved less and invested more complexly, more "safely", hedging and spreading it between bonds, stocks, real estate and so on; buying and selling actively; and ignoring ethical standards "because those restrict your pool of potential firms too much").

They're still working.

In CAPITAL terms, I'm low-end rich, $1.6M. A quarter of that was a recent inheritance. Less than 1/8 was the wages I saved up. Over 5/8 are capital gains & dividends earned by the firms I invested in with those savings! Even for a small-scale saver like me, capital growth outpaced my wages after my first 5 years of saving & investing; lifetime, they're over 5 times as big! The system today, just as in the 19th Century, overwhelmingly favors capital.

I think Piketty's long view underestimates just how high the returns on capital now are. He says over & over that capital's historically returned 5% not 10%. Amazing! I've always expected longterm returns of 10+%, comparable to Harvard's! And why not? US stock yields average over 10%, for the 120-odd years records have been kept; and the social funds I prefer to invest in (screening out unethical firms) have done as well or better since their inception 30-40 years ago. Think about that. Small investors can consistently get at least 10% from stocks--all you need do is invest, get absolutely mediocre returns, and have the self-restraint to leave it alone, staying fully exposed to both booms & busts. Dare to be stupid!

Maybe this huge discrepancy in growth is due to my location in the New World. Piketty looks deep into the past, and old financial records are overwhelmingly European--and colonial. 5% may be correct for economies built on slavery & war: that'd be the whole world in the 18th & 19th centuries, growing patchy in the 20th, until, after WW2, Africa and Asia have held a near-monopoly on war--98-99% of all deaths. Maybe a 10% return is reasonable for any market not regularly devastated by war. And what of slavery and subtler exploitation? Returns on modern social/ethical funds hint that good labor relations help the bottom line--so, did worker exploitation stunt growth and returns for centuries? Probably.

Piketty confirms the conventional wisdom that stocks outperform bonds with real estate's way behind (averaging just 3%) but points out longterm returns on capital are lowered by inflation & taxes--trimming about 2% each for most investors. So is the stock market's 10-12% really 6-8%? Well, no, not for most of us. US law doesn't tax the first $35,000 or so of capital gains. The mega-rich have their own ways of evading taxes on capital and capital gains. And inflation nibbles at everyone, not just market investors. My rule of thumb remains 10%. 9, if you're feeling cautious.

Do I get that? No. Turns out I get MORE. In the 21st century I've averaged 20% on stocks and 10-12% on real estate. I haven't looked as closely at my 20th century investments since they're paper records tedious to look through (I admire Piketty's team for doing it), and back then I was partly influenced by a conventional financial advisor. But even then I got 8-10%, not 5. Maybe it's just luck that doing my homework and sticking to long-term ethical investing paid off--but maybe not. The high returns in real estate too suggest it's not chance:

  1. My friends and I looked at 100 houses before buying this one, and agonized over how to set up a financially sound co-op. It's septupled in 19 years--about 11% a year.
  2. We installed solar, but took over a year to comparison shop. Cost a tenth our original estimate and it paid for itself in just 18 months. Not years. Months.
  3. I chipped in to help my sister buy & fix up homes in Portland for her & my niece--rents were rising as Portland boomed. They lived there and knew the area. The homes have more than doubled in the last six years. 15% growth is surely unsustainable, but when they finally sell we'll get 10-12%.
In short: just by doing your homework, being ethical and being patient, you can match Harvard's elite "experts". This implies that the experts who mid-size colleges and multimillionaires hire, who make just 5-9%, are biz-school graduates trained to be hyperactive, to churn accounts, to hedge, to cut moral corners... to get rich quick.

It looks impressive. It supports bad business. It causes crashes. It destroys.

My guess: only the topflight experts (who only billionaires can afford) overcome their brainwashing to be daredevils... and dare to be dull and obvious. Or else they take great risks, working hard to achieve 10%... which you can get doing nothing but investing in firms that aren't scum, and... being... patient. Get rich slow!

In short: I'm one of the TINY minority (0.1%?) living entirely on capital, not wages, not just for a decade or so in old age, but my whole adult life, but who didn't inherit most of that capital--I guess the technical term would be "selfmade rentier". My experience makes me disagree with Piketty on this point (and agree with some conservatives, to my surprise). Working people CAN and SHOULD save. They NEED to tap into the power of capital. It's NOT arcane, NOT inaccessible, NOT reserved for billionaires. They'd like you to think so--so you stay wage slaves.

But not only the working class sees wealth in income terms. What surprises me it that the college-fund evidence implies even high-end financial "experts" have the income mindset, playing get-rich-quick, trying to make capital grow by effort and cunning, buying and selling, playing the market--not simply investing in ideas & people they think are good, and then giving them time to enact their dreams. Short-term market-players sabotage themselves--and the larger economy, too.


We're stuck with late capitalism for now--it resists reform. And it savagely penalizes debtors & workers, and grossly overrewards savers & investors. So...

  1. Spending bleeds you as much as low wages do. Live simply (shouldn't you anyway for ecological reasons?)
  2. Credit is your enemy. DON'T go into debt for anything except a house you live in (and even that's doubtful if your mortgage costs more than rent would).
  3. Save relentlessly, doing without all but basics, and do NOT put savings in a bank. Invest it. Long-term. How? Well:
  4. Choose an social/ethical fund like Ariel, Calvert or Domini. If you really adore weapons, coal, big tobacco and union-busting firms, pick a market-index fund (based on the S&P500 or Dow or similar). Or invest in specific products and firms you know & like. But invest, and then LEAVE IT ALONE. Don't buy & sell as the market heaves & thrashes...
...and get rich slow. Not because "To be rich is glorious." Because being poor in this ugly system is hazardous to your health!


Given the new data he's dug up, Piketty's proposals seem like plain commonsense.

  1. Raise America's minimum wage--it's economically safe to. At LEAST $12, maybe $15. Claims that a raise from $7.50 to $10 "will cripple the economy" are laughable.
  2. Put a surtax on firms with extreme wage inequality--remember, it won't hurt them a bit! Since they're throwing the money away on unproductive clowns right now.
  3. Raise taxes on the very highest incomes. But perhaps most importantly...
  4. Start tracking and taxing capital--not just income.
  5. Spend the money gained from taxing the rich on health & education--those consistently promote economic growth AND individual happiness.
If there's one message Piketty has for all social classes, it's that last item--notice capital, track capital, tax capital. Find big lumps of it and tax them enough to keep them small. Multimillionaires, and especially billionaires, really ARE political manipulators and tax evaders, on a bigger scale than is visible in any one country; and their behavior has serious longterm consequences.

Like... feudalism.


I've been charting my net assets over the last 20 years in more detail (before that, it's harder to dig up data) just to see if I perhaps made a mistake. Over that 20-year long-haul, I didn't get the 10% a year I claimed is always possible. More like 12%! I was underestimating!

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