Sunday, January 3, 2016

Book Review: Capital in the 21st Century by Thomas Piketty

Read Capital in the 21st Century written by this French Economics Professor named Thomas Piketty over the last one month. I should mention that the book was originally written in French and has been translated into English by Arthur Goldhammer whom I heard speaking well on an NPR interview. Quality of his translation and perhaps the original writing itself is quite good that the flow, prose, tempo and information density of the book remain consistent throughout this tome. Depending upon the eReader font/page size, this could appear as a 700 to 900 pages long book and so may not be for everyone. But I thoroughly enjoyed reading it and would recommend it.

Piketty argues that the rate of return capital produces (r) is invariably more than the rate of growth of the economy (g). When this r > g status continues for long periods of time, the importance of capital increases creating a "rentier" class that becomes richer and richer simply by holding on to capital while the segments of the population that depends on their labor to generate income is permanently put on a disadvantage making them poorer with no real path/opportunity to catch up. This wealth inequality leads to conditions where the wealthiest 1% of the population (top centile) often disproportionately receives >20% of the nation's income, while the wealthiest 10% (top decile) takes away >50% of the income/wealth, leaving the bottom 50% with just about 10% of income. 

He marshals in volumes and volumes of data that is analyzed in detail (lots of Excel generated charts :-) to bring these points out over time (over hundred years) and space (France, US, UK, Japan, Sweden being the countries analyzed the most). He can't appreciate enough about the quality of probate records available for analysis in France and complaints about how little data is available from countries like China, India and Russia. There is hardly any analysis of African countries for the same reason. But his conclusion is that analyzing data from these rich countries clearly spells out as to how the rise in inequality will continue unless governments take concrete steps to arrest this trend. 

Book is segmented into four parts. Parts 1 titled Income and Capital & 2 titled The Dynamics of the Capital/Income Ratio covers all the basics of economics one needs to know to understand the rest of the book. Part 3 titled The Structure of Inequality dives into how the current world is made up of people deriving their wealth mostly through capital and those that get paid for their labor and how the inequality gets magnified between the two classes. On the labor side, there are these super managers (CEOs of MNCs) that get paid absurd amounts of money. He points out well as to how the increase in margins of productivity brought about by these CEOs can never really be that high to match the salary they draw and how often they get enormous raises when factors totally outside their control increase their company revenue or stock price. Then he digs into the capital side with even more vigor to show that capital that usually provides 5% annual return while the growth of the mature economy average only about 1%, people holding capital can live a very comfortable life and still reinvest most of their profit to keep building up their wealth endlessly. Only during the two world wars capital actually got decimated correcting this trend. Now that the world wars are long past, we are back to the normal mode where the inequality trends higher and higher. 

He points out as to how France and UK used to be more inegalitarian in early parts of the last century compared to US. But during the last 30 years this trend has changed considerably making US one of the most inegalitarian states in the world. In US there is a general sense ensconced in the collective conscious that inequality is a prerequisite to entrepreneurial dynamism. It is contrasted with Europe which is denounced as a poster boy of socialism that is a sanctuary to Soviet style egalitarianism. But letting this trend to continue will be devastating to the overall wellness of the society. So, what is his prescription to address the issue? On part 4, he suggests a small progressive tax on capital, say 0% on wealth less than 100K Euros, 0.2% for the band between 100K to 1 million Euros and say 0.5% or more above that band. He says this will be similar to property taxes we pay now but will include all kinds of wealth including  bank balances, stocks, mutual funds, real estates, and so forth. He concedes that all the countries in the world sharing their banking data across the world will be a prerequisite to implement such a tax policy. I'd fully endorse such transparency as it can bring in phenomenal changes in the world. He argues that bringing that level of transparency may look daunting initially, successful implementation of FATCA type laws clearly show that it is possible. He sees lot more value in bringing this global transparency than the actual revenue that will be generated by this capital tax, though it won't be anything to laugh about. Since he is not talking about replacing income or estate taxes but complimenting them with capital tax, it does make sense. Countries like Sweden are moving in that direction already. My main worry will be how effective will governments be in properly collecting and spending so much more money. I think being in Europe where there are several small countries (Nordic & Scandinavian countries comes to mind) with homogeneous population, similar values, small but rich economies and good technology manage to run high tax/high government services model well supporting a very egalitarian setup might push one to think that the same model could be extended to the whole world. In reality in large countries with diverse population with varying values and technology, it may be much harder to implement. But as he argues, though it may sound utopian, trying to move in that direction might be better than not trying at all letting the inequality continue to build up towards some eventual societal explosion. 

On a side note, he talks about Bill Gates' wealth and how is portrayed in the US media as the poster boy for reaping rewards for good work and how he should be allowed to accumulate any amount of wealth while contrasting his with current richest man in the world, Carlos Slim and previous richest men from Japan who are portrayed by the US media as shady characters that got their wealth via unacceptable illegal monopoly and due to some lucky real estate investments respectively! I do notice such media biases allover the world. Anyway, Bill Gates maintains a blog site where he talks about the books he reads and has appreciated this book and has even discussed the book via Skype with Piketty. You can see his write up here:

Bill Gates argues that consumption should be taxed instead of wealth. But Piketty doesn't think that is a good idea for multiple reasons. Measuring consumption is even more difficult, making the tax burden progressive will be very tricky and it will impose larger tax burden on the poor again. There are lot more discussions on how arbitrarily drawn national boundaries make countries rich/poor due to availability of natural resources (oil, minerals), how the implementation of the stateless currency of Euro across Europe has to be quickly followed up by fiscal, political integration of Europe without which the whole system will unravel and so forth, that I found persuasive. It is always good to see works that comprehensively analyze data over large periods of time (this one starts from Belle Époque and spans into the recent great recession) and explain trends in similar scales instead of over reading small ups and downs occurring in short time periods in specific markets and extrapolating them to make global predictions. I was quite amused by all the literary references in the book (Jane Austin's Sense and Sensibility makes multiple appearances) to explain how in previous centuries idle living using the income generated from large estates is considered the most respectful. He is able to develop lot of ideas using pointers available in old novels as to how much income one needs to get from their wealth (usually 100 times the national average) to live a comfortable life. 

I picked up the hardcover edition from the local public library few months back. But since it was a new book, I could get it only on a two week loan. As you could imagine, I had to return it unfinished as there were holds on the book preventing me from renewing it. But during this Dec/Jan season, our local library is undergoing renovation and so I could check it out for two months. So, jumped on it. Though I read the hardcover edition, since I liked the book and found the eBook on the web for $4.99, bought a copy as well. Buying an eBook reminded me of an article I read about this particular book. Amazon & Google are able to track how far people get to by looking at their bookmarks and what page numbers quotes used in book reviews come from. Apparently not very many get past the first 100 pages. :-) 
-sundar.

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