"There's nothing surer....

....the rich get rich and the poor get poorer". (Ain't we got fun, lyrics by Egan and Kahn)

Time for another bulletin from the Piketty coalface.  I'm now about two thirds of the way through "Capital in the 21st century".  After expounding at great length on the history and sources of inequality in incomes and wealth over the past two centuries, Piketty is finally starting to set out his case for a global, progressive tax on capital.

The impressive thing about this book, and the thing that sets it apart from most modern economics tomes, is the amount of trouble that Piketty (long with his numerous collaborators) has gone to in assembling a massive database (the so-called "World Top Incomes Database" or WTID), covering a wide range of countries over a long period of time.  Then he has applied some very simple mathematical techniques, most of them little more than identities, to tease out some far-reaching conclusions.

Most notably, he finds that inequality in incomes and wealth has a natural tendency to grow and become entrenched, just as the lyricists observed a century ago.  Inequality was very pronounced in the century before the outbreak of the Great War.  It became much less so between about 1914 and the 1950s, mainly because of the destruction of capital resulting from the two World Wars. However, it has been steadily increasing in the last few decades, and if current trends persist, could return to or even exceed its 19th century levels within the next few decades.

Inequality grows because, as Piketty shows, the return on capital always tends to exceed the rate of economic growth.  Then there are two factors that tend to have a kind of multiplier effect: inheritance (now becoming as big a factor as it was in the Austen and Balzac novels Piketty loves to quote), and size: big fortunes tend to grow faster than small ones, probably because holders of large fortunes can afford better investment advice.

Piketty illustrates this last point in a very interesting way, by analyzing the investment returns of the 800 or so university endowment funds in the US.  There's a very clear hierarchy.  The largest (Harvard, Yale, Princeton) consistently earn more than the mid-sized (Penn, Chicago), which earn more than the smallest (the likes of Iowa State).  For virtually all of these funds, returns on existing capital account for far more of their long-term growth than do new donations.

Piketty acknowledges society's need for capital, but questions whether this can possibly justify the level of inequality that is now re-emerging.  In particular, as inheritances start to assume greater importance again (after a lengthy hiatus cause by the destruction of capital by war in the 20th century), he questions whether tolerating rising inequality can possibly be justified by the need to foster entrepreneurial activity.  As he puts it, thanks to inheritance, all entrepreneurs eventually become rentiers.

Piketty's advocacy of a wealth tax to stem the rise in inequality has seen him labelled a Marxist by many in the US. He's responded to at least one such accuser by denying that he has ever read Das Kapital, but he clearly doesn't seriously expect us to believe that.  The obvious problem with his tax plan is that it would be impossible to get every country to go along with it.  From what I've read so far, he seems to believe that even a wealth tax imposed by just a few countries would be feasible and desirable.  I'm interested to find out how he thinks this could work, and will no doubt post again after another couple hundred pages!