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The richest 1 percent alone absorbed nearly 60 percent of the total increase of US national income in this period. Hence for the bottom 90 percent, the rate of income growth was less than 0.5 percent per year.
this internal transfer between social groups (on the order of fifteen points of US national income) is nearly four times larger than the impressive trade deficit the United States ran in the 2000s (on the order of four points of national income).
In other words, workers at McDonald’s or in Detroit’s auto plants do not spend a year of their lives as top managers of large US firms, any more than professors at the University of Chicago or middle managers from California do.
the vast majority (60 to 70 percent, depending on what definitions one chooses) of the top 0.1 percent of the income hierarchy in 2000–2010 consists of top managers. By comparison, athletes, actors, and artists of all kinds make up less than 5 percent of this group.42 In this sense, the new US inequality has much more to do with the advent of “supermanagers” than with that of “superstars.”
All signs are that the Scandinavian countries, where wage inequality is more moderate than elsewhere, owe this result in large part to the fact that their educational system is relatively egalitarian and inclusive.2 The question of how to pay for education, and in particular how to pay for higher education, is everywhere one of the key issues of the twenty-first century.
We are free to imagine an ideal society in which all other tasks are almost totally automated and each individual has as much freedom as possible to pursue the goods of education, culture, and health for the benefit of herself and others. Everyone would be by turns teacher or student, writer or reader, actor or spectator, doctor or patient. As noted in Chapter 2, we are to some extent already on this path: a characteristic feature of modern growth is the considerable share of both output and employment devoted to education, culture, and medicine.
To sum up: the best way to increase wages and reduce wage inequalities in the long run is to invest in education and skills. Over the long run, minimum wages and wage schedules cannot multiply wages by factors of five or ten: to achieve that level of progress, education and technology are the decisive forces.
This very sharp discontinuity at the top income levels is a problem for the theory of marginal productivity: when we look at the changes in the skill levels of different groups in the income distribution, it is hard to see any discontinuity between “the 9 percent” and “the 1 percent,” regardless of what criteria we use: years of education, selectivity of educational institution, or professional experience.
the explosion of very high salaries occurred in some developed countries but not others. This suggests that institutional differences between countries rather than general and a priori universal causes such as technological change played a central role.
In Sweden, the top centile’s share was a little more than 4 percent in the early 1980s (the lowest level recorded in the World Top Incomes Database for any country in any period) but reached 7 percent in the early 2010s.15
The differences are obvious: the top thousandth in the United States increased their share from 2 to nearly 10 percent over the past several decades—an unprecedented rise.
To make clear what this represents in concrete terms, remember that a 2 percent share of national income for 0.1 percent of the population means that the average individual in this group enjoys an income 20 times higher than the national average (or 600,000 euros a year if the average income is 30,000 per adult). A share of 10 percent means that each individual enjoys an income 100 times the national average (or 3 million euros a year if the average is 30,000).
This was true not only of Britain, France, and Germany but also of Sweden and Denmark (proof that the Nordic countries have not always been models of equality—far from it), and more generally of all European countries for which we have estimates from this period.
For example, tax returns show that the top centile’s share of national income in Colombia in 2000–2010 was more than 20 percent (and almost 20 percent in Argentina). Actual inequality may be even greater. But the fact that the highest incomes declared in household surveys in these same countries are generally only 4 to 5 times as high as the average income (suggesting that no one is really rich)—so that, if we were to trust the household survey, the top centile’s share would be less than 5 percent—suggests that the survey data are not very credible. Clearly, household surveys, which are often
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is only reasonable to assume that people in a position to set their own salaries have a natural incentive to treat themselves generously, or at the very least to be rather optimistic in gauging their marginal productivity. To behave in this way is only human, especially since the necessary information is, in objective terms, highly imperfect.
Simply put, wage inequalities increased rapidly in the United States and Britain because US and British corporations became much more tolerant of extremely generous pay packages after 1970. Social norms evolved in a similar direction in European and Japanese firms, but the change came later (in the 1980s or 1990s) and has thus far not gone as far as in the United States.
the decrease in the top marginal income tax rate led to an explosion of very high incomes, which then increased the political influence of the beneficiaries of the change in the tax laws, who had an interest in keeping top tax rates low or even decreasing them further and who could use their windfall to finance political parties, pressure groups, and think tanks.
this fear of growing to resemble Europe was part of the reason why the United States in 1910–1920 pioneered a very progressive estate tax on large fortunes, which were deemed to be incompatible with US values, as well as a progressive income tax on incomes thought to be excessive. Perceptions of inequality, redistribution, and national identity changed a great deal over the course of the twentieth century, to put it mildly.
so low that nearly half the population were able to acquire some measure of wealth and for the first time to own a significant share of national capital.
People felt that capitalism had been overcome and that inequality and class society had been relegated to the past. It also explains why Europeans had a hard time accepting that this seemingly ineluctable social progress ground to a halt after 1980,
the lost US paradise is associated with the country’s beginnings: there is nostalgia for the era of the Boston Tea Party, not for Trente Glorieuses and a heyday of state intervention to curb the excesses of capitalism.
It is an incontrovertible historical reality that r was indeed greater than g over a long period of time.
After World War I, the tax rates on top incomes, profits, and wealth quickly rose to high levels. Since the 1980s, however, as the ideological climate changed dramatically under the influence of financial globalization and heightened competition between states for capital, these same tax rates have been falling and in some cases have almost entirely disappeared.
A concatenation of circumstances (wartime destruction, progressive tax policies made possible by the shocks of 1914–1945, and exceptional growth during the three decades following the end of World War II) thus created a historically unprecedented situation, which lasted for nearly a century.
FIGURE 10.10. After tax rate of return versus growth rate at the world level, from Antiquity until 2100
it relies on the assumption that no significant political reaction will alter the course of capitalism and financial globalization over the course of the next two centuries. Given the tumultuous history of the past century, this is a dubious and to my mind not very plausible hypothesis, precisely because its inegalitarian consequences would be considerable and would probably not be tolerated indefinitely.
the largest fortunes increasingly belonged to the elderly, who saved a large fraction of their capital income, so that their capital grew significantly faster than the economy. As noted, such an inegalitarian spiral cannot continue indefinitely: ultimately, there will be no place to invest the savings, and the global return on capital will fall, until an equilibrium distribution emerges.
This equilibrium clearly broke down in the interwar years: the wealthiest 1 percent of Parisians continued to live more or less as they had always done but left the next generation just enough to yield capital income of 30–40 times the average wage; by the late 1930s, this had fallen to just 20 times the average wage.
The society of rentiers that flourished in the Belle Époque was not a society of the past based on static landed capital: it embodied a modern attitude toward wealth and investment. But the cumulative inegalitarian logic of r > g made it prodigiously and persistently inegalitarian. In such a society, there is not much chance that freer, more competitive markets or more secure property rights can reduce inequality, since markets were already highly competitive and property rights firmly secured.
the national solidarity tax, which was also imposed in 1945. This progressive tax was a one-time levy on both capital and acquisitions made during the Occupation, but the rates were extremely high and imposed an additional burden on the individuals affected.
One conclusion is already quite clear, however: it is an illusion to think that something about the nature of modern growth or the laws of the market economy ensures that inequality of wealth will decrease and harmonious stability will be achieved.
The inequality r > g in one sense implies that the past tends to devour the future: wealth originating in the past automatically grows more rapidly, even without labor, than wealth stemming from work, which can be saved. Almost inevitably, this tends to give lasting, disproportionate importance to inequalities created in the past, and therefore to inheritance.
FIGURE 11.1. The annual inheritance flow as a fraction of national income, France, 1820–2010 The annual inheritance flow was about 20–25 percent of national income during the nineteenth century and until 1914; it then fell to less than 5 percent in the 1950s, and returned to about 15 percent in 2010.
Conversely, younger people, in particular those born in the 1970s and 1980s, have already experienced (to a certain extent) the important role that inheritance will once again play in their lives and the lives of their relatives and friends. For this group, for example, whether or not a child receives gifts from parents can have a major impact in deciding who will own property and who will not, at what age, and how extensive that property will be—in any case, to a much greater extent than in the previous generation.
It partly explains the low inheritance flows of the second half of the twentieth century, as well as the expected sharp increase in these flows in the decades to come.
In countries where the population has begun to decrease significantly or will soon do so (owing to a decrease in cohort size)—most notably Germany, Italy, Spain, and of course Japan—this phenomenon will lead to a much larger increase in the adult mortality rate in the first half of the twenty-first century and thus automatically increase inheritance flows by a considerable amount.
This is precisely what happened in France: the ratio μ of average wealth at death to average wealth of the living rose sharply after 1950–1960, and this gradual aging of wealth explains much of the increased importance of inherited wealth in recent decades.
Regardless of whether the wealth a person holds at age fifty or sixty is inherited or earned, the fact remains that beyond a certain threshold, capital tends to reproduce itself and accumulates exponentially. The logic of r > g implies that the entrepreneur always tends to turn into a rentier.
The gradual return to a dynastic type of wealth inequality since 1950–1960 explains the absence of dissaving by the elderly (most wealth belongs to individuals who have the means to finance their lifestyles without selling assets) and therefore the persistence of high inheritance flows and the perpetuation of the new equilibrium, in which mobility, though positive, is limited.
FIGURE 11.10. The dilemma of Rastignac for cohorts born in 1790–2030 In the nineteenth century, the living standards that could be attained by the top 1 percent inheritors were a lot higher than those that could be attained by the top 1 percent labor earners.
