Paul Krugman discusses Thomas Piketty’s new book, Capital in the Twenty-First Century, on Bill Moyers’ show. Those who follow the economic press will know that Piketty and Emanuel Saez have been following and writing about the growing disparity in wealth and income since the early 2000s. This interview focuses on a major finding of Piketty’s book, that the very richest aren’t, as most people like to believe, self-made, say, Bill Gates, Warren Buffett, Steve Jobs, Larry Ellison, or a hedge fund or private equity manager like George Soros, Leon Black, or James Simons. Ironically, CEOs are typically included in the “self made” which is more accurately “first generation uber-wealthy” camp, when they become stewards of established enterprises.
Piketty tells us we’ve got the wrong model. The super rich increasingly inherited their wealth. Think, for instance, of the Walton heirs. They occupy positions 6, 7, 8, and 9 on the latest Forbes 400 list, with each of their fortunes estimated at $33.3 billion to $35.4 billion. The famed Koch brothers, tied for fourth position at $36 billion, similarly inherited a family business.
There’s one argument from Piketty that Krugman didn’t dwell on:
BILL MOYERS: Here’s Piketty’s main point: capital tends to produce real returns of 4 to 5 percent, and economic growth is much slower. What’s the practical result of that?
If you think about this, that statement makes no sense. Even businesses that outperform the economy as a whole for a while eventually converge to GDP-ish rates of growth (or lower). And the reason is purely arithmetical: trees don’t grow to the sky. Nothing can keep growing at meaningfully higher rates of GDP forever. It would eat the economy (admittedly, the medical-industrial complex in the US is nevertheless trying really hard to do precisely that).
I knew a very successful money manager for wealthy families, and he told them that if they beat inflation by 1% on a sustained basis, they were doing very well and should be happy. His position was that loss avoidance was the top investment priority, that it was very difficult to recover from that, and the effort to do so generally made matters worse.
Now if Piketty is talking about financial claims on real assets, it becomes even clearer that this arrangement is not sustainable. (Piketty apparently conflates ownership of assets with financial claims, which is a bit disconcerting, since he includes stocks, bonds, land, housing, businesses. But if you include financial claims like stock and bonds, then you need to include derivatives, which are actually senior since they are secured… This admittedly is not a trivial problem to parse). We are in the territory that Michael Hudson and David Graeber have covered well, that of financiers demanding interest rates that real economy borrowers cannot support, which leads to periodic debt restructurings and jubilees. But the current model is being pushed to its limits through the pauperization of the former middle class.
Piketty argues that extreme income disparity has been typical, and the post-war period in the US is an anomaly. Yet even if oligarchy may be the typical economic structure of society, who has been in that oligarchy has not been stable in the modern era. The landed aristocracy was replaced by successive waves of robber barons. If we see a rise of a more ossified elite, that would represent an even more fundamental change in our social order.