mars 05, 2014

Capital is Back!

In an interesting paper titled “Capital is back: wealth-income ratios in rich countries 1700-2010” Piketty and Zucman (2013) show how wealth-to-income ratios in rich countries have come back to the levels seen in the eighteenth and nineteenth century. Between now and then, i.e. in the post-war period, the wealth-to-income levels were much lower. Today, the ratios in countries such as US, UK, France and Germany are around 400-600%, which is similar to the ratios from 1700 to 1900, while in 1970 the ratios were closer to 200-300%! I.e., there is a clear U-shape in the wealth-to-income ratios in all these countries. The U is most extreme in Italy (250% in 1970 and 650% today) and least extreme in Germany (200% in 1970 and 400% today) and in the US (300% in 1970 and 500% today).

Interestingly, Piketty and Zucman (2013) argue that the low post-war ratios, particularly in Europe, appear to be a historical anomaly. They argue, and I cannot but agree, that the special circumstances of massive capital destruction and anti-capital policies destroyed a large fraction of the world capital stock during the two world wars. Most likely, this will not happen again.... Instead, low growth, substantial savings rates and low productivity and population growth will keep wealth-to-capital ratios high in the future. Of course, the form of capital is very different today then in 1800. Back then, half of wealth was agricultural land (today that is close to zero) while today the wealth is made up of housing, machinery and patents etc. But still!

My conclusions when reading this paper is:
(i) In the future, it will be impossible to ignore the importance of international cooperation on issues such as capital and wealth tax. Purely national attempts to tackle these tax issues are doomed to fail (capital flight to tax havens), with anti-globalization and anti-capital policies most likely stepping in their shoes.
(ii) Conditional on (i) above, I find the situation more problematic in countries such as Italy than in the US and in Germany. The (rather academic and theoretical) findings by Piketty and Zucman are also supported by my own personal observations after having lived in both Italy and the US: the much larger wealth-to-income ratios among my peers in Italy (where jobs are few and new graduates make 1000 dollars or so per month but a decent house costs 1 million dollars) than in US (where jobs are many and new graduates make 5000 dollars or so per month and a decent house costs 1/2 million dollars) are real-life parallels to the observations in Piketty and Zucman (2013). Another reason to avoid Italian stocks in the long run perhaps?