Capital in the Twenty-First Century
52. See in particular Figure 5.7.
53. In Figure 12.6, the “wealthy countries” include Japan, Western Europe, and the United States. Adding Canada and Oceania would change little. See the online technical appendix.
54. See Chapters 3–5.
55. Or 7–8 percent of total net financial assets worldwide (see above).
56. See the online technical appendix for a discussion of the high estimate made in 2012 by James Henry for the Tax Justice Network, and the intermediate 2010 estimate by Ronen Palan, Richard Murphy, and Christian Chavagneux.
57. The data in Figure 12.6 are from Gabriel Zucman, “The Missing Wealth of Nations: Are Europe and the U.S. Net Debtors or Net Creditors?,” Quarterly Journal of Economics 128, no. 3 (2013): 1321–64.
58. According to an estimate by Roine and Waldenström, accounting for assets held abroad (estimated from inconsistencies in the Swedish balance of payments) can, under certain assumptions, lead to the conclusion that the top centile in Sweden is close to the same level of wealth as the top centile in the United States (which probably should also be increased). See the online technical appendix.
13. A Social State for the Twenty-First Century
1. As is customary, I take tax revenues to include all taxes, fees, social contributions, and other payments that citizens must pay under penalty of law. The distinctions between different types of payments, especially taxes and social insurance contributions, are not always very clear and do not mean the same thing in different countries. For the purpose of historical and international comparisons, it is important to consider all sums paid to the government, whether the central government or states or cities or other public agencies (such as social security, etc.). To simplify the discussion, I will sometimes use the word “taxes,” but unless otherwise indicated I always include other compulsory charges as well. See the online technical appendix.
2. Military expenditures generally amount to at least 2–3 percent of national income and can go much higher in a country that is unusually active militarily (like the United States, which currently devotes more than 4 percent of its national income to the military) or that feels its security and property threatened (Saudi Arabia and the Gulf states spend more than 10 percent of national income on the military).
3. Health and education budgets were generally below 1–2 percent of national income in the nineteenth century. For a historical view of the slow development of social spending since the eighteenth century and the acceleration in the twentieth century, see P. Lindert, Growing Public: Social Spending and Economic Growth since the Eighteenth Century (Cambridge: Cambridge University Press, 2004).
4. Note that the share of compulsory payments is expressed here as a proportion of national income (which is generally around 90 percent of GDP after deduction of about 10 percent for depreciation of capital). This seems to me the right thing to do, in that depreciation is not anyone’s income (see Chapter 1). If payments are expressed as a percentage of GDP, then the shares obtained are by definition 10 percent smaller (for example, 45 percent of GDP instead of 50 percent of national income).
5. Gaps of a few points may be due to purely statistical differences, but gaps of 5–10 points are real and substantial indicators of the role played by the government in each country.
6. In Britain, taxes fell by several points in the 1980s, which marked the Thatcherite phase of government disengagement, but then climbed again in 1990–2000, as new governments reinvested in public services. In France, the state share rose somewhat later than elsewhere, continued to rise strongly in 1970–1980, and did not begin to stabilize until 1985–1990. See the online technical appendix.
7. In order to focus on long-term trends, I have once again used decennial averages. The annual series of tax rates often include all sorts of minor cyclical variations, which are transitory and not very significant. See the online technical appendix.
8. Japan is slightly above the United States (32–33 percent of national income). Canada, Australia, and New Zealand are closer to Britain (35–40 percent).
9. The term “social state” captures the nature and variety of the state’s missions better than the more restrictive term “welfare state,” in my view.
10. See Supplemental Table S13.2, available online, for a complete breakdown of public spending in France, Germany, Britain, and the United States in 2000–2010.
11. Typically 5–6 percent for education and 8–9 percent for health. See the online technical appendix.
12. The National Health Service, established in 1948, is such an integral part of British national identity that its creation was dramatized in the opening ceremonies of the 2012 Olympic games, along with the Industrial Revolution and the rock groups of the 1960s.
13. If one adds the cost of private insurance, the US health care system is by far the most expensive in the world (nearly 20 percent of national income, compared with 10–12 percent in Europe), even though a large part of the population is not covered and health indicators are not as good as in Europe. There is no doubt that universal public health insurance systems, in spite of their defects, offer a better cost-benefit ratio than the US system.
14. By contrast, social spending on education and health reduces the (monetary) disposable income of households, which explains why the amount of the latter decreased from 90 percent of national income at the turn of the twentieth century to 70–80 percent today. See Chapter 5.
15. Pensions systems with capped payments are usually called, after the architect of Britain’s social state, “Beveridgian” (with the extreme case a flat pension amount for everyone, as in Britain), in contrast to “Bismarckian,” “Scandinavian,” or “Latin” systems, in which pensions are almost proportional to wages for the vast majority of the population (nearly everyone in France, where the ceiling is exceptionally high: eight times the average wage, compared with two to three times in most countries).
16. In France, which stands out for the extreme complexity of its social benefits and the proliferation of rules and agencies, fewer than half of the people who were supposed to benefit from one welfare-to-work program (the so-called active solidarity income, a supplement to very low part-time wages) applied for it.
17. One important difference between Europe and the United States is that income support programs in the United States have always been reserved for people with children. For childless individuals, the carceral state sometimes does the job of the welfare state (especially for young black males). About 1 percent of the adult US population was behind bars in 2013. This is the highest rate of incarceration in the world (slightly ahead of Russia and far ahead of China). The incarceration rate is more than 5 percent for adult black males (of all ages). See the online technical appendix. Another US peculiarity is the use of food stamps (whose purpose is to ensure that welfare recipients spend their benefits on food rather than on drink or other vices), which is inconsistent with the liberal worldview often attributed to US citizens. It is a sign of US prejudices in regard to the poor, which seem to be more extreme than European prejudices, perhaps because they are reinforced by racial prejudices.
18. With variations between countries described above.
19. “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain inalienable Rights, that among these are Life, Liberty and the pursuit of Happiness; that to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.”
20. The notion of “common utility” has been the subject of endless debate, and to examine this would go far beyond the framework of this book. What is certain is that the drafters of the 1789 Declaration did not share the utilitarian spirit that has animated any number of economists since John Stuart Mill: a mathematical sum of individual utilities (together with the assumption that the utility function is “concave,” meaning that its rate of increase decreases with increasing income, so that redistributi
on of income from the rich to the poor increases total utility). This mathematical representation of the desirability of redistribution bears little apparent relation to the way most people think about the question. The idea of rights seems more pertinent.
21. It seems reasonable to define “the most disadvantaged” as those individuals who have to cope with the most unfavorable factors beyond their control. To the extent that inequality of conditions is due, at least in part, to factors beyond the control of individuals, such as the existence of unequal family endowments (in terms of inheritances, cultural capital, etc.) or good fortune (special talents, luck, etc.), it is just for government to seek to reduce these inequalities as much as possible. The boundary between equalization of opportunities and conditions is often rather porous (education, health, and income are both opportunities and conditions). The Rawlsian notion of fundamental goods is a way of moving beyond this artificial opposition.
22. “Social and economic inequalities … are just only if they result in compensating benefits for everyone, and in particular for the least advantaged members of society” (John Rawls, A Theory of Justice [Cambridge, MA: Belknap Press, 15]). This 1971 formulation was repeated in Political Liberalism, published in 1993.
23. These theoretical approaches have recently been extended by Marc Fleurbaey and John Roemer, with some tentative empirical applications. See the online technical appendix.
24. Despite the consensus in Europe there is still considerable variation. The wealthiest and most productive countries have the highest taxes (50–60 percent of the national income in Sweden and Denmark), and the poorest, least developed countries have the lowest taxes (barely 30 percent of national income in Bulgaria and Romania). See the online appendix. In the United States there is less of a consensus. Certain substantial minority factions radically challenge the legitimacy of all federal social programs or indeed of social programs of any kind. Once again, racial prejudice seems to have something to do with this (as exemplified by the debates over the health care reform adopted by the Obama administration).
25. In the United States and Britain, the social state also grew rapidly even though economic growth was significantly lower, which may have fostered a powerful sense of loss reinforced by a belief that other countries were catching up, as discussed earlier (see Chapter 2 in particular).
26. According to the work of Anders Bjorklund and Arnaud Lefranc on Sweden and France, respectively, it seems that the intergenerational correlation decreased slightly for cohorts born in 1940–1950 compared with those born in 1920–1930, then increased again for cohorts born in 1960–1970. See the online technical appendix.
27. It is possible to measure mobility for cohorts born in the twentieth century (with uneven precision and imperfect comparability across countries), but it is almost impossible to measure intergenerational mobility in the nineteenth century except in terms of inheritance (see Chapter 11). But this is a different issue from skill and earned income mobility, which is what is of interest here and is the focal point of these measurements of intergenerational mobility. The data used in these works do not allow us to isolate mobility of capital income.
28. The correlation coefficient ranges from 0.2–0.3 in Sweden and Finland to 0.5–0.6 in the United States. Britain (0.4–0.5) is closer to the United States but not so far from Germany or France (0.4). Concerning international comparisons of intergenerational correlation coefficients of earned income (which are also confirmed by twin studies), see the work of Markus Jantti. See the online technical appendix.
29. The cost of an undergraduate year at Harvard in 2012–2013 was $54,000, including room and board and various other fees (tuition in the strict sense was $38,000). Some other universities are even more expensive than Harvard, which enjoys a high income on its endowment (see Chapter 12).
30. See G. Duncan and R. Murnane, Whither Opportunity? Rising Inequality, Schools, and Children’s Life Chances (New York: Russell Sage Foundation, 2011), esp. chap. 6. See the online technical appendix.
31. See Jonathan Meer and Harvey S. Rosen, “Altruism and the Child Cycle of Alumni Donations,” American Economic Journal: Economic Policy 1, no. 1 (2009): 258–86.
32. This does not mean that Harvard recruits its students exclusively from among the wealthiest 2 percent of the nation. It simply means that recruitment below that level is sufficiently rare, and that recruitment among the wealthiest 2 percent is sufficiently frequent, that the average is what it is. See the online technical appendix.
33. Statistics as basic as the average income or wealth of parents of students at various US universities are very difficult to obtain and not much studied.
34. The highest tuition fee British universities may charge was increased to £1,000 in 1998, £3,000 in 2004, and £9,000 in 2012. The share of tuition fees in total resources of British universities in 2010 is almost as high as in the 1920s and close to the US level. See the interesting series of historical studies by Vincent Carpentier, “Public-Private Substitution in Higher Education,” Higher Education Quarterly 66, no. 4 (October 2012): 363–90.
35. Bavaria and Lower Saxony decided in early 2013 to eliminate the university tuition of 500 euros per semester and offer free higher education like the rest of Germany. In the Nordic countries, tuition is never more than a few hundred euros, as in France.
36. One finds the same redistribution from bottom to top in primary and secondary education: students at the most disadvantaged schools and high schools are assigned the least experienced and least trained teachers and therefore receive less public money per child than students at more advantaged schools and high schools. This is all the more regrettable because a better distribution of resources at the primary level would greatly reduce inequalities of educational opportunity. See Thomas Piketty and M. Valdenaire, L’impact de la taille des classes sur la réussite scolaire dans les écoles, collèges et lycées français (Paris: Ministère de l’Education Nationale, 2006).
37. As in the case of Harvard, this average income does not mean that Sciences Po recruits solely among the wealthiest 10 percent of families. See the online technical appendix for the complete income distribution of parents of Sciences Po students in 2011–2012.
38. According to the well-known Shanghai rankings, 53 of the 100 best universities in the world in 2012–2013 were in the United States, compared with 31 in Europe (9 of which were in Britain). The order is reversed, however, when we look at the 500 best universities (150 for the United States and 202 for Europe, of which 38 are in Britain). This reflects significant inequalities among the 800 US universities (see Chapter 12).
39. Note, however, that compared with other expenses (such as pensions), it would be relatively easy to raise spending on higher education from the lowest levels (barely 1 percent of national income in France) to the highest (2–3 percent in Sweden and the United States).
40. For example, tuition at Sciences Po currently ranges from zero for parents with the least income to 10,000 euros a year for parents with incomes above 200,000 euros. This system is useful for producing data on parental income (which unfortunately has been little studied). Compared with Scandinavian-style public financing, however, such a system amounts to a privatization of the progressive income tax: the additional sums paid by wealthy parents go to their own children and not to the children of other people. This is evidently in their own interest, not in the public interest.
41. Australia and Britain offer “income-contingent loans” to students of modest background. These are not repaid until the graduates achieve a certain level of income. This is tantamount to a supplementary income tax on students of modest background, while students from wealthier backgrounds received (usually untaxed) gifts from their parents.
42. Emile Boutmy, Quelques idées sur la création d’une Faculté libre d’enseignement supérieur (Paris, 1871). See also P. Favre, “Les sciences d’Etat entre déterminisme et libéralisme: Emile Boutmy (1835–1906) et la création de l’Ecole libre des sciences p
olitiques,” Revue française de sociologie 22 (1981).
43. For an analysis and defense of the “multi-solidarity” model, see André Masson, Des liens et des transferts entre générations (Paris: Editions de l’EHESS, 2009.
44. See Figures 10.9–11.
45. Recall that this volatility is the reason why PAYGO was introduced after World War II: people who had saved for retirement by investing in financial markets in 1920–1930 found themselves ruined, and no one wished to try the experiment again by imposing a compulsory capitalized pension system of the sort that any number of countries had tried before the war (for example, in France under the laws of 1910 and 1928).
46. This was largely achieved by the Swedish reform of the 1990s. The Swedish system could be improved and adapted to other countries. See for example Antoine Bozio and Thomas Piketty, Pour un nouveau système de retraite: Des comptes individuels de cotisations financés par répartition (Paris: Editions rue d’Ulm, 2008).
47. It is also possible to imagine a unified retirement scheme that would offer, in addition to a PAYGO plan, an opportunity to earn a guaranteed return on modest savings. As I showed in the previous chapter, it is often quite difficult for people of modest means to achieve the average return on capital (or even just a positive return). In some respects, this what the Swedish system offers in the (small) part that it devotes to capitalized funding.
48. Here I am summarizing the main results of Julia Cagé and Lucie Gadenne, “The Fiscal Cost of Trade Liberalization,” Harvard University and Paris School of Economics Working Paper no. 2012–27 (see esp. figure 1).
49. Some of the problems of health and education the poor countries face today are specific to their situation and cannot really be addressed by drawing on the past experience of today’s developed countries (think of the problem of AIDS, for example). Hence new experiments, perhaps in the form of randomized controlled trials, may be justified. See, for example, Abhijit Banerjee and Esther Duflo, Poor Economics (New York: Public Affairs, 2012). As a general rule, however, I think that development economics tends to neglect actual historical experience, which, in the context of this discussion, means that too little attention is paid to the difficulty of developing an effective social state with paltry tax revenues. One important difficulty is obviously the colonial past (and therefore randomized controlled trials may offer a more neutral terrain).