The super-rich and the rest of us: author Thomas Piketty

MARK COLVIN: In an Essential Media opinion poll published this week, Australians were asked to compare fairness and equality in the country to the situation 20 years ago. Forty three per cent said they thought Australia was less fair and equal. Only 28 per cent thought fairness and equality had improved.

Inequality seems to be a rising issue in the electorate, and much of the controversy about the federal budget here has focussed on perceptions that it’ll hurt the poor more than the rich and make Australia a more unequal place.

That’s consistent with an international trend in which politicians and economists are being confronted with a serious inequality debate.

And in the last few months, that’s been fuelled by a fat best-seller by a hitherto obscure French economist who’s been studying, among other things, the widening gap between the super-rich and the rest of us.

His name is Thomas Piketty. He’s is a professor of Economics at the Paris School of Economics. And his book, Capital in the 21st Century, has become a massive worldwide bestseller.

He spoke to me from his office in Paris.

THOMAS PIKETTY: My book is really trying to shift the attention from income to wealth and from the study of top income and top managerial compensation to the study of wealth dynamics, wealth accumulation, wealth concentration and of course both issues are important and both issues are related but I think in the long run, the issue of wealth concentration is even more important.

So let me take an example that illustrates what you’ve just said. Take the Forbes ranking of global billionaire over the 1987-2013 period. What we did is to compute the evolution of the average wealth of a fixed fraction of the world population at the top. Now if we were in an equilibrium for the world distribution of wealth, you know, this group should be rising at the same speed as the average wealth in the world economy.

Now what we see is that it is actually rising three times faster. So it has been, over this entire period, it has been rising about 6, 7 per cent a year in real terms above inflation rate, whereas average wealth at the global level has been rising at about 2 per cent per year.

MARK COLVIN: So if you’re a person who has saved $50,000 in the bank, compared to a person who’s saved $2 million, you’re not going to get richer at the same rate? I mean it’s not that you’re not going to make more money, it’s that the rate itself is going to change. That person is going to get richer faster with bigger percentages than you?

THOMAS PIKETTY: This is what we observed for the wealth rankings. You come to your bank with $100,000 or $200,000, you’re not going to get 6 or 7 per cent real return these days and it looks as if financial deregulation has probably increased the inequality in rates of returns.

MARK COLVIN: Is it also just because, naturally, if you’re pulling in 2 million a year or something, you’re likely to spend much less of your income than somebody who’s pulling in $100,000 a year?

THOMAS PIKETTY: Right, so you’re perfectly right. Scale economies, you know, import volume and demand are the key part of the explanation. So, take the capital endowment of Harvard University, you know, they spend only 0.3 per cent per year in management cost, but because they have $30 billion, you know, 0.3 per cent is $100 million.

So they can spend $100 million to pay a group of portfolio managers, you know, which is enough to pay a pretty good team, and still that’s going to cost them only 0.3 per cent. So if this allows them to get a return of 8 per cent rather than 4 per cent, that’s clearly a good deal.

Now, if you have an endowment of 100 million, of course you cannot spend your entire endowment in management cost, and if you have $100,000, you know, you can ask your brother-in-law what to do with your money, but probably that’s not going to get you very far.

So, you know, unless you have a very productive brother-in-law, but on average, the rate of return that we observe in the data, you know, are very different depending on the initial size of the portfolio.

Now, that’s one source of rising inequality. Of course, it’s not the only explanation. You know, it’s also, you know, some people at the very top of the list are also by their fortune an entrepreneurial wealth and, you know, that’s very useful. But still, even if, of course it is good to have entrepreneur, to have new wealth accumulation, if the top of the list, if the top of the distribution is rising three times faster than the average, you know, whether it comes from a year rate of return for large initial wealth, and that’s part of the explanation, or whether it comes from entrepreneurial wealth, and this is another part of the explanation, in any case, you cannot have the top rise three times faster than the average forever.

So, this will have to stop somewhere. What will be the level of wealth consolidation where this will stop? I don’t know, and nobody knows and, you know, I think we should all be concerned about that.

MARK COLVIN: Now, as you know, The Financial Times newspaper has been picking away at your figures and has launched a fairly concerted attack on them.

In a radio interview it’s difficult to go into all the technical material, but what, broadly, has been your response?

THOMAS PIKETTY: Yeah, I have responded point by point. You know, it’s available online, and I think anybody who would spend a few minutes on this controversy will see that, you know, they have made a lot of noise out of nothing. You know, I am very happy to put all the detailed data online. That’s what I have always done. But I think in the case of the Financial Times, you know, I think it’s a bit silly on their side, you know, to try to deny the rising inequality.

You know, I think we see rising inequality very clearly in top managerial compensation over the past few decades. You know, if they can’t see that, you know, they should open the financial statements of companies.

And regarding wealth, you know, every magazine in the world is publishing wealth rankings where you can see that the top of the distribution is rising faster than the average.

There is one country, Britain, where they try to make the case that wealth inequality is actually declining in the recent decade, but in fact, they are comparing apples and oranges. They are comparing a measure of wealth inequality for 1990 that’s based on administrative tax data with a measure for today that’s based on self-reported wealth data where, by definition, the top of the distribution does not respond.

I’m not saying that rising inequality is the only possible outcome. You know, there are other economic forces which can sometimes lead to a decline in inequality, but this also requires specific policies and institutions, investment in education, better access to skills and higher education. But, you know, there are forces that, even with the right educational investment, tend to push in the direction of rising inequality.

MARK COLVIN: Thomas Piketty. Professor Piketty is a professor of Economics in Paris, and his book is called Capital in the 21st Century.

ABC national radio 12/6/14