For the Weekend: "Snatch the Pebble from My Hand, Grasshopper..."

Must-Watch: Heather Boushey et al.: "After Piketty" panel at the Graduate Center, CUNY: "Heather Boushey, Paul Krugman, Branko Milanovic, and Salvatore Morelli discuss After Piketty at the Graduate Center of CUNY on May 11, 2017.

After Piketty: The Agenda for Economics and Inequality

Janet Gornick: Good evening. Welcome to the Graduate Center at the City University of New York. My name is Janet Gornick. I am professor of political science and sociology here at the Graduate Center, and Director of the Stone Center on Socio-Economic Inequality. The Stone Center is a research center here focused on the study of income and wealth disparities. Among our many activities is housing the United States Office of LIS, the cross-national data archive located in Luxembourg.

The Stone Center is co-sponsoring this evening's event. In my role as director, I have the pleasure of welcoming all of you. And to those of you watching the livestream, thanks for joining us.

We convene this evening for a conversation about a new book titled After Piketty: The Agenda for Economics and Inequality. In this volume the authors of 22 essays reflect on the enormously influential book by Thomas Piketty, Capital in the 21st Century, which was published in 2013 by Harvard University Press.

Tonight we have on stage four of the authors in the new volume: Paul Krugman, Branko Milanovic, Salvatore Morelli, and Heather Boushey. Heather also served as one of the editors of the volume.

Starting in just a few minutes the four of them are going to present and assess highlights from the new collection.

Note that we were expecting Suresh Naidu, assistant professor of economics at Columbia, but he had to withdraw due to the impending arrival of a baby, who seemed to decide to want to appear this afternoon. We thought that was a reasonable excuse.

As luck would have it, Salvatore Morelli, another one of the authors, was in town. At 4:30 p.m., he agreed to step in Thank you, Salvatore. That's what you call a last-minute save.

Before I turn this stage over to them, I want to tell you why my colleagues and I at the Graduate Center and at the Stone Center were especially delighted when Heather asked us to co-host this evening. Then I want to say a few words about the original book just to help lay some context. Finally, I will introduce the speakers in just a little bit more detail.

Why assess economic inequality on a stage at the City University of New York? Perhaps the best reason is that CUNY, the country's largest urban public university, is itself a massive project aimed at reducing socio-economic inequality and enabling intergenerational mobility.

When our first college, the City College of New York, was founded in 1847, it was described as an experiment whose purpose was to educate the children of the whole people. 170 years later that mission is intact. Today almost 40% of our undergraduates come from homes with incomes of less than $20,000 a year. 42 percent are the first in their families to go to college.

Here at CUNY, we took note earlier this year when a new study by Raj Chetty and his colleagues produced a statistic that they call: the college's mobility rate. That statistic combines a college's share of students from lower-income families with its success at propelling them into the upper parts of the distribution.

Chetty et al. identified the 10 US colleges with the highest mobility rates. Five of them were CUNY colleges. For those of you who are local, you will be happy to know: City, Lehman, Baruch, John Jay, and City Tech. Yay for CUNY! Furthermore, the Graduate Cente—I think you all know that's where you are—CUNY's doctorate-granting campus and the home to the Stone Center—has long been a venue for the study of inequality, in not just our Center but many others as well.

The Stone Center's work on inequality is heavily empirical and quantitative. It is carried out via an array of courses, intensive workshops, international conferences, lecture series, and public events. In the last four years we have, on this stage and others in the building, co-hosted nearly 20 public events focusing on the relationship between inequality and economic growth, globalization, technological change, immigration, occupational trends, the care economy, climate change, and global health. Our overarching goal is to contribute to and to deepen the complicated national conversation about economic inequality that has received so much attention in the last half dozen years.

In fact, one of our first large events was hosting a public book launch for the very book that would eventually spark this evening's gathering: Capital in the 21st Century.

It's almost impossible to say anything about Thomas Piketty's book that has nor been said already many times. I do want to make three points to help put the sequel in context. First, by nearly all accounts the book was an intellectual tour de force. It was innovative theoretically. It integrated economic and historical methods to build a novel framework for understanding the interplay between capital accumulation, economic growth, and rising inequality. The book was not only descriptive and diagnostic but it was predictive, envisioning a second Gilded Age, another Belle Epoque, one in which again the claims of wealth—especially inherited wealth—would drive political developments and shape economic structures. Income and moreover wealth inequality would rise, threatening if not reversing an era of convergence and access to resources.

Finally, the book was also prescriptive. It laid out a sweeping plan for transforming public finance on a global scale—a plan intended to push back on this rising inequality.

Prominent economists, including some on our stage, celebrated the book in high profile reviews, calling it a watershed book in economic thinking, the most important economic book of the year—maybe of the decade—and declaring it written in the tradition of great economic texts. Even its critics—and there were several—admired its scope.

Second, and this may be of interest mainly to researchers, Piketty's book introduced its readers to the power of public tax records for studying inequality. Tax data are especially useful for assessing the richest households. That exact stratum is difficult to study using the survey data that we at LIS here at our Institute have worked with and produced for decades. As a result, the Piketty book and the distribution data on which it was based complimented and enlarged ongoing methodological practices used to study income and wealth inequality, with a sharp focus on the most affluent.

Third, the book was insanely popular, with record-breaking sales topping more than 2 million copies, translations into over 30 languages, countless public events, reviews, and scores of academic and popular venues—and a film is in the works.

I was often amused by seeing people reading it on the New York City subway. I noted that my eye doctor had it sitting on his instruments table. I might add that he is a good eye doctor, but his his grasp of the book was a little blurry.

The book was so popular that its popularity became the subject of study: why this book and why at this moment in time? The answer to that question might remain one of the publishing mysteries of all time.

In After Piketty Arthur Goldhammer provides an intriguing analysis of what he calls "the Piketty Phenomenon". As the translator of the original book he had a front-row seat during its wild ride. Yet in the end even Goldhammer concludes that ultimately the book's popularity defies explanation.

Now here we are, more than three years later, and it's time to assess the book and its impact on scholarship, on policy analysis, on economic practice, and do so with steely eyes. That is exactly what our guests this evening will do.

Paul Krugman is distinguished professor of economics here at the Graduate Center, a core faculty member in the Stone Center, and a LIS senior scholar. He is well known, of course, for his academic career. The long list of honors that he has received includes the Clark medal, the Nobel Prize. He is known for his twice weekly column in The New York Times. In his contribution to After Piketty, Paul lays out the fundamental economic and political thesis of Piketty's book, detailing why it is that we are now in a new Gilded Age.

Branko Milanovic on the far left is visiting president's professor here at the Graduate Center, where he is also a core faculty member in the Stone Center and a LIS senior scholar. Branco's main area of work is income inequality, both within countries and globally, as well as in pre-industrial societies. In his contribution to After Pikitty, Branco presents a model that explores the effects of the rising capital share on income inequality. He concludes that a more equitable distribution of capital is a surest route to avoiding the unequal world that Piketty projects.

Salvatore Morelli earned his D. Phil. in economics from Oxford in 2013. Since then he has served as a research associate at INET: the Institute for New Economic Thinking at the Oxford Martin School. Salvatore's interests center on the economics of income and wealth distribution, macroeconomic history, and applied microeconomics. This September he'll begin a two-year position here at the Graduate Center, serving as a visiting fellow with the Advanced Research collaborative and a senior researcher in the Stone Center. He will oversee a new project on high-end wealth inequality here at the Stone Center.

In his contribution to After Piketty he asks how inequality affects economic stability, if so how, what do we know, and what more do we need to know to advise policymakers on this question.

Last but never least, Heather Boushey is Executive Director and Chief Economist at the Washington Center for Equitable Growth. Her research focuses on economic inequality and public policy—specifically employment, social policy, and family economic well-being. In her contribution, Heather looks at the institutions that matter for inheritance, and explores the role that gender disparities play in this era of patrimonial capitalism.

Please join me in welcoming this evening's speakers.

Heather Boushey: Thank you so much, Janet, and thank you to the Stone Center for hosting this event this evening. We're so happy to be able to partner with you, especially since so many of our authors are here at the Stone Center. It seemed like an appropriate place to do our first book event for After Piketty

I also want to note that there are two authors up here in the second row: Elira Delacourte and Elizabeth Jacobs. We've got many others who emailed because they were very disappointed that they couldn't make it to New York tonight, among them Art Goldhammer, the After Piketty translator who wrote the opening chapter. He was very dismayed that he could not make it here among other people.

I want to just set the stage a little bit before we get into the conversation here: why we why we wrote this book, why we why we're here tonight, how we got here.

Let me start by thanking Ian Malcolm, who was Thomas Piketty's editor at Harvard University Press. He approached the Washington Center for Equitable Growth's Brad DeLong and myself to help him put together this edited collection to get people thinking and working on the next steps After Piketty. This is something that Thomas himself was also very excited about and eager to work with Ian. We're very grateful for their help and inspiration to put this book together from the get-go.

Our goal, as Bob Solow writes in his contribution here, was to take Capital in the Twenty-First Century seriously. As we started this project Brad and I compiled all of the different reviews that we could find on Piketty. It was over 700 pages. We felt that there was there was a lot of talk out there. But it didn't seem that the economics profession and economists we're taking it the core ideas as seriously as we wanted them to. We wanted more serious critique and engagement. So that was a big part of our motivation. But we also wanted this to be an interdisciplinary volume. Thomas himself very strongly encouraged us to bring in sociologists and geographers and some legal scholars—people outside of economics.

As we wrote in the introduction that I co-authored with Brad DeLong and Marshall Steinbaum, it seemed that other disciplines were actually doing more to engage with the ideas of Piketty. That was one of the conclusions about the state of play. We hope that this conversation night with a bunch of economists and that this book will help spark more economics conversation. But we are excited to have this interdisciplinary engagement.

We were able to bring the authors—not all of them, for there are 22 authors, but I think we had 15—together for a conference, so there was a three-day debate about all of this. That may explain why the book is so long. It's only seven pages shy of the original, which which is a fact that I'm actually not very proud. It feels very big. I hope you'll buy it on Kindle. Maybe I shouldn't say that because maybe Ian hopes for you all to buy it in hardback.

Let me just note a couple more things about how we as editors saw this challenge. Janet did a nice introduction to Thomas's book and to the ideas. He brought the fore inequality. He identifies it as the problem that economists should be concerned about. He spends the whole introduction making the argument that inequality was something that economists used to be concerned about—what economists would call "distribution"—but this sort of faded from favor.

In the work that he's done over the years with Anthony Atkinson and Emmanuel Saez and many other scholars, they've documented this massive rise in inequality globally, and of course set out to understand what that means for the economy.

By the time we finished and put this volume to bed, we found ourselves believing that the 2016 election here in the United States, and some of the other global political trends, make this work more important than ever. We concluded in our introduction, which we put together after the election, that at least the outcome here in the U.S. makes Piketty's core assertion—that if we don't address inequality it will have negative outcomes on politics and policy—even stronger. That is one of the reasons I'm so excited that we're having this conversation here this evening.

Hopefully we can get to some of those issues. We also really hope that this will spark some engagement—that the critique of Piketty will move the conversation forward.

In the introduction we laid out four big questions that we had for Capital in the 21st Century. They are:

  • Is the argument that Thomas Piketty lays out in Capital in the 21st Century right?
  • Should we care about his conclusions and about what he what he uncovered?
  • What are the implications if he's right?
  • Even if he's wrong, what ought we to do next?

These are some of the questions that I hope we can attack here in our conversation this evening.

So let me turn to our panel. I want to start with you, Branko, on the end. Thomas's book came out a couple years ago. There have been other things that people been talking about and thinking about. Janet kind of opened up a little bit with what his book was about. Just quickly, what do you think the key takeaways that you want to refresh the been studying in anticipation of this very exciting event this evening?

Branko Milanovic: I would say three things, the first two to summarize a book that has 908 pages or whatever.

The first one is bringing back the importance of capital, which somehow has faded not only in the study of the net income distribution but also the role of capital in economics. I was reminded of that when I went in the libraries here and actually found Piketty placed next to Marx's Capital. The similarities of title led them to place them in the same place, even though Piketty said that he is not a Marxist. So that's one point: bringing back "capital" as an important thing that determines income distribution.

The second thing is, as we just mentioned before, the scope and his openness to introduce history and the other social sciences, which makes the book fun to read, and makes it very different from the books that we have been used to recently.

There was a kind of a division: bringing in the social sciences, history, and even literature makes the book much more fun and more pleasant to read. It is in the vein of the really big books in economics that were actually very social science based.

It's not surprising, as Heather said, that of course you would like people—sociologists, historians, geographers—to contribute to the volume.

The third point, maybe sort of slightly more economical, and in terms of economics maybe more important, is what I actually see as an attempt to combine the theory of production, the theory of distribution—of the factor distribution that is between capital and labor—with a theory of interpersonal income distribution. Although they were technically combined before, they were often studied separately. You went from one to the other. In the book, actually, the three of them are really so well combined. In that sense it's it's a grand well-run synthesis or grand theory that actually is offered to us in the book.

Paul Krugman: I agree with everything Branko just said. It might be important to think of there being three kinds of readers of this book and of the original Piketty book. One of the great things is that he reached all three.

One group are the people who were really not fully aware of just how much the concentration of income and wealth at the top has exploded. Everybody on this stage, everybody associated with this project, probably almost everybody in this audience was well aware of that. But lots of people were not. It still wasn't out there. Even though some of us have been citing Atkinson and Piketty and Saez for many years, this was the book that really brought that to a mass audience. That in itself, whatever the magic was that made it happen very important.

The second, which was, I think, news to many of us even those of us who work in this area, was that Thomas was telling us that the nature of this concentration of income and wealth at the top is changing. We still have in a way an 80s frame of mind, We visualize that it's individuals who one way or another have made fortunes: self-made men, whether it's Steve Jobs or Gordon Gekko depending upon what your your take on on the goodness or badness of what's going on in our society.

While that is still true to some extent, increasingly now we are looking at patrimonial capitalism—inherited fortunes. Don't think Steve Jobs. Think Koch brothers. Piketty makes an argument that that's increasingly going to be the case. The historical part actually one thing that for an American was very important. He say: don't think "Gilded Age", which is America and which is an era of self-made men. Instead, think more "Belle Epoque": late 19th century France, which is very much a dynastic inherited wealth thing.

The third thing is there is this remarkable, fascinating, but insider technical integration of the theory of economic growth, the theory of factoral distribution of income between capital and labor, and the theory of the individual distribution of income and wealth, which he tries to integrate together. That's the part where I think there are the most criticisms you can raise. But it's a magnificent effort regardless. It's one of the things that leads those of us would have loved it anyway to say: Oh my god! I can't believe he actually managed to do that too!

Salvatore Morelli: I absolutely agree with what Paul and Branko just said.

The popularization of inequality studies and analysis and assessment of trends and bringing in into the discussion the role of inheritance and patrimonial capitalism, but at the same time one of the main I believe contributions of the book is also to popularize the role of a history in understanding the economic trends, both at the aggregate level, but also to understand the distributional consequences of that trends for our economies. History is usually overlooked in economics. It comes very strongly out of Thomas Pikitty's book. The analysis of what happens to taxation over the history of the centuries is quite powerful to look in relationship to distributional outcomes. It avails the fact that things that were quite radical were actually implemented in not far distant past. That is I think one also main contribution of Thomas Piketty.

Building on Branko's comment on bringing in the capital, so the analysis on the capital income and capital in the aggregate production function, if you wish. But I would look at that capital more from the household or individual point of view. It is rather the asset side of the balance sheets of the individuals in the households. That is very important for living standard and living conditions of individuals, because wealth is is one of the most powerful means to bring forward to in dynastic terms economic advantages to our children. That's the role of inheritance. That's been highlighted before.

Wealth as a consumption enhancing tool for the present and the future. Wealth also as a as a means of control over people's lives. I'm thinking about the role of the employer-employee relationship. The role of extremely rich and wealthy individuals. Wealth, inheritance, and history.

Heather Boushey: I'm glad you brought up history. A number of the essays in here are critiques from people outside of economics who are thinking outside of the neoclassical model, praising Piketty for bringing in history and questioning institutions, but then also trying to unpack that.

Suresh and I talked a lot about that. Piketty has a bit of a black box when it comes to actually how institutions work. I argued in my chapter how history plays out for different groups. But I'm glad you brought that into the conversation. This sort of leads into my next question, which is about critiques. What do you think—and I think, Paul, you you talked a little bit about this in yours—about the functional distribution between capital and labor that there needs to be more work there. So I'll start with you, and you can go off on other things. Do we know yet, a few years out, whether or not the book is right? Do we have places where we think that he didn't get the economics right? Or where we where we still have big questions that we want answered and that we think people need to address?

Paul Krugman: Clearly the big thesis about the transformation is going to take us a generation to find out whether it is right. There's enough in there to say that he certainly caught on to something that wasn't there before. You can just take a look at your your your Forbes 400, and see that that there are a surprising number of people who inherited their wealth, and also a surprising number of people who are 80 years old, which means there's going to be a lot more people who inherited their wealth as we go forward a bit. That in itself is revelatory.

But whether we really are going to be seeing a shift increasingly towards patrimonial capitalism in the next 20 years, we don't know yet.

It remains true that to date most of the explosion of income concentration at the very top has not been about capital. It has been about compensation of some form. It has been about bonuses and executive pay. There's a lot of interesting discussion of that in Capital in the 21st Century. But that is not nearly at the level of rigor of explanation, because it's hard when nobody really fully understands. I think his discussion is good on that.

The place where I think is closest to him being—wrong is not quite the right word—where there is a really serious critique from the economists' point of view—I defer the historical social issues to other people–he makes a lot about the rising ratio of capital to income. That we've been accumulating capital in a way. That we had a lot of capital destroyed by the by the wars of the 20th century. Then we restore it and we get a much more capital. He talks about this as a story of there's more and more capital out there and that this given certain parameters whatever it tends to raise the capital share of income even as it reduces the rate of return. The thing that has become clear is that an awful lot of that rise in the value of capital is real estate. A lot of the Piketty book is written as if there's capital and there's labor. That is true. But an awful lot of the capital by value turns out to be housing. That does change your picture significantly. It doesn't mean that the underlying thesis is wrong, but it means that that it's a little harder to make his case than might otherwise have seemed to be the case.

Heather Boushey: Salvatore, do you want to take next? What do you think are some of the major criticisms and and issues where we still see big questions?

Salvatore Morelli: From the economic point of view I agree with Paul that the issue of capital and wealth is a problematic one. Also, from the determinants of what gave rise to an increase in the capital income ratio, an increase in wealth inequality that comes from real estate is somewhat different than coming from an increasing concentration of ownership of firms or stock ownership. Therefore the question is: Are we moving from a classic, if you wish patrimonial, capitalism to a middle-class patrimonial capitalism—which is to some extent from the policy point of view harder to address. There is much more resistance, I believe, to real estate wealth taxation. To the extent where a strong increase in wealth inequality of real estate is actually impairing growth and equitable distribution of access to opportunities.

Paul Krugman: I am sorry. I just cannot resist. We can easily envision a Belle Époque, where inherited capitalists with vast industrial empires dominate the political process. But to imagine that modern economies could be dominated by real estate tycoons is inconceivable.

Salvatore Morelli: I don't know whether I said that, but I agree. If I said that maybe I should revise my English teacher.

Paul Krugman: I could not help myself there.

Salvatore Morelli: The other potential worry from my point of view is I think we should not make the mistake of considering the book and Piketty's market analysis as an overarching theory of everything. I think there are limits to a theory. We should acknowledge that. Also, there is an enormous difference across countries. We always have in mind the U.S. as an experience for what happened to the income and wealth distribution, but actually if you look at the data the experiences in income and wealth distribution do vary a lot across countries. I think that's probably something that is missing in the book. Trying to understand why experiences are different across countries, and what role different institutions play in that.

Paul Krugman: Just to say, rather spectacularly, top income shares, which is so much of this research is about. The big contrast we often make is between the United States which is where the top income share has skyrocketed and France—France where it has not. It is interesting that Thomas should have written this book.

Heather Boushey: Definitely . It's also interesting that in some ways some of your criticisms are about things that we—he's writing a book that's making an argument about what's going to happen far off into the future, and so he's arguing "if these trends continue" then there's going to be this convergence [to the steady-state equilibrium wealth-to-income ratio]. You don't know it yet. And there is this question because you have these differing experiences across countries. This, again, comes back to understanding the institutional differences, and doing that heavy lifting.

Branko, do you want to weigh in on this question?

Branko Milanovic: Let me make two points. I'm not sure how strictly related they are to the question.

The first point is that the usage of the term "patrimonial capitalism". I am very pleased that we are all using it very freely. I have to tell you an anecdote. Originally, I read the book in French. And in French it does make sense—much more, I think, than in English. When I wrote my review, I didn't know how to write it, so in my original review it was "inheritance-based capitalism". The book is about that. Then I talked to Thomas and to the translator Arthur Goldhammer about how it should be translated. And they said: "No, no—we will go with 'patrimonial capitalism' because it will then become a technical term. I think to some extent it has become a technical term. Originally it seemed to me—although I'm not a native English speaker— it didn't seem to me to convey the the image that it does in other languages. But I now think that it does, for it became a technical term. But I would really emphasize the inheritance.

Heather Boushey: May I interrupt you just for a second because this is what my chapter is on. I read Piketty. I wasn't going to talk about my chapter—thank you, Branco. I took issue. I mean the whole time I was reading it it was so shocking every time I read the word "patrimonial capitalism", and he never once unpacked the fact that in the English language—I do not speak French, so what do I know of what the original language was—that means inheritance through the father. That is the dictionary definition of "patrimonial capitalism". I understand from Art that in the French usage it means "natural inheritance". So it has this bigger meeting that is more inclusive. It is not so gendered.

He also has all of these wonderful evocative stories from Jane Austen and these other authors writing about what this what inequality looked like in different eras, when of course inheritance was by law in many countries through the male line. But he never unpacked that. He never explored what that actually means for gender equity.

I'll let you go on with your criticism.

Branko Milanovic: I will not actually go with the criticism, because I think actually I agree that not a confusion but the use of "capital" for wealth was criticized because for economists "capital" is productive capital: the input into the production function in the theory of growth, and so on. But "wealth", for people who work on income distribution like myself, includes all other things, including real estate, and other things which are even not necessarily immediately marketable. Although, obviously, real estate is. So there is a little bit of a difference between the two.

In the book it's not actually clear. The two are really conflated. I want to say a lot of things about that part of the book, which I think has not received the attention that I think deserves. Over towards the end—because maybe not too many people got to the end—there is an analysis based on the French data only, because that's the only country which apparently has the data, which shows what percentage of people would inherit what amount of money which would allow them, given improving life expectancy, to with that money live at a medium level of income for that country.

That is, actually, a very impressive statistic. When you think that if I inherit something that would actually allow me to live at the mean income level of my country until I die, it is really a very strong sort of inequality that brings back the role of inheritance very strongly. At that part of the book there is something which I like to call—he has actually three—actually two fundamental laws and one fundamental inequality. I actually believe there is a fourth one.

Heather Boushey: A number of the chapters deal with the human capital component of this. They talk a little bit about the inheritance aspects—what elites are leaving to their children in terms of better access to college, and human capital, which we're not going to talk about too much on this panel. But I think it's worth at least noting that piece of inheritance as well. He doesn't seem to think it is an important part of this story. I want to keep on this topic here. I actually want to turn to you, Paul. One of the one of the issues with the the return to so-called "patrimonial capitalism" is that it—today it is still the case that most people are getting most of their income at the top from labor income not capital income. He shows that during the Belle Époque and the Gilded Age the very top 1% were all were all getting most of their income from capital. Today they continue to get it from labor until the very very tippy top. One set of questions is: is that a measurement issue? Is it that executive high incomes can be categorically flexible? Some of it could really be capital—could be thought of as capital income or labor income. What is the issue there?

Paul Krugman: I don't think it's a problem of us mislabelling what is truly "capital income". Ff you look at what a hedge fund manager or a Fortune 500 CEO receives, he—and almost always he—because of the inherited wealth that he brought to the table. It is associated with the job. whether it's "earned" in a social sense is a whole different question. What is true is that the way that income comes for such people is very different from the way it comes from an ordinary wage or salary worker. It's not that there's a job and there's pay. It's that you do something. You climb. It comes in the form of stock options—although those are actually a lot less tied in reality to the price of the stock than people think. The basis tends to get adjusted. In the finance industry it comes from however much profit you've managed to make.

What's odd is that argument is used sometimes to defend preferential tax treatment. And we have the "carried interest" loophole, which lets people in the finance industry pay much lower tax rates. The argument is: well, yes, they're working hard and all this stuff, but the returns to that labor are highly uncertain, so you don't want to treat it as normal income. To that, some of us say: you know, I'm writing a book in which you put often an awful lot of work, and then you have no idea how much if any money you're going to make at the end. And somehow or other I'm paying a full rate.

There's something going on. To a large extent this is a category of income that must have always existed. John D. Rockefeller, the original John D. Rockefeller, did not inherit his wealth. For most of his life he presumably was making most of his money through the profits of his enterprises rather than as return on his accumulated capital. But it seems to be much more prevalent now than it was before. That is a bit of a problem for the Piketty argument. He is saying: inherited wealth will go back to becoming much more central. But I don't think it's a fundamental category error.

Heather Boushey: Okay. Would either of you like to comment on that?

Salvatore Morelli: I only have a small technical comment on that. Related to the data, it is true that the original Piketty and Saez studies on top incomes in the U.S. were showing that, relatively speaking, labor income was much more prevalent at the top—if we exclude the top 0.001%, of course. But it's also true that that study in particular was based on tax statistics, so on tax returns. The problem is that not all the capital income is reported in the tax returns. Importantly, a growing share of capital income is not reported. This led Thomas Piketty and Emmanuel Saez and Gabriel Zucman to do a follow-up study, which is now part of the DINA Project—Distributional Income National Accounts. What they did is to take the national account income and distribute it back to the population so that it does not suffer from the tax-reporting bias. When you do that, it's actually surprising to see how capital income rises across the distribution. Even at the bottom of the distribution you have a lot of capital income—most of capital income from tax-exempt savings accounts was not reported in tax statistics. When you get to even the top 10% people are earning more income from capital and not from labor. The research question is still open. But I wanted to point that out.

Paul Krugman: Let me just say that returns and profits—dividends and capital gains—which are popping up in your account in the Bahamas are just not going to be in the original Piketty-Saez data. That means that we actually are more like the 19th century than we think we are, yes.

Heather Boushey: : Yes, and there's been a lot of new interesting research on that question recently.

That actually is a nice segue to a question I have for you, Branko. I wanted to ask you, if I can get my papers in order. I think about Bahamas and I think of taxes. So that is where this question is going—or to tax avoidance. So, Branko, in your chapter you lay out a model that teases out the effects of a rising factorial capital income share on individual income inequality in different types of economies. You conclude that if a rising capital income share is a problem, the solution is less concentration in the ownership of capital. So you call for opening up the the ownership of capital.

That is is a solution which contrasts with Piketty's conclusion that we need to tax capital.

Could you talk about that for a moment?

Branko Milanovic: Yes, well, thank you for that. Actually, what I want to explain is that, if we think not only of Piketty's work but of the empirical data,what we notice is that if you look, for example, at the Credit Suisse report ,which is published annually, about wealth in the world, what you notice is that the richer countries are not only richer. Like you take liquid wealth in Switzerland and in India. The ratio in their incomes is like 8 to 1. But the ratio in wealth per person or per adult is not 8 to 1. It is like 15 to 1.

In other words, rich countries are not simply in terms of wealth richer then poor countries proportionately to how much better off they are in GDP. In reality they become richer also in terms of wealth . If you take that view and like to look at empirically, and that was of course Piketty's argument—that as these countries become more mature and richer the wealth will become larger and larger compared to their income or GDP, then, unless the return to that wealth goes down proportionately to the way that the wealth goes up, you would have larger share of net income being received out of capital. I think it's actually purely an automatic thing. If there is more capital and the return on that capital doesn't fall proportionately, you simply have more returns and more income received from capital. That goes back to this "patrimonial capitalism".

Now, then, the question becomes: If we really don't do anything about that, you would be automatically translating that increase in the capital share into greater inequality in interpersonal income distribution simply because capital is very heavily concentrated. Again, that's something that we know empirically: concentration of capital is much greater, obviously, than the concentration of income or consumption or anything else. You essentially have a direct transmission from higher capital share into higher inequality among us as individuals. Then my argument was that we should then—this is really sort of a bad word, but I cannot come up with a better one—because when I say "equalizing capital ownership", it seems that I would like everybody to have the same ownership. That's kind of an extreme. "Deconcentration" simply means having less of a concentration then we have currently

That's the idea. It is not in contradiction with Piketty. To some extent I think it's complementary. If you look at his point of view, that idea of taxing capital is precisely the result of his view that the capital share will become more and more important, and the way to stop the transmission into higher inequality is to tax capital back.

Heather Boushey: In other words, to tax wealth, which, of course, is much more difficult if you have so much wealth hidden abroad.

Branko Milanovic: If I can just summarize, one way is actually you just tax wealth. The other way is you make wealth more broadly shared. So there are really these two different approaches.

Heather Boushey: Thank you. Let me go to a question for Salvatore. I liked all of the chapters equally. But I also very much liked your chapter.

Paul Krugman: Some are more equal than others

Heather Boushey: It's equitable growth. We've been thinking a lot about the intersection between inequality and economic growth and stability. That is the core of your chapter. You talk about the effects of inequality on destabilizing economies, and the intersection between that and the business cycle. Could you just give talk for a couple of minutes about what you've discovered in that chapter. Just give us the key highlights.

Salvatore Morelli: Yes. The title of the chapter: is rising inequality and economic stability. The chapter's main objective is to, as you said, dig deeper deeper and into the very important issue—the old question about the interrelationship or nexus between rising inequality and economic growth performance and stability. This provides us with an interesting and instrumental reason to focus on on economic inequality that goes beyond equity and fairness reasons.

The chapter is a critical assessment of the literature—the empirical and theoretical literature—concerning these questions. It also goes a little bit beyond the classic interpretation and the classic discussion of the of the argument of inequalities leading to higher or lower economic growth. What I attempted to do was to dig deeper into the heterogeneity of what we mean by "inequality" and what we mean by "economic growth and performance". Why is this related to Piketty's book? Piketty's main argument and contribution was to highlight the macroeconomic circumstances and how they may may affect the wealth distribution within the economy: how the aggregate rate of capital returns versus the aggregate rate of economic growth affects the way the wealth distribution changes over time: the r > g type of argument.

What, instead the chapter and the book by Thomas Piketty was silent about was the reverse order of causality: how inequality may affect in return macroeconomic circumstances. The ambition or the objective of the chapter was to answer: can we endogenize, in technical terms, economic growth or performance in Piketty's model. The assertion that inequality has led to the destabilization of the economy has typically fallen into two main lines of argument. One is related to how inequality may affect economic growth, so GDP growth, income growth, and performance more generally—so volatility, etc. The other one: how inequality may affect financial instability.

The two things, of course, may be a forced sort of conceptualization. But they do have different features.

Of course, the investigation of the inequality-growth nexus has a long tradition in economics. Mostly the literature is focused o the economic growth bit: so GDP growth.What I try to do is, starting from a different angle of observation, which is: let's analyze the complexity of economic growth, so economic growth is not just GDP growth. It could be volatility of growth. So how volatile is that growth over time? Whether or not, once an economy is hit by a recession, is that recession—the magnitude of the recession and thetime that the economy takes in order to recover. The resilience of the economy. Is that affected by the level of inequality or not? Also, once once a country starts a process of economic growth, is that process more stable and sustainable once we observe the initial level of inequality or not? These are also questions that the recent literature has explored. That's why the debate has been enriched by these different new questions.

For instance, let's start from the idea that inequality is leading to volatile aggregate performance, so more volatility in the economy. This is an idea that in theory was also present back in 1930, with the famous account of the Great Crash by Galbraith. In his book, one of the determinants of potential instability in the economy that led them to the crash—in a passage in his book highlights the role of income inequality, especially at the top. How the economy, in that case the US economy, was particularly affected by the volatility of investment and luxury consumption that was concentrated at the top.

This argument was resonated, for example, in recent analysis by Rob Frank, who summarizes the problem very well with a quotation, where he says: "America's dependence on the rich"—which is increasing top income share, for instance—"plus the greater volatility among the rich equals a more volatile America". Greater share of the pie, more volatile share of the pie, equals aggregate income which is more volatile. A recent IMF study also estimated that more than 70% of U.S. changes in consumption between 2003 and 2013 derived from top 10% behavior.

Piketty himself had a theory together with Abijit Banerjee and Philippe Aghion in the late 90s, where they endogenous the business cycle and the link to wealth inequalit,y especially between investors and savers.

Heather Boushey: Can I jump in? I want to tee a question off of exactly what you just said. I also want to give the audience one little heads-up, which is that in about four minutes I'm going to turn to questions from you all. So if you could be thinking now, and there's microphones. So if you want to get up and get in line ,you feel free to do that. Actually, it's probably better to just stay seated. It will be really obnoxious to stand up and walk through the crowd. So I'll call on people. But just get ready for that.

But let me tee off exactly what you're talking about—the consumption patterns at the top, and that leading to volatility. That has been a conversation that we've had a lot, especially since the financial crisis, especially as we were thinking about how we pull out of it, and that's somewhat related to what I actually wanted to segue here into: politics, just a little bit, just before we before we go to opening the questions.

One thing that you wrote about Paul in your piece is: "sometimes it seems as if a substantial part of our political class is actively working to restore Piketty's patrimonial capitalism". You also reference the French Third Republic, which Piketty brings up in Capital in the 21st Century, which was founded under egalitarian political notions but still managed to be an extremely unequal society: most of the wealth was still controlled by a small sliver of society. So if we have this challenge, with this higher inequality, and the folks at the top—what what do we need? Not just for the United States but for other countries? That would be an effective counteractive force to this entrenchment of wealth and entrenchment of political power?

Paul Krugman: Three quick points.

The first one: one piece that really impressed me in Piketty was the discussion of the Third French Republic, which is "liberte, egalite, fraternite", and yet politics is dominated by vast inherited wealth dynasties. A point he makes is that the intellectual domination—that the fact that inherited wealth in effect managed to set the terms of discussion and to define what was responsible, what you could do. You can easily see that looking at a lot of things are going on in America now. How that happens we can talk about. We can talk about foundations. We can talk about influence. We can talk about all of those things.

There's a countervailing thing—which is also stuff I should have known—where he talks about the United States in the Progressive Era, which was also a vastly unequal society, but in which it was quite common for people—often people who were themselves very much on the top—class to express ideas that would be regarded as radically left-wing today. It was perfectly common to talk about the dangers of vast wealth, to talk about the importance of high inheritance taxes to prevent concentration. You would even have people—I believe including Theodore Roosevelt—saying things like: we would want to tax this wealth even aside from the revenue we raise, for we want to make sure that these great fortunes do not accumulate. For anyone to try to say that now you would be accused of being a radical Marxist.

Maybe the dominance of patrimonial wealth is not—the intellectual dominance is not necessarily as large as we might imagine.

The last thing I want to say is: countervailing institutions. What else can serve? It's very difficult. Maybe my imagination is limited, but it's hard for me to think of anything that I know in my history that is comparable to the historical but now largely vanished role, at least in this country, of unions. Organized labor has always been the huge counterweight to organized wealth. That diminution—if you ask me what would be the one thing that I would want to see happen to get us back, it would be somehow rather to restore the role of a substantial effective labor movement.

Heather Boushey: Three cheers to that! Are there any questions out there? Yes. So people do need to go to the mics. Good for picking an aisle seat there.

Rick McGahey: I'm Rick McGahey with the Institute for New Economic Thinking. This is very much of an economics question. There's been recent literature and discussion in economics with a different framing of inequality. I'm thinking of the work on superstar firms—the kind of stuff that David Autor, Larry Katz, and other people have been doing. It seemed to focus on a driver of inequality and the declining labor share overall rooted more in oligopoly firms—large firms really that are controlling data, controlling production. I just am curious if maybe this is a future research agenda here. How do you think about those explanations for inequality in reference to kind of a Piketty-driven more kind of ownership and build up in generational patrimonial capitalism?

Paul Krugman: There's something there. A quick answer. The arguments that say that inequality is largely about inequality between firms is interesting research at some level, but I'm not convinced. That's technical discussion that we need. The role of increased market power does look increasingly significant. Something is causing the share of labor income in national income. It is declining. One very plausible explanation is in fact growing monopoly power. The decline of antitrust enforcement, and maybe other forces. When we see capital share rising, is it because of the robots? Is it technology? Or is it because of market power? There are a lot of reasons to think that market power has to be a large part of the story.

Heather Boushey: I'll note that one of the chapters in the book is by David Weil, who just stepped down a couple of months ago from leading the wage and hour division in the Department of Labor. He is back at Boston University. He wrote a book called: The Fissured Workplace. His chapter applies this line of thinking. I think it's not orthogonal to what you said, Paul. He argues that that you're seeing this discrepancy across firms where some firms are outsourcing more and more of what they used to do in-house, which is creating firms lower down the supply chain that can't tap into the value that's created by this by the main firm, often which is focused on brand management and not actually sort of making anything . He talks about this as a fissuring across corporations, but also as a way to explain that the increasing fact that inequality across people across workers is iinterfirm inequality. Just an interesting contribution to that debate.

Paul Krugman: To make it a little concrete: if your corporation used to have cafeteria workers who were company employees on the company benefits plan and everything else, and now they are contract employees at some firm paying minimum wage, that's going to show up as an increase in personal income inequality. It's going to show up as an increase in interfirm inequality. But it isn't really exactly, in the sense that you might think.

Heather Boushey: Let's go to the next question. Over here. If you could briefly state your name, and then go quickly to your question.

Christina Jojo: Sure I'm Christina Jojo, and I study industrial and organizational psychology. Professor Krugman, you talked about unions as a counteracting force against rising inequality. I was wondering. Janet Gornick was speaking about how universities and schools increase social mobility and reduce inequality. I was wondering whether organizations—private businesses, corporations also—have the responsibility to become in the future perhaps the great equalizers, as schools have become.

Paul Krugman: I almost hate to use the language of responsibility, not out of any personal moral aversion but because I don't think they care. The point was that they did in fact. In the America I grew up in, there were large corporations viewed themselves as representing a variety of stakeholders—not simply not simply the stock investors. That included labor. That was partly either because they were unionized or because they knew there were unions out there, and knew that they knew would become unionized if they did not represent all stakeholders. Thus there is certainly a way in which the private sector can play a role in being an institution for equality. That is in fact the way America was for about 40 years after WWII. So it can happen here. Whether and how we get to make that happen now—I don't know.

Robert Avila: Robert Avila. I spent about 40 years as either corporate staff or corporate consultant after getting my degree in economics. The thing that I am aware of is the shift that took place, in terms of the attitude of corporate executives towards their job, after the marginal income tax disappeared. We had about 60 years or so in the U.S. of the extremely high contrast confiscatory marginal income tax, which in effect put a lid on corporate executive pay. You can see this by the degree to which it's skyrocketed after the tax cuts relative to normal workers. During that period we had exactly what you had just been talking about: corporate executives who had interests in stakeholders other than stockholders.

I was in the office of a major corporation in the early 70s when the executive said: to hell with Wall Street, we're going to do what we want to do ,we don't have to go there. To what extent has the marginal income tax disappearing contributed to what we have seen?

Heather Boushey: Thank you. Thank you.

Paul Krugman: I'm pretty sure it's Piketty and Saez among others who have made exactly that argument.

Heather Boushey: And Stan Shaiva and other people whom I can see in the audience.

Paul Krugman: The IMF I believe has some recent stuff. That's it. Exactly. Think about a corporate executive who has various interests. He wants to be rich. He wants to not have this employees hate him If there's a ninety-one percent marginal tax rate, as there was in the in the 50s, he's probably going to pay more attention to the to the personal non-pecuniary aspects of the job. Part of the explosion of top incomes probably does reflect the fact that we've made it possible for people to keep whatever they get by making life harder for other people.

Heather Boushey: There is certainly economic empirical evidence to that effect. I have a question that I want to throw out to the to the panel—I'll get to you in a sec, just one second, let me throw this one at—well, I'll let you ask your question then I'll ask my question.

Tracy Rogers: Mine is quite quick. My name is Tracy Rogers from the United Nations. My question is: we're seeing a lot of articles currently related to real estate and removing the tax benefits for owning real estate, especially in the housing market. It's positioned as a way to degentrify the entire process. Given the fact this book is looking at the economic implications in other realms, I'm very skeptical of these articles currently. I'm wondering if there's other political implications and social implications of owning that you can maybe think beyond the economic arguments they're being positioned on this. Thanks.

Paul Krugman: We need another conference for this one.

That's a very important one but it's a huge one.

Heather Boushey: I will just say I think it is a big question. One thing I'll note on it that we already have talked here this evening is that a lot of the capital that Piketty measures and his colleagues pick up is real estate. He called for taxing capital, which you know, in the United States we do tax that kind of capital because we tax real estate, but we also give this massive bonus if you borrow money to purchase that real estate. So it is very complicated because these things work in opposite directions. Anyone want to take that on? Or or I can go to my question? Branko you look like you might? I'm going to go to my question, and you can take that one too.

I wanted to end on this question of politics. We're living in this. There's a lot of elections going on right now. There's an election that, of course, just happened in France. We had an election in the fall here in the United States. There's elections coming up in the United Kingdom. Across a lot of the recent elections in the United States and Europe, you're seeing this conversation around this demise of—in some cases although not all—center-left parties, and a rise in leftist and far-right parties. Of course, that's not what happened in France. But it is certainly what happened here in the United States and in the UK. Then there are other countries where this appears to be happening as well.

So I wanted to end on this note, and I want to go through each of you. I'll start with Branko: Do you think that Piketty's political-economic analysis has anything to say about the current moment, either here in the United States or in another country—pick your country, whichever one you want to talk about? And do you think that his case is strengthened or weakened in terms of current events? I talked in my opening that we as the editors as we were putting together the introductions felt that the case was strengthened by the US elections. But I would be very curious to end with your analysis of this question.

Branko Milanovic: This question took me a little bit by surprise, so I am really trying to improvise. Let me make two points. The first point which I think falls into the category of the limits of the book is that the book is very much Eurocentric/United States. To the extent that that part of the world, in terms of output and in terms of population, is not increasing or actually it's decreasing its share. It is still of course the most important part of the world in the sense that it influences the other parts of the world more than the other parts of the world influence that part of the world—the West. I think it is a limitation of the book.

Now I think Piketty, in his work now with Saez, Zucman, and others, is going towards inclusion of countries like India, China and so forth. But this is a limit of the book.

It shows also politically. Obviously we are very much concerned about what is happening in the Western set of rich countries. There I must say I should have pled the amendment where you don't have to think—the fifth amendment. I am actually not sure myself if this is the case, because he makes the case about the importance of inequality and how it is important to actually stop further increase in inequality, and how it seeps into the political arena. So in that sense, yes, he was definitely right. But whether the outcomes that we have seen in France or in the US or the UK reinforce—we would of course say in principle yes, because it seems that actually his analysis had something to do with the outcome. But I think actually that the political part of his analysis was not really very well fleshed out to the extent that we can say: yes, this really reinforces the case.

Salvatore Morelli: I think the book provides a fundamental anchor to what we need them to work on in the future. What is mostly lacking from from the book is our faces to the numbers. What lies behind those numbers? Who are these people? How the wealth was accumulated. How the income was created. The processes that lead to rising income and wealth inequalities as fundamental as deriving the right number of the index of inequality. That's what then provides us with a further understanding of the democracy and the functioning of the democracy within the society itself, as well as I think—and fundamentally—trying to understand who are the key players with which we can create, can share a common purpose. I don't know the right words in English, but yeah.

Heather Boushey: That's important. Thank you.

Paul Krugman: I am with Branko. I would like to take the fifth to some extent. I don't think I understand really what's happening politically. I've been paying a fair bit of attention lately to issue polling, in this country, obviously. The issue polling is interesting because for the most part as I read it it says that likely voters basically have center-left views—that the center-left movement that we say is dying is in fact, on by the issues, almost all of them, what people support. People believe in guaranteed health care. People believe in most of the strong social safety net. They want all of these things.

The most recent polling obviously has the United States has been on two things. Health care, where people just absolutely hate what's being proposed. They suddenly discover that they love Obamacare now that it's maybe its way out.

What was interesting—and this is maybe the last word—is the poll that came out I think this morning—Quinnipiac—showed people with very center-left views on almost everything. The one piece of the current administration's tax agenda that people do approve of is abolition of the estate tax.

So it turns out that people want a strong welfare state, a strong middle class, and patrimonial capitalism.

Heather Boushey: Go figure. Go figure.

Salvatore Morelli: I just remembered the English word: which is "alliance". We need to build alliances withentrepreneurs that care about inclusive society.

Heather Boushey: Yes, and hopefully alliances that can help explain the importance of taxing wealth.

Well, let's end there. Thank you all so much, and thank you again to Janet and the Stone Center for helping us do this.