Capital in the Twenty-First Century (75 page)

It is also possible that the lower inheritance flow in Britain is due to different
psychological attitudes toward savings and familial gifts and bequests. Before reaching
that conclusion, however, it is important to note that the difference observed in
2000–2010 can be explained entirely by a lower level of gift giving in Britain, where
gifts have remained stable at about 10 percent of the total amount of inheritances
since 1970–1980, whereas gift giving in France and Germany increased to 60–80 percent
of the total. Given the difficulty of recording gifts and correcting for different
national practices, the gap seems somewhat suspect, and it cannot be ruled out that
it is due, at least in part, to an underestimation of gift giving in Britain. In the
current state of the data, it is unfortunately impossible to say with certainty whether
the smaller rebound of inheritance flows in Britain reflects an actual difference
in behavior (Britons with means consume more of their wealth and pass on less to their
children than their French and German counterparts) or a purely statistical bias.
(If we applied the same gift/inheritance ratio that we observe in France and Germany,
the British inheritance flow in 2000–2010 would be on the order of 15 percent of national
income, as in France.)

The available inheritance sources for the United States pose even more difficult problems.
The federal estate tax, created in 1916, has never applied to more than a small minority
of estates (generally less than 2 percent), and the requirements for declaring gifts
are also fairly limited, so that the statistical data derived from this tax leave
much to be desired. It is unfortunately impossible to make up for this lack by relying
on other sources. In particular, bequests and gifts are notoriously underestimated
in surveys conducted by national statistical bureaus. This leaves major gaps in our
knowledge, which all too many studies based on such surveys forget. In France, for
example, we find that gifts and bequests declared in the surveys represent barely
half the flow observed in the fiscal data (which is only a lower bound on the actual
flow, since exempt assets such as life insurance contracts are omitted). Clearly,
the individuals surveyed tend to forget to declare what they actually received and
to present the history of their fortunes in the most favorable light (which is in
itself an interesting fact about how inheritance is seen in modern society).
⁶²
In many countries, including the United States, it is unfortunately impossible to
compare the survey data with fiscal records. But there is no reason to believe that
the underestimation by survey participants is any smaller than in France, especially
since the public perception of inherited wealth is at least as negative in the United
States.

In any case, the unreliability of the US sources makes it very difficult to study
the historical evolution of inheritance flows in the United States with any precision.
This partly explains the intensity of the controversy that erupted in the 1980s over
two diametrically opposed economic theories: Modigliani’s life-cycle theory, and with
it the idea that inherited wealth accounts for only 20–30 percent of total US capital,
and the Kotlikoff-Summers thesis, according to which inherited wealth accounts for
70–80 percent of total capital. I was a young student when I discovered this work
in the 1990s, and the controversy stunned me: how could such a dramatic disagreement
exist among serious economists? Note, first of all, that both sides in the dispute
relied on rather poor quality data from the late 1960s and early 1970s. If we reexamine
their estimates in light of the data available today, it seems that the truth lies
somewhere between the two positions but significantly closer to Kotlikoff-Summers
than Modigliani: inherited wealth probably accounted for at least 50–60 percent of
total private capital in the United States in 1970–1980.
⁶³
More generally, if one tries to estimate for the United States the evolution of the
share of inherited wealth over the course of the twentieth century, as we did for
France in
Figure 11.7
(on the basis of much more complete data), it seems that the U-shaped curve was less
pronounced in the United States and that the share of inherited wealth was somewhat
smaller than in France at both the turn of the twentieth century and the turn of the
twenty-first (and slightly larger in 1950–1970). The main reason for this is the higher
rate of demographic growth in the United States, which implies a smaller capital/income
ratio (
β
effect) and a less pronounced aging of wealth (
m
and
μ
effects). The difference should not be exaggerated, however: inheritance also plays
an important role in the United States. Above all, it once again bears emphasizing
that this difference between Europe and the United States has little to do a priori
with eternal cultural differences: it seems to be explained mainly by differences
in demographic structure and population growth. If population growth in the United
States someday decreases, as long-term forecasts suggest it will, then inherited wealth
will probably rebound as strongly there as in Europe.

As for the poor and emerging countries, we unfortunately lack reliable historical
sources concerning inherited wealth and its evolution. It seems plausible that if
demographic and economic growth ultimately decrease, as they are likely to do this
century, then inherited wealth will acquire as much importance in most countries as
it has had in low-growth countries throughout history. In countries that experience
negative demographic growth, inherited wealth could even take on hitherto unprecedented
importance. It is important to point out, however, that this will take time. With
the rate of growth currently observed in emergent countries such as China, it seems
clear that inheritance flows are for the time being quite limited. For working-age
Chinese, who are currently experiencing income growth of 5–10 percent a year, wealth
in the vast majority of cases comes primarily from savings and not from grandparents,
whose income was many times smaller. The global rebound of inherited wealth will no
doubt be an important feature of the twenty-first century, but for some decades to
come it will affect mainly Europe and to a lesser degree the United States.

{TWELVE}

Global Inequality of Wealth in the Twenty-First Century

I have thus far adopted a too narrowly national point of view concerning the dynamics
of wealth inequality. To be sure, the crucial role of foreign assets owned by citizens
of Britain and France in the nineteenth and early twentieth centuries has been mentioned
several times, but more needs to be said, because the question of international inequality
of wealth concerns the future above all. Hence I turn now to the dynamics of wealth
inequality at the global level and to the principal forces at work today. Is there
a danger that the forces of financial globalization will lead to an even greater concentration
of capital in the future than ever before? Has this not perhaps already happened?

To begin my examination of this question, I will look first at individual fortunes:
Will the share of capital owned by the people listed by magazines as “the richest
in the world” increase in the twenty-first century? Then I will ask about inequalities
between countries: Will today’s wealthy countries end up owned by petroleum exporting
states or China or perhaps by their own billionaires? But before doing either of these
things, I must discuss a hitherto neglected force, which will play an essential role
in the analysis: unequal returns on capital.

Many economic models assume that the return on capital is the same for all owners,
no matter how large or small their fortunes. This is far from certain, however: it
is perfectly possible that wealthier people obtain higher average returns than less
wealthy people. There are several reasons why this might be the case. The most obvious
one is that a person with 10 million euros rather than 100,000, or 1 billion euros
rather than 10 million, has greater means to employ wealth management consultants
and financial advisors. If such intermediaries make it possible to identify better
investments, on average, there may be “economies of scale” in portfolio management
that give rise to higher average returns on larger portfolios. A second reason is
that it is easier for an investor to take risks, and to be patient, if she has substantial
reserves than if she owns next to nothing. For both of these reasons—and all signs
are that the first is more important in practice than the second—it is quite plausible
to think that if the average return on capital is 4 percent, wealthier people might
get as much as 6 or 7 percent, whereas less wealthy individuals might have to make
do with as little as 2 or 3 percent. Indeed, I will show in a moment that around the
world, the largest fortunes (including inherited ones) have grown at very high rates
in recent decades (on the order of 6–7 percent a year)—significantly higher than the
average growth rate of wealth.

It is easy to see that such a mechanism can automatically lead to a radical divergence
in the distribution of capital. If the fortunes of the top decile or top centile of
the global wealth hierarchy grow faster for structural reasons than the fortunes of
the lower deciles, then inequality of wealth will of course tend to increase without
limit. This inegalitarian process may take on unprecedented proportions in the new
global economy. In view of the law of compound interest discussed in
Chapter 1
, it is also clear that this mechanism can account for very rapid divergence, so that
if there is nothing to counteract it, very large fortunes can attain extreme levels
within a few decades. Thus unequal returns on capital are a force for divergence that
significantly amplifies and aggravates the effects of the inequality
r
>
g
. Indeed, the difference
r
−
g
can be high for large fortunes without necessarily being high for the economy as
a whole.

In strict logic, the only “natural” countervailing force (where by “natural” I mean
not involving government intervention) is once again growth. If the global growth
rate is high, the relative growth rate of very large fortunes will remain moderate—not
much higher than the average growth rate of income and wealth. Concretely, if the
global growth rate is 3.5 percent a year, as was the case between 1990 and 2012 and
may continue to be the case until 2030, the largest fortunes will still grow more
rapidly than the rest but less spectacularly so than if the global growth rate were
only 1 or 2 percent. Furthermore, today’s global growth rate includes a large demographic
component, and wealthy people from emerging economies are rapidly joining the ranks
of the wealthiest people in the world. This gives the impression that the ranks of
the wealthiest are changing rapidly, while leading many people in the wealthy countries
to feel an oppressive and growing sense that they are falling behind. The resulting
anxiety sometimes outweighs all other concerns. Yet in the long run, if and when the
poor countries have caught up with the rich ones and global growth slows, the inequality
of returns on capital should be of far greater concern. In the long run, unequal wealth
within nations is surely more worrisome than unequal wealth between nations.

I will begin to tackle the question of unequal returns on capital by looking at international
wealth rankings. Then I will look at the returns obtained by the endowments of major
US universities. This might seem like anecdotal evidence, but it will enable us to
analyze in a clear and dispassionate way unequal returns as a function of portfolio
size. I will then examine the returns on sovereign wealth funds, in particular those
of the petroleum exporting countries and China, and this will bring the discussion
back to the question of inequalities of wealth between countries.

Economists as a general rule do not have much respect for the wealth rankings published
by magazines such as
Forbes
in the United States and other weeklies in many countries around the world. Indeed,
such rankings suffer from important biases and serious methodological problems (to
put it mildly). But at least they exist, and in their way they respond to a legitimate
and pressing social demand for information about a major issue of the day: the global
distribution of wealth and its evolution over time. Economists should take note. It
is important, moreover, to recognize that we suffer from a serious lack of reliable
information about the global dynamics of wealth. National governments and statistical
agencies cannot begin to keep up with the globalization of capital, and the tools
they use, such as household surveys confined to a single country, are insufficient
for analyzing how things are evolving in the twenty-first century. The magazines’
wealth rankings can and must be improved by comparison with government statistics,
tax records, and bank data, but it would be absurd and counterproductive to ignore
the magazine rankings altogether, especially since these supplementary sources are
at present very poorly coordinated at the global level. I will therefore examine what
useful information can be derived from these league tables of wealth.

The oldest and most systematic ranking of large fortunes is the global list of billionaires
that
Forbes
has published since 1987. Every year, the magazine’s journalists try to compile from
all kinds of sources a complete list of everyone in the world whose net worth exceeds
a billion dollars. The list was led by a Japanese billionaire from 1987 to 1995, then
an American one from 1995 to 2009, and finally a Mexican since 2010. According to
Forbes,
the planet was home to just over 140 billionaires in 1987 but counts more than 1,400
today (2013), an increase by a factor of 10 (see
Figure 12.1
). In view of inflation and global economic growth since 1987, however, these spectacular
numbers, repeated every year by media around the world, are difficult to interpret.
If we look at the numbers in relation to the global population and total private wealth,
we obtain the following results, which make somewhat more sense. The planet boasted
barely 5 billionaires per 100 million adults in 1987 and 30 in 2013. Billionaires
owned just 0.4 percent of global private wealth in 1987 but more than 1.5 percent
in 2013, which is above the previous record attained in 2008, on the eve of the global
financial crisis and the bankruptcy of Lehman Brothers (see
Figure 12.2
).
¹
This is an obscure way of presenting the data, however: there is nothing really surprising
about the fact that a group containing 6 times as many people as a proportion of the
population should own 4 times as great a proportion of the world’s wealth.