Tuesday, July 15, 2014

Capital in the 21st Century: Merit and Inheritance in the Long Run (Chapter 11)

I should have blogged a review after every chapter when I started reading Capital in the 21st Century by Thomas Piketty three months ago, I still have 160 dense pages or so to go. For those that don’t know, which in all honesty is most people, Capital in the 21st Century is the definitive research, and most thorough work, on wealth, income and financial inequality by a French professor who coined the term the 1%. (Whoever coined the term the 99% has really accomplished more in the US I would say, yet the 1% begs the question, ‘what about the 99%?’) In short, it’s the book all the economics geeks have been reading this spring... and summer and maybe fall. 

Chapter 11 was about where inequality comes from. If it comes from true merit, everyone seems to be okay with it. In other words, a doctor is paid more than an engineer for saving lives. An engineer is paid more than the mechanic, for deciding how to connect the parts in the car. A mechanic is paid more than a fast food server because most vehicles are more complex than a hamburger. So to some extent, I think most people can say, yeah, if a doctor gets paid more than me, but has to sleep with a conscious knowing that he prescribed the wrong medication which caused a patient to die, he can have the money. But that’s small potatoes in terms of this chapter. 

What does a person have to do to make 100 times the minimum wage? What about 500 times the minimum wage? For the record, that’s $7.25 million a year. Also, we hear a lot about sports stars but it’s worth ignoring them because first they are a minority in terms of people earning millions of dollars a year and second a large majority of sports stars file bankruptcy within a half decade of retiring. What about 1000 times the minimum wage, $14.5 million? What can one person do, in one year that is worth what 1000 other people could not have done? That’s more of a side topic to the chapter, how to justify these 50x and 100x minimum or average salaries for “talent”, yet he does ask the question.

However, we’re still talking about merit, this chapter covered inheritance too. Reading any of the classic literature books from the early 1800s provide bountiful examples of people who want to marry rich to live a luxurious lifestyle. This chapter changed my views on inheritance. It hasn’t changed my actions. I will still tell my parents and grandparents to spend it all, they don’t owe me anything. Yet this chapter brought two ideas to my mind, one, if you inherit an inheritance, is it a responsibility to pay it forward? Not even necessarily to the next generation, although that would be nice and logical, but I think of all the suffering people in Africa and Asia and how much better spent the money could go toward helping them rise to a higher level, rather then on a sports car for me. Second, the selfish side of me says, wow, wouldn’t it be great to not have student loans? Wouldn’t it be great to have a “free” downpayment on a house? As much as I like my 21 year old minivan, a nicer newer car would be good.

Piketty charts the fall and now the rise of merit, and in more detail, inheritance. We are not living in the world our parents or grandparents lived in. It is in many ways close to the level of inequality in the developed world that my great grandparents lived in. As he repeatedly mentions, with the political competition for capital (money) going global, no country wants to raise taxes on wealth, lest it flees to another country. And taxes, on wealth specifically, which are the main way of reducing inequality (wealth inequality is far greater than income inequality) are often frowned upon and lobbied against by the minority of people most likely to suffer from the effect of such wealth taxes, the 1%. 

Unfortunately, Piketty has a number of U shaped graphs in his book. To the best of my knowledge, no one is disputing them. These graphs represent things like the private wealth of a country owned by the richest 1% or 10%. In short, the last 100 years really, due to the “shocks” of 1914 to 1945 and then the recovery from those shocks, including the baby boom, in the last 70 years contributed to a time of equality and merit based wealth unlike any time in history. We are now finally coming out of that time and returning to an era when inheritance begins to matter more than education and profession. (I added the “finally” in the last sentence both to say that I don’t anticipate the last 100 years of turbulence to repeat in anything like the same way in the next 100 years, and as a joke as if inheritance should matter more than merit.)

The short story being, if you want material wealth, you should go into STEM fields or medicine, but clearly most importantly, marry rich (perhaps the best "investment" you can make) or have rich parents.

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