00:00okay everyone this is the a 6nc podcast
00:03I'm Balaji Sreenivasan and I'm here with
00:05Larry Summers good to be with you Balaji
00:08maybe we can talk about thomas piketty's
00:11which 696 page doorstop is the number
00:15one bestseller on amazon against all
00:16expectation and he's been doing all the
00:18tours and and so on and we've kind of
00:21like had our criticism of him on twitter
00:23but i'm interested to hear your takes
00:24criticism audits etcetera it's a
00:28stunning thing and it must reflect
00:32positively on the growing
00:35intellectualism of the society that a
00:38book like that could be the best seller
00:42it is a book that touches the zeitgeist
00:47at a moment of great concern about
00:52inequality now comes a learning tome
00:57proclaiming the gravity of the
01:00inequality problem the response reminds
01:05me a little bit of the book the rise and
01:08fall of great powers by Paul Kennedy
01:11that worried about military and imperial
01:14military overstretch as a problem facing
01:18nations right at the end of Ronald
01:22Reagan's administration that book
01:25managed to miss the fact that the Berlin
01:27Wall was gonna fall and the Soviet Union
01:30was going to collapse and while
01:34piketty's diagnosis is I think a very
01:38powerful one I think it is pretty clear
01:41that the share of wealth and income
01:45going to the top one percent has risen
01:48and there's at least good reason to
01:51believe that the trends will continue I
01:56don't find his theory of the
02:01contradictions implicit in capitalism
02:04and his theory of where the well why
02:07wealth is rising at this
02:11rate to be a terribly convincing one his
02:18basic argument is that rates of return
02:22or greater than growth rates that
02:24capitalists just accumulate wealth and
02:27that eventually all the capital is going
02:29to accumulate in fewer and fewer hands
02:34and I think there are two large
02:40problematic aspects of the argument and
02:43then there are other factors that are
02:46more important the two problematic
02:49aspects are that as capital is
02:52accumulated the rate of return on
02:55capital would be expected to go down
02:57what economists refer to as the
02:59elasticity of substitution and
03:02essentially all of the estimates when
03:05you look at the proper concept of output
03:07output adjusted for the depreciation and
03:10obsolescence of capital conclude that
03:13the elasticity of substitution is not
03:16that high and therefore as more and more
03:19capital is accumulated the share of
03:22income going to capital should actually
03:24decline rather than increase which means
03:29what we traditionally would have thought
03:31that the process of capital accumulation
03:33is on net good for workers who can use
03:38capital as a tool second problem is that
03:43in piketty's basic structure the savings
03:46rate is assumed to be a constant but
03:49people save differently if their wealth
03:50is 25% of their income then they do if
03:55their wealth is 25 times their income
03:57and so there's an additional
03:59self-correcting factor the tendency of
04:02savings to decline as wealth accumulates
04:05that also operates to contain the very
04:10serious cycle that he describes his is a
04:14theory of accumulation by the fortunate
04:18but what is striking and you certainly
04:21see it out out here in particularly
04:27dramatic form is how dynamic the process
04:31of wealth accumulation is Forbes looked
04:36at its twenty looked in twenty twelve at
04:40its 1982 Forbes 400 and found that less
04:46than ten percent of those who were on
04:49the 1982 Forbes 400 were still part of
04:54the 2012 Forbes 400 on part thirty years
04:58is a long time and people die and their
05:01fortunes get split up several ways but
05:06there was all you know Mark Zuckerberg
05:08had not been born in 1982 so there are
05:15all kinds of fortunes being created and
05:19I think a better way to think about the
05:23sources of large fortunes and a better
05:27way to think about this is in terms of
05:31the economic processes that we were
05:36talking about earlier that take all the
05:38middlemen out and therefore allow the
05:43creator director designer to capture a
05:48larger part of the benefits and that's
05:52what's behind entrepreneurial fortunes
05:55in a different sense with much better
06:01information systems much greater
06:04capacity to execute the judgments to the
06:09CEO makes as two broad strategy and
06:12direction become a larger part of
06:16business success than they once were and
06:21so entrepreneurial CEOs are rewarded
06:25heavily not just in new companies but in
06:29traditional companies and in a world of
06:33this kind of ferment there's an
06:36enormous gains to be had by being able
06:40to judge the ways in which things are
06:42moving and judge who's doing the best
06:45job of taking advantage of the
06:46opportunities and that contributes to
06:49the fortunes that are made in the
06:52financial sector so I think it is much
06:55better to analyze inequality in terms of
07:01the fundamental forces of Technology and
07:03globalization than it is in terms of any
07:07kind of inherent cultural contradiction
07:10of capitalism that is not to deny that
07:14the phenomena are hugely important it is
07:19a grave mistake to say that because an
07:23economic explanation can be given for
07:26wealth inequality that means that it is
07:29socially alright to have so much wealth
07:36inequality and a book that has set off
07:41so much discussion and suggested so many
07:45lines of argument for consideration has
07:48to be regarded as a substantial
07:50contribution even if the ultimate
07:54hypothesis that it stresses does not
07:57strike me as being the primary
07:59phenomenon at work so I will again like
08:05defer to you on the sort of the
08:07macroscopic but I want to come at this
08:10from a slightly different angle and
08:11piketty's some of the angles that we've
08:12been talking about with mark and so
08:14under one of these actually you touched
08:15on which is a mark remarked you know
08:18it'd be amazing if we could find this
08:20source that would compound wealth
08:22infinitely at scale right because it's
08:25it's not easy but it's possible to put
08:27in 1 million and make 10 million back
08:29it's much harder to put in a hundred
08:30million and make a billion and it's very
08:32very difficult to put in ten billion and
08:34get a hundred billion reproducibly so
08:36the you know the diminishing returns
08:38aspect here is is something where the
08:40micro economic analysis of exactly
08:42what's going on in piketty's cases I
08:43think is very interesting because even
08:46just from a totally you know
08:48rational Sandpoint people would want to
08:50be in those investments right so it's
08:52kind of one but in terms of inequality
08:54there's a few I think interesting takes
08:56on this one is so maybe in roughly
08:59increasing order of contentiousness or
09:01interestingness or mentioned s what have
09:03you so first I'd say global inequality
09:06has decreased right so in the sense of
09:08you know Hans Rosling's drafts and
09:10Gapminder and so on from a number of
09:11different measures you've seen that
09:13because of the rise of India of China
09:15the emergence of this global middle
09:16class if you take a global perspective
09:18there's a lot of people who have who
09:20were very poor who are now no longer
09:22starving and who are getting wealthier
09:23much more quickly and so you know the
09:27fortunes are being created are not just
09:28the individual ones but you know China
09:29was in rags you know within our lifetime
09:32in 82 was just four years five years out
09:34of communism really and so so that's
09:37kind of one global inequality I think is
09:39decreasing number two is I think
09:42consumption inequality is decreasing so
09:44you know that is to say the hyper
09:46deflation of a lot of different costs
09:48sergey brin is a billionaire but he
09:50doesn't have an appreciable better
09:51Wikipedia experience than somebody who
09:53just has an iPhone right so the if you
09:55set the cost of something to pennies
09:57then or lessen that micro sense so
10:00that's almost free or so so cheap as to
10:03literally not be metered and just
10:06bandwidth then you you have more and
10:08more things that are accessible to more
10:10and more people and I think that as soft
10:12rates the world will see more and more
10:14of these things right now you could
10:15argue that technology has given us
10:17universal basic telecommunications and
10:19universal basic recreation in terms of
10:22infinite games and stuff on internet and
10:24we'll probably you know it'll be a
10:26question as to whether it'll actually
10:28give us universal basic education and so
10:30on but things like Khan Academy or at
10:31least pretty good even if you one could
10:33argue they're they're not as good as an
10:34institutional approach so I think the
10:36decline and consumption equality is
10:38important here because that's the other
10:39side of it it's not just how much money
10:40you're making is what do you get for
10:41that money how much do things cost then
10:43third which is I think when the also
10:46important ones perhaps least discuss of
10:48these three is what I call the decline
10:49in power inequality right so for example
10:52there's on the order of a thousand
10:54billionaires list in Wikipedia and one
10:56things I've been tracking is a fraction
10:57of them that are non-western right it's
10:59almost 500 of them are outside the US
11:02and so that's a huge change again from
11:04like the middle of the 20th century
11:05right the extent to which the US and you
11:08especially Western Europe sort of domini
11:10of the world economy has just been you
11:12know declining into clinic lining as a
11:13percentage and that's simply because you
11:15know even though they're you know like
11:17rising absolute terms it's not a
11:19zero-sum game the you know you couldn't
11:21keep all these other countries back
11:23indefinitely they eventually you know
11:25kind of got their economics together and
11:28trying to kind its economy together in
11:29India to a lesser extent and and so they
11:31rose and so I think that you know
11:34inequality is not just an economic thing
11:37there's a few more dimensions to it and
11:39from several different vantage winds
11:40things are actually going quite well
11:41finally I'd say all these things tie
11:43together in you know you mentioned that
11:46you thought his graphs are very good and
11:47I agree I think there's a lot of
11:49interesting data in that and his but his
11:51prognosis me you know may not agree with
11:54as much and I think that one aspect of
11:56his thing which is I think really under
11:59considered is the proposal for a global
12:01wealth tax you know soon actually
12:04already more than 50 percent of GDP by
12:07PPP is outside the US and Western Europe
12:09right and so I don't think it's going to
12:11be very easy to tax all of China and
12:13India's you know new millionaires you
12:15know for a little while tax I don't
12:17think you're gonna get in a court on
12:18that it's hard enough to come to an
12:19accord on climate change or something
12:20like that something like this I don't
12:22believe is going to be feasible and
12:24that's not an aspect that I've seen
12:26discussed all that much it's almost as
12:28if there's still sort of a time warp to
12:291950 when and so these are sort of the
12:34things that I've been thinking about
12:35with respect to epic adding I do think
12:38that you may be a little bit too serene
12:42no I agree with you that fantastic
12:46things are happening in the emerging
12:49markets and they're converging but I
12:52think many of us in the United States
12:54are right to be concerned about what's
12:58happening within our country I hear you
13:01on consumption inequality but if you
13:05look at what is probably the most
13:07fundamental measure of consumption which
13:12the data are very dramatic that the gaps
13:17in life expectancy between the top 10%
13:20of the population and the bottom 10% of
13:24the population have widened massively
13:27yep it didn't used to be the case that
13:29people with higher incomes lived far
13:32longer than people with lower incomes
13:35today it is the case the change in the
13:41relative life expectancy of a relatively
13:46fortunate person say any 80th percentile
13:49and a relatively less fortunate person
13:51say in the 20th percentile so we're not
13:53talking about big extremes the change in
13:57their relative life expectancy over the
13:59last long generation since the 1970s has
14:03been three or four years let's put that
14:06in some perspective that is the
14:08equivalent of a doubling of cancer
14:10mortality is a three or four year
14:14difference and so I don't know there
14:18surely are aspects we all have the same
14:22iPhones we all watch the same net net
14:27Netflix we all partake of Starbucks in
14:34that sense perhaps consumption
14:37experiences are equalizing but it'd be a
14:42grave mistake not to recognize that
14:44what's more fundamental than all of that
14:46is health and life is not converging and
14:51is within the United States very
14:52substantially diverge I am the miner
14:55kind of knit which is I would group the
14:58iPhone and Netflix together but I put
15:00Starbucks separately because that's a
15:02physical good so it hasn't had that same
15:03decline I don't think fair enough so
15:06let's wrap it up thank you for being
15:08here like good to be with you
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