Capital in the Twenty-First Century (51 page)

But that is not all. A stunning new phenomenon emerged in France in the 1990s: the
very top salaries, and especially the pay packages awarded to the top executives of
the largest companies and financial firms, reached astonishing heights—somewhat less
astonishing in France, for the time being, than in the United States, but still, it
would be wrong to neglect this new development. The share of wages going to the top
centile, which was less than 6 percent in the 1980s and 1990s, began to increase in
the late 1990s and reached 7.5–8 percent of the total by the early 2010s. Thus there
was an increase of nearly 30 percent in a little over a decade, which is far from
negligible. If we move even higher up the salary and bonus scale to look at the top
0.1 or 0.01 percent, we find even greater increases, with hikes in purchasing power
greater than 50 percent in ten years.
²²
In a context of very low growth and virtual stagnation of purchasing power for the
vast majority of workers, raises of this magnitude for top earners have not failed
to attract attention. Furthermore, the phenomenon was radically new, and in order
to interpret it correctly, we must view it in international perspective.

FIGURE 8.5.
   Income inequality in the United States, 1910–2010

The top decile income share rose from less than 35 percent of total income in the
1970s to almost 50 percent in the 2000s–2010s.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

Indeed, let me turn now to the US case, which stands out precisely because it was
there that a subclass of “supermanagers” first emerged over the past several decades.
I have done everything possible to ensure that the data series for the United States
are as comparable as possible with the French series. In particular,
Figures 8.5
and
8.6
represent the same data for the United States as
Figures 8.1
and
8.2
for France: the goal is to compare, in the first figure of each pair, the evolution
of the shares of income going to the top decile and top centile of the wage hierarchy
and to compare, in the second figure, the wage hierarchies themselves. I should add
that the United States first instituted a federal income tax in 1913, concluding a
long battle with the Supreme Court.
²³
The data derived from US income tax returns are on the whole quite comparable to
the French data, though somewhat less detailed. In particular, total income can be
gleaned from US statements from 1913 on, but we do not have separate information on
income from labor until 1927, so the series dealing with the wage distribution in
the United States before 1927 are somewhat less reliable.
²⁴

FIGURE 8.6.
   Decomposition of the top decile, United States, 1910–2010

The rise of the top decile income share since the 1970s is mostly due to the top percentile.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

When we compare the French and US trajectories, a number of similarities stand out,
but so do certain important differences. I shall begin by examining the overall evolution
of the share of income going to the top decile (
Figure 8.6
). The most striking fact is that the United States has become noticeably more inegalitarian
than France (and Europe as a whole) from the turn of the twentieth century until now,
even though the United States was more egalitarian at the beginning of this period.
What makes the US case complex is that the end of the process did not simply mark
a return to the situation that had existed at the beginning: US inequality in 2010
is quantitatively as extreme as in old Europe in the first decade of the twentieth
century, but the structure of that inequality is rather clearly different.

I will proceed systematically. First, European income inequality was significantly
greater than US income inequality at the turn of the twentieth century. In 1900–1910,
according to the data at our disposal, the top decile of the income hierarchy received
a little more than 40 percent of total national income in the United States, compared
with 45–50 percent in France (and very likely somewhat more in Britain). This reflects
two differences. First, the capital/income ratio was higher in Europe, and so was
capital’s share of national income. Second, inequality of ownership of capital was
somewhat less extreme in the New World. Clearly, this does not mean that American
society in 1900–1910 embodied the mythical ideal of an egalitarian society of pioneers.
In fact, American society was already highly inegalitarian, much more than Europe
today, for example. One has only to reread Henry James or note that the dreadful Hockney
who sailed in luxury on
Titanic
in 1912 existed in real life and not just in the imagination of James Cameron to
convince oneself that a society of rentiers existed not only in Paris and London but
also in turn-of-the-century Boston, New York, and Philadelphia. Nevertheless, capital
(and therefore the income derived from it) was distributed somewhat less unequally
in the United States than in France or Britain. Concretely, US rentiers were fewer
in number and not as rich (compared to the average US standard of living) as their
European counterparts. I will need to explain why this was so.

Income inequality increased quite sharply in the United States during the 1920s, however,
peaking on the eve of the 1929 crash with more than 50 percent of national income
going to the top decile—a level slightly higher than in Europe at the same time, as
a result of the substantial shocks to which European capital had already been subjected
since 1914. Nevertheless, US inequality was not the same as European inequality: note
the already crucial importance of capital gains in top US incomes during the heady
stock market ascent of the 1920s (see
Figure 8.5
).

During the Great Depression, which hit the United States particularly hard, and again
during World War II, when the nation was fully mobilized behind the war effort (and
the effort to end the economic crisis), income inequality was substantially compressed,
a compression comparable in some respects to what we observe in Europe in the same
period. Indeed, as we saw in
Part Two
, the shocks to US capital were far from negligible: although there was no physical
destruction due to war, the Great Depression was a major shock and was followed by
substantial tax shocks imposed by the federal government in the 1930s and 1940s. If
we look at the period 1910–1950 as a whole, however, we find that the compression
of inequality was noticeably smaller in the United States than in France (and, more
generally, Europe). To sum up: inequality in the United States started from a lower
peak on the eve of World War I but at its low point after World War II stood above
inequality in Europe. Europe in 1914–1945 witnessed the suicide of rentier society,
but nothing of the sort occurred in the United States.

Inequality reached its lowest ebb in the United States between 1950 and 1980: the
top decile of the income hierarchy claimed 30 to 35 percent of US national income,
or roughly the same level as in France today. This is what Paul Krugman nostalgically
refers to as “the America we love”—the America of his childhood.
²⁵
In the 1960s, the period of the TV series
Mad Men
and General de Gaulle, the United States was in fact a more egalitarian society than
France (where the upper decile’s share had increased dramatically to well above 35
percent), at least for those US citizens whose skin was white.

Since 1980, however, income inequality has exploded in the United States. The upper
decile’s share increased from 30–35 percent of national income in the 1970s to 45–50
percent in the 2000s—an increase of 15 points of national income (see
Figure 8.5
). The shape of the curve is rather impressively steep, and it is natural to wonder
how long such a rapid increase can continue: if change continues at the same pace,
for example, the upper decile will be raking in 60 percent of national income by 2030.

It is worth taking a moment to clarify several points about this evolution. First,
recall that the series represented in
Figure 8.5
, like all the series in the WTID, take account only of income declared in tax returns
and in particular do not correct for any possible understatement of capital income
for legal or extralegal reasons. Given the widening gap between the total capital
income (especially dividends and interest) included in US national accounts and the
amount declared in income tax returns, and given, too, the rapid development of tax
havens (flows to which are, in all likelihood, mostly not even included in national
accounts), it is likely that
Figure 8.5
underestimates the amount by which the upper decile’s share actually increased. By
comparing various available sources, it is possible to estimate that the upper decile’s
share slightly exceeded 50 percent of US national income on the eve of the financial
crisis of 2008 and then again in the early 2010s.
²⁶

Note, moreover, that stock market euphoria and capital gains can account for only
part of the structural increase in the top decile’s share over the past thirty or
forty years. To be sure, capital gains in the United States reached unprecedented
heights during the Internet bubble in 2000 and again in 2007: in both cases, capital
gains alone accounted for about five additional points of national income for the
upper decile, which is an enormous amount. The previous record, set in 1928 on the
eve of the 1929 stock market crash, was roughly 3 points of national income. But such
levels cannot be sustained for very long, as the large annual variations evident in
Figure 8.5
show. The incessant short-term fluctuations of the stock market add considerable
volatility to the evolution of the upper decile’s share (and certainly contribute
to the volatility of the US economy as a whole) but do not contribute much to the
structural increase of inequality. If we simply ignore capital gains (which is not
a satisfactory method either, given the importance of this type of remuneration in
the United States), we still find almost as great an increase in the top decile’s
share, which rose from around 32 percent in the 1970s to more than 46 percent in 2010,
or fourteen points of national income (see
Figure 8.5
). Capital gains oscillated around one or two points of additional national income
for the top decile in the 1970s and around two to three points between 2000 and 2010
(excluding exceptionally good and bad years). The structural increase is therefore
on the order of one point: this is not nothing, but then again it is not much compared
with the fourteen-point increase of the top decile’s share exclusive of capital gains.
²⁷

Looking at evolutions without capital gains also allows us to identify the structural
character of the increase of inequality in the United States more clearly. In fact,
from the late 1970s to 2010, the increase in the upper decile’s share (exclusive of
capital gains) appears to have been relatively steady and constant: it passed 35 percent
in the 1980s, then 40 percent in the 1990s, and finally 45 percent in the 2000s (see
Figure 8.5
).
²⁸
Much more striking is the fact that the level attained in 2010 (with more than 46
percent of national income, exclusive of capital gains, going to the top decile) is
already significantly higher than the level attained in 2007, on the eve of the financial
crisis. Early data for 2011–2012 suggest that the increase is still continuing.

This is a crucial point: the facts show quite clearly that the financial crisis as
such cannot be counted on to put an end to the structural increase of inequality in
the United States. To be sure, in the immediate aftermath of a stock market crash,
inequality always grows more slowly, just as it always grows more rapidly in a boom.
The years 2008–2009, following the collapse of Lehman Brothers, like the years 2001–2002,
after the bursting of the first Internet bubble, were not great times for taking profits
on the stock market. Indeed, capital gains plummeted in those years. But these short-term
movements did not alter the long-run trend, which is governed by other forces whose
logic I must now try to clarify.