Review: Capital in the Twenty-First Century

If you are curious why I am doing so many documentary reviews lately it’s because I am in the home stretch of my CFA studying and take breaks by watching documentaries or reading. It’s easy to take notes and critique while I watch and use these as content for posts later. Of course, I choose books and documentaries that keep with my general themes of motivation, personal finance and macroeconomics while adding my own personal spin on the manner in which the information is presented.

For this review I have to admit I am also the worst type of reviewer: critiquing a documentary based on a book which I haven’t read. That book is French economist Thomas Piketty’s book Capital in the Twenty-First Century which was published originally in 2013 in French and has since been translated to dozens of languages and read throughout the world. The book was one of the catalysts for the Occupy Wall St. movement and touched off heated debates about inequality in the US and throughout the world.

The documentary, found on Netflix, involves the author as well as other media and academic personalities including renowned economist Joseph Stiglitz, political scientist Francis Fukuyama and columnist Rana Foroohar.

Looking Back on History

Dear to my own interests in economics, markets and history, the documentary looks back on inequality since the 18th century and characterized the reality of the social forces at play from the times of the French Revolution. Contrary to popular belief, the time prior to much of the industrial revolution was not a enjoyable period for much of the human population. Only a tiny percentage of people who were involved in the aristocracy wore more than a few pairs of clothes, ate decadent foods and pontificated on state of politics. Most of the masses were forced to eke out a living from the little they had, be it subsistence farming or grueling manual labor.

At that time, much of the aristocracy was made up of landowners who further stratified their wealth by marrying into other rich families. At that time in the West, the rich owned about 70% of all land, a figure which the documentary claims, we are approaching again in modern times, despite the fact that land is much less important in determining who is wealthy today compared to the past.

The move to the new world in the West was characterized as economic refugees fleeing much of the rigid class structure in Europe. Peasants and urban poor with little stake in European society moved to places like the US, Latin America, Australia etc to take advantage of the abundant land and set up their own economic lives free of the yoke of systems that offered them little opportunity.

The turn of the 20th century and WWI are quickly glossed over and is characterized as being a period of big monopoly business and strike breaking. All along the way at each period, the documentary attempts to keep the attention of those who are not history buffs by drawing a parallel with past situations and the current state of the world.

In the mid 20th century however is where the narrative starts to get a bit more partisan and the facts start to become more selective. Much of what was described prior to this point follows a well trodden narrative by academics for the historical economic time period but when it moves into policies that are a bit more relevant to today’s world, the interpretation becomes a bit more subjective.

Rose Colored Glasses

If you didn’t know anything about rent control, you may be apt to buy the nostalgic way that the documentary mentions the rent controls put in place in much of the US during WWII. The producers seem to imply that the lifting of these controls may have contributed to an untethered and unaffordable market which we see in much of the US today. As I have described in a number of posts on this blog, this couldn’t be any further from the truth and the economic reality.

New York City was one of the few cities to maintain those rent controls from WWII up to the present day. These controls are fine when people are leaving and rents are falling. When that circumstance reversed though, rent control squeezes new renters and rewards those who are older, were there first, or have in depth knowledge of the archaic rent loopholes.

The oil shock of the 70’s got similar treatment in the film. The stagflation period saw prices rise along with unemployment. This was characterized as a period when wages didn’t increase but prices did, hurting workers. Indeed inflation hurts workers and the poor but blaming in solely on the oil crisis is a massive simplification. In the US there was inflation from financing the Vietnam war and the abandonment of the Bretton Woods monetary pact that essentially floated all exchange rates and transmitted inflation between countries more easily.

This also ties into the manufacturing of cars which was touched on at the time. This was a period when the US started to lose market share, even in their home market for automobiles. The documentary implied that the German and Japanese auto makers having workers on their board somehow translated into more sales and stealing market share. This is nonsense. German and Japanese auto makers did well because they made high quality cars that didn’t guzzle gas like the American ones.

The 90’s were glossed over as if all the gains were due to lower costs born by international trade and financial innovation when in fact there were real productivity gains during this period that ushered in a new period of growth.

Behavioral Studies

Where the documentary does shine is when it recounts studies on personal motivations. One study flipped a coin to give a player an unfair initial advantage in playing Monopoly. It found that after a while, gains by the player who started with more accelerated and these players did not attribute their positions in the game to luck. The mocked the players with less money and even slammed their prices harder. This was in interesting insight into the potential entitled attitude for many of those born wealthy.

Spot On

Where the facts and arguments were stronger were when the current housing market was discussed. Not just in the US, but across the Western world, housing has become increasingly unaffordable in the past 30 years, this is a drag on growth for younger people who have to devote an ever higher share of their income to housing as opposed to earlier generations.

Inheritance was discussed by the author as putting an egalitarian society in danger. Piketty thinks that without reform, inheritance will play just as important a role in the 21st century as it did in the 19th century. Inheritance in the US is not taxed until estates are $11.5 million or larger although some states impose their own taxes. In addition, it’s too easy to skirt the inheritance taxes altogether through things like trust agreements, lending and derivatives. The wealth management industry has been coming up with ever more clever ways to legally dodge taxes for heirs at the expense of everyone else. Not only does this stratify those that are already well off, it creates a class of people that don’t need to or often don’t want to work. Rather the jobs many occupy do not contribute in meaningful ways to greater productivity.

Is it Really That Bad?

Part from the broad conclusions of the documentary though, Piketty’s research and subsequent fame has touched off a flurry of studies looking into income inequality and they aren’t always coming to the same conclusions.

Piketty examines tax data for his conclusions but some academics feel this is not the most accurate picture of the actual state of income and wealth in an economy. Authors Gerald Auten and David Splinter adjusted the same tax data for transfers like free healthcare and food assistance and found that the share of income by the 1% has not changed since the 60’s. The Congressional Budget Office (CBO) also adjusts for transfers and comes to similar conclusions.

The other side of the inequality argument is that labor and the middle class is taking less and less of a share of income while the rich and their capital returns consume an ever higher share of total income.

However The Economist also points out that the S-Corp pass through company may look like capital on paper but in actuality are usually wholly owned companies that depend on the labor of their owners like a doctor’s or lawyer’s practice.

So although the conclusions seem to be definitive and forgone, what the data showed is not necessarily agreed upon by all economists.

Staying on Message

That being said, Piketty seems to be more the voice of reason when it comes to policy suggestions. He poses some policy tweaks that leave the current system in place, especially upping the inheritance tax so people start from more of an even plying field.

Other commentators rail on technology which I find to be a vague and naive. It ignores all the benefits of technology and comes off as old timers complaining about a world that is passing them by.

All in all, this was one of the more interesting documentaries I have seen but keep in mind the agenda and the omissions of the authors before you come to your own conclusions.

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