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Video transcript

before going into depth into some of the other charts in the book let's think about what Thomas Piketty outlines is the the two theories why we have this increasing income inequality in the United States one theory is that it's driven by Labor it's driven by layer labor and in particular you have this phenomenon so this is you have this phenomenon where top managers so we're talking about executives maybe of large corporations are getting a larger and larger share of income larger share of income and he argues that this could be due to one of two reasons or maybe some combination of them one might be the market just recognizing the value or the importance of having top managers and so over the last few decades the market has realized hey it's worth it to pay these folks more and more and more money because even though those are large salaries these are very very large enterprises and if you can measure that someone can drive a 1 or 2 or 3 percent better return on capital for a bill multi-billion dollar company or a or drive the growth faster for a multi-billion dollar company then maybe it's completely worth it for two giving them a larger and larger and larger share of income so one possibility one possibility is just the recognition so let me write it this way this is the market recognition of value market recognition of value but another thing he cites and he actually implies that this is what he believes is the more likely one is that over the last several decades you've had situations where the top managers have been able to essentially control what they themselves get compensated and there's not a lot of checks and balances there so this is the one that he actually argues is probably happening more so you could almost say this is a kind of a self-regulation of income self-regulation and most folks if they're allowed to self-regulate their income would would tend tend to increase it or maybe it is a combination both so this is one dynamic that he argues could be driving this increase in inequality that you know top managers are getting a larger and larger share of income the other one is driven by capital so the other argument is one based on capital so capital and it's all around the idea that the return on capital is greater than growth then over generations those who have capital especially those who generate a disproportionate share of their income from capital are going to if their proportionate income their proportional wealth is going to grow become a larger and larger and larger share of the economy what do we mean there well if most of your income is comes from just your from your labor then your salary is just going to be based on market forces for how much value you might be able to add to a to a organization and how many other people have that skill and your negotiating leverage and all of those types of things but if most of your income starts to be generated not from labor but from returns on capital so what do I mean by that well let's say that you are let's say that you are a doctor you are a doctor and let's say you make two hundred thousand dollars a year so two hundred thousand dollars a year this is let me do this in a color that you can actually see two hundred thousand dollars a year this is your income this is your income from labor income from labor but let's say that let's say that you've come upon some inheritance and you have a ten million dollar inheritance so you have a ten million dollar inheritance and you invest it and you get a five percent return on it so your return on capital is five so you get five percent so let me write this as R is equal to five percent here R is equal to five percent well five percent of ten million dollars is $500,000 $500,000 per year so this right over here is income from capital income from capital and so his argument here is is once you get to a certain point and you start having a lot of capital and if your return is greater than the growth and the economy well then this this doctor in this example his wealth so it's going to go from ten million to ten point five million that's going to grow by five percent again year in year out it's going to grow faster than the economy and then he could he could I guess bequeath it to his children or to someone else and then they will be able to compound in the same way and that over time you might have some form of dynastic wealth where wealth is being driven really you know they don't really need to have a job and just this phenomenon by itself where you inherit some money you invest it at a rate of return that is growing faster than the economy and so this overtime is going to take up a larger and larger chunk of the economy and I'll do a spreadsheet to kind of show at least this dynamic now he also points out that look there could be other dynamics that balance this off in fact maybe this is one of the dynamics that really I guess you could say valued labor weather and we see that in some areas whether it's sports stars or maybe in finance or the the best hedge fund managers or portfolio managers get a disproportionate share of income maybe some of that is justified or maybe you don't even get these returns you need some of it to go to labor but then you go the other way as well when people get huge labor income that might allow them or potentially the people that they bequeath their money to to kind of go into this category right over here where they're getting a lot or all of their income or a disproportionate share of their income from the return on their capital as opposed to their labor and that's this whole idea is really that you're just going to have a higher savings rate if you have a large income and actually let me make that clear as well so for example for example if if let's say there's two people one person so person a and person B person B let's say person a it makes a hundred thousand a year one hundred thousand year and let's say that person B let me do those in the right colors let's say person a makes a hundred thousand a year and let's say person B makes 1 million 1 million a year actually let me just write it this way makes 1 million a year so that's their income and we're not even saying how it's coming to them whether it's labor or returns on capital so that's their annual income now person a you could consider them I guess upper middle class they might have you know a mortgage or house payments send their kids to college whatever their expenses might be 80 thousand a year expenses are 80 thousand a year and let's say this is after-tax just to make it simple after this is after-tax income so their expenses are going to be 80 thousand a year and so they will be left to save so their savings savings are going to be twenty thousand dollars per year now let's say person B their after-tax income is a million dollars a year now they are able to live a a more glamorous life I guess and so they might have more expenses maybe they spend and you know maybe their families are the exact same size maybe they spend I don't know five times as much money so these this person is living a must a much more consumptive lifestyle I guess you could say so they're spending four hundred thousand dollars to live and so their savings are going to be $600,000 $600,000 and so you see this idea that this person right over here has a 20% savings rate they are saving 20% of their after-tax income 20 K out of 100 K while this person right over here has a sixty sixty percent savings rate now it's completely possible that this could person could really you know live large and spend eight hundred thousand dollars a year but it's this phenomenon that the larger that this goes it's actually hard to spend that much money in fact you could imagine if someone with a lower income 40,000 or 50,000 where they have spend all of their money and they actually have zero savings so as you as your income as your after-tax income becomes larger and larger relative to your standard of living your cost of living the savings rate generally goes up and because the savings rate generally goes up you start to go more into this category right over here where you benefit where you might benefit from returns of capital especially if returns of capital are growing larger than the growing larger than faster than the economy and another question to ask is what do you think this could happen over very long periods of time so once again my point here is to really just articulate what's going on and this what's now seems to be a pretty pretty popular book but you should look at this one with an open mind but also at a critical mind does this make sense what are the balancing factors why this might not continue forever why are can't be greater than gee forever or why this might break down or why this won't continue on and on forever