Capital in the Twenty-First Century
Page 22
Indeed, despite a very high rate of private saving (roughly 15 percent of national income), national saving in Italy was less than 10 percent of national income in the period 1970–2010. In other words, more than a third of private saving was absorbed by government deficits. A similar pattern exists in all the rich countries, but one generally less extreme than in Italy: in most countries, public saving was negative (which means that public investment was less than the public deficit: the government invested less than it borrowed or used borrowed money to pay current expenses). In France, Britain, Germany, and the United States, government deficits exceeded public investment by 2–3 percent of national income on average over the period 1970–2010, compared with more than 6 percent in Italy (see Table 5.4).18
In all the rich countries, public dissaving and the consequent decrease in public wealth accounted for a significant portion of the increase in private wealth (between one-tenth and one-quarter, depending on the country). This was not the primary reason for the increase in private wealth, but it should not be neglected.
It is possible, moreover, that the available estimates somewhat undervalue public assets in the 1970s, especially in Britain (and perhaps Italy and France as well), which would lead us to underestimate the magnitude of the transfers of public wealth to private hands.19 If true, this would allow us to explain why British private wealth increased so much between 1970 and 2010, despite a clearly insufficient private savings rate, and in particular during the waves of privatizations of public firms in the 1980s and 1990s, privatizations that often involved notoriously low prices, which of course guaranteed that the policy would be popular with buyers.
It is important to note that these transfers of public sector wealth to the private sector were not limited to rich countries after 1970—far from it. The same general pattern exists on all continents. At the global level, the most extensive privatization in recent decades, and indeed in the entire history of capital, obviously took place in the countries of the former Soviet bloc.
The highly imperfect estimates available to us indicate that private wealth in Russia and the former Eastern bloc countries stood at about four years of national income in the late 2000s and early 2010s, and net public wealth was extremely low, just as in the rich countries. Available estimates for the 1970s and 1980s, prior to the fall of the Berlin Wall and the collapse of the Communist regimes, are even more imperfect, but all signs are that the distribution was strictly the opposite: private wealth was insignificant (limited to individual plots of land and perhaps some housing in the Communist countries least averse to private property but in all cases less than a year’s national income), and public capital represented the totality of industrial capital and the lion’s share of national capital, amounting, as a first approximation, to between three and four years of national income. In other words, at first sight, the stock of national capital did not change, but the public-private split was totally reversed.
To sum up: the very considerable growth of private wealth in Russia and Eastern Europe between the late 1980s and the present, which led in some cases to the spectacularly rapid enrichment of certain individuals (I am thinking mainly of the Russian “oligarchs”), obviously had nothing to do with saving or the dynamic law β = s / g. It was purely and simply the result of a transfer of ownership of capital from the government to private individuals. The privatization of national wealth in the developed countries since 1970 can be regarded as a very attenuated form of this extreme case.
The Historic Rebound of Asset Prices
The last factor explaining the increase in the capital/income ratio over the past few decades is the historic rebound of asset prices. In other words, no correct analysis of the period 1970–2010 is possible unless we situate this period in the longer historical context of 1910–2010. Complete historical records are not available for all developed countries, but the series I have established for Britain, France, Germany, and the United States yield consistent results, which I summarize below.
If we look at the whole period 1910–2010, or 1870–2010, we find that the global evolution of the capital/income ratio is very well explained by the dynamic law β = s / g. In particular, the fact that the capital/income ratio is structurally higher over the long run in Europe than in the United States is perfectly consistent with the differences in the saving rate and especially the growth rate over the past century.20 The decline we see in the period 1910–1950 is consistent with low national savings and wartime destruction, and the fact that the capital/income ratio rose more rapidly between 1980 and 2010 than between 1950 and 1980 is well explained by the decrease in the growth rate between these two periods.
Nevertheless, the low point of the 1950s was lower than the simple logic of accumulation summed up by the law β = s / g would have predicted. In order to understand the depth of the mid-twentieth-century low, we need to add the fact that the price of real estate and stocks fell to historically low levels in the aftermath of World War II for any number of reasons (rent control laws, financial regulation, a political climate unfavorable to private capitalism). After 1950, these asset prices gradually recovered, with an acceleration after 1980.
According to my estimates, this historical catch-up process is now complete: leaving aside erratic short-term price movements, the increase in asset prices between 1950 and 2010 seems broadly speaking to have compensated for the decline between 1910 and 1950. It would be risky to conclude from this that the phase of structural asset price increases is definitively over, however, and that asset prices will henceforth progress at exactly the same pace as consumer prices. For one thing, the historical sources are incomplete and imperfect, and price comparisons over such long periods of time are approximate at best. For another, there are many theoretical reasons why asset prices may evolve differently from other prices over the long run: for example, some types of assets, such as buildings and infrastructure, are affected by technological progress at a rate different from those of other parts of the economy. Furthermore, the fact that certain natural resources are nonrenewable can also be important.
Last but not least, it is important to stress that the price of capital, leaving aside the perennial short- and medium-term bubbles and possible long-term structural divergences, is always in part a social and political construct: it reflects each society’s notion of property and depends on the many policies and institutions that regulate relations among different social groups, and especially between those who own capital and those who do not. This is obvious, for example, in the case of real estate prices, which depend on laws regulating the relations between landlords and tenants and controlling rents. The law also affects stock market prices, as I noted when I discussed why stock prices in Germany are relatively low.
In this connection, it is interesting to analyze the ratio between the stock market value and the accounting value of firms in the period 1970–2010 in those countries for which such data are available (see Figure 5.6). (Readers who find these issues too technical can easily skip over the remainder of this section and go directly to the next.)
The market value of a company listed on the stock exchange is its stock market capitalization. For companies not so listed, either because they are too small or because they choose not to finance themselves via the stock market (perhaps in order to preserve family ownership, which can happen even in very large firms), the market value is calculated for national accounting purposes with reference to observed stock prices for listed firms as similar as possible (in terms of size, sector of activity, and so on) to the unlisted firm, while taking into account the “liquidity” of the relevant market.21 Thus far I have used market values to measure stocks of private wealth and national wealth. The accounting value of a firm, also called book value or net assets or own capital, is equal to the accumulated value of all assets—buildings, infrastructure, machinery, patents, majority or minority stakes in subsidiaries and other firms, vault cash, and so on—included in the firm’s balance sheet, less th
e total of all outstanding debt.
FIGURE 5.6. Market value and book value of corporations
Tobin’s Q (i.e. the ratio between market value and book value of corporations) has risen in rich countries since the 1970s–1980s.
Sources and series: see piketty.pse.ens.fr/capital21c.
In theory, in the absence of all uncertainty, the market value and book value of a firm should be the same, and the ratio of the two should therefore be equal to 1 (or 100 percent). This is normally the case when a company is created. If the shareholders subscribe to 100 million euros worth of shares, which the firm uses to buy offices and equipment worth 100 million euros, then the market value and book value will both be equal to 100 million euros. The same is true if the firm borrows 50 million euros to buy new machinery worth 50 million euros: the net asset value will still be 100 million euros (150 million in assets minus 50 million in debt), as will the stock market capitalization. The same will be true if the firm earns 50 million in profits and decides to create a reserve to finance new investments worth 50 million: the stock price will rise by the same amount (because everyone knows that the firm has new assets), so that both the market value and the book value will increase to 150 million.
The difficulty arises from the fact that anticipating the future of the firm quickly becomes more complex and uncertain. After a certain time, for example, no one is really sure whether the investment of 50 million euros several years earlier is really economically useful to the firm. The book value may then diverge from the market value. The firm will continue to list investments—in new offices, machinery, infrastructure, patents, and so on—on its balance sheet at their market value, so the book value of the firm remains unchanged.22 The market value of the firm, that is, its stock market capitalization, may be significantly lower or higher, depending on whether financial markets have suddenly become more optimistic or pessimistic about the firm’s ability to use its investments to generate new business and profits. That is why, in practice, one always observes enormous variations in the ratio of the market value to the book value of individual firms. This ratio, which is also known as “Tobin’s Q” (for the economist James Tobin, who was the first to define it), varied from barely 20 percent to more than 340 percent for French firms listed in the CAC 40 in 2012.23
It is more difficult to understand why Tobin’s Q, when measured for all firms in a given country taken together, should be systematically greater or smaller than 1. Classically, two explanations have been given.
If certain immaterial investments (such as expenditures to increase the value of a brand or for research and development) are not counted on the balance sheet, then it is logical for the market value to be structurally greater than the book value. This may explain the ratios slightly greater than 1 observed in the United States (100–120 percent) and especially Britain (120–140 percent) in the late 1990s and 2000s. But these ratios greater than 1 also reflect stock market bubbles in both countries: Tobin’s Q fell rapidly toward 1 when the Internet bubble burst in 2001–2002 and in the financial crisis of 2008–2009 (see Figure 5.6).
Conversely, if the stockholders of a company do not have full control, say, because they have to compromise in a long-term relationship with other “stakeholders” (such as worker representatives, local or national governments, consumer groups, and so on), as we saw earlier is the case in “Rhenish capitalism,” then it is logical that the market value should be structurally less than the book value. This may explain the ratios slightly below one observed in France (around 80 percent) and especially Germany and Japan (around 50–70 percent) in the 1990s and 2000s, when English and US firms were at or above 100 percent (see Figure 5.6). Note, too, that stock market capitalization is calculated on the basis of prices observed in current stock transactions, which generally correspond to buyers seeking small minority positions and not buyers seeking to take control of the firm. In the latter case, it is common to pay a price significantly higher than the current market price, typically on the order of 20 percent higher. This difference may be enough to explain a Tobin’s Q of around 80 percent, even when there are no stakeholders other than minority shareholders.
Leaving aside these interesting international variations, which reflect the fact that the price of capital always depends on national rules and institutions, one can note a general tendency for Tobin’s Q to increase in the rich countries since 1970. This is a consequence of the historic rebound of asset prices. All told, if we take account of both higher stock prices and higher real estate prices, we can say that the rebound in asset prices accounts for one-quarter to one-third of the increase in the ratio of national capital to national income in the rich countries between 1970 and 2010 (with large variations between countries).24
National Capital and Net Foreign Assets in the Rich Countries
As noted, the enormous amounts of foreign assets held by the rich countries, especially Britain and France, on the eve of World War I totally disappeared following the shocks of 1914–1945, and net foreign asset positions have never returned to their previous high levels. In fact, if we look at the levels of national capital and net foreign capital in the rich countries between 1970 and 2010, it is tempting to conclude that foreign assets were of limited importance. The net foreign asset position is sometimes slightly positive and sometimes slightly negative, depending on the country and the year, but the balance is generally fairly small compared with total national capital. In other words, the sharp increase in the level of national capital in the rich countries reflects mainly the increase of domestic capital, and to a first approximation net foreign assets would seem to have played only a relatively minor role (see Figure 5.7).
FIGURE 5.7. National capital in rich countries, 1970–2010
Net foreign assets held by Japan and Germany are worth between 0.5 and one year of national income in 2010.
Sources and series: see piketty.pse.ens.fr/capital21c.
This conclusion is not quite accurate, however. For example, Japan and Germany have accumulated quite significant quantities of net foreign assets over the past few decades, especially in the 2000s (largely as an automatic consequence of their trade surpluses). In the early 2010s, Japan’s net foreign assets totaled about 70 percent of national income, and Germany’s amounted to nearly 50 percent. To be sure, these amounts are still substantially lower than the net foreign assets of Britain and France on the eve of World War I (nearly two years of national income for Britain and more than one for France). Given the rapid pace of accumulation, however, it is natural to ask whether this will continue.25 To what extent will some countries find themselves owned by other countries over the course of the twenty-first century? Are the substantial net foreign asset positions observed in the colonial era likely to return or even to be surpassed?
To deal correctly with this question, we need to bring the petroleum exporting countries and emerging economies (starting with China) back into the analysis. Although historical data concerning these countries is limited (which is why I have not discussed them much to this point), our sources for the current period are much more satisfactory. We must also consider inequality within and not just between countries. I therefore defer this question, which concerns the dynamics of the global distribution of capital, to Part Three.
At this stage, I note simply that the logic of the law β = s / g can automatically give rise to very large international capital imbalances, as the Japanese case clearly illustrates. For a given level of development, slight differences in growth rates (particularly demographic growth rates) or savings rates can leave some countries with a much higher capital/income ratio than others, in which case it is natural to expect that the former will invest massively in the latter. This can create serious political tensions. The Japanese case also indicates a second type of risk, which can arise when the equilibrium capital/income ratio β = s / g rises to a very high level. If the residents of the country in question strongly prefer domestic assets—say, Japanese real estate—thi
s can drive the price of those preferred assets to unprecedentedly high levels. In this respect, it is interesting to note that the Japanese record of 1990 was recently beaten by Spain, where the total amount of net private capital reached eight years of national income on the eve of the crisis of 2007–2008, which is a year more than in Japan in 1990. The Spanish bubble began to shrink quite rapidly in 2010–2011, just as the Japanese bubble did in the early 1990s.26 It is quite possible that even more spectacular bubbles will form in the future, as the potential capital/income ratio β = s / g rises to new heights. In passing, note how useful it is to represent the historical evolution of the capital/income ratio in this way and thus to exploit stocks and flows in the national accounts. Doing so might make it possible to detect obvious overvaluations in time to apply prudential policies and financial regulations designed to temper the speculative enthusiasm of financial institutions in the relevant countries.27
One should also note that small net positions may hide enormous gross positions. Indeed, one characteristic of today’s financial globalization is that every country is to a large extent owned by other countries, which not only distorts perceptions of the global distribution of wealth but also represents an important vulnerability for smaller countries as well as a source of instability in the global distribution of net positions. Broadly speaking, the 1970s and 1980s witnessed an extensive “financialization” of the global economy, which altered the structure of wealth in the sense that the total amount of financial assets and liabilities held by various sectors (households, corporations, government agencies) increased more rapidly than net wealth. In most countries, the total amount of financial assets and liabilities in the early 1970s did not exceed four to five years of national income. By 2010, this amount had increased to ten to fifteen years of national income (in the United States, Japan, Germany, and France in particular) and to twenty years of national income in Britain, which set an absolute historical record.28 This reflects the unprecedented development of cross-investments involving financial and nonfinancial corporations in the same country (and, in particular, a significant inflation of bank balance sheets, completely out of proportion with the growth of the banks’ own capital), as well as cross-investments between countries.