Chelsea Follett: Joining me today is Dr. Daniel Waldenström, a professor of economics at the Research Institute of Industrial Economics, or IFN in Stockholm, Sweden where he directs the taxation and Society research program. Previously, he taught at Uppsala University, the Paris School of Economics and UCLA. He is an expert on economic inequality, fiscal policy, and economic history, and he joins the Human Progress Podcast to discuss his book, Richer and More Equal: A New History of Wealth in the West. Thank you so much for joining me. How are you?
Daniel Waldenström: Thank you for inviting me, Chelsea. I’m very good. Thank you.
Chelsea Follett: So before we get into the substance of the book, what inspired you to write it and explore this topic?
Daniel Waldenström: So I’ve been working on income and wealth inequality and taxation issues in the economics research context for like 20 years. I’ve been participating in the building of historical data series for a lot of western countries that allow us to understand better where we come from and where we’re heading. So and during this endeavor, I have been collaborating with a lot of people and reading and being inspired by a lot of people amongst them, my former colleague, Thomas Piketty, who wrote this bestselling book, Capital in the Twenty-First Century, that built a lot on my research and others, the research of others. So but what happened over the years is that we gained more insights into what was really happening with the long-term trends.
Daniel Waldenström: I will tell you more in detail later on. And new data came along and new results that has actually pointed to a fairly important reappraisal of some of the main themes in how we think about what has been happening over the past century and what the reasons are for the wealth inequality and income inequality changes, and what we learned from that. So this is what made me then compile all of these thoughts into a narrative, into a book that I feel is important to tell to people.
Chelsea Follett: No. Absolutely. It’s a fascinating book. There are so many enlightening charts in it. And then, your preface is called an uncovering a positive story, and the book does indeed reveal a surprisingly upbeat story that the tide has turned and that ordinary citizens in the western world are now richer and more equal than before, as the title of the book would suggest. So tell me about that and why the prevailing narrative of increasing inequality seems to be overstated or wrong.
Daniel Waldenström: So I think to some extent, the data that I use is the same data that previous people have been using in the research community and so on. But I think to the extent that the… So there’s one aspect of this, which is in terms of how do we interpret the economic outcomes in society? How do we interpret that wealth is being created? How do we interpret entrepreneurs gaining new grounds, creating new firms that make profits that become valuable in the views of others? Is that something positive? And some of these people get very rich and building enormous fortunes. Is that a problem for society? So I think my view is that within the democratic market economy context, I see very few problems with having such value creating activities in the economy.
Daniel Waldenström: So of course there’s a difference with people working, for example, within autocratic countries. Maybe we have examples of the oligarchs in eastern Europe that has become rich basically because of theft, or we have dictatorships in developing countries where people get super connected to the elites or the presidents even. But within the democratic market economies, all of these value creating activities, they bear something positive to welfare or people. So no matter whether you’re the worker who gets hired or you’re the tax collector who gets the tax money, everything begins with value creation in the private sector. People start firms, they hire people and they pay wages and pay taxes. And when we look at this development over time and we see that some people get very successful in all of this, I think that we should view this as something inherently positive.
Daniel Waldenström: So the expansion of the economy, the size of the pie is expanding, which is then translating into people’s welfare. This is why the narrative of having successful entrepreneurship, creating huge fortunes is something that can be very, so that is very positive to society and to the economy. Of course, we should tax them, and so on, and they should be taxed as all other citizens to the extent that we have democratically decided that we should tax. But this stands a little bit in contrast to some of my research colleagues, people maybe in other parts of society who view even within the western world within the democratic transparent market economies, rich people as a problem. So they are suspicious about the rich that they have evaded, maybe, taxes or they have maybe become rich for the wrong reason, or they are too rich, excessively rich.
Daniel Waldenström: I depart from that view and I challenged that view, and I also then challenged it actually using the data that shows that the previous narrative that wanted to explain equalization. So reduced gaps of the 20th century as mainly driven by the destruction of capital of the rich, either through the wars that has been the main channel according to maybe Thomas Piketty, but other historians as well. But also the taxes, the capital taxes that, basically lowering the top creating equality that way. My data show that in fact to the extent that we have had capital distractions during the war, and we have had a capital taxation that actually prevent or disincentivize people from collecting and building wealth.
Daniel Waldenström: The main force that has created equality over the 20th century is lifting the bottom, allowing people, normal people to save, to build wealth in either housing or saving for their retirement. And that has been the main driver for the equalization that we’ve seen during the 20th century. And it’s a complex process, but basically my story emphasizes that lifting the bottom is the key to sustained equalization. And the good thing is that it actually goes hand in hand with value creation, the capital accumulation. So it doesn’t rely on destruction of capital, but instead the creation of capital.
Chelsea Follett: Okay. That relates to this idea that you state in the book of Wealth not being a zero-sum game, as many people believe. Can you talk a little bit about that narrative and what you found and why that’s wrong?
Daniel Waldenström: So the zero-sum game viewpoint or view of the world is basically that if someone is to succeed, someone else has to fail. So if someone’s income is increased, some other’s incomes are decreased. So if you have that view of the world, of course, you’re gonna be suspicious about successes. So people becoming rich because, Oh, who did they take that money from? So the historical analysis that I rely on it’s not only my research. I rely on the research of a lot of people from the US, from Europe and from other development countries even. So, it shows very clearly that over time, and this is actually one of the main value added aspects of looking at history, we see that the expansion of the economy, so coming through technological development, economic growth, and also the building of institutions that are inclusive, that engage people democratically in the educational system, actually provides new opportunities, expands the wealth and the incomes without taking anything from someone else.
Daniel Waldenström: So entrepreneurs and innovators offer us new stuff that didn’t exist before. So having that in mind, it enhances our understanding of what actually creates welfare in society. So we want to live good lives. We want to be able to enjoy a good health and do the things we want and consume whatever we want. So having the positive, constructive view of how economic development is coming about and how people’s incomes and fortunes are being built, namely by creating opportunities and allowing them to expand and not by having it as that is requiring being taken from others. That guides us as all into understanding society, maybe looking into certain policies that promote these activities, unlike the zero-sum game thinking, which then would think that if we want to lift the bottom, we need to take from the top. So that’s gonna be the zero-sum view of the world, which I think historically has been quite wrong. I think politically it leads in the wrong direction.
Chelsea Follett: Most of the book focuses on wealth and wealth inequality, but of course, much of the inequality research is also on income inequality. And you do mention in the book, briefly, some different forms of inequality and how inequality has changed across different dimensions. So why wealth? What kind of wealth are you looking at? How do you define it? And can you talk also a little bit about other forms of inequality?
Daniel Waldenström: So thanks for bringing this up, Chelsea. It’s a very broad question you that you ask, of course. So yes, of course. So let me just emphasize that. So the book is quite narrow in its focus in the kind of outcome, which is wealth building and also wealth inequality, which is kinda a particular economic outcome in society. So I do this, I will come back to the second part of questions that you asked about in terms of what, there are different kinds of wealth even that could affect our understanding of the outcomes.
Daniel Waldenström: So, but when it comes to the first question in terms of what kinds of outcomes do we care about? How do we think about our welfare everyday life? I think income is more important than wealth. So it’s important that we have our wage earnings, allowing us to pay our rents and buy the food and so on, gas for the car and so on. So this requires a steady income. So this is why everybody’s talking about labor market policy and/or labor markets and unemployment. So income and consumption is, I think, the most important part of people’s normal everyday welfare. Looking at the historical development, interestingly, that development is pointing to the western world becoming more and more equal. So 100 years ago we had small elites getting almost all of the income in the economy. Some of these countries were very uneven in the sense that people worked in the agriculture, maybe didn’t even get a monetary pay. They’ve got paid through housing and food.
Daniel Waldenström: But even today… So today, we’ve see that more and more people get into the formal economy. They have also gotten better educated throughout the 20th century. This is one of the main transformative developments during the 20th century, the expansion of the educational system. So the point that in the beginning of the book, I point to is wealth inequality changes leading us to see that we have had a great reduction in wealth inequality over the 20th century. Is that an isolated event amongst all of these economic outcomes? No. It turns out that also income inequality has changed along the same lines of the technological change, the economic growth, but also the institutional developments that are inclusive, allowing people to invest in their education and getting better savings and so on. Then in the beginning, I also look at some other outcomes, for example, health or lifespans. Maybe this is the ultimate sign of where we want to and how long lives we live. And that turns out to have produced an even larger equalization over time.
Daniel Waldenström: So if we use the most common statistical measure of inequality, the so called Gini coefficient, it’s a measure between 0 and 1 where 1 is extremely unequal, and 0 is super equal. Everybody has the same lifespan in this context. We see that the Gini coefficient in the rich countries as of today have gone from maybe 0.5, 0.6 in the 19th century down to 0.1 today. So the differences in how long lives we live has also decreased a lot during the 20th century. So our societies today are so much more equal in basically all relevant respects. And my focus is on wealth in my book, but it expands then to these other economic outcomes. So that’s a very important broad-based conclusion that, even though we look at wealth here, the lessons about the role of economic growth, the roles of having institutions, creating platforms for people to work actively and to engage in society, they all lead to the same positive circles. So we get richer and and having a higher state of consumption, but also getting more equal along this way.
Chelsea Follett: So the book is divided into three parts. Let’s go through those. The first part is building wealth and you begin with a dive into the history of wealth accumulation. Could you tell me that story?
Daniel Waldenström: Yeah. So building wealth is, of course, key for society. So we need capital to do things. So we need… So capital and wealth are concepts that are used sometimes interchangeably. They are not exactly the same. We can come back to that. But as for now, we can just say that capital is needed to produce stuff. So whether it’s gonna be the production of food or it could be the production of goods and so on. And the other main factor of productions in society is then labor. So we also need to work to who is going to run the machines and so on. So during the 20th century, we see that our economies have accumulated capital, especially during the post war era, but even earlier than that. And that has been an important component in understanding why our society has been able to engage in better and more expansive production, but also becoming wealthier along this way. So the more capital we have, the more wealth people will own.
Daniel Waldenström: And those people leading the way are often the producers. So the entrepreneurs may be starting these firms and becoming successful. We should also bear in mind at the individual level, there are a lot of entrepreneurs failing. So risk taking is key to the market economy. So the experimentation, the trials, and the errors, in parenthesis, I can just say that some parts of the analysis today when it comes to taxing wealth, maybe being suspicious about successful entrepreneurs, is sometimes or I think most of the time neglecting or ignoring or forgetting the fact that for each successful and rich entrepreneur, you would have maybe a 100 failed entrepreneurs. And some of them basically go in bankrupt and but in a fair share of the others are maybe also then just working as hell and to get, sorry, to get through of their everyday lives.
Daniel Waldenström: So another aspect of the importance of wealth is that when we compare the size of capital or wealth in the economy to national incomes or GDP, so the size of the economy in terms of income, then we see that capital was actually a little bit more important in the aggregate 100 years ago. Then it asked technological development, economic growth to speed that up during the 20th century. So the wealth income ratio so when you divide the sum of all wealth by national income and when the national income started growing faster during the 20th century, that ratio was reduced. But in the past research narratives, there were stories about the capital of the old pre democratic, pre taxation and pre deregulation market economies of the 19th century. So when there was an almost unfettered capitalist society, you could say.
Daniel Waldenström: Some old results suggested that the density of capital was extremely large. So we didn’t tax it, we didn’t regulate it. And this was then going against some of the economic rules or economic theories that, and try to suggest that income and capital, they kind of go hand in hand. If we get too much capital, it starts becoming less productive. So then we will having less capital and more labor and so on. So we will have a level of that ratio being relatively constant over overtime. So in the previous wealth research, and this is again guided by my former colleague, Thomas Piketty suggesting that those previous wealth income ratios or capital income ratio were extremely high in the old unfettered capitalist era, and pointing that we are heading back that way now.
Daniel Waldenström: During the 20th century, we started regulating capital. We started taxing capital. We had these shocks to capital coming from the wars. But now in the 1980s, 1990s, we started deregulating, lowering taxes and allas we see, once again, the intensity of capital in society is increasing, going back to this unfettered era of the 19th century. So the problem is that the newer series coming from different countries actually invalidates parts of that story. As it turns out, capital values weren’t that high in the old era. In fact, they were around the levels of today, maybe sometimes even lower. We only saw hints about that in the early works of Thomas, where the European countries stood out as having huge capital values relative to income whereas the US series were much flatter. So the US kind of departed. So having much more like in aligned with traditional economics modeling, whereas there then how can understand this, we didn’t know.
Daniel Waldenström: But then as new data came out, my Swedish series, for example, but there were series for Spain and for some other countries, suggested that maybe those early data sets that was used had some problems. And then came another set of series or of studies recalculating the values for the UK, the values for Germany suggesting much lower levels of early capital values. And the bottom line here is that, so capital as accumulator of time, we are much richer today than we have ever been before in our history. This is then, of course, in real terms. So depending on given how much you can purchase with your capital stock. It’s much larger today than ever before in history. So when, but even when, but also when you compare it to national income or GDP, it’s actually larger today than during most areas in the past.
Daniel Waldenström: So it wasn’t the way that the democratic taxation or the taxation capital or the destructive forces against capital was crucial to break this true raw capitalist state of affairs when it came to the intensity of capital. But in fact, it seems as if the market economy structures even in the 19th century weren’t that different from the 20th century. So that’s one of the… So those two things. So we’re richer today and capital has become much larger, even when we compare to GDP are kinda the some of the lessons that we take out of this analysis.
Chelsea Follett: So that’s how wealth has increased over time. And then you talk in the next section about the changing nature of wealth and how wealth has increasingly moved into housing and pension funds. Tell me about this shift.
Daniel Waldenström: So this shift is crucial for our views of how capital works in the economy, and especially for how capital and wealth translates into the wealth distribution and wealth inequality. So what we see when we look at the historical development is that capital in its composition. So there are different kinds of assets that we can own. We can own a house, we can own stocks, we can own… Many people have bank deposits, we can have bonds, we can also have land or summer cottage, or, there are different kinds of assets that we have in our portfolio. So this gonna differ across households, but when we add up all the households in the economy, and we have this aggregate composition, we see that the capital stock or the wealth stock in actually all the rich nations have transformed profoundly.
Daniel Waldenström: So 100 years ago, most of all of these assets in their values were stuff that the rich people owned. There were industrial corporations, so their shares, there were large agricultural domains very often owned by large farmers or the aristocracy. Whereas the stuff that, or normal people or like workers, middle class people who were very few, by the way, the middle class was small, most of them were like workers 100 years ago. The stuff that they owned, as you said, the houses or their homes and also maybe their long-term savings, that was just like a fourth of all assets. So a minority. But along the way of the 20th century, we started establishing these structures that I mentioned before, institutions in the political domain and also economic institutions that started making people more engaged and active in the economy.
Daniel Waldenström: So the democratic transitions during the 1910s and ’20s, when people got the right to vote, first all men and then all women, that actually pushed for an expansion of educational attainment. So we saw educational reforms allowing more and more people to get better trained. We had more rule, better rules to have better arrangements in the labor market with maybe structures for numbers of hours that you should work and so on. And all of that made workers more productive. So they had a safer work environment, and they were better trained. And then, therefore, they got better paid, typically, so everything just grew in terms of economic outcomes. And then that allowed them to start saving privately. And the first thing they started saving in was housing. So we saw during the middle of the 20th century, 1940s, 1950s, 1960s, a virtual expansion, or even explosion in homeownership, going from 20%, 30% of the population to maybe 60%, 70% depending on, we have a variation across countries.
Daniel Waldenström: So that was the first pillar of the household wealth that was being created during the 20th century. And then along this development, people started living longer lives. And what happened was that they started living way past retirement age. And what did that imply? Well, they started to… Needed to save for retirement. And this is then something the next pillar of household wealth that emerged during the Post War Era where people started saving for old age. And these two kind of assets, the housing wealth and the pension funds, have then grown in importance and value over time.
Daniel Waldenström: And that has been such a success story, so today, so they have become the most important part of total private wealth in all Western societies, from the US to UK, France, and even Sweden. So today, I would say maybe 75%, 80% of all wealth is either housing wealth. In fact, this is around half of all private wealth in our economies. And then the next quarter is long term savings. And so we’ve had this transformation in the nature of wealth going from being mainly composed of the stuff that the elite owns. And this, of course, goes hand in hand with wealth and having been very, very highly unequal in the past to being mainly composed of stuff that you and I own. So this is our portfolios. Meaning also then, that explains why we have a much more equal society in terms of wealth ownership. So basically, most of the stuff around the values in society is the assets that normal people hold. And this is crucial then for understanding of how wealth building transforms into changes in wealth inequality.
Chelsea Follett: So let’s talk about that. Part two of the book shifts the focus to the distribution of wealth. So wealth inequality over the past 130 years or so from various Western nations. You look at the data, and tell me, what did you find?
Daniel Waldenström: So over the last 20 years, maybe, we’ve started a group of researchers amongst… I mean, I’ve been part of that group, building comparable series, longitudinal series of wealth inequality for a number of countries. In the book, I discuss this, like, how do you do this? How do we measure wealth inequality? It’s difficult. But mainly, we use data that has collected wealth holdings of the top of the wealth distribution among… Basically those with the wealth, the rich people. And then compared the wealth that they own with the total private wealth in society. So that’s kind of how we compute measures such as the top 10% wealth share. So the richest 10% in the economy.
Daniel Waldenström: So when we rank all households from the poorest to the richest, and we then look at the richest tenth in society. Then we take the sum of their wealth and divide it by total wealth in the economy. Then we get the top 10% wealth share, or the top decile group wealth share. And we can do this also for the top 1% wealth share, so the richest percentile. But this is, of course, something that we’ve heard of many times over the years, whether it’s income or whether it’s wealth. Anyway, so we have data on the top wealth shares over the entire 20th century up to today. Like, 120, 130 years of comparable wealth inequality trends.
Daniel Waldenström: And what they say is quite clear. So they say that we are much more equal today than we were in the past. So as I said before, we were unequal in wealth ownership in many… In the European countries, if we begin there, I think we could say that the richest tenth of society, they held around 90% of all wealth. So almost all of the wealth was kind of concentrated to the richest minority. And that share has been halved over the 20th century, at least then up to the 1970s, 1980s, roughly. And this is… The first fascinating thing is that this equalization, this great wealth equalization has occurred in all Western countries, even the US, over the 20th century up to the 1970s and ’80s. So Europe was much more unequal than the US 100 years ago, and the equalization has then been larger in Europe than in the US.
Daniel Waldenström: And that kind of consistency and the kind of the similarity across these countries is a huge, is a very interesting fact, telling us about these economic forces creating equality through economic development. Then in the last decades, in the recent decades, if you continue from 1980 onwards, one of the most surprising facts in the entire book that I was kind of struck by seeing study after study on wealth inequality over the recent years was that in the European countries, wealth inequality has not increased almost at all since the 1980s. It’s been hovering around the same historically low wealth inequality levels that they kind of landed on in the 1970s after this long period of equalization. And this is despite the fact that wealth values have increased tremendously around the Western world.
Daniel Waldenström: I mean, Housing has become more expensive, stock markets have boomed. We can talk about the reasons for all this, but nonetheless this is a fact. Wealth values have increased. We are richer today than we were in 1980. And yet in Europe, wealth inequality has not increased. And The reason is, going back to that previous development on the nature of wealth, is that most of the wealth that has increased in value is held by the middle class or the ordinary people. So they’ve been kind of lifted up by these asset price increases and the positive economic developments and actually quite extraordinary positive tendency in our Western market economies. Looking at the US, there has been more of a wealth concentration increase.
Daniel Waldenström: And we see that what has happened in the US is that it has shared the common wealth growth that we see also in Europe that the wealth holdings of ordinary like middle class households has increased in value a lot. But in the US, we have had an additional pace of increase amongst the most successful groups in society. So the wealth of the top groups have increased even faster. So in Europe, the top has increased around the same pace as the middle class, but in the US, the richest groups, mind you, they are different also over time, but they have seen their wealth grow even faster. And that explains the increases in wealth concentration that we have seen in the US over the past years. Mind you, if we want to look at, into very detail in the US, it hasn’t been much of a wealth concentration increase since 2010. Over the last 10-15 years, US wealth concentration has hovered at a relatively stable path. So we get a lot of nuances when we look deeper into data, but nonetheless, Europe and US have a little bit of a different path over the recent decades.
Chelsea Follett: And yet, even for the US, you note that inequality is actually lower than the pre-war levels, which is fascinating. But let’s get into the why of these changes. What explains this pattern of inequality that we see?
Daniel Waldenström: So of course that is super interesting and also super complex question. There are tons of causes. I think it’s difficult for social scientists in general to talk about cause and effect. This is something that we strive hard to reach. And so what I can talk about or what I discuss in the book, I think is about what are the main forces that we’re talking about. So to reiterate a little bit, so we can just see that mechanically, the main explanation for the long equalization during the 20th century is that we’ve been lifting the bottom. So we’re expanding, we’ve been expanding wealth ownership and wealth growth in the lower parts of the wealth distribution. And then they have experienced higher wealth growth than the top. So this explains why we had this wealth equalization and also explains why we haven’t had much of wealth concentration increase over the last decades in Europe and so on and vice versa a little bit in the US. So the reasons for why we’ve seen this is to a large extent institutional.
Daniel Waldenström: So political and economic institutions that expand opportunities in the population, that allow people to get educated, to get access to the labor market, to be able to take loans for starting enterprises. Basically coming into the economic market and maybe succeed. This is key. And I think this departs a little bit from what people have talked about previously on how wealth inequality has changed. So then focusing, as I said before, on factors about capital destructions of the rich or taxing the rich. That has been relatively unimportant to understand the drivers of wealth inequality change. So the accumulation and the creation of wealth, that’s the kind of the elephant when we talk about the drivers of wealth inequality change. So this is… Then, of course, taxes matter and they can prevent people from wanting to invest or so on.
Daniel Waldenström: We’ve seen examples of that in the economic histories of all of these Western countries. But mind you, it’s an interesting fact that much of the growth of government that we’ve seen over the 20th century has actually been built on the increasing of labour taxes. So workers have beared the biggest burden of the increased taxation, meaning that their opportunity to save privately is what has been prevented the most through the tax increases. But anyway, so this is at least to think about the main drivers and so on.
Chelsea Follett: You go into greater detail in the book about the different kinds of wealth. You devote one chapter to offshore wealth. You also devote one to public sector wealth. You talk about the role of inheritance. Tell me about all of these things.
Daniel Waldenström: So the concept of wealth is a little bit complicated if we compare it to, for example, income. So income from labor is quite clear in its definition, whereas wealth is the stock value of assets that need to be defined and valued. And in fact, some of these assets aren’t that well observed and even well defined economically. So when one studies wealth and discusses wealth and equality, one needs to be very clear about what are we measuring and what are we not measuring. So the main measure and the baseline analysis in my book and in actually in all of the wealth inequality or wealth measurement literature and also the research literature and also in the international organizations and statistical agencies and so on is a measure of financial assets, plus non financial assets.
Daniel Waldenström: Meaning then our bank deposits, our shares, bonds, and so on, and mutual funds and pension funds, plus the non-financial asset, which is property, like housing and land, minus all debts, student loans, but mainly mortgages. Then when measuring this wealth in the realm of the domestic economy, we have the first aspect that you mentioned is offshore assets. So people moving not themselves, but their assets abroad. Of course, this should be part of their portfolios, and it should then be part of the standard wealth inequality or wealth measurement. The problem is if that wealth is offshore is hidden for maybe for tax reasons. So one chapter in the book, I discuss this question.
Daniel Waldenström: So I start by saying that most of the capital flows across countries is not illegal. To the extent that it has to do with tax planning, I just also comment on basically saying that this is not necessarily problematic. Everybody tax plans. I mean, we need to do minimize the cost in our economies. So then but there is also one part of the offshore assets that could be hidden illegally. And then there is research trying to measure the size of those assets and add them on to the people that potentially own them in the rich countries. And finally, does this affect our understanding of wealth and wealth inequality in our countries? So the main conclusion is no. It doesn’t change much. So it has a gradient. So the richer people, in the rich countries are more likely to hide wealth. It’s actually it seems to be a quite exclusive phenomenon. I mean, it’s quite costly to set up this infrastructure. But on the aggregate, when it comes to measuring wealth amounts or wealth inequality, it doesn’t change a lot. And it definitely does not change the historical developments at all.
Daniel Waldenström: So that’s just to be very clear about that. Then you also mentioned what we can talk about as Social Security wealth and/or sometimes we think about unfunded pension wealth. So there are kind of drawing rights to live in our economy. So when we get sick, we get an income, or when we get retired, we have a pension. Some of that is then based on our own savings, but some of it is actually based on promises from employers or most of the time, for most countries by the state. So how about so not including the present value of the those future income streams, some of which are very certain, for example, when it comes to pensions. Not including that is kind of as neglecting the savings that people could have done had they not had the future expectations about future pensions. So, one way would be to think about those future pension incomes as a capital value. You would need them, you would need to save privately for those amounts in the absence of a pension system. So therefore adding those amounts to people, it actually makes a difference.
Daniel Waldenström: It’s those amounts, especially in the pension system, which is the kind of the broadest or the biggest part of this of this Social Security or social insurance welfare system, these wealth amounts are huge. Interestingly, they are much more evenly distributed than other types of wealth. So whereas many workers don’t own much property or have a lot of private savings in the banking accounts, they have a lot of expectations, a lot of pension incomes to come. So when we add pensions or the present value of future pensions to people, we see that the long equalization of wealth inequality over the 20th century is much larger. So we have a much more equal wealth distribution if we account for the unfunded pension wealth or other kinds of Social Security wealth. This is interestingly, I show this in the book, true for both, the US which is, like one of the most starkest market or unregulated or low regulated and low taxing market economies, and for Sweden, which is, like, has in during parts of the 20th century being kind of close to socialist, command economy almost, and yet we see common trends.
Daniel Waldenström: And this just says that the equalization of wealth and equalization society has been much stronger over time. And we also account for these values that our countries have have created, through the pension systems. Finally, you asked about inheritance. That’s another chapter in the book where I just asked a question. Okay, we see that has been a lot of equalization of wealth ownership, but maybe inheritance changes this narrative. Maybe we have much more inherited wealth today, so there’s much less of mobility and much more of dynasties, much less of that kind of opportunity inequality, you could say. So when we look at the aggregate picture, looking at what is the aggregates or macroeconomic flows of inheritance compared to GDP, and how has that changed over time, we see that over the last 120 years, the relative importance of inheritance or inheritance flows was the largest in the beginning of the 20th century. So and during the 20th century, the role of inheritance flows has become less and less important. We don’t have that much data for many countries. We have it that for the UK, France, Sweden, to some extent, the US, but they show basically the same picture.
Daniel Waldenström: So in the aggregate wealth inherited wealth has become less important over time. And another interesting aspect that I discuss in the book is that even though we have a positive correlation of wealth ownership between parents and their children, and this could be for a lot of reasons. So we see that, richer parents have often richer children. And not only because they may have received gifts, but maybe they have inherited other traits of working hard or intelligence or connections. It could be a lot of things. I mean, where we draw the line for what is inherited wealth or inheritance is an interesting discussion. But, anyway, what we see in a number of countries is that even so we see that the richer heirs receive larger inheritances, larger bequests. But the relative importance of the inheritance is actually larger for the less wealthy heirs. So in fact, when we see in the impact on wealth inequality from inheriting, we see that it has an equalizing effect.
Daniel Waldenström: So inheriting money means that wealth distribution among heirs will be less unequal. So that’s just stuff that I discuss in this book. We see I mean, also, other another section of the book discusses how many of the super rich are self made and how many or how large shares are rich heirs. And I have data there for US and for the US and for Sweden and showing similarly clearly decreasing trends in the relative importance of inheritance. So there are more and more self made billionaires in our economies over the last 30, 40 years. Of course, reflecting, the technological change, the globalization that has created opportunities for entrepreneurs, generating new wealth, but it just is a signal of that this overall message of the book that we are getting richer and more equal is not changed when we also account for the role of inheritance.
Chelsea Follett: Fascinating. You mentioned globalization. Obviously, your book focuses on the West, but do you have a sense as to how generalizable these results might be, for the entire world?
Daniel Waldenström: So, yes, in fact, I have some discussion about this in the book. This comes a little bit on depending on where in the country we look at and also if we also look at the global scale or in for example, developing countries. But if we start with the global level, so basically looking at all wealth in the world and see how it has been, how it is distributed and how that has changed over the past we had data for the past 25 years roughly. We can see that it’s very unequally distributed, more unequally distributed in the world than in any country. This is maybe not that surprising. But we see that the measures of wealth inequality have decreased every year from the year 2000 up until the 2020s. This is then reflecting what we’ve seen in other equality measures for the world when it comes to income or when it comes to poverty.
Daniel Waldenström: The world is a much more equal place today than it was 20 years ago. The equalization has been much faster for poverty and for incomes than it has for wealth. But it’s with clearly decreasing trend in wealth inequality reflecting that the low and middle income countries are not only getting higher income, but they’re also starting to save and build capital and become better equipped to take part in the global economy. So we have smaller gaps. And that’s basically having a quite nice confirmation of the positive trends that we’ve seen in the global economy as well as in the western market economies.
Chelsea Follett: Given all of these trends toward more equality and less inequality, Why do you think there is this prevailing narrative to the contrary that we live in a new gilded age that inequality has never been worse? What explains the staying power of this narrative and what are some of the potential consequences of this widespread misconception?
Daniel Waldenström: So, Chelsea, that’s a very good question. It’s a difficult question. And so, I think one part of the discussion has been quite narrow in its focus on certain parts of the recent years. So especially when it comes to comparing outcomes to early 1980s. So early 1980s was a turning point in the global economy and especially in the Western world where we started leaving a very bad economic situation with stagnating economies. Our production systems became less and less productive. Shipbuilding, textile industries were evaporating. They left the rich world because we were simply too bad, and we were out-conquered by upcoming countries in the, especially in Asia. We saw the car industry facing new competition from also Asia.
Daniel Waldenström: The US car industry almost vanished under the pressure from especially from Japanese car producers. And then so that was observed in the west, and what it did was, we learned the lessons, that that situation, what we had, in a demise economically was actually explained by our economic regulations and actually the high taxation of income and capital. In Sweden for example, we had a top marginal tax rate on labor income above 90%. Sweden was an outlier in this regulation, but we were not so far away from the other western countries. So what happened was that we started deregulating and lowering taxes and starting understanding and talking about the role of technological change, having incentives in the economy that it was important to get people to work hard, to educate themselves, to start new firms.
Daniel Waldenström: And, of course, with that we got both growth and we also got larger income differences. Not so much wealth holding differences, but we got larger income differences. Sweden saw the largest increase in income inequality from the ’80s from the early ’80s and until maybe 2010, but much of that was actually a normalization. And I think for most of the Western countries, we went from historically low levels of income inequality that was the result of extremely high tax pressures on productive people. And going from that, we all we got more growth and those leading that development also got higher incomes, and we saw higher income differences as a result. So that’s a fact that people have interpreted negatively. I think they are misinformed. I think, much of this is a normalization that has created welfare. This is that some actually, many of the critics benefit a lot from. Better medical care, better technological tools.
Daniel Waldenström: They all… I think it’s pretty fun that they dislike successful entrepreneurs and rich people, but they love to drive electric vehicles. They love to use smartphones and buy stuff from Amazon maybe or stream music from Spotify, the Swedish firm. Anyway, so that’s a kind of a misinformed narrative, but it’s based on observations of increasing inequality since the 1980s. Another kind of explanation maybe for why people are talking about this development is something very negative negatively is that they have this zero-sum thinking. In fact, there is a research paper from Harvard that have asked that has asked people about their views of the economic pie and divisions and whether people have a zero-sum game thinking or not.
Daniel Waldenström: And it and then they have asked about people’s political views. And they find a very strong correlation between left wing ideologies and zero-sum game views of the world. So this means that people being critical about the growth and the successes in the market economies are people from the left that also have much more zero-sum game thinking and in their how they interpret the world. So I think that is kind of explaining why we still have this narrative that they think truly think that they something bad is happening. Let me also say this. People from the more liberal parts of the political spectrum, have in many countries, Sweden included, but maybe also the US, actually been quite disinterested in questions about inequality, that they haven’t really understood that inequality matters.
Daniel Waldenström: It’s important to have similarities in society. Equals, for example, have much more trust in each other, and trust is something very good. We need to feel included. We want to have the same opportunities and so on. But people from the rightwing spectrum, I feel are less interested in talking about inequality, learning about it, understanding what is happening, how it is measured. And in many cases, they basically left a walkover in these discussions. Whereas people on the left part of the political spectrum, their problem is not that they are disinterested. They all have an interest in inequality, but their problem is that they already know the answers. They don’t care about typically the data or how, the measurement and so on. They already know that inequality is too high and it’s increasing. So it’s a very strange political situation, political debate, I think, in many developed countries when it comes to inequality. Meaning that we have many of these relatively strong but misinformed statements. So that at least some takes on how this has come about.
Chelsea Follett: And that is interesting that people who are more on the market liberal side or who are believers in economic liberty often don’t want to talk about inequality even though the story there is actually quite good for their policies, which gets into the question of policy recommendations. Obviously, the misconceptions about inequality lead to support for policies that seek to rack down on the rich. You have some different policy recommendations in your book. What insights can we learn from this new history of wealth?
Daniel Waldenström: So I think we could think about it from true directions. So one very important part of the lessons that we can learn is about building wealth amongst the broad layers in the population. So how do we want to create more equality and ownership? I think history teaches us very clearly that this is about lifting the bottom, so including more people to become owners. So we have seen that home ownership has been the main pillar in household wealth and has included people to start saving. We see it from research that it’s… Research suggests that owned property has less wear and tear than rented property. So private ownership has a lot of gains. We see, there’s a research paper that I cite in the book showing that the long-term returns in home ownership has been almost as high as the long-term returns in the stock market, but at half the risk when it comes to owning homes compared to stock ownerships.
Daniel Waldenström: So there’s a lot of benefits of home ownership that I think we should include. US and Sweden has a home ownership rate amongst household that is around 65%. But a lot of the countries in Europe has higher levels. So Finland has 70%, Norway has 80%. Many of the Eastern European countries, Southern European countries have even up to 90% home ownership rate among households. That’s one thing. I think another pillar of household ownership is funded pension or mutual funds. So the mutual fund was a financial innovation that came, it became very popular in the 1980s, and that has democratized the stock market, allowing people to own shares that give high returns, but to much lower risk than a single share that would imply. So, and luckily, we understood this and guided a lot of our pension savings or pension investments into fund ownership.
Daniel Waldenström: So that has exploded in the western world or throughout the world, and that has become a very large success for many households and to build their wealth and to have a more prosperous retirement period. So, and finally a lesson about the top part. So when it comes to taxation of capital, and this is something that I want to discuss more especially in the US context because this is something that is coming about now when we talk about the presidential election. And this is about how should we tax capital. So it’s not about whether we should tax capital. I think it’s important to see that we should tax capital as we should tax labor to the extent that we have democratically decided that we should tax and to fund some collective expenses for infrastructure, education, defense, and so on.
Daniel Waldenström: So, that people get rich also means that they get, means to pay taxes. But how we pay capital taxes matter. So there’s one big group of capital taxes that work well. These are capital income taxes, so capital taxes on flows of returns. The biggest one is the corporate tax. So the profit tax of corporations. We could think about levels, but we can just look at the OECD countries, corporate taxes amount to around half of all capital taxes in total. Then we have taxes on dividend income. We have taxes on rental income. We have taxes on realized capital gains. And this is kinda ownership taxes in the business sector, which are kind of natural.
Daniel Waldenström: So whenever you as an owner take out cash from your company, we should tax that as an income. And the good thing about capital income taxes is that it’s actually you have a tax base which exists, is allows you, you get an income, you can pay some of it in taxes, like for any labor earner. The other kind of capital taxes, which are much more problematic are the taxes on wealth and stocks of capital. And inheritance tax are amongst those as well. They tax values that must not be associated with income. So you immediately run into liquidity problems. So owning a company that may not generate a lot of profit, but it may be still valuable maybe to others. Maybe there is stock market valuation or based on some assets that you have in your company, could then render a large wealth tax levy.
Daniel Waldenström: The problem is that if you make little profit, you don’t have any money to pay the tax with. How should you do them? Should you sell parts of the firm, well, then that’s gonna open up for corporate governance problems. And that’s actually something that’s, it’s very clear from economic research that we don’t want those kinds of effects of taxation. It’s a very negative outcome of taxation. Another problem with wealth taxes and inheritance taxes is that we don’t know exactly how to value these assets that typically are not traded very actively. Many of the companies that are not on a stock exchange listing how much they’re worth, we don’t know. We could guess, we could have consultants trying to value them, but I would suppose we would have maybe 50% error margins and having 50% error margin on your tax bill, that’s not so fun and it could be very costly. So that’s also why… These problems are why very few countries today still have wealth taxes.
Daniel Waldenström: And I think this lesson needs to be learned, that these taxes, they haven’t worked historically. They have actually, looking at the revenues that they have generated, very, very small when it comes to wealth and inheritance taxes, unlike the capital income taxes. They amount to more than 90% of all capital tax revenues in OECD countries. So my recommendation, and this is something that I hope to be able to discuss more in the future, is that it’s not a recommended policy to start taxing wealth or as someone wants to call it, unrealized capital gains. So values in companies that are theoretically calculated from the increases in asset prices or asset values of these firms, and count that as an income that can be taxed. The problem is that income does not exist.
Daniel Waldenström: It’s based on a presumptive value increase, which may be wrong, but nonetheless, there is no money to pay those taxes with. So I think those proposing these kinds of taxes, they lack a basic understanding of entrepreneurship and the kind of the basic forces for driving private enterprise and wealth accumulation in society. So that’s a very, another kind of set of take-home messages from history and in terms of what kind of economic policies that we want for the future.
Chelsea Follett: I hope that more policymakers read your book and come to those same conclusions. Thank you so much for talking with me. This has been fascinating.
Daniel Waldenström: Thank you, Chelsea, for inviting me.