Early in the introduction to his arresting new book on wealth distribution, the French economist Thomas Piketty asserts that “the distribution of wealth is too important an issue to be left to economists, sociologists, historians, and philosophers.” (P. 2.) “Everyone,” he writes, should be interested. It seems to me that, on the issue of wealth distribution, trusts and estates scholars should be at or near the front of the queue. In any event, that is my excuse for choosing a book on economics as a JOTWELL selection for trusts and estates.
In the short time the English translation of Capital in the Twenty-First Century has been available (March, 2014), Piketty has achieved near rock-star status. The hard-copy version of the book, which runs 577 pages excluding the footnotes, is sold out on Amazon as I write this. It has been reviewed by all the major newspapers, discussed in all the business and academic journals, and debated across the blogs, and its themes have been batted around by commentators of all stripes. The New York Times, not content to restrict discussion of the splash the book is making to its opinion pages, recently featured Piketty in its Sunday Styles section. Reviews, references, debates and interviews continue. All of which seems to indicate that at least the chattering and scribbling classes, if not the public at large, are rather intrigued by the themes offered by the book.
In case you haven’t been paying attention, or if you haven’t yet been Pikettyed out, let me summarize a couple parts of the book that should be of particular interest to the trusts and estates lawyer. As noted, the book concerns itself with the distribution of wealth, a question with which Piketty has been engaged his entire career. It will no longer be a surprise to us that the ownership of wealth is highly skewed among the populace, but it is the fact of this disparity on the question of inheritance that I want to focus on in this review. First, Piketty’s data on the distribution question are the most comprehensive yet compiled. They show that the share of total wealth held by the top 10% in the United States is extraordinarily large, some 70% of the total and rising, with the top 1% holding over 30% of all wealth in the United States. Perhaps more importantly, the vast majority of Americans hold almost no wealth at all, with the entire bottom half owning only two percent. (P. 257.)
As to the question with which the trusts and estates lawyer concerns herself, that of inheritance, Piketty delivers an alarming message. His claim is that when the rate of return to capital exceeds the rate of economic growth, capital’s share of economic spoils becomes increasingly dominant. This, he says, will lead to what he calls a “patrimonial” society, the term he uses to indicate that inheritance, not work, will determine who gets what. And since he predicts that rates of growth are quite likely to be less than returns to capital going forward (P. 84, 95, 378 and others), inherited wealth will predominate. (also P. 351.)
Three factors produce a population’s “flow of inheritance.” (P. 385.) They are (i) the mortality rate (expressed as a percentage of the population); (ii) the ratio of average wealth of the dying to the average wealth of the living; and (iii) the capital income ratio (total capital stock/annual income flow). Aging baby boomers are expected to increase the mortality rate from our current point forward for the next few decades. As to the dying/living wealth ratio, Piketty’s data suggests that the famous “Modigliani Triangle,” which holds that wealth increases only until retirement and then decreases, is false. Especially when lifetime gifts are added back in, the dying have significantly more wealth than the living. The third factor, the capital income ratio, will increase with predicted lower growth rates, so long as savings rates are stable or increasing.
Unfortunately, Piketty does run into some problems in gathering hard inheritance data for the United States. Estate tax returns are insufficient, as the federal estate tax has never applied to other than a small percentage of the population. Nonetheless, he draws some conclusions. He admits that, throughout the twentieth century, inherited wealth probably constituted a smaller percentage of the total in the U.S. than in France, primarily due to higher growth rates in the U.S. (Higher growth rates reduce the capital/income ratio, factor (iii), above.) He nonetheless estimates that “inherited wealth accounted for at least 50-60 percent of total private capital in the United States” beginning in 1970. And if population growth decreases, then inherited wealth will claim an increasingly larger share of the total.
I am certainly not qualified to critique Piketty’s economic theories and predictions, so will leave that to the economists. But his data showing high levels of wealth concentration speak for themselves. And given the legal mechanisms of inheritance, Piketty’s findings and predictions have some interesting implications for the T&E lawyer. If, as Piketty claims, inherited wealth will come to predominate, what role will the law of trusts and estates play in this process? It is no secret that U.S. trust law enables far more dead hand control of wealth than that of England. To take just a couple of examples, do Piketty’s claims, if credible, lend support to the position that mechanisms such as spendthrift trusts and Claflin restrictions are ill-advised? Can we afford to be sanguine about jurisdictions eliminating their Rules Against Perpetuities? Unless we wish to leave the important issue of wealth distribution to “economists, sociologists, historians, and philosophers,” these are the types of questions with which we must engage.
Editor’s note: For other Jotwell reviews of Thomas Piketty’s Capital in the Twenty-First Century see:
- Neil H. Buchanan, Thomas Piketty’s Book Is Masterful and Important, but Ultimately a Sideshow (Tax)
- Daniel Shaviro, The Return of Capital (Tax)
- Michael J. Zimmer, (Re)Booting the Dismal Science (Worklaw)