Daniel Waldenström-Lifting the Bottom: A Fresh Look at Wealth and Economic Progress with

This has totally different implications for people's saving and their wealth today, as opposed to a hundred years ago, because today, most people have a, stake in these assets that are appreciating, and what it did to, what it has done to wealth inequality, is that despite the enormous growth in the prices of financial assets, but also housing assets over the last two or three decades, we haven't seen an equivalent growth, growth in wealth inequality or wealth concentration.

In 2009, Daniel gained his second PhD in economic history at Lund University, perhaps more salient for today's conversation. Daniel's also authored a couple of books. me a little over a decade ago, coauthored Sick of Inequality and just last year published Richer and More Equal, A New History of Wealth in the West. And, Daniel, I stumbled across your work and your thinking with the interview that you did with Michael Shermer a couple of months ago.

And, so that, that's what, Got me curious in your research efforts and, and piqued my interest in wanting to have you on the show. So Daniel, welcome to Resolve Riffs. Um, to get us started, I was hoping I warned you before the show that maybe we would try to, go back a little further, uh, into your past than maybe other, interviews have. So I was wondering if you could give us some insight into, you know, how you grew up and, well, maybe first start with what exactly you focus on.

And then, then we'll talk about, how maybe your upbringing and your early studies led to you to become curious and doing more work in this field.

But so finding the balance between promoting people's efforts and making them want to grow and want to like expand in society, but also then how can society help in terms of redistributing by. Taxing people, but also then, you know, supplying the needs to do and social safety nets and so on. And where do we strike a balance between retaining the, the incentives, you know, the carrots to people, but also then offering, broad, uh, you know, solutions for society to work well as a whole.

So growth, inequality, taxation, and also do some policy work and policy advice in, in, in Europe, I would say like Sweden, Swedish government, different colors, and also European level, you know, EU commission, OECD, and so on. So, you know, that's basically what I do. I do some, uh, Supervising of graduate students as well. But then, this is, this is what I do.

my parents coming out of the, like, the boom, baby boom generation, that kind of protested against, you know, the older conservative society that they grew up in and wanting to, you know, Improve on society. You had the Vietnam War was very influential in Sweden and you had so those kind of sentiments I think infused me to into like political interest I would say at early age.

so I when I get got up became a teenager I I kind of was kind of interested in societal issues, politics, and, more of a social scientist than some kind of natural or science or math person. so I came in through into economics, more from that background, also history. I've always been interested in history. so, well, Sweden also then lived through a pretty serious economic crisis in the early nineties.

So we had like had some centuries of very low, low unemployment rates, high growth rates, but as it happened, also high inflation rates, stagnation, You know, hollowing out of competitiveness as most European, also the US and North American economies had in the 70s and early 80s. So, so that in Sweden, the policy, there's the market failures or the market underperformance was really grave and we lost a lot of industries.

we had really high inflation rates, bad policies, that, you know, gave us this really deep economic crisis. You know, unemployment levels went up from maybe 2 percent to 12 percent within a couple of years. and you know, we have bankruptcies, banking crisis and so on. And I think many people then, I was then like a teenager, became interested in, you know, wow, what's happening. we, we understood that economics matters. Then I kind of understood that I wanted to.

I needed to know more in order to really get to know the facts so I think that kind of channeled me into studying economics as a topic.

But, and then I was invited, or I got a job at UCLA, as an assistant professor, and there I met Emmanuel Sayes of Berkeley University. He gave a presentation on, the wealth inequality in the U. S. and its, its development over the 20th century. It was a really great paper with Vojtek Kopchak, who's now at Columbia University. so, then I kind of, and I had already felt that some parts of the financial sector was kind of unreal.

I mean, it's almost by construction, you know, not part of the real sector, but I felt, you know, I needed to know more about how people fare. And, so I think And with my earlier political interests, I think I kind of realized that the development or like, yeah, development, but also inequality dimensions were like what I wanted to look at. So then I was kind of, I was, became interested in, in what Emmanuel had done and also Thomas Piketty in Paris.

and then let me, we could come, come back to this, but I think, at that time, I didn't really think that growth development was that important, even though I kind of, I knew that it existed and I'd studied it, but, and I think this is actually something we need to talk about that many inequality researchers, but also people interested in inequality have a problem of not really understanding that, you know, in order to have something to tax, we also need income. We need profits.

So, so not only the division of the pie, but the size of the pie. And I think this is something that I started to realize actually even later during the later years. And I think this is also what was kind of the key driver behind my book on, uh, so richer and more equal, which is where I really try to highlight, you know, that those two sides, both the size of the pie and, and also the division of the pie.

And so the fact that you grew up in Sweden, you're, you're, you're a Swedish guy and your, the outcome of your research and the focus of your academic life has been on how, you lionize capitalism and its effects on bringing up the bottom half, let's say, of the income distribution might strike a lot of, listeners as surprising in a lot of ways, given the, the, the, the more social democratic, bent, that the Scandinavian countries seem to have.

So I'm curious if perhaps that episode in the 1990s, were there particularly bad policies that you remember, that, the Swedish government imposed and maybe what, what those were would be interesting to understand.

I think some of them, I think this is particularly problematic for, for people interested in like maybe inequality, but it's a policy makers, maybe leaning towards left side, left side of the, of the political spectrum to, to see like the means of society as given, you know, they're there, you know, not seeing, you know, the, the efforts required for growth to happen. So for example, what happened was a lot of deficits.

So deficit spending, meaning not first make sure that, that, that the means are created in the private sector, but instead policymakers could, borrow, from the future, from future taxpayers, raising government debt, without needing to prioritize between different areas. Because, you know, if you borrow, you can just like add resources. you don't need to take from some area. and this is, What that kind of destabilized Swedish, the Swedish economy during the 1980s.

It generated like spending, which then in turn generated higher inflation rates, you know, built up a fiscal balance that also made, creditors, uh, Uh, leading to higher interest rates, so that in, you know, increase the pressures on, on, on the budget, without really solving the underlying problems of competitiveness on, on really, you know, the growth, uh, potential. derivatives that are needed.

Then we also had some other, some other aspects at that time in terms of like, we had a fixed exchange rate that was pegged towards, like a basket of European currencies. And as you may know, so if you have like, you know, committed to a certain exchange rate and there is like these speculative tax, then, uh, and, and typically also this fixed exchange rate may over time be. With respect to your like the competitive level of your of your economy that became very expensive then.

So that was just part of the of the in the imbalances that were being built up. But as far as the deficit spending. You know, the lack of commitment, and, long termness, long termness of, of, of politicians. I think, I think that is a really grave problem that especially Europe is suffering from today. As you can see, I think that was aggravated during the, during the pandemic, but we had it before.

Many of the over inducted economies, you know, just continued borrowing and they do still continue to borrow. France, for example, has a really large government debt and they have low growth rates and yet their latest budget was like some 5 6 percent of GDP deficit. just signaling that, you know, these guys really are out of hand with what's needed for them to create long run stability. So, really what we experienced 30 years ago.

And, And this is something that Europe is actually experiencing right now.

And then there was an interest rate spike and some inflation, which obviously was probably the trigger for a collapse in the real estate bubble, that had accumulated over sort of a, the five or 10 years previous. and this kind of gets into some of the frictions or tensions I, have found with, with some of your conclusions and your, in your analysis. around wealth, right?

So just taking the Swedish example, obviously there was an enormous credit bubble, maybe it wasn't obvious at the time, or, you know, it was obvious in retrospect, but it wasn't obvious as it was accumulating. It had an enormous wealth effect, right? For a time, I'm sure, Swedish citizens felt very wealthy, right? During the accumulation of this credit bubble and the increase in commercial and residential real estate prices.

so, you know, I, I just wonder to what extent are we confabulating maybe a wealth effect, you know, cause you do make the point that. Over the, you know, since the 1980s, certainly since the early 1900s, global wealth has increased and it's not just increased for the, those at the top of the food chain, but for those at, at other stratum, strata in, in the food chain. to what extent are we confabulating or conflating, asset price bubbles with a general wealth effect?

So all the banks, you know, basically were required to do things that was steered by the finance minister or the central bank, in terms of how much to lend or how much, what at what interest rate we couldn't like have capital flowing across borders. We couldn't have borders taking active part in our economy because of these regulations, capital account regulations.

our tax system was, you know, such that borrowing was really, supported or, or you could say, subsidized by, by, you know, high deduction possibilities. And then what, when we deregulated the banking system, because that was just part of what What was kind of lacking in, in a dynamic economy. The problem is that we stick with our older, with our tax system that, you know, promoted borrowing and having these deduction possibilities, making it very beneficial to borrow a lot.

so it's kind of boosted borrowing and, and construction, and so on. And we can, so we had a bubble. That's right. I think though that that was more like, so that was the bubble that kind of burst in a sense. When we, when we, when we redesigned the tax system in the early nineties, but I think, the deeper economic problems and political problems, you know, were in place in the 1970s, I think throughout the Western World.

And they kind of outlived the 1980s and also then for Sweden then created this huger, much larger crisis in the, in the early nineties, but, but fair enough. as for the other question that you raised, and I think it's very kind of interesting about what is wealth, and how is wealth generated, and what you allude to in, in the sense of, of housing prices going up, and you could also have new buildings, of course. So this is basically how wealth is created.

Either we save, it's a kind of volume growth of, of assets and wealth, or we have Price gains, relative asset price gains. and that, that we can have actually both in terms of the, of the non financial assets, the property or the housing and the houses, or at the financial side, of course, we could have, capital gains.

And so there is definitely the case that a large part of middle class wealth growth over the last two, three decades, you could say, in many Western countries has been the, in the, in the, has been asset price driven. So, and this is shown by, by some scholars for different countries.

So, and we see in fact, relative price gains or capital gains are relatively dominant in, in middle class portfolio growth, whereas higher end of the wealth scale, we see much more of like new savings or like, maybe gains from income or whatever that makes you expand in like buying new assets. and this has made people think, what happens if prices Drop if prices fall, or whether there is like some kind and, and, and, and how to interpret these kinds of gains.

Uh, and I think there's like, isn't, there's no really simple answer. I mean, wealth is a very complex outcome in this sense. so capital gains, unrealized capital gains are kind of paper gains. so they don't really change your life, very much, you know, depending, you know, as you, as you know, I mean, if your house becomes much more valuable, still your house, it provides the same services.

We can, so there, there's like some, so the liquidity dimension or interpretation of, of, of different kinds of assets becomes important here. but, well, I don't know, I don't know if this was not an answer really. This is just like some thoughts, but let, let me hear what you, what you have to

You know, the popular wealth that people sometimes have are basically our, our homes, our dwellings. that's We know it like it dominates most people's total portfolios, in all, you know, in the aggregate, but also in the micro, like the household level. so that is, uh, and also we have long term savings. We save primarily for old age.

So this is something that, you know, we as households always have wanted to do, but it, as it turns out, looking at the very long time perspective, like a hundred year, It turns out that maybe some people did, many people didn't. Because why? People were too poor to save. So basically, all that they earned, they had to eat. we were underdeveloped.

so looking at the aggregate, The total amount of housing wealth and also long term savings, is like maybe a one quarter of all wealth in society and the rest was other things. What was that? Well, agricultural domains, Land, forestry and so on, but also industrial capital that, you know, grew, grew in our economies in the early 20th century. Over time, this has changed. So why? Well, people started becoming more, more educated, better paid, starting to build their lives.

This is something we have not, perhaps our generation have not seen that, but our parents have seen it. I think they have been part of it. And their parents were kind of. In the midst of it. So normal people could basically start buying homes. and you know, our parent generation, 40s, 50s born, many of the, some of them are still the first ones to get a university education. so these are real growth developments.

And, and what happened was that, people started building, you know, their own saving and building their own portfolios. So, and today, when we look at the aggregate, three quarters instead of one quarter of all wealth are made up of housing and long term savings, pension funds and so on. So that is like this huge shift of the 20th century. And what it, what it does is that whenever we have, you know, Price changes in the markets.

So we talk a lot about housing prices and house price, maybe inflation, but it doesn't matter. We could also talk about stock prices, booming stock markets, and so on.

This has totally different implications for people's saving and their wealth today, as opposed to a hundred years ago, because today, most people have a, have a stake in these assets that are appreciating, not everyone but a lot of people and what it did to, what it has done to wealth inequality, which is then like the other big theme of my work and also my book, is that despite the enormous growth in the prices of financial assets, but also housing assets over the last two or three decades, we

haven't seen an equivalent growth, growth in wealth inequality or wealth concentration. Let's, we could let U. S. be a little bit aside for the time being, but if we will look at basically all European countries, but also Canada, Australia, so despite asset gains of 200%, 300 percent between say 1990 and 2020, top wealth shares, the richest people's share of all wealth has not increased a lot.

In some countries it hasn't increased almost, you know, It's it's basically flat and this is because yeah, we've had a lot of new entrepreneurs building new companies and so on but The values of our economies have also increased, you know Both in terms of no savings, but also these asset price gains. Then dampening or like basically balancing out the wealth growth in the top. We can then talk about why we had these asset price changes and so on.

But this is just like looking at the value of wealth as we, we, as we measure it. Namely the market, the current market price of our assets. And we see that since people have started saving and owning to a large extent, middle class people, they are also part of these asset price increases. Meaning that, despite the value creation, we haven't had the, boost or growth in, in, uh, wealth inequality. And I think this is worth pointing out.

And this is completely different from what we had, what we experienced like a century ago.

Because in the U. S. so many people also own such a large amount of stocks, and that has kind of shifted the perception on asset ownership and wealth effect. Effect.

there have been some changes, but they're very small, especially historically in mostly in almost all Western economies, except for the U. S. I think for the, and that's why, why I wanted to take you as a little bit aside in the U. S. We've seen much clearer increases in wealth inequality. and, but I don't think that's the main reason, in fact, that would be if more people are kind of participating in, in, stock market, ownership, they, they would also be part of that.

And actually this is what we see. What, what is where the US is actually kind of a little bit departing is that their top guys, their successful business people have been the most successful globally, of any country. So their wealth growth has been faster than And more, more pronounced than in other Western countries. So they have kind of, even though middle class people have experienced higher wealth growth. The top guys in the U. S. have experienced the highest wealth growth in the world.

So this explains why wealth inequality, wealth concentration has increased in the U. S. quite pronouncedly. So the U. S., you have other kinds of, you had the financial crisis where the middle class in the U. S. took pretty big hits on their home values, which I think was more pronounced than maybe some other Western countries.

But, but as for participation, I think also, in fact, Sweden being a very small country, but, but, we have pretty high financial market participation rates, especially when it comes to mutual funds, that's a very popular saving vehicle in the US, in this, in Sweden, as well as in the US.

What was the arc of that trans, transition over, you know, seven or 80 years? When did that kind of, when did equality peak, let's say, kind of globally. and then what's happened since, and then we can maybe talk a little bit about why.

This means lining up the population from the poorest to the richest, and dividing the population into hundredths. So 100 groups of equal size. Then we take the richest group in that population and add and count or measure all their wealth and relate it to the total wealth in the country. In the early 19 hundreds, the, the share of this 1%, the richest 1% was between 50 and 70% of all wealth in, in, in the western world.

Meaning that like 100th had, had commanded basically more than half of all assets of, in the entire population. So I think the UK then has had at some point, maybe 73% as the, you know, the peak of the inequality, in the early 19 hundreds. In fact, I think this is the highest degree of wealth concentration that any human society has ever seen. So we know that. Earlier societies were not as unequal in wealth holding because there weren't that much values.

so the value started being built up in during like industrialization and then they went down during the 20th century. So that's around, so around 1900, 1910. Then we have a peak in wealth concentration in the Western world. And after that, concentration starts decreasing. A little bit differently.

Exactly when they started in different countries, but it starts decreasing during the 1910s and continues throughout the 20th century, 20s, 30s, 40s, 50s, up until around the 1970s when it flattens out. So then we go from, top 1 percent wealth shares around 50 to 70%, down to maybe 20%, around the Western world. and this is, so then after the 1970s, this is one of my main Kind of facts that I want to highlight.

so despite the deregulation of our economies, so we started getting rid of the post war regulations or World War regulations, despite the booming housing markets, especially, but then the stock markets, values increasing by several hundreds of percent, we have not witnessed them in similar vast increase in, in, in wealth inequality since the 1970s. so those are the data. Those are the numbers.

The US began maybe a little bit lower actually, in, in concentration, wealth concentration in the early 1900s. Coming down to the 1970s around the same level as Europe, but then has shown a clearer increase in wealth inequality rates, during the 90s and 2000s. so those are basically the broad, so when I, you know, broad, broad trends and I, you know, I call in the book this for the, I call this the great wealth equalization.

I think, you know, those kind of, some people like those brands and I couldn't find it actually anywhere else, but, it is, has really been a great wealth equalization, within, Western countries during the 20th century.

I actually depart from my old, my, my old colleague to my Piketty and, whereas where he highlighted shocks to capital. So wars, crisis, but specifically wars, as being the main driver of, of the wealth equalization. So you could have outright capital destruction, bombings of factories and, you know, stuff that the rich owned, but also, you know, you can have wars coming with regulation of societies that hampered, you know, the rich or like slash the wealth of the rich. And then we had capital.

And then he proposes as a second channel capital taxation, that came up, during the 20th century, especially during the post war era with like inheritance or estate tax rates being at very high capital income tax rates, profit or corporate tax rates, Basically, so according to Thomas Piketty, but also like Walter Scheidel, the historian at Stanford, who has said like the wars are a necessary condition for sustained wealth equalization.

So they kind of aim at factors lowering the top of the distribution and thereby creating equality. I don't think that this is really, the factors that we want to look at. I don't think they are that important at all. I think they have contributed, but they are not at all that important that they have kind of highlighted.

In fact, or instead, my book, and I think I lean on others like, you know, Daron Acemoglu, Jim Robinson, like Doug North, of course, and Lance Davis and many of the economic historians and promoting the view of. Economic growth generating values that in combination with political changes, economic changes in the 20th century that allowed for these new, new values to be more widely dispersed, namely the democratic values.

Uh, events, the, you know, the extension of suffrage, the, the educational reforms, labor laws and so on. That is what has changed totally, our lives and that has lifted bottom of the distribution. Allowing people to start saving in housing and pension savings and so on. And, so I, I will come back then to talk about, you know, you know, some, perhaps some of the magnitudes, but so, so this is then.

Instead of having, you know, the shocks to capital, slashing the wealth or the rich, lowering the top as, as the main drivers, as you know, Piketty has promote it as main, main, causes. I instead promote, you know, that it's lifting the bottom and here. So democracy, democracy, uh, is a key to understand this, the kind of the inclusiveness of the institutional changes that came, came during the 20th century, this kind of almost like a zero one thing, all of a sudden.

You have to take into account that people can't have a say. You can't get ousted as a government, and so on. So we had democracy, kind of pseudo democracies, and this has kind of come gradually. But then we see that over time, we had changes. I mean, I, in my book, I highlight the educational system, which means, so schooling becomes broadened.

Access to higher education, is, is expanded to more groups, like professional, professionalists, uh, people with, uh, you know, skills, become more and more like larger and larger share of the working population. And also we have labor laws, we have trade unions being able to, you know, empower people to, you know, ask for better work conditions, maybe restricting work hours, having a more, having more say on, on environments at the working place and so on. And all of this raised.

People's productivity. we see that incomes go up. We see that wage rates, uh, uh, and, and, and labor incomes, uh, increase as, as a whole. And this is, uh, and this is then especially for the laborers, normal workers. And I think this is like connect, connected to then this new, new kind of institutional setting where we had to take them into account when. When kind of promoting the educational, or the economic development of our societies.

so I wouldn't be able to rank unfortunately like, education or labor laws or maybe some, you know, variants of this, but so then democracy is key and then, but then don't forget then the other part, namely the growth thing, the growth part. So technological change, industrial, industrials. Uh, revolution bringing more gains to the side. And here we also have private property rights.

And I think that is If, like, democracy is very important, I think private property rights is perhaps the key, uh, institution for value creation, for wealth, wealth creation, or, that, you know, in all dimensions, perhaps the most important one. and that we had too. So we had our legal systems securing private property rights to people. that was like, that came earlier. that was probably very important for the Industrial Revolution to take place in the first place.

and then after, during the 20th century, having then the technological change, economic growth, and then we have people being able to take part in this then this plays out either through people starting buying homes. of course, then also thanks to financial development.

Banks becoming better to mortgage, home purchases, And then with the pension systems being built up in various forms, you could have, employee, employee, you could have like trade unions being part of this, the private part in the private sector, you could also have state solutions like or government solutions. this was then And the other kind of main asset that people started building up during the 20th century.

Here, of course, mutual funds as a financial innovation also helped, of, uh, ramping, ramping up, growth potential in, in, in pension savings. Okay. So, um, at least, so this is the, you know, the broad picture. Uh, we can go into details, but, uh, this is at least the broad picture.

And this is kind of interesting because, the countries are kind of different. So US or like, yeah, well, US, uh, also, also equalized, but UK and looking at Europe, then UK, France, Germany, Sweden, Spain, they were kind of Similar, but also different because, you know, in terms of war experience, we know the big ones, big countries had like really rough war experiences, during the first and second world wars.

Whereas Sweden didn't even take part in any of these wars and yet experienced the same equalization trend. meaning that I think this is kind of exhibit A against wars as being a key Uh, of course, wars can affect also non belligerent countries like Sweden, through, you know, war economy spreading and war regulations. And this was indeed something that Sweden was affected by.

But, but still, Wars as a main or a key driver necessity necessary kind of condition for wealth equalization is clearly Not really kind of a strong strong conclusion coming out of the historical data. I think So and also You could also think that, you know, some of these other things that differ across these countries are not playing out so much in the wealth concentration evolution. But then, as you say, this leveled out, the equalization stops in the 1970s. Why?

Well, I mean, this is now getting into an area where we don't know exactly why we we have a certain level of. like dispersion in wealth or income so we, we don't know what from theory what is the optimal level of income inequality or wealth inequality, but we know that wealth is more unequally distributed than income, ahh as we measure it. Why?

Well we know for example that ah looking at the diffusion of people owning wealth and not owning wealth, we see that almost half of the population has almost no Net wealth. So, which is different from income because, it's not that half of the population has no income because they, you need to have income in order to survive. But you don't need to have wealth in order to survive. Why? Well, I mean, we, a large part of the population not having wealth are young people.

People just becoming adults, maybe going into higher education, they don't need, they can't save because they have almost no income, and they don't need to save because they basically live their lives and they study. Fair share, maybe one third, maybe half of all the zero net wealth owners, net wealth people in the population, young people. And then we have people who have like, maybe they have, you know, Very little saving. They don't want to save. Why?

Well, they they they don't want to save privately because they pay taxes and these taxes give them right the right to Unemployment insurance if they gotta get become unemployed Their kids can get schooling and even university dedication in many of these countries. That's cost cost free and also when they get old they have elderly care and so on health care Basically provided for everybody, but also specialized care. Meaning that after all the taxes, they don't have a very high income.

So they can save privately, but they actually don't need to. Meaning that with half of the population not holding wealth in the net, we would have to begin with relatively high inequality levels. So this means that, and where exactly would that be? I don't know. I did a, I did a kind of a simulation of a population looking exactly the same, but the only thing that differed was their age.

And just from the age, we would have like the famous Gini coefficient, which is an inequality measure from zero to one, with zero being no inequality and one being that one individual has all wealth. And we would have, only looking at the age differences, we would have maybe a Gini of 0.2 or 0.3, meaning that life cycle effects are very imminent in understanding or explaining wealth inequality.

So when we have this flattening out of wealth equalization in the 70s, we may be approaching a level where, are stagnating. Economists don't generate a lot of new wealth. So our wealthiest entrepreneurs were historically, I think, relatively poor, but, still it was, you know, we would have a large share of the population not having a lot of wealth giving us some, you know, Gini coefficient or maybe 0. 6, 0. 7 and a top 1 percent share or maybe 20%.

Uh, We couldn't maybe go much lower than that, simply because of these reasons. And also the US, I mean, I think this is, this is something, I mean, I think up until then, I think we have a large commonality across Western countries actually. but then in the areas, like in the years thereafter, then we've had some differences, I think, uh, economically, but also policy wise. And this could also matter for why we have difference, differences in, in, in these developments.

And I think, That will help us understand why do we have that much of the kind of the growth, the new technologies that we've seen, and the dominance of some larger economies have become more and more oriented and more centered around the United States and not in other countries.

In fact, looking at the top, the top country, the top corporations in the world, uh, in terms of market cap, The share of the U. S. has kind of increased, I think, quite, quite markedly over the last, profoundly, exactly over the last like four, four decades or something.

I mean, the fact of the matter is the U. S. continues to be, the country where almost everyone in the country, in the world wants to integrate towards. And so you have this influx of talent and human capital, which obviously is one of the main factors for economic growth as well. So allowing for perhaps some of this, inequality or perhaps a higher Gini coefficient, perhaps it's a necessary condition for you to, to generate this, this larger pie.

But I am wondering how that, how that argument stacks when comparing the bottom half of the income distribution of the U. S. against some of these other Western countries.

and here research is also like try to understand like how mobile is the U. S. Contra, uh, Europe and so on in terms of when we look at both within people's careers, but also across generations. So the role of family, family background, and as it turns out, So the U. S. has not a much more mobile or, or dynamic economy, according to, you know, most of the studies.

So, the gaps are very large in, in the income distribution in the U. S., meaning not so much that, you know, the low income earners are much poorer, but But instead of the high income earners are much richer in the U. S. It's a bigger, both bigger economy, market size effects. But also as you say, you know, the kind of selection of talents flowing in. You just get the best and the brightest globally. Then, you know, that effect on, on the income gaps.

but also that makes it more difficult to really reach the top. You need to You know, become much, much more productive than otherwise, uh, in maybe in some other countries where, where income distributions are more compressed. so I think, well, you brought up, so this is, this is like, there are a number, a number of questions here, but, I think, Here we have a difference.

The low income earners in Western Europe, maybe Canada, maybe Australia, have lower incentives to change their situation because they're better taken care of. So I think these countries are, Western countries outside of the US, more experienced and I think better in taking care of people who have a hard time. And I think we could discuss levels But I think, for example, I think when I talk about better, it's not just different.

I think it's better because, for example, when we came to the, when we saw during the pandemic, so many of the, our countries had like systems of automatic stabilizers, basically setting systems so that when you lose your job or so, you automatically get An insurance income, which is set in the system, to have it practically, you know, decided. In the US, I think, you had not so much of that.

Instead, what you saw was they started sending out checks to people, so that they, people shouldn't like starve, right? And this was the same, basically the same as printing money. I think this is also then showing that, you know, the safety nets didn't work as well in the US as they did in other Western economies, but also then additionally they I think that may have contributed to the You know inflation increases basically that you printed money.

so at the end of the day, we we don't it's difficult, but I think this is this matters all of this matters to why we get these, You know differences in outcomes, maybe more of getting high talented people and having higher um Upsides in the US economy, lower, maybe lower tax rates on high income earners, maybe having low, lower corporate tax rates and so on. Now at least, that contributes to people wanting to, to be in the US and be successful in the US.

Maybe more than having just like, you know, looking at low income earners and finding the explanations there.

That's a, we've accrued an enormous liability, or not we, but the U. S. has accrued an enormous liability on the infrastructure side of its balance sheet. On the other side, we have the U. S. and to a great extent, Western democracies. Have succeeded beyond our wildest dreams or nightmares, depending on how you look at it in capitalizing future labor income further and further out, right?

If you think about a US 30 year, fixed interest mortgage, well, what you've effectively done is you've capitalized 30 years of labor income, all at once in this, you know, crystallization of this, of this mortgage, which is obviously a bank asset and a homeowner's liability. In, in allowing homeowners to capitalize. An increasing duration or maturity of their future income. that has allowed asset prices to rise in proportion.

So I just, I find a wealth effect to be very difficult to kind of disentangle, what real wealth has accrued and to whom, and has it accrued because we have built new things, we, there are vastly more housing units or, productive enterprise units. in these economies, or whether we have just valued the price of existing units at much larger multiples. And how does that impact your analysis and your conclusions?

If you can allow me so it will be a little bit like, not so crystal clear in all dimensions because I also think this is like difficult area. This is a difficult domain to really disentangle.

And these, this is just like simple accounting and these values are both in this kind of volume stuff, you know, the number of assets, but also their market values that in the market values, the market prices can go up and down. And, but what's fascinating is that, yes, it's not that If you want to double your market value as a like a normal working household, you can't just like easily at least like a buy, construct a new home.

like, like an entrepreneur, maybe starting up a new firm, or like expand, you know, services and goods being produced. You just have your home and then it may go up in value or not. and this is kind of, this is kind of the basic contract that we, we agree upon. and yes, so the wealth gain for these households is that their house of value has gone up, Does it give them more power to influence politicians? Well, probably not. It's just like, paper gain as long as they stay in their house.

With exception for a fraction of households who have actually been able to actually liquidize some part of that, you know, that asset price game, namely by taking additional mortgages, maybe by, you know, improving on their home or maybe even buying a car or doing things, consume. So we had, I mean, in theory, they could have also started, you know, setting up some, political action comedy or something to, to influence politicians.

But, whereas the liquidity share of wealth held by, you know, of the, of the rich households or the rich people, is, is most likely very clearly larger. So, but still that said. Our asset price change would affect, the top as well. So I think during 2022, the market value of Tesla shares or Tesla corporation decreased by, I don't know, 65 percent or so. So asset price fluctuations affect both the top and the bottom of the, of the wealth distribution.

And this means that it's not really clear at the end of the day where, you know, where distributional changes will be the swiftest. We could have a financial crisis, for example, they typically hit the rich guys hardest. We think that wealth, wealth concentration goes down during, during financial crisis typically. And you would also have a lot of reshuffling within the top. So some people just get bankrupt and then get kicked out and being replaced by others. So that's one thing.

And then the other part, okay, let me just shift, shift a little bit to what you said about infrastructure and, you know, the, the kind of the underinvestment, if one may want to talk about that. I, I, I think here, here's another kind of interesting, you know, ground for comparison between the US and other Western countries.

I think we, and I, And I actually often when I give talks, I, I emphasize the importance of separating out different country experiences, especially, especially separating the U S from Europe, maybe where Europe should also include Canada and Australia, I don't know, or, or New Zealand, but, simply because we have such large differences in, you know, and this has to do with how much we tax, so the average level of taxation is an order of magnitude higher in Europe, meaning that we are more

ambitious in doing public infrastructure investments or like having collective expenditures that comes into the education system and so on. So the question is then, are we better, are we better in doing this? You know, there's one question about should the government do this rather than the private sector? But I think in general, I think it's fair to say that the U. S. has could do much better in terms of taking care of their infrastructure. I think this is quite clear.

And, uh, you know, then to add to this is the role of growth, growth, potentially in the economy. So if we pick up on growth and here, I think on the other end, then Europe is actually underperforming. We, I mean, we have a secular stagnation throughout the Western world, but I think growth rates are, are worryingly low in Europe at the moment.

And, and why, and why this is a big, big, big thing to discuss, but with higher growth, could we pick up growth, meaning productivity growth and just like doing better. And what we do, maybe doing new things as well. This would give us means to do a lot of good things. Both in terms of expanding quality in public infrastructure, but also then generating more means for people to live good lives.

And that then also then adheres to like future income growth would then maybe that would then also have capitalization effects on our assets. So we would then have higher than housing values. In fact, I think a fair share of the capital gains in the housing market over the last two or three decades is part of the real, income increases that we've seen. Households in most Western countries have fared really well over the last decades. On average, that is. Why?

I think growth has been increasing because of globalization, partly. I think not least the China entry into the world economy has generated a lot of A lot of gains, both in terms of lowering like consumption stuff or like goods and so on, but also their capital flowing in and so on and so forth. anyway, so they're like, as you can hear, a lot of things are interplaying at the same time.

Finally, like interest rates, for example, lowered interest rates is also capitalized in market values and maybe shares. So of course that could then be offset if interest rates go up. We saw that a little bit a few years ago. this may be the way we come back if we would have military conflicts and, you know, we would have like, you know, extreme needs of, of, of capital in the military industry or defense industry.

Maybe climate investments would then Create, create demand all of a sudden, it would actually demand large investments. So we could have higher interest rates because of that. And that would of course have effect on housing values as well, but, but also on, on, on corporate values, I would say. Um,

And I think in most places in Europe and the UK, every two to five years and get a new interest rate and renegotiate your mortgage with, with the bank. Whereas in the U S. We don't see the impact of higher interest rates propagate to the same extent through the economy, despite the fact that the U S is maybe more financialized than the rest of the world.

But just by virtue of the fact that those interest rates are locked in and therefore asset owners don't experience the consequences of their over leverage in the way that, asset owners in other jurisdictions might, right? And so you're going to get a, Reset of the of that capitalized value of of future labor, as a function of a reset in interest rates in the rest of the world. Right? So, I, I, I think that probably meaningfully, certainly not completely, but but meaningfully explains.

Some of the difference in the, reaction to higher interest rates that we've observed in the rest of the world outside of the U. S. versus in the U. S.

then on the other hand, this is also something where we have like relationships between banks and, and, and, and the borrowers. I think that also depends on how is the banking system structured? What do we have in terms of, the guarantees, insurance guarantees, for, for depositors? but you know, but anyway, so, but you're, you're perfectly right.

So that kind of propagation of, of interest rate shocks, uh, into like household behavior consumption and so on, getting more real effects on that, uh, is of course, something which we, we are discussing. And, there are kind of. In fact, in Sweden, we try to have had some regulation of, of, of like ceilings on, on how much to borrow against certain interest rates or when you need to start having, paying off your mortgage, mortgages and so on.

so it's kind of an experimentation, institutional experimentation or policy experimentation on how to get a little bit of less reliance on, on, or maybe exposure to these kinds of events. But, I don't know. I don't know what the, what the best scenario is or what the best, you know, where, where we want to be,

The, just the ability to capitalize future labor and the innovations in the financial sector, I think have had a profound impact and that impact is felt differently in different jurisdictions because of different banking and landing policies and, and, and other things, right? But I just think that substantially weakens the conclusions that we can make about wealth accretion, the changes in wealth inequality that we've observed over time.

And I think it's more than a coincidence that if you look at the trajectory of wealth concentration or wealth, equalization over time. Wealth tends to be the most equal when asset prices are low, right? In the very, in the late 19th cent relative to cash flows, right? When the home prices are low relative to rents, when stock prices are low relative to earnings, when interest rates are high and therefore bond prices are low. That tends to be when we see the greatest amount of equality.

And when, after many years of asset price appreciation, relative to fundamentals, that's where we see the most.

unequal share of, of wealth and why we also see a much more unequal share of wealth in the US than we do in the rest of the world, because the US has experienced such a massive appreciation of financial assets relative to the rest of the world, which over the last 15 years, outside of the US, there really hasn't been any growth in equity markets, and in the US, Equity market growth has been about twice the long term average of the last 15 years.

So I think that explains a lot more than maybe we give credit to and I don't know how you disentangle it But I think it's a really important factor

But, you know, along that kind of angle or that axis, in the seventies, yes, markets were dysfunctional, economies were dysfunctional, mass asset prices were low, we had stagflation and so on. And then, as you say, since then, markets have appreciated, uh, we have, and you could say they have boomed, for several decades. For different reasons, still, not only in the U. S., market caps have increased a lot also in Europe.

and I think that is one of the striking facts from comparing wealth distributions across countries is that we have not seen the same level of increases in wealth inequality, that we've seen in the U. S. in comparison to what we've seen in, in, in Europe and so on. So in Europe, when we Wealth inequality has not increased, secularly over the, over the decades since 1980s.

that is basically, and this is part of them because as you say, people's houses have gone up, house prices have gone up, but also that people have started saving also in these financial markets that have become more valuable. thanks to, you know, globalization, Funded capitalism. So pension funds being built up, perhaps driven by Japanese and U. S. pension funds, like investing in smaller economies and so forth.

but again, a little bit picking up on, So this kind of capitalization of income, I think here, here's like, you know, where we also want to talk about the role of income and income distribution. So, so, so there is just like so much you can say about wealth inequality in terms of this distributional discussion. So, yes, people's wealth may go up and down or maybe very subtle.

It's gonna, Reliant on, on house price changes, and it doesn't really matter for their kind of real wealth, you know, life, you could say. but instead for them, what is crucial and also for the economy as a whole is the income. So as long people, as long as people have an income, they're, they're fine. they can buy, they can pay their mortgage mortgages or like they could, you know. live good lives.

So, and therefore, also when you talk to monetary policy makers, instead of them focusing on asset prices and so on, which is very complex, we don't know really how to think about this or the implications. I think for them to promote equality is to, to To try to reach full employment. So that is what's kind you know, the most by far important dimension in where, in which we can create like, inclusion and equality by basically allowing people to live good lives.

And we take part, act apart in the labor markets and then they can, if they want, they can buy a home, they can invest in the stock market, or they could be like hand to mouth and just like, go traveling or whatever. consume whatever they want, as long as, and then, so that's my kind of also the take on it.

So you may have asset price changes that are not really important for people's lives with house price gains and giving maybe, I get a feeling that there is like, or people, I get these comments when I, whenever I present, feel like, how could you compare like, super-billionaire asset gains to, to middleclass people's housing gains, they're just just different universes. And I, kind of agree.

And yet, they're kind of, part of like some, some kind of income wealth complex that at the end of the day, want, want us, want us to build, live good lives.

It's more on the, the transition, the transmission mechanisms more about animal spirits and confidence. The idea of asset price appreciation, more so, in the real estate, element of this, but also in stock prices, because people aren't necessarily, selling those stocks and, and cashing them out. Those are also, I think, play a much, stronger role in terms of boosting their confidence in terms of spending.

And so that, that, that prosperity angle, I think really comes from when they have the income. To improve their lives on a daily basis, people might have, you know, very large properties and, and, and, and that are, appreciating in value over time, but unless they have the cashflow to sustain their quality of life, they're actually going to be downgrading, selling out. And so the prosperity angle has to be intertwined as far as I can see, to the, to the income element of this. And,

You can redo your kitchen if you want, but most, many people don't. Instead, they take that key lock and they spend it on a vacation or they, you know, to Daniel's point, they buy a new car or, you know, otherwise consume. Right. And so in this way, rising asset prices subsidizes.

Incomes so that we don't need to see the same appreciation in labor share of the pie because labor can, or at least asset owner labor, owner's labor can take money out of their, you know, unlock their savings by lending against the assets that have gone up in value.

I, I guess, asset price appreciation is a very narrow way to look at this, and it doesn't account for these, for, for the, the, the cash flow element, the, the, the flow versus stock argument, I think of, well, I think is the key. I

For example, the pension system. So the occupational pensions or the, you know, the defined contribution pensions, can in some countries actually be taken out before I know, for example, 401k, you can borrow from it, but it's very strict how you need to repay and so on. I know Switzerland has that much more flexibly, Italy, Denmark, Sweden doesn't. So we're kind of very strict on that. Of course, there's like a behavioral. gradient here as well.

So people short termism and so on and so forth, but it's just like, you know, the financialization aspect of how to kind of capitalize on your appreciated home values in terms of living a better life. I mean, so it's interesting to hear us here. I think this isn't yet another example of how a dynamic economy like the U. S. can offer new institutional innovations. Maybe not all good. Maybe some of them will backfire. Who knows?

but at least it's kind of, yeah, as you say, it kind of strengthens, you know, the wealth income, or connections in this sense in people's daily life.

I want to understand a little bit what might be your policy prescriptions given your work and some of the recommendations that you would have, for Sweden, for, for the West and maybe for, for, for the broader world, because you offer a very positive view of capitalism and, and of, the sort of human ingenuity and innovation, which contrasts, I think, pretty starkly with, your colleague, uh, Piketty and the idea that you, you need some mores in order to level the playing field, which is a, which

can create some pretty perverse incentives if you take that to the extreme, right? So I'm, I'm, I'm wondering what the policy prescriptions might be and how your work has been received in academia and in broader, uh, policymaker circles.

but nonetheless, These people taking part in creating firms that become valuable, offering services and goods and so on. Offering jobs that people get, they get income, they pay taxes. This is adding value to society. So even also for those who love taxes and redistribution should love these private actors, private industry actors who actually generate these incomes and profits that end up being taxed and providing these tax, tax revenues. So this is just like a first conclusion.

Growth is very good for the welfare of societies and also welfare of citizens. and this is like against, going against some kind of zero sum, view of the economy of like, Oh, that you have some, you know, prosperous and successful people. Meaning, means that someone else has, you know, We don't have that in the economy. We may have it in other, settings. you know, we can talk about climate, views of climate policy and resource usage and so on.

But when it comes to values, the value creation processes and growth, we don't. I don't, I don't think so. So that's just one thing. Growth promotion, is very good for society and that we have successful, People in the private industry, private sector, that's very positive actually. and then when it comes to wealth, so this book is about wealth inequality.

So it's not about broader, you know, economic policies in general or economic inequality or welfare inequality or so, but so it comes in terms of wealth, wealth ownership. We know that, What has equalized wealth is to have to have people start participating in the economy so that make to make them earn as much so earn good enough so that they can start saving and investing and we know historically that what they did was to Buy their home and then save for, for, for old age.

And I still think that that is kind of the backbones or the pillars of people's portfolios. and this is something worth promoting if we can. I think for example, thanks to like mutual funds, we've started doing this at a much higher level, so we didn't, we don't need to be experts in the, in the stock market we can just like buy an index fund and then take part of this.

so to promote private property, private ownership in both in terms of home ownership, like housing and pensions, I think is very positive. As for pensions, we have a demographical hollowing out. in our economy.

So fewer and fewer are supposed to support more and more, meaning that, uh, we need to think also about the pension system here, this kind of human, human capital hollowing out or human capital deficit could, I think in part be, counteracted by a building up of financial capital in the pension system. so I'm not the one saying this, only this like Hans Van der Zeen, this ingenious German economist who kind of dominated much of Germany's pension system.

Discussions for years has also pointed at this particular aspect of promoting funded pensions. and not only because it's kind of also been part of a productive in productive wealth growth in like when we have growing economies, but also because it kind of relies, makes us rely a little bit less on the traditional PSGO pension systems where today's pensioners are are get their pension incomes based on the taxes paid by by wage earners.

so those are and then on another kind of policy, you could say a broader policy inside I think is about uh, and it can relate also to the kind of the rich not being the problem is the kind of the role of money, money and power. I think power comes in a lot when I talk to people, And why will It used to be like Silvio Berlusconi and Trump. Now it's maybe Musk and Trump. there are other names. We could have Rupert Murdoch.

We could have many, many like successful individuals building up huge fortunes and then stepping into politics or media or so, and then, you know, people get concerned. and maybe rightly so. I think in here being on this positive angle, I think we could look at the countries, where, where this, we have been able to kind of strike a balance between having a market economy, providing growth and prosperity, and maybe also super rich people.

And yet, Retaining well functioning political systems with we think that there are, you know, democratic functions that provide good life and it's like balanced and, and also media that that kind of we think offers good information and so on. And here, Look, I think it's like, like learning from these positive examples, I think is the way forward instead of just like clanking down on, on, on fortunes that we suspect may become influential in the wrong way, but we don't know.

So instead, let them do their things. Let the entrepreneurs do their thing. Build their corporations and create their, create value and try then instead shield off politics from bad political influence. Increase transparency, maybe have rules against campaign contributions and private, private like support politicians and we could have public service. Public service media as, as one, you know, backbone of the media landscape. we could have, support for smaller medias.

That's at least the way to go. I mean, we, you know, what was her name? Lisa Kahn, in the, in the U. S., was a federal Lina Kahn, sorry, who wanted to kind of break up these big corporations in kind of preempting the risk of them becoming too influential or whatever. I think this is the wrong way to go instead. Uh, improve, kind of improve, the market economy and you know, the dynamism and in fact, looking at what's happening in like Nvidia being great.

I mean, OpenAI didn't exist 10 years ago, and I'm sure, you know, people may stop Googling relatively soon because, you know, the new services are coming up. Maybe Google, in its dominant position, may not be as dominant. And what happens when, like, India comes up as a major player on like AI based systems and services and other countries because, you know, we have the open source basis of all this. Who knows? But that kind of, maybe I'm, you know, too rosy. I don't know.

But the idea is to keep on doing it. What we do good, namely a market, like a democratically embedded market economy is kind of the, you know, historically, globally, the total dominant example of what we want in terms of creating good lives. And yet, let's try to then shield off that from our democratic Arena, media and so on in order to, or if we're going to have private media, let's make sure that they are embedded in transparency and so on.

Do you see the potential for a substantial displacement of, of labor? how might a change in concentrated ownership of the factors of production? Labor has historically been a primary factor of production. The industrial revolution obviously mediated that somewhat.

The AI revolution and robotics revolution are set to, probably profoundly Affect that, how does a market economy evolve when the marginal product of labor goes to zero and the factors of production are increasingly owned by a smaller and smaller group of AI and robotic deployment technology companies?

first of all, huge uncertainties, the trajectories are going like maybe, you know, or like 180 degrees in opposite directions in terms of when it comes to market concentration, uh, inequality effects, the end of labor or not. I, on my, on my end, let me, let me be very concrete and very try to be, you know, effective in time. You said to begin with, three to five years. You know, have you heard of Amaro's Law?

This Roy Amaro, who's kind of said that we tend to overestimate the impact of technological changes in the short run, but we tend to underestimate their effect in the longer run. So I think three to five years is much too short in terms of seeing huge effects in the labor market. I think at least in the Western world. So why? Well, automation has been around for decades. this has been gradual. So we don't see like bank clerks counting bills anymore as they maybe did in the 80s.

So things have kind of evolved. I think we're going into a world where almost 100 percent of the workforce will be employed in the service sector. So production will not be done by humans in the traditional sense of goods, that is, but production of services will be all what we do. Once again, I'm, I'm kind of positive. I think, the traditional kind of liberal minded approach to the market economy would be to make sure that entry is, is. is as free as possible.

I think that I'm not too worried about these tech giants dominate, totally dominating. and I think because there will be new entrants coming and offering new kinds of robots that are doing things differently. I think why? And also because, you know, because the gains are huge. So I'm sure there are sitting tons of people around the world trying to think about this. so I think we will have quite Great deal of dynamism.

so no, no really like strong need to hardly regulate, like regulate, you know, specifically with robo taxes or so, or like universal basic income, which is another kind of policy thing that I don't believe in at all because I think we won't afford a really fully fledged universal basic income and it will create tensions also because how to map that with market incomes in, for those who have jobs and experience productivity growth.

So we will, so as a system, or like as a specific policy that won't work, but we will still need, of course, income insurance. So displace workers, like with any like trade reform, like opening up a trade, we would have like maybe fishermen losing their jobs in richer countries or whatever. Let's support them and then still having the open markets generating their goods for, for, for the majority for, for everyone, so to say.

So I don't think, and also I think tax policy or like that kind of policy won't be, you know, maybe best we would have, we would need some regulation of like maybe data ownership. there are like, we need to learn and think hard. But I'm, I'm, I'm quite positive actually. I think, uh, also when we have more and more robots, they think they may produce more and more, their marginal products will also go down.

So, so the, the kind of the, the, the, their value, the value added to the capital owners will also go down. So it's not, it's not necessarily so that capital income shares of national income will increase a lot. at least looking at last 2, 3, 4 decades capital shares haven't increased a lot in the in the world or in the OCD countries, especially when you account for that some of that capital income is depreciation. So rusting, titillation. Technological aging and so on.

So the capital needs to be replaced taking that into account like wage shares aren't really Falling maybe with exception for the U. S. and especially for some industries, but but but look at other in other look at the data that's pretty much so. Finally final point on China Yes, it's it's it's interesting I think on going back to the private property rights thing. I think this is what is key for long run you evolution, economic development and growth and innovation.

And we don't have that fully in China. We have commando economy. We have some private property rights, for sure. But so far, China, you know, has just imitated or like, they just, they start this, they have stolen for decades. And now they do things, they do things very well. But it's just not, and it's basically what Stalin did in the 30s and 40s, you know, massing Productive power, that made people think that this is a solution.

Schumpeter at Harvard, he said like, you know, okay, his book from the 40s, Capitalism, Socialism and Democracy was basically, this is the final stage of capitalism. Monopoly, production, and several people around, also in the US, you know, accepted this, that this is like, Stalin has kind of shown us that this is how it's going to be. Some people now think that China shows us, you know, okay, they, they're just like so good and so, so efficient.

I think they may be able to do that, for some years, maybe decades. but I mean, every new thing comes from, from below. From, from people wanting to do things that they love, but also that they think that they can benefit from, that requires these private property rights. So that's my, my two cents on, on China. Um,