Monday, November 03, 2014

Capital in the Twenty-first Century

Occupy Central demands a more open and democratic election for the Chief Executive. Underlying the anger, however, is disgust at the pervasive inequality in Hong Kong.  The political process is tightly controlled by pro-Beijing forces, while practically everyone is squeezed dry by the few superrich.  The two issues, of course, are intertwined.  The Communists came to power through violent revolutions, and maintains it through dictatorial power.   The superrich, on the other hand, rides on a historical tide - and being cozy with the Communists.  

Thomas Piketty’s “CAPITAL in the Twenty-First Century” draws on a huge amount of data to explain the historical tide.  Capital, in the form of real estate and financial assets, generates average returns of ~5% averaging over the long term.  Large fortunes, such as those owned by the superrich of Hong Kong, generates returns as high as 8%.  

On the other hand, labour income grows at ~1% over the long term.  Hence those who can accumulate or inherit a significant amount of capital will get richer and richer exponentially, compared to those whose income consists mainly of salary from labour.  The gap between those who have and those who have-not will just get wider and wider. 

In 2010, the top 10% owns 70%, the middle 40% owns 25%, and the bottom 50% owns 5% of the wealth in the USA.  The top 1% alone owns 35%, while the bottom 50% owns practically nothing.  The book provides no data for Hong Kong.  I suspect the picture is probably not too different in Hong Kong.  

This is the historical tide that is very hard to change, which is obviously unsustainable in the long run.  The anger will built up to such an extent that society will fall apart, which we may be witnessing in Hong Kong already.   According to Piketty, the best solution is a progressive tax on capital, which taxes the larger pools of capital at a higher rate, to be re-distributed to the poor.  On the one hand, it reins in the exponential growth of capital. On the other hand, it enables the poor to reduce the wealth gap.  

As long as the rich controls the government, however, there is little hope of that happening in Hong Kong.  That’s why democracy is so crucial.  

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