Backgrounder

[00:00:50]Adam Butler: Okay, welcome everyone and welcome to Daniel Waldenström. Quick background on Daniel, who is a professor of economics with the Research Institute of Industrial Economics. Received his PhD in economics from the Stockholm School of Economics in 2003, and thereafter worked as visiting assistant professor at UCLA, and global fellow at the UCLA International Institute from ‘03 to ‘04.

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… 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’s what got me curious in your research efforts, and piqued my interest in wanting to have you on the show. So Daniel, welcome to ReSolve Riffs.

Get us started, I was hoping, I warned you before the show that maybe we would try to go back a little further into your past than maybe other interviews have. So I was wondering if you could give us some insight into how you grew up and, maybe first start with what exactly you focus on, and 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.

[00:02:34]Daniel Waldenström: So thank you guys for inviting me and talk about these questions that are both my work, and, but also my hobby, I would say. And so, I’m a professor of economics, doing academic economics research, focusing on questions on growth and distribution. So how do the economies develop? How do we get to live a better life, but also how to make that broadly dispersed in the population? How do we get people to feel engaged, but also to be taken care of? 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, supplying the needs to do and social safety nets and so on.

And where do we strike a balance between retaining the incentives, the carrots to people, but also then offering broad solutions for society to work well, as a whole. So growth, inequality, taxation, and also do some policy work and policy advice in Europe, I would say like Sweden, Swedish government, different colors, and also European level, EU Commission, OECD, and so on. That’s basically what I do. I do some supervising of graduate students as well. But then, this is what I do.

[00:04:14]Adam Butler: Thank you. So Daniel, maybe take us back to your upbringing. Were you always interested in this kind of subject matter? Or was there something in your early life, or maybe in your early studies that triggered a particular interest in this focus?

[00:04:43]Daniel Waldenström: You could say I grew up in Stockholm, Sweden, or in the suburb of Stockholm, in the seventies, eighties, living relatively good life, I would say then, in like some kind of middle class framework, with parents, coming out of university, working on, working in like, these kinds of more academic professions, but also there are, some of these longer ties might with banking and so on.

And that was an era of, so political engagement, I would say. My parents coming out of the baby boom generation, that kind of protested against the older conservative society that they grew up in, and wanting to 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 got up, became a teenager I was interested in societal issues, politics, and more of a social scientist than like some kind of natural or science or math person. So I came in from, through into economics, more from that background, also history. I’ve always been interested in history. Sweden also then lived through a pretty serious economic crisis in the early nineties. So we had had some centuries of very low unemployment rates, high growth rates, but as it happened, also high inflation rates, stagnation, hollowing out of competitiveness, as most European, also the U.S. and North American economies had in the 70s and early 80s.

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 gave us this really deep economic crisis. Unemployment levels went up from maybe 2 percent to 12 percent within a couple of years. And we have bankruptcies, banking crises and so on. And I think many people then, I was then like a teenager, became interested in, wow, what’s happening? We understood that economics matters. Then I 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.

[00:07:32]Adam Butler: Okay, and particularly, development economics, right? What are the progenitors of sustained growth, the progenitors of wealth generation, the dynamics that lead to increasing or decreasing inequality? Did that fall out of any early courses in university or any experiences, academic or otherwise, at that time in your life?

[00:08:04]Daniel Waldenström: Not exactly, actually. So I think I was pretty much primarily interested in historical questions, also the financial development, financial industries. So I started looking at the interactions between policy, like political events, and financial markets. So stock trading, taxation of stock trading, also then within a historical context.

So that was more of how I, this is what I did some research on in my dissertation in economics at the Stockholm School of Economics. But, and then I was invited, or I got a job at UCLA, as an assistant professor, and there I met Emmanuel Saez, of Berkeley University. He gave a presentation on the wealth inequality in the U.S. and its development over the 20th century. It was a really great paper with Wojciech Kopczuk, who’s now at Columbia University. So, then I kind, and I had already felt that some parts of the financial sector was unreal. It’s almost by construction, not part of the real sector, but I felt I needed to know more about how people fare.

And so I think, and with my earlier political interests, I think I realized that the development or yeah, development, but also inequality dimensions were like what I wanted to look at. So then I was, became interested in what Emmanuel had done and also Thomas Piketty in Paris, and then let me, we could come back to this, but I think, at that time, I didn’t really think that growth development was that important, even though 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, in order to have something to tax, we also need income.

We need profits. 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 the key driver behind my book on, so, Richer and More Equal, which is where I really try to highlight that those two sides, both the size of the pie, and also the division of the pie.

[00:10:37]Richard Laterman: I’m curious to maybe circle back to the crisis you mentioned in the early 1990s, which you said you grew up in the ‘70s and ‘80s so that your early, young adult is probably out of university,

[00:10:53]Daniel Waldenström: Yeah, you can see that from my color on here, right? Sorry.

[00:10:56]Richard Laterman: Yeah, I wasn’t going to go there, but, I think what we’re trying to get at is from the outside, I’ve never been to Sweden. I think a lot of people’s views on Sweden, it’s usually remarked along with the other Scandinavian countries as this beacon for social democratic policies, more homogenous society, a more equal society. And so the fact that you grew up in Sweden, 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 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 those were, would be interesting to understand.

[00:12:02]Daniel Waldenström: Oh, it’s a great question. I think this is something that’s actually really on the agenda as of today, as well. Maybe I didn’t really understand it at the time, but so the policy makers, they of course wanted to do as good as possible. They wanted growth. All policy makers say they want high growth, and so on.

The problem is that many of them don’t understand what it, what’s needed in order for growth to happen. I think some of them, I think this is particularly problematic for people interested in like, maybe inequality, but it’s policy makers, maybe leaning towards left side of the political spectrum, to see like, the means of society as given, they’re there, not seeing 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 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 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 spending, which then in turn generated higher inflation rates, built up a fiscal balance that also made creditors, leading to higher interest rates, so that in, increase the pressures on the budget, without really solving the underlying problems of competitiveness on really, the growth potential, derivatives that are needed.

Then we also had some other aspects at that time, in terms of 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 committed to a certain exchange rate, and there is like these speculative taxes, then, and, typically also this fixed exchange rate may over time be, with respect to your like, the competitive level of your economy, that became very expensive then. So that was just part of the imbalances that were being built up. But as far as the deficit spending, the lack of commitment, and long term-ness of politicians, 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 pandemic, but we had it before. Many of the over-inducted economies 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 these guys really are out of hand with what’s needed for them to create long-run stability, really what we experienced 30 years ago. And this is something that Europe is actually experiencing right now.

[00:15:39]Adam Butler: So that’s a really interesting framing of the Swedish, Economic Crisis in the late ‘80s, early ‘90s, because my recollection of it was that it was centered around real estate and loose lending standards by Swedish banks, especially in commercial real estate. And so the banking system got over leveraged with asset-backed loans.

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 the five or 10 years previous, and this kind of gets into some of the frictions or tensions I have found 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 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.

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

[00:17:47]Daniel Waldenström: Okay. there are several topics, a little bit. So let’s, so just very briefly on the 1980s episode in Sweden. So you’re perfectly right. So, I think, so what we did was to deregulate the banking sector in the 1980s. So this was part of the, kind of the political, these were part of post war or like Second World War regulations. So we had regulations of the financial industry. So all the banks, 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, such that borrowing was really supported, or you could say subsidized by high-deduction possibilities. And then what, when we deregulated the banking system, because that was just part of what was lacking in a dynamic economy, the problem is that we stick with our older, with our tax system that promoted borrowing, and having these deduction possibilities, making it very beneficial to borrow a lot. So it boosted borrowing and construction, and so on. And we can, so we had a bubble. That’s right. I think though that was more like, so that was the bubble that kind of burst, in a sense, when we redesigned the tax system in the early nineties, but I think the deeper economic problems and political problems were in place in the 1970s, I think, throughout the Western World.

And they outlived the 1980s, and also then for Sweden then created this much larger crisis in the early ‘90s, but fair enough. As for the other question that you raised, and I think it’s very interesting about what is wealth, and how is wealth generated, and what you allude to in the sense 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 assets and wealth, or we have price gains, relative asset price gains, and that, we can have actually both in terms 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, has been asset price driven, and this is shown by some scholars for different countries. And we see in fact, relative price gains or capital gains are relatively dominant in middle class portfolio growth, whereas higher end of the wealth scale, we see much more of like, new savings or maybe gains from income or whatever, that makes you expand in buying new assets, and this has made people think, what happens if prices drop, if prices fall, or whether there is some kind, and how to interpret these kinds of gains. And I think there’s no really simple answer. Wealth is a very complex outcome in this sense.

[00:21:39]Adam Butler: Hmm.

[00:21:40]Daniel Waldenström: So capital gains, unrealized capital gains are kind of paper gains. So they don’t really change your life very much, depending, as if your house becomes much more valuable, still your house, it provides the same services. We can, so there’s some, so the liquidity dimension or interpretation of different kinds of assets becomes important here. But, I don’t know, I don’t know if this was not an answer really. This is just like some thoughts, but let me hear what you have to say.

[00:22:12]Adam Butler: No, it’s a good point. And I put the cart before the horse a little bit, with my question. So why don’t I allow you to describe what you investigated for your book, and probably what you’ve investigated as your life’s work over the last decade or so, and then talk about some of your main conclusions, and then we can follow up with some challenges potentially.

[00:22:35]Daniel Waldenström: Yeah. So thanks for reminding me about like bringing forth my thoughts on this. So what I found when looking at the data, in terms of what wealth is, what kind of people wealth, what kind of wealth that people hold, and how this has maybe changed over time, was precisely the fact that, all of a sudden the stuff that you and I own, and what is that, the popular wealth that people sometimes have are basically our homes, our dwellings. That’s, we know it dominates most people’s total portfolios, in all, in the aggregate, but also in the micro, like the household level.

So that is, and also we have long term savings. We save primarily for old age. So this is something that 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 maybe a one quarter of all wealth in society, and the rest was other things. What was that? Agricultural domains, land, forestry and so on, but also industrial capital that grew in our economies, in the early 20th century.

Over time, this has changed. So why? People started becoming 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 n the midst of it.

So normal people could basically start buying homes. and our parent’s 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 what happened was that people started building their own saving, and building their own portfolios, 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 does, is that whenever we have 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 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 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 2oo percent, 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, 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 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 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 wealth inequality. And I think this is worth pointing out. And this is completely different from what we had, what we experienced a century ago.

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[00:28:33]Richard Laterman: It sounds like the reason why you would put, excuse me, the U.S. aside is that because the stock market in the U.S. plays such a magnified role as a savings vehicle for the U.S. population, much more so than any other European or Western country that would come to mind. Is the access to real estate, to owning real estate, what has been the main driver of wealth accumulation for that bottom half of the income distribution, and is that maybe the main reason why you would put the U.S. aside? 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.

[00:29:27]Daniel Waldenström: Actually not really. So, things are of course complex, and so I, the reason I wanted to put U.S. aside a little bit, was that whereas basically all Western economies have not experienced almost any increase in wealth concentration, so measuring this by the share of the rich relative to others, so these trends have been almost flat. 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 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 participating in stock market ownership, they would also be part of that. And actually, this is what we see. What, what is, where the U.S. is actually 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 pronounced than in other Western countries. So they have, 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 as for participation, I think also, in fact, Sweden being a very small country, 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 U.S., in Sweden, as well as in the U.S..

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[00:31:35]Adam Butler: How…

[00:31:36]Richard Laterman: I guess the…

[00:31:37]Adam Butler: … the trajectory of this change in the distribution of wealth over time? In my research, I noted that you, I think you primarily start your observation in the very early 1900s, and then paint the trajectory of wealth inequality. When does that, how did that look in the very early 1900s? You did touch on that with a large concentration in agricultural wealth, that sort of thing. What was the arc of that transition over 70 or 80 years? When did that kind of, when did equality peak, let’s say, globally. and then what’s happened since, and then we can maybe talk a little bit about why.

[00:32:32]Daniel Waldenström: So looking at the facts, when it comes to, so to national level wealth inequality trends, so what I do was, is to basically collect the numbers that we have for a few countries, maybe a handful, maybe up to maybe a dozen of Euro of Western countries, and what we see is when measuring wealth inequality by the share of the richest guys, the richest, for example 1 percent of the entire population. 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 1900s, the share of this 1 percent, the richest 1 percent was between 50 and 70 percent of all wealth in the Western world, meaning that 100th had commanded basically more than half of all assets of, in the entire population. So I think the U.K. then has had at some point, maybe 73 percent as the peak of the inequality, in the early 1900s.

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 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 percent, 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 wealth inequality since the 1970s. So those are the data. Those are the numbers. The U.S. began maybe a little bit lower actually, 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, broad trends, and I call in the book this for the, I call this the great wealth equalization. I think 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.

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[00:36:34]Richard Laterman: What have been the main drivers then for this wealth equalization? I mean, I think we’ve touched on a little bit on this. but why don’t you walk us through? I think education plays a major role here, and institutional reform. So kind of maybe, and if you might be able to, rank them in terms of hierarchy? What do you think is perhaps the single most important variable that has driven this, and then work your way down?

[00:36:59]Daniel Waldenström: Ok thanks, but this is actually, but let me just mention that this is, has, this is actually one, or the main new things that I think I have contributed to, highlighting with my book. And also with my research, namely, it’s why my, the subtitle on my book is called A New History of Wealth in the West, and the, that the reason is the drivers between this equalization here. I actually depart from 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 the wealth equalization. So you could have outright capital destruction, bombings of factories and stuff that the rich owned, but also, you can have wars coming with regulation of societies that hampered the rich or 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 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 highlighted. In fact, or instead, my book, and I think I lean on others like, 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 values to be more widely dispersed, namely the democratic values, events,  the extension of suffrage, 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 will come back then to talk about some, perhaps some of the magnitudes, but so, this is then. Instead of having the shocks to capital, slashing the wealth or the rich, lowering the top, as the main drivers, as Piketty has promoted it as main causes I instead promote that it’s lifting the bottom and here, so democracy is a key to understand this, the kind of, the inclusiveness of the institutional changes that 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 come gradually. But then we see that over time, we had changes. I, in my book, I highlight the educational system, which means, so schooling becomes broadened. Access to higher education is expanded to more groups, like professional, professionalists, people with skills become more and more larger and larger share of the working population. And also we have labor laws, we have trade unions being able to empower people to ask for better work conditions, maybe restricting work hours, having more say 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, and labor incomes increase as a whole. And this is then, especially for the laborers, normal workers. And I think this is connected to then, this new kind of institutional setting, where we had to take them into account when promoting the educational, or the economic development of our societies. So I wouldn’t be able to rank, unfortunately, education or labor laws, or maybe some 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 revolution bringing more gains to the side. And here we also have private property rights. And I think that is, if democracy is very important, I think private property rights is perhaps the key institution for value creation, for wealth creation, or that 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, you could have trade unions being part of this, the private part in the private sector, you could also have state solutions, or government solutions. 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, ramping up growth potential in pension savings. Okay? At least, so this is the broad picture. We can go into details, but this is at least the broad picture.

[00:44:44]Adam Butler: I think it’s worth exploring some of the differences between this evolution in the U.S. and versus ex-U.S., right? Call it Canada, Australia, New Zealand, Europe and the U.K., right? So maybe let’s start with Europe and the U.K., and then we can sort of transition to a discussion of the U.S. as maybe a bit of a special case.

[00:45:13]Daniel Waldenström: Okay. Yeah, sure. Oh, do you want me to?

[00:45:17]Adam Butler: Yeah. What happened in Europe? Like it’s, it seems like this wealth concentration or wealth equalization, really, that peaked in the late 1970s, very early 1980s, has stabilized in Europe. So first of all, why hasn’t it continued to go down, and why has it stabilized, and then maybe we can contrast that with what we’ve seen in other jurisdictions?

[00:45:48]Daniel Waldenström: Okay. Thanks. Thanks. So yes, so looking first at when we look at the European countries, maybe, then I was, I think, Canada, Australia, and so on their entire kind of Western offshoots. I think what is striking is how similar they are, actually, over the 20th century. As I said before, the levels of concentration were very high in the early 20th century, to early 1900s, throughout the Western world. And then we see this equalization also throughout the Western world. And this is interesting because, the countries are different. So U.S. or yeah, U.S. also equalized, but U.K., and looking at Europe, then U.K., France, Germany, Sweden, Spain, they were similar but also different, because in terms of war experience, we know the big ones, big countries, had 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 Exhibit A against wars as being a key. Of course, wars can affect also non-belligerent countries like Sweden, through war economy spreading and war regulations.

And this was indeed something that Sweden was affected by. But still, wars as a main or a key driver, necessary kind of condition for wealth equalization is clearly not really a strong conclusion coming out of the historical data, I think, so, and also you could also think that 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? This is now getting into an area where we don’t know exactly why we have a certain level of dispersion in wealth or income, so 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, as we measure it. Why?

Well we know, for example, that 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, 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? 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, are young people. And then we have people who have, maybe they have very little saving. They don’t want to save. Why? They don’t want to save privately because they pay taxes and these taxes give them the right to Unemployment Insurance. If they got to get, become unemployed, their kids can get schooling and even university education in many of these countries.

That’s 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 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…

[00:50:53]Adam Butler: Silence.

[00:51:08]Daniel Waldenström: … 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, so we would have a large share of the population not having a lot of wealth, giving us some…

[00:51:49]Adam Butler: Thank you.

[00:51:50]Daniel Waldenström: … Gini coefficient or maybe 0.6, 0.7 and a top 1 percent share or maybe 20%. We couldn’t maybe go much lower than that, simply because of these reasons. And also the U.S., I think this is something, 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, economically, but also policy wise. And this could also matter for why we have differences 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 country, the top corporations in the world, in terms of market cap, the share of the U.S. has increased, I think, quite markedly over the last, profoundly, exactly over the last four decades or something.

[00:53:13]Richard Laterman: When…

[00:53:14]Daniel Waldenström: Yeah, sorry.

[00:53:15]Richard Laterman: No, I, as you’re describing this, I’m wondering if the bottom half of the U.S.’s income distribution, how that compares to some of the other Western, countries. Because as you’re describing this, it occurs to me that, and you correct me if I’m wrong, but that’s an aspect of your argument, is that some degree of inequality is increasing. Perhaps a necessary condition for much larger growth and perhaps even innovation. 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 generate this larger pie. But I am wondering how that argument stacks when comparing the bottom half of the income distribution of the U.S. against some of these other Western countries.

[00:54:23]Daniel Waldenström: No, but that’s a longstanding question. So that kind of relates to both how the cross-sectional differences of the gaps in income, how they look, and who are there and so on, but also then the mobility within the system. So how easy it is to improve on your situation if you work hard, for example, and here research is also trying to understand how mobile is the U.S. contra 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 background, and as it turns out, so the U.S. has not a much more mobile or dynamic economy, according to most of the studies.

The gaps are very large in the income distribution in the U.S., meaning not so much that the low income earners are much poorer, but instead, 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, the kind of selection of talents flowing in. You just get the best and the brightest globally, then, that effect 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, in maybe in some other countries, where income distributions are more compressed.

So, I think you brought up, so this is, there are 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 U.S., more experienced and I think better in taking care of people who have a hard time. And I think we could discuss level, 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 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, decided.

In the U.S., 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 starve, right? And this was the same, basically the same as printing money. I think this is also then showing that the safety nets didn’t work as well in the U.S. as they did in other Western economies, but also then additionally, they, I think that may have contributed to the inflation increases, basically that you printed money. So at the end of the day, we don’t, it’s difficult, but I think this is, this matters, all of this matters to why we get these differences in outcomes. Maybe more of getting high talented people and having higher upsides in the U.S. economy, lower, maybe lower tax rates on high income earners, maybe having lower corporate tax rates and so on.

Now at least, that contributes to people wanting to be in the U.S. and be successful in the U.S., maybe more than having, just looking at low income earners and finding the explanations there.

[00:58:22]Adam Butler: So the two primary factors, just, I think from reading your work, that have had the greatest impact on this contraction of wealth inequality, have been the proliferation of private pensions and the appreciation of, and participation in private home ownership. Is that, are those kind of the two big, variables that you continue to highlight?

[00:58:57]Daniel Waldenström: I think so, at least, when it comes to outcomes of what people actually own at the end of the day, and looking at people’s portfolios, those two are the kind of the dominant assets in middle class households.

[00:59:09]Adam Butler: And then how do you disentangle? This is where I was trying to go earlier. I was too, it was too early in the discussion, but how do you disentangle the impact of just rising asset prices, relative to their underlying fundamentals, relative to the accrual of genuine capital, right? As an example, the Association of Civil Engineers in the United States forecasts that by 2030, there’s going to be a 29 trillion infrastructure deficit in the U.S., right? 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 U.S. 30 year fixed interest mortgage, what you’ve effectively done is you’ve capitalized 30 years of labor income all at once in this crystallization of this mortgage, which is obviously a bank asset, and a homeowner’s liability. 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 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?

[01:01:43]Daniel Waldenström: You’re raising many important aspects of why we want to look at wealth, but also why we do not want to look at wealth, only in terms of both the kind of understanding the size of the economic pie, so the wealth of our societies, but also wealth and welfare of people. So I think here we need to, so you’re, so we need to, 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 a difficult area. This is a difficult domain to really disentangle.

So looking just at wealth. The wealth ownership, the assets that we hold and their market value, our measures of wealth and wealth inequality are simply to add up all the assets in our balance sheets in the non-financial assets, whatever they may be, land and housing and dwellings and holiday homes and so on. And then our financial assets could be bank savings, could be some mutual funds and then like stock market shares, and pension funds. And these, this is just like simple accounting and these values are both in this kind of volume stuff, 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 normal working household, you can’t just easily, at least buy, construct a new home, like an entrepreneur, maybe starting up a new firm, or expand services and goods being produced. You just have your home and then it may go up in value or not. and this is the basic contract that 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? Probably not.

It’s just 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 asset price game, namely by taking additional mortgages, maybe by improving on their home, or maybe even buying a car or doing things, consume. So we had, in theory, they could have also started setting up some political action committee, or something to influence politicians. But, whereas the liquidity share of wealth held by the rich households or the rich people, is most likely very clearly larger.

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 wealth distribution. And this means that it’s not really clear at the end of the day 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 concentration goes down 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 a little bit to what you said about infrastructure, and the kind of, the underinvestment, if one may want to talk about that. I think here’s another kind of interesting ground for comparison between the U.S. and other Western countries. I think we, and I, actually often when I give talks, I emphasize the importance of separating out different country experiences, especially separating the U.S. from Europe. Maybe where Europe should also include Canada and Australia, I don’t know, or New Zealand, but simply because we have such large differences in, 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, in doing this? 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 then, to add to this is the role of 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 have a secular stagnation throughout the Western world, but I think growth rates are worryingly low in Europe at the moment. And, why this is a 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 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 gains, both in terms of lowering consumption stuff or 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 we would have extreme needs of capital in the military industry, or defense industry.

Maybe climate investments would then 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, also on corporate values, I would say. What’s interesting to just talking about cross sectional differences between, for example, U.S. and rest of the world, or rest of the developed world, call it, is, of course, that U S. mortgages are typically fixed for decades, whereas mortgages in the rest of the world are reset every two to five years.

[01:10:24]Adam Butler: You’ve got to go back to the bank in Canada and Australia, and I think in most places in Europe and the U.K., every two to five years, and get a new interest rate and renegotiate your mortgage 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 future labor, as a function of a reset in interest rates in the rest of the world. I think that probably meaningfully, certainly not completely, 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..

[01:11:38]Daniel Waldenström: This is an area of great concern also in Europe, Sweden, with a large share of homeowners have mortgages, are not even only set by every two or 52 or 50 years or five years, but instead every third month, every three months.

[01:11:56]Adam Butler: Ah, yes, holding rate.

[01:11:57]Daniel Waldenström: Yeah, like, and, so monetary policymakers are, follow this very closely. And they were, of course, really concerned during the pandemic or post pandemic period. So, exactly what to take out of this? So there’s a difference across Europe, European countries. I mean, French, the French households are much more U.S. like in the sense of having very long-term interest contracts. Then on the other hand, this is also something where we have relationships between banks 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 depositors? But you know, but anyway, so, but you’re, you’re perfectly right.

So that kind of propagation of interest rate shocks into household behavior, consumption and so on, getting more real effects on that, is of course, something which we are discussing. And, there are kind of, in fact in Sweden, we try to have, had some regulation of ceilings 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, or maybe exposure to these kinds of events. But, I don’t know. I don’t know what the best scenario is or what the best, where we want to be. Just in general, I know, I’ve monopolized this segment, Richard, to which I apologize. I know you’ve got some other questions, but I guess just to tie a bow on this is, I think it’s very difficult to make assertions, strong assertions about, okay, wealth accumulation or the share of wealth in an economy in the presence of financialization, right?

[01:14:09]Adam Butler: 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 lending policies 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 century 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 wealth and why we also see a much more unequal share of wealth in the U.S. than we do in the rest of the world, because the U.S. 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 U.S., there really hasn’t been any growth in equity markets, and in the U.S. 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.

[01:16:09]Daniel Waldenström: I agree, but at least in part, but only in part, I mean, I, so I think, so yes, when we get depressed asset values, when we basically, when the value of the market, value of wealth would be zero, we wouldn’t have any wealth inequality as just like a core, as a core solution, let’s say in a commando economy, or when private ownership is disallowed entirely, yeah.

But, you know, along that kind of angle or that axis, in the ‘70s, 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, 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 Europe and so on.

So in Europe, when we, wealth inequality has not increased, secularly 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 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’s like, you know, where we also want to talk about the role of income and income distribution.

So there is just 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 going to, reliant 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 as people have an income, they’re fine. They can buy, they can pay their 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 try to reach full employment. So that is what’s kind of the most by far important dimension in where, in which we can create 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 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, or people, I get these comments whenever I present, people feel like, how could you compare super-billionaire asset gains to middle class people’s housing gains? They’re just different universes. And I kind of agree. And yet, they’re kind of, part of like some kind of income wealth complex that at the end of the day, want us to build, live good lives. Yeah.

[01:20:53]Adam Butler: Yeah, I’ve got some other…

[01:20:54]Richard Laterman: I like the…

[01:20:54]Adam Butler: I’ll let Richard…

[01:20:55]Daniel Waldenström: Yeah. Yeah. I,…

[01:20:57]Richard Laterman: I like the way that you, no, way we’re framing that I think raises a very interesting, and very important point, which is much like, when central banks lower interest rates, we see stock markets boom. But that has nothing to do with actual repricing valuations, because the stock market is not narrowly focused on short-term interest rates, but much more on the longer end of the curve.

It’s more on 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 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 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 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.

[01:22:15]Adam Butler: I don’t, that’s the whole point about my, about financialization is it disconnects asset prices and spending from incomes. If you can, if you were able to take a 30 year mortgage on a home with 5 percent down, the home goes up 20%, then without doing too much complex math, your wealth has increased by 2 or 3 times in that period, your equity in your home, and now that can be used with a home equity line of credit.

You can pull that out. 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, to Daniel’s point, they buy a new car, or otherwise consume. 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, unlock their savings by lending against the assets that have gone up in value.

[01:23:36]Richard Laterman: But mostly the U.S. because in the rest of the world, so I guess to your point, the importance of financialization, and I agree with you. I agree with that argument. It’s hard to overstate that because it does allow you to unlock the appreciation of these asset prices towards actual consumption and towards actual perceptions of prosperity. I guess, asset price appreciation is a very narrow way to look at this, and it doesn’t account for these, the cash flow element, the flow versus stock argument, I think of, well, I think is the key.

[01:24:15]Daniel Waldenström: Let me just say that we, so there are some differences across these countries, and then institutional settings, that is kind of interesting. And I think we can learn from each other how this is also a function of how well we are insured against shocks and so on. And the more internationalized, maybe the insurance industry, it becomes, the better our, maybe also the banks become, in terms of being more flexible and allowing for different kinds of contracts.

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 the wealth income or connections in this sense in people’s daily life.

[01:25:54]Richard Laterman: I wonder if we can maybe shift gears a little bit, and I’m cognizant of time here. 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 the West, and maybe for the broader world, because you offer a very positive view of capitalism and of the sort of human ingenuity and innovation, which contrasts, I think, pretty starkly with, your colleague, Piketty and the idea that you need some wars 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 wondering what the policy prescriptions might be and how your work has been received in academia, and in broader policymaker circles.

[01:26:41]Daniel Waldenström: Yeah. Thanks for asking. I mean, I think so an overarching policy insight for me, and I hopefully maybe for some of the readers is that so the rich are not the problem. So they who have become successful in generating wealth, either by being entrepreneurs or maybe some of them just being lucky, of course being lucky to be maybe born in well-functioning Western societies, unlike, you know, Southern, South of Sahara and Africa and so on. 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 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 prosperous and successful people, 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 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 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 people start participating in the economy, so that 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 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 stock market. We can just 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, we need to think also about the pension system here, this kind of 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 Franz van der Zee, 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, get their pension incomes based on the taxes paid by wage earners.

So those are and then on another kind of policy, you could say a broader policy inside I think is about, 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 successful individuals building up huge fortunes and then stepping into politics or media or so, and then 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 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 democratic functions that provide good life, and it’s balanced, and also media that kind of, we think, offers good information and so on.

And here, look, I think it’s like learning from these positive examples, I think is the way forward instead of just clanking down 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 support politicians, and we could have public service media as one 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 U.S., was a federal trader. Lina Khan, sorry, who wanted to kind of break up these big corporations in kind of pre-empting the risk of them becoming too influential or whatever.

I think this is the wrong way to go. Instead, improve the market economy, and 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, 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 AI based systems and services, and other countries because, 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 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.

[01:35:03]Richard Laterman: I like it.

[01:35:04]Adam Butler: If maybe we could spend the last five minutes looking forward a little bit. So you brought up OpenAI. Obviously, we’ve got just unbelievable innovation on the AI front. We’ve got astonishing, almost mind blowing, innovation and improvement in robotic capabilities. Much of this work is coming out of China. It’s just, it’s crazy, honestly, to see how quickly their robotics programs are advancing, looking out three to five years. Do you see the potential for a substantial displacement 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?

[01:36:34]Daniel Waldenström: Oh, yeah, great questions. I mean, actually I wrote a piece on this very recently. It came out like in Oxford University Press. No, it was Elger, maybe, an OCD chapter on AI Automation and the implications for the future tax, future of tax policy, discussing precisely this kind of complex of questions and I think so. 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, inequality effects, the end of labor or not. On my end, let me be very concrete and very, try to be 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 kind of positive. I think the traditional kind of liberal minded approach to the market economy would be to make sure that entry 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 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 really strong need to hardly regulate, like regulate 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 displaced workers, like with any trade reform, like opening up a trade, we would have 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 the majority, for everyone, so to say.

So I don’t think, and also I think tax policy or that kind of policy won’t be, you know, maybe best we would have, we would need some regulation of maybe data ownership. There are like, we need to learn and think hard. But I’m quite positive actually. I think, also when we have more and more robots, they think they may produce more and more, their marginal products will also go down, so the kind of, their value, the value added to the capital owners will also go down. So 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 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 look at other, in other, look at the data, that’s pretty much so.

Finally final point on China. Yes, it’s interesting I think, on going back to the private property rights thing. I think this is what is key for long run 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 has just imitated, 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 U.S., 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, okay, 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 below, 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. and, yeah.

[01:43:11]Adam Butler: Okay, awesome. there’s plenty of other directions that we might go, which might prompt a future conversation, Daniel, but we’re sneaking up on an hour 45. Richard, unless you’ve got a burning question you want to finish with?

[01:43:29]Richard Laterman: I think this is a great place for us to put a pin in the conversation, and we can have a round two in the coming months, as the response to your work becomes a little bit clearer and policies start to evolve, especially with the new leadership in the U.S., it’ll be interesting to see how that plays out in contrast to some of the other Western policymakers.

So thank you very much for coming today, Daniel. This was great.

[01:43:59]Adam Butler: Thank you.

[01:43:59]Daniel Waldenström: Thanks guys. Awesome input and awesome questions. It was a great pleasure speaking to you.

[01:44:04]Adam Butler: Fantastic. Thank you.

[01:44:06]Richard Laterman: Till next time.

[01:44:07]Adam Butler: We’ll do it again soon.

[01:44:07]Rodrigo Gordillo: I did want to take a quick second to remind our listeners that the team works really hard on these podcasts. We spend a lot of hours trying to get the right guests and we do a lot of prep work to make sure that we’re asking the right questions. So if you do have a second, just do hit that Subscribe button, hit that Like button, and Share with friends, if you find what we’re doing useful.