Germany fact of the day

Thomas Piketty, the French economist, calculates that more than half of total wealth in Germany today is inherited — an estimate confirmed by German economists. In the 1960s and 1970s, the share was just a little over 20 per cent.

That is from Tobias Buck at the FT.


Uh so the people that lost all their wealth in ww2 didn’t have much to leave behind, but now people do? What is the benchmark for inherited wealth percent here?

Don't mention the War!

And for that matter, don't mention the Wirtschaftswunder either - 'The term Wirtschaftswunder, also known as The Miracle on the Rhine, describes the rapid reconstruction and development of the economies of West Germany and Austria after World War II (adopting an Ordoliberalism-based social market economy). The expression referring to this phenomenon was first used by The Times in 1950.
Beginning with the replacement of the Reichsmark with the Deutsche Mark in 1948 as legal tender (the Schilling was similarly established in Austria), a lasting period of low inflation and rapid industrial growth was overseen by the government led by West German Chancellor Konrad Adenauer and his Minister of Economics, Ludwig Erhard, who went down in history as the "father of the German economic miracle." In Austria, efficient labor practices led to a similar period of economic growth.

The era of economic growth raised West Germany and Austria from total wartime devastation to developed nations in modern Europe. At the founding of the European Common Market in 1957 West Germany's economic growth stood in contrast to the struggling conditions at the time in the United Kingdom.'

Have to broadly agree. This could just be a function of post-war capital accumulation. Estates in the 60's and 70's didn't have as much accumulated wealth as they later would; the thrifty Germans were still in the process of re-accumulating capital.

The Wirtschaftswunder is one of those periods worthy of serious contemplation.

Effective management of money supply. Relatively light regulation and taxation. Good courts. High capital investment (some public). High social trust and asabiyyah. Catch up growth. Strong STEM education system and apprenticeships. Technically orientated and "trained" management. Non-antagonistic industrial culture. Modest social expenditures?

What in this list was important? What was incidental? How does the post-war British list differ?

Didn't Mancur Olson write about this in The Rise and Decline of Nations?

I have not been able to find the figures on wikipedia, so this is just hear-say, but an important question is : how much, after the dust settled, say after 1950, did West Germany had to pay to the rest of the world as war reparation and reimbursements of lease, and how much did UK have to pay in reimbursements of the Lend-Lease and other wartime and immediate post-war-time borrowings? How does these figures
compare ? Many argued in Europe (at the time of the apex pf the Greek crisis that Germany had a very advantage deal w.r.t to the victors. But again, it is difficult to find figures.

Germany's post war growth was just convergence back to it's relative position before WW2. In 1938 Germany's cap GDP was 84% of the US's, by 1946 it was ca. 25%, then recovery followed and by 1980 it's income was 87% of the US's. Hence, Solow growth model explains Germany very well. Actually, the decline of the UK that is more puzzling: why the UK's cap GDP relative to the US declined from ca. 95% of the US in the 1910's to 70% of the US's by 1980? Kinda interesting question.

The British decline is relatively easy to explain. In 1900, Britain was the leading colonial empire in the world. They extracted economic rents from their colonies, demanded favorable trade terms, monopolize certain key industries, etc. They made 30% of the world's manufactured goods for export. By 1960 that had crashed to 12%.

The wars were extremely expensive for Britain and unlike Germany, they were unable to wipe the slate clean. They were stuck with massive foreign debts that drained resources and the collapse of the empire cost them their primary markets.

UK direct rent extractions from colonies, even India, was surprisingly slight. There was some trade rents accruing to manufacturers extracted by Imperial preference policies in earlier part of the 19th century, but almost nothing in late period.

Most of the Empire's wealth was actually domestic manufacture and global trade.

Rebuilt unions...

"Don't mention the War!"


"And for that matter, don't mention the Wirtschaftswunder either"

Sure that seems like good advice.

...two paragraphs of prior not taking his own advice...

Prior, you're definitely a "Do as I say guy" and not a "Do as I do guy".

Yes, it's wealth inequality that matters; income inequality, not so much. Of course, income inequality can contribute to wealth inequality, but most wealth inequality is attributable to increases in asset prices (the wealthy own most of the assets) not income generated from productive activity, and it's the reliance on increases in asset prices and the behavior it promotes that put us on, and keep us on, the path to financial and economic instability. Unfortunately, the mere mention of the word "inequality" causes many folks to lose their minds.

If "inequality" is a tainted word, the messengers should find a better one.

Economists use the term "concentration", which is something I wish more of them would do (concentrate).

Like in German concentration camps?

The point being to concentrate Jews in one place (concentration of wealth, concentration of Jews), which also likely increased the concentration of Jews about their fate. To be clear, I don't propose we concentrate economists in order to increase their concentration (although one may have noticed that economists have voluntarily concentrated themselves according to ideology) .

So we need a Final Solution for the Economists' Problem.

Good to see the Boys in Brazil all grown up.

Which is better than the Boys innAmerica, who never grow up.

I prefer the word "dispersion". That is, "income dispersion" is a better characterization than "income inequality" since incomes will always be unequal while "dispersion" is a more precise term since it refers to the degree of differences in income. And I disagree with "wealth" being more important than income: income is more important, wealth is just another way to generate income.

Funny how any word we try to use to talk about power becomes tainted

"If "inequality" is a tainted word, the messengers should find a better one."

The word isn't tainted because of it's phonology. It's tainted from overuse and the negative connotations implied by the Left. Any replacement word would rapidly become just as tainted. It's the fate of any word or phrase that becomes filled with ideological subtext.

Can you provide some examples of positive connotations of inequality?

Preferably without quoting Ayn Rand

Seriously? Broadway. Harvard. Google. Brain surgery. Competitive sports. How many people were lifted out of abject poverty each year for the last 20? Even in your daily experience: the vehicle you drive, the technology that makes the aircraft work, the lights come on, we have reasonably reliable networks to communicate this drek.

Societies who institutionalize the drive for equality above all else have been utter failures. Venezuela anyone, for those with memory unequal to the subject.

Even more basic than those.

How about Gold Medals, A's in school, Valedictorians, Best in class, Gold Standards, etc.

You can't have any type of meaningful competition without inequality. If there is competition there is inequality.

Didnt occur to me to specify I wasnt referring to basketball games and spelling bees.

Though they both do, to their credit, go to lengths to ensure an equal starting point and equal treatment.

This might be a good place to talk about golf handicaps though

This might

"Though they both do, to their credit, go to lengths to ensure an equal starting point and equal treatment."

Treatment, yes, starting point -- are you kidding me?

Just ask any uncoordinated 5'2" guy about his future in the NBA.

How is "it's wealth inequality that matters; income inequality, not so much."?

It seems like that is a nonsense statement. First, you only can spend and consume something after you turn the "wealth" into income. Non-liquid wealth can limit spending.

Second, what is defined by wealth is critical. Who owns a real property type asset only determines who pays the taxes on that "wealth", not who "controls" the use of that asset. Real ownership is "control" over an asset, not who has the pink-slip (auto ownership in California). When a government bureaucrat controls the use of that asset, does he "own" it? When a political bureaucrat tells an "Owner" who he can and can't rent to and at what rent, who really "owns" the property?

Third, which types of assets are included? My brother-in-law has a government retirement in California that pays him about $150,000 per year with inflation adjustment and special tax treatment. If I purchased an insurance contract that would have provided me with that income with the inflation and the same net after-tax basis for the rest of my life starting at age 55 with zero risks, the cost would be about 5 million (at today's lousy after-inflation rates of return). Most of the inequality discussions and calculations don't include this type of asset, but it is the most valuable asset.

The actual article is behind a paywall so I have no idea what they included and excluded in their "Wealth" definition, but other articles I could obtain were fast and loose with the accounting in support of their biases and envy. For example, an annuity or bond investment was usually an asset (Wealth), but a government pension wasn't.

"...most wealth inequality is attributable to increases in asset prices (the wealthy own most of the assets) not income generated from productive activity."

Actually, increases in asset prices are largely attributable to increases in income generated from productive activity.

Most people don't understand what the stock market is, so they don't understand this.

But they aren't sweating while they till the ground.

Maybe the lesson to learn from this is that policies that are designed to distribute and equalize have the opposite effect in fact. The best way to get rich is to have a protected market where new entrants have huge barriers to entry. There will be a few very well off and the majority just managing.

How much increased income did your home generate for you over the past decade?

My home cost me more income even as up its price rose substantially.

Nah, only consumption inequality matters.

If anyone in Germany is looking for a solution to inequality, whether income or wealth, I have a modest proposal.

Just transfer ownership of all but the first $50K worth of assets and income to me. As I don't live in Germany, the end result will be a much better level of inequality within German, and after all that's what's really important, right? No one cares about any other related economic effects or why that inequality might be a good thing...

Now do Brazil and the Philippines so we have all the countries of prominent MR trolls covered.

Piketty's work is important and yet politicians keep ignoring it. Including Macron in France. Disappointing.

Picketty's thesis is substantively wrong at the data level and level of argument, but his work remains interesting (and informative) in parts.

"From the Meuse to the Neman,
From the Adige to the Belt,
Germany, Germany above all,
Above all in the world!"

Didn't read it. Does this inherited wealth include the former East Germany? How would it have been possible for the Commie Krauts to inherit anything of substance? Is there more economic equality today in the former East than in the decadent capitalist West?

'Does this inherited wealth include the former East Germany?'

A complicated question, as the percentage of inherited wealth in East Germany in the 1960s/70s would have been quite small, assuming this is part of that 20% figure. In part because the East German economic growth stands in stark contrast to West Germany's, and essentially all the growth that did occur in the DDR was under state control.

However, things do not get less complex after re-unification. Though it did several decades to straighten out, the property that had formerly belonged to the DDR that came from the state simply taking it (think real estate in particular, and don't think just DDR, the Nazi seizures are also part of this) was returned to the duly appointed rightful owners. Many of whom have died in the last couple of decades, and who went from being essentially owners of zero wealth worth passing on to those able to give their children a piece of property that might be worth 100,000 euros.

Think of it this way - the value of inheritances in East Germany in 1989 was probably a rounding error around a statistical null. Three decades on, the value of East German inheritances are likely somewhere around 10-15% of the current German, rounding down from population %, and assuming that the largest block of German inheritances involve property. In other words, the West German rate in 1970 was 20%, and today it is 35-40% A notable gain, of course - as was the Wirtschaftswunder, of cours.

And to keep the complexity going, that figure may not be accurate due to the massive increase in the German stock market over the past couple of decades. Previously, Germans shied away from stocks, but the last couple of decades has seen a major boom, which would also be reflected in inheritances. However, broadly speaking, the East Germans were not well positioned to take advantage of this stock boom, in significant part due to their relative poverty. Paying the rent, a non-concern in 1988, was much more important than getting in on the ground floor of something like Telekom's stock offering.

Might this be a corrolary of the solow model. Germany built up there capital in a generation or two. We would expect there to be more new capital owners than in the steady state.

Also immigration and outsourcing prevents gains from increased productivity from accruing to labor. I imagine a lot of people in Germany as in the US have zero net worth.

It's all good... earning money the old fashioned inheriting it.

I have often read that Germany has a rather low level of capital per capita due to a low level of home ownership (this is not the place to comment on why there should be a correlation). So a large fraction of capital being inherited might still mean a modest amount by international standards.

Any readers have figures on this?

Well, yes; home ownership is lower, but prices are also quite low. Compared to UK, there's a much smaller proportion of German wealth in housing. (this is actually a good thing for Germany)

Why is it good for Germans to have less valuable property?

I have read that too, but I don't understand. Every house in Germany, like anywhere else, is owned by somebody, doesn't, presumably a German. Low level of ownerships means that many Germans own no house, but then some other Germans just own 10 houses, and per-capita it amounts to the same.

Maybe there is a relation, but it must be more complex. For example, housing is less over-valued in Germany than in France or the US (due to irrational preferences for ownership and tax advantages for owners in these countries -- please don't shout me!) so the total amount of capital in the form of real estate is lower in Germany per capita?

The majority of Germans are tenants, and most rental properties are apartments owned by holding corporations with the larger sharing having ownership by government entities, particularly at the local level and then investment groups, typically associated with professionals -- physicians representing a fairly large group of these. Ownership of rental properties is not necessarily attractive to individual private investors as the legal framework is generous towards tenants and individual landlords often do not have the immediate legal or financial resources for managing this (evicting a tenant for non-payment may take several years with little prospect for seeing payment in arrears, for example.) In addition, it is important to note that while in many areas of Europe it is not unusual for individuals and families to have a primary home and a holiday home in the countryside. Secondary home ownership of this sort is extremely rare in Germany.

Note Germany has long had one of the the lowest birth rates in the world. That helps when it comes to inheriting stuff.

I guess it must be by value of estate rather than by sum to recipient?

Over time definitely. An asset that is inherited by one child gets passed on with more accumulation to the next.

A few additional relevant facts about wealth in Germany:
- Home ownership in Germany is remarkably low.
- About half the population has almost no wealth at all.
- Taxes on cash and housing inheritances are high, but extremely low on inheriting business.
- Germans are poor savers, an unusually high proportion of Germans save with their savings accounts

My guess is a very large share of this wealth is related to the high number of small to medium sized bussinesses that are passed down generations.

British inheritance tax is rather sensible in falling lightly on business, and distinctly foolish in falling lightly on agricultural land.

The first €400,00 per child is tax exempt. Inherited businesses are mostly untaxed.

But I suppose envy and the hatred of others who have more than you runs deep in Germany. Perhaps they should remember the role of envy and hatred for others who had wealth contributed to the Holocaust.

Best tell those who are working and saving to provide a better life for their children that they showed expect a knock on their doors in the middle of the night as government agents confiscate their property.

Many in Germany do not save. Why? In part because of generous state pensions.

Germans do not save wealth in the form of home ownership. Lowers savings for some but leaves workers more mobile with less of their income paying for housing.

Lastly, German small business people invest in their businesses. In America, wealthy families look for tax dodges, trusts, shelters, etc. Which is better for the economy, for the future of the country?

"Lastly, German small business people invest in their businesses. In America, wealthy families look for tax dodges, trusts, shelters, etc. "

In the US more investment goes to stocks in larger businesses, which enjoy economies of scale. I'm not sure your point about small businesses is valid. The rest of your comment is good.

Most small businesses in America do not survive generational transfers.

In Germany, much wealth is transferred in the form of a small to medium business. This is done mostly tax-free. It gives incentives for families to invest in the business, provide jobs, etc. A system that encourages investment in growth and prosperity is better than the alternative - seeking tax avoidance over growth.

There's nothing wrong with wealth being inherited. What matters is its distribution, it concentrated?

Distribution? Hopefully to its owners. Property rights are important.

A lot of German wealth is in pensions that can't be inherited. That's my guess.

Given the rather immense economic events in Germany over the past 75 years, to which the commenters have alluded, most notably total wartime destruction and the establishment and fall of Communism, it seems like a very poor choice of countries for understanding the standard processes of wealth accumulation. It's like examining the life expectancies of German men born in the 1920 to 1925 period, compared to those born in 1960 to 1965, and then making pronouncements about public health.

And yet we pretend to care about "equality of opportunity." In a world of such inherited wealth that is completely unrealistic.

We might want to examine the passing of wealth from person to person *in general*, not just when the former person dies. Another thought: consider the passing of wealth from one *person-stage* to another; for example, I-today inherited virtually all my wealth from me-yesterday (who went out of existence at midnight).

"I-today inherited virtually all my wealth from me-yesterday (who went out of existence at midnight)."
If it was a murder, you are the main suspect. You had motive (as you said, money), you had opportunity (you were right there) and you had the means.

"The means"? All it took was the clock ticking over!

If Trump had put the money is father gave him in the stock market, he would be wealthier than he is now. Is his wealth today inherited or earned?

Serious questions:

1. Would as many people be employed if he put the money in the stock market? (I don't know the answer to this. My gut says no.)
2. Presumably rich people spend lots of money in addition to making lots of money. Wouldn't Trump's return be lower if he invested the money in the stock market but spent at the same level as he has done in reality. (This is obviously true, but I'm not sure how significant the difference would be).

The Trump Organization itself has around 100 employees. Employees associated with entities owned or partially owned by Trump are no different from employees of corporations in which Trump owns stock. Given the collapse of the largest job-creating Trump enterprises (those in Atlantic City), Trump would certainly have contributed to employing more people by investing instead in the stock market in the early 1970s.

>Employees associated with entities owned or partially owned by Trump are no different from employees of corporations in which Trump owns stock.

I am not sure. Does a country with 100 investors, 1 entrepreneur, and 1bil in cash have the same amount of jobs as one with 1 investor, 100 entrepreneurs, and 1bil in cash? Consider SV: too few entrepreneurs compared to the available cash, so the money ends up flowing a lot more freely than in other places.

I'm not sure about this. I'd imagine that money that goes to a newly formed organization employs more people than the same amount of money that goes to an already operating organization, just because the new organization has to fill a lot of bureaucratic roles once it's formed (HR, legal, facilities, etc.) that large corporations largely don't need to create because they already have people filling these roles.

You may have missed that many large companies which existed in the stock market in the early 1970s have since failed and dropped out of the stock market, just like some of Trump's companies.

You have to take the change in the composition of the market into account when calculating long term returns. Stock Market survivorship bias: It's not as rosy as just looking at the survivors would make you think.

This is sadly fake news.

"If Trump had put the money is father gave him in the stock market, he would be wealthier than he is now. Is his wealth today inherited or earned?"

If Trump had invested all of his inheritance in the S&P, got a normal job, lived a normal life, he'd have about the same wealth he has now.

Of course, he would have missed out on the billions he's spent on personal consumption over the time period. The billions that he earned over and above what his inheritance would be worth.

So,, his current net worth was inherited. The billions he's spent on a legendary life style was earned.

Trump has four or five siblings so if this were true (it's not) then Trump's siblings should at the very least be centimillionaires. They're not.

This is not a phenomenon specific to Germany; it is consistent with what MR has previously reported about Sweden having high asset inequality. This seems to be the way the wealthy quietly maintain their position in a society that outwardly aspires to egalitarianism.

Also, as others above have noted, German law exempts many residential premises (including some apartment buildings) and 85 percent of business assets from inheritance tax. Also, the inheritance tax Is significantly lighter for one's children than for outsiders.

How much of total wealth is inherited in the United States?

All of it, eventually.

how much economic illiteracy with a best-selling econ author, and a leading econ blog?!

The market value of assets is inversely proportional to the discount rate. What was the discount rate then, and what is it now?

Given that capital is nominally worth much more, but pays much less return, how is it surprising that the necessary capital can not be created out of current income but has to be accumulated in the past — i.e. inherited?

And the wealth in question is overwhelmingly real estate, and its value is mostly consumed, providing shelter services. So we all use increasing wealth to live in, but as a low-risk, low-yielding form of return, and nothing changes materially.

Not to be confused with scarcity of shelter in certain metropolises — but Germany, of all places, isn’t hit by that nearly as much as others

I have heard Thomas Piketty go on about how the high income tax rates of the 50's through the 70's in the US created greater equality. In reality, nobody with a good accountant paid those rates, the wealth was in lower taxed corporations that supplied everything for the owners who had little wealth or income shown on their 1040's (tax forms). Then we dropped the income tax rate in the 80's and allow subchapter S pass through corporations and the income that was going into C corp. books could now pass through to lower-taxed individual taxes. This bookkeeping shift "Wealth" from C corporations to Individual 1040 increased the statistical "inequality" without any change in real "inequality".

When Thomas Piketty was asked about why care about "inequality", he claimed concern about the new rich building dynasties, but if we look at the Forbes list over time that doesn't appear to be true.

However, around the world, political dynasties are the reality and are a threat to our society. We know from companies run by a family dynasty consistently underperform their competitors (Wang computer for us old-timers). The idiot son becoming the boss doesn't work very well and neither do the kids of a political dynasty become innovative leaders. However, the political dynasties are good at using the power of the gun and helping their self-interest.

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