Why treat capital gains differently when the world is awash in capital?

November 15, 2021, 10:37 AM UTC

Good morning.

When I started my journalistic career four decades ago, there was a lot of talk about the need to encourage “capital formation” to drive investment, productivity and economic growth. That was the rationale for cutting the capital-gains tax rate—and has remained the rationale for treating capital gains differently than ordinary income to this day.

But new data from the McKinsey Global Institute could cause analysts to think twice about that broad-brush approach. The MGI number crunchers created a global balance sheet for 10 big countries—Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, U.K. and U.S. And what they found is a world awash in capital. By their account, wealth has tripled since the beginning of the century, grown 50% faster than GDP, and—at six times GDP—reached levels never experienced before.

Where is all that wealth being invested? It turns out two-thirds rests in real estate. Meanwhile, the assets that “drive economic growth”—infrastructure, industrial structures, machinery and equipment, intangibles, as well as inventories and mineral reserves—make up less than a third. For all the talk of a digital economy, “intangible” assets—like software and intellectual property—account for only 4% of the global balance sheet.

What does that mean for the global economy? If the trend continues, and wealth keeps rising faster than GDP, it could lead to ever greater inequality in wealth. Or, in an alternative scenario, inflated wealth could be a sign that a correction in asset prices is coming, as the world returns to the norm. In either case, it seems clear that policy should focus less on undifferentiated “capital formation,” and more on investments that drive economic growth.  

It’s not light reading, but you can find the full report here. More news below.

Alan Murray


Clarification: This essay was updated on Nov. 15 to note that wealth has grown 50% faster than GDP, rather than six times as fast.


Shell structure

Prepare for Royal Dutch Shell to become just "Shell"—under pressure from activist investors who want to see the fossil-fuel firm break up to address the energy transition, it's ditching its dual-share structure and moving its head office from the Netherlands to the U.K. The company says the simplification will "strengthen Shell's competitiveness and accelerate both shareholder distributions and the delivery of its strategy to become a net-zero emissions business." Reuters

Chinese coal

India and China blindsided the West's negotiators at the end of COP26 with a last-minute demand to change coal-reduction aspirations from "phase out" to "phase down"—a successful tactic that left conference chief Alok Sharma in tears for the vulnerable countries that may be devastated as a result. And lo and behold, a couple days later China has reported its mines' highest coal output in six years. Fortune

Russian fears

There's a "high probability" of Russia moving to destabilize Ukraine this winter, Western intelligence officials have apparently warned Kiev. Russian troops are massing near the Ukrainian border, while the attention of many Eastern-Europe observers is focused on Belarus's border with Poland, where there's a tense standoff with hundreds of migrants stuck in the middle. The U.K.'s outgoing military head says the country needs to be ready for war with Russia. Financial Times

Indian borders

After 20 months of pandemic-induced closure, India has finally opened its borders to mass foreign tourism. People from 99 reciprocating countries can visit, when they're fully vaccinated against COVID-19. Over a billion doses have been deployed in India itself, where most people have likely had the disease by now. Fortune


IBM quantum

IBM has unveiled a quantum processor that it claims will be able to perform calculations beyond the reach of traditional computers—though it still needs to prove that claim. The Eagle process has 127 qubits. By 2023, IBM hopes to be producing quantum processors with 1,000 qubits, which might make them useful in a business context. Fortune

Dimon in China

Jamie Dimon has become the first big Wall Street bank boss to visit greater China since the beginning of the pandemic last year. He went to Hong Kong, saying "it is very important for me to see our people." FT

Trump hotel

The Trump International Hotel on Pennsylvania Avenue in Washington, D.C. is about to become a Waldorf Astoria, managed by Hilton. Former President Donald Trump's company is reportedly selling the rights to the Old Post Office building, which it leased from the federal government in 2012. Fortune

WFH please

How best to convince your boss to keep letting you work from home? Meena Thiruvengadam has some suggestions: ask for what you want, make it about more than just you, build a case, and be open to compromise. Fortune

This edition of CEO Daily was edited by David Meyer.

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