Dr. Strangelove’s House Call

February 26, 2015 § 1 Comment

The House Call

John Boehner, the Republican Speaker of the House of Representatives, without consulting with the President and heedless of its potentially disruptive effect on current negotiations with Iran concerning its nuclear program, has invited Benjamin Netanyahu, the Israeli Prime Minister facing a serious election contest within a few weeks, to address a joint session of Congress, an opportunity rarely offered to a foreign leader and never before offered as a brazen act of hostility toward the President of the United States.

Mr. Netanyahu, also without consulting the President, accepted the invitation and has declared his intention to deliver a speech deliberately designed to undermine and disapprove the President’s efforts to reach a peaceful negotiated agreement that would ease fears that Iran is developing nuclear weapons.

Introductory Background

Stanley Kubrick’s 1964 cult classic anti-war comedy was entitled Dr. Strangelove or How I Learned to Stop Worrying and Love the Bomb.  The movie was about a demented person’s delusional effort to start a nuclear war.

Benjamin Netanyahu, Israeli Prime Minister, is determined to force a war between the United States and Iran.  That war, given the volatile state of world politics and the current number of overlapping and interlocking conflicts, could, if there is a miscalculation by any of the combatants or their allies, result in a nuclear tragedy.

The Middle East, where most of the probable participants are located, is a place where suicide bombing is a weapon of choice.  The phenomenon usually referred to as “mutually assured destruction” has so far been an effective deterrent to nuclear war.  In most Middle Eastern countries it would not serve because the religious zealots who live there eagerly await the Apocalypse and have little apprehension about dying for reasons believed required by their religious beliefs.

Pending Negotiations

For the past few years, the United States has been trying to dissuade the government of Iran from developing nuclear weapons.  That effort has employed progressively serious economic sanctions coupled with both formal and informal negotiations.

In recent months, following Iran’s  election of new and less bellicose government leadership, a team of negotiators led by our State Department has engaged in serious negotiations with representatives of Iran’s government concerning this issue.  Those negotiations have now reached a crucial stage.  According to published reports, there is some hope that Iran may, at last,  agree to enforceable measures that will, at least, slow and postpone development of its nuclear capability and provide hope for verifiable steps insuring that it will not develop nuclear weapons.

A vital factor affecting the negotiations is the opinion of Iran’s Supreme Leader Ayatollah Ali Khamenei.  Here is a link to an informative and somewhat hopeful article from the Bulletin of Atomic Scientists concerning this issue:  Khamenei  Like all negotiations, success depends on shared confidence that proposals are made in good faith; that if accepted, they would be adhered to.

The failure of this effort at peaceful settlement of these issues can, and probably will, have grave consequences for Iran, the United States and Israel.  If Iran insists on a course that could lead to a nuclear attack on Israel, the United States will be forced into yet another Middle East war.  As stated above, such a war would be dangerous and its outcome and long term consequences impossible to predict.  The recent emergence of ISIS and various other similar military groups adds to the complexity and risks that will confront the United States if it becomes enmeshed in such a war.

Enter Dr. Strangelove

The United States confronts these dangerous possibilities because it is  committed  to safeguard the safety of Israel.  Instead of supporting  efforts to forestall a possible nuclear holocaust that could obliterate Israel, Benjamin Netanyahu has joined factions of his supporters in opposing all efforts intended to achieve a peaceful settlement with Iran.

Some articles related to such efforts have equated them with Neville Chamberlain’s negotiations with the Nazis in the 1930’s, and equated Chamberlain with President Obama.  History has labeled Chamberlain naive and branded him with his speech upon returning from Munich which featured the often quoted phrase, “Peace For Our Time”. [Usually misquoted as “Peace in our Time”]

According to Netanyahu, Iran cannot be trusted to abide by any agreement and, hence, negotiations are merely a ploy to buy time to build nuclear weapons to destroy Israel.  The inevitable logic of this argument is that war between the United States and Iran is the only sensible solution.   All indications that peaceful negotiations are succeeding evoke more intense and raucous efforts to sabotage them from Netanyahu.  The sabotage tactics have now culminated in this unprecedented effort by a foreign elected leader openly to engage in political  conflict with the elected leader of another sovereign nation.

Our Form of Government

Lest it be forgotten, we are governed by a Constitution.  Article II describes the duties of the President.  It states, in part, “He shall have power, with the advice and consent of the Senate, to make treaties . .  . .”  This authority has been construed to give the President the authority to negotiate with other countries.  The Supreme Court, in a 1936 decision sustaining the right of the President to impose an embargo on the export of arms, wrote, “The President is the sole organ of the federal government in the field of international relations – a power which does not require as a basis for its exercise an act of Congress, but which, of course like every other governmental power, must be exercised in subordination to the applicable provision of the Constitution.”  United States v. Curtis-Wright Export Corporation.

Conclusion

It is very plain that neither the House of Representatives nor Benjamin Netanyahu, as an elected leader of the State of Israel, should intrude like bulls in a china closet into the fragile and important negotiations between the United States and the nation of Iran.  It is time for our government to send Netanyahu home with a message:  Our President will respect  your proper concern for the safety of your country, but we will not countenance your effort to dictate the policies we design in the interest of our country.  Our obligation to Israel is to protect it from harm but the tactics and policies related to that matter must be and will be made and designed by us, based on our judgment and our system of government.  Their design will not be and has not been delegated to you or your government.

An Afterthought

There are two Jewish lobbyist groups in the United States.  The American Israel Public Affairs Committee, usually abbreviated AIPAC, generally supports and promotes Netanyahu’s policies.   The other, Jewish  Voice for Peace, operates as a grass roots political organization.  Its membership is not limited to Jews.  It supports, advises and furnishes information to elected officials generally identified as liberals.  Its primary aim is to promote peace between Israel and Palestine based on security and fairness.  Here is a link to an article written by a spokesperson for that organization concerning the issues discussed here:  JVP

Willful Ignorance

February 20, 2015 § Leave a comment

Several of the crazier representatives of the Republican Party and some of the shameless hacks employed by Fox News have attacked President Obama because he does not label ISIS or ISIL or any of the groups affiliated with those organizations as “Islamic Extremist” or “Islamofacist Extremists” or some other catchy label associating the armed thugs with the religion of Islam.  Various “experts” on combating terrorism have pontificated that “accurate labeling” is essential to effectively opposing terrorism.

These attacks have implied that failing to identify the terrorists with Islam implies some kind of unwillingness to “call a spade a spade” – a sort of unmanly, weak hesitation to be blunt and forceful.

I agree that it is time to call a spade a spade.  There are three possible explanations for these attacks:  First, they may result from stupidity and ignorance.  Second, they may be the result of minds so consumed with hate and bigotry that rationality has been overwhelmed.  Third, they may be a political strategy based on the assumption that the American public is so stupid that such attacks will be effective to gain political points.

This is not a close question.  There is no “on the other hand” or “maybe they have a point” here.  These attacks are unadulterated stupidity.

Why?

The proper motive for any media-based attack on ISIS or ISIL is not to influence or change the minds of members of ISIS or ISIL.  That is a futile exercise.  The only sensible response to members of ISIS or ISIL members is to kill them and destroy their organization and its philosophical and ecclesiastical claims.  That task must be led and accomplished by  legitimate leaders and adherents of Islam. When secular leaders attack ISIS and ISIL, their appeal is directed to people who have not yet succumbed to the false claims of Islamic legitimacy.  We should do nothing to lend credence to those claims.

This is not the time for a new Christian Crusade.  It is also not the time for another “Global War on Terror” waged with the same ignorance and futility that characterized the recent War in Iraq.

Haven’t we learned anything?   Is our collective memory so deficient that we can’t recall the outcome of that foolishness?

Our public posture toward ISIS and ISIL should be exactly what President Obama has articulated:   We are not going to be drawn into a war against Islam.  ISIS and ISIL are not legitimate representatives of Islam.  Their actions do not have any legitimate roots in the religion of Islam.  They are lying about that.  They are trying to mask  their bloodthirsty activities with the language and rhetoric of Islam.

The last thing we should do is assist them by agreeing that they represent some part or sect with any legitimate claim to ties with Islam.

The KKK Example

After the Civil War, the Ku Klux Klan was born as a violent response to Reconstruction.  It was a lawless group of frustrated Southerners who sought to instill fear and horror through lynchings and murders and beatings mostly, but not entirely, directed at black men and women.

The KKK continued long after Reconstruction ended and new forms of KKK  organizations have persisted to the present day.

Throughout its bloody history, the KKK has claimed legitimacy by masking its hateful rhetoric with Christian religion.   The burning cross is the universally recognized symbol of its public activities.  Here is a link to KKK’s present website:  KKK  If you click on the “about” button, the first sentence is “The Loyal White Knights is a law abiding Christian Organization.

From the beginning of this wretched organization’s existence, there have been brave and steadfast opponents eager and willing to publicly oppose it.  But never, so far as I am aware, did the opponents choose to refer to the KKK as a “Christian extremist organization”  or as a “Christian rogue sect”.  Does anyone think that would have been an effective way to oppose the KKK?  Of course not!  Why on earth would the KKK’s opponents want to associate it with the Christian religion?

Which should, but apparently does not, suggest to the ignorami who are attacking Obama that perhaps his approach is sensible and theirs merely exposes their misunderstanding of how to oppose terrorism.

Bob

 

 

A Piketty Update, Addition and a Warning

February 17, 2015 § Leave a comment

I have learned how to reformat quoted material so, if you check out my latest post, you will find that the dangling overhangs littering the quoted passage illustrating Ocemogulu’s gobbledegook have been removed.

After posting that essay I found an article by Dean Baker, a reliable source of common sense economic commentary, about ways to begin correcting the wealth and income inequality disclosed by Pikkety’s data.  Here is a link:

Dean Baker 

He is understandably pessimistic about the likelihood that the tax on capital proposed by Piketty will be implemented any time soon, so he suggests that Piketty’s data should be used to support other, more likely, ways to remedy inequality.

Finally, today’s New York Times has an article citing recent research that reflects that the near finance system collapse of 2008, followed by significant losses related to the near bankruptcy of some Wall Street banks, caused substantial losses of top tier wealth.  Those losses, plus the economic stimulus measures initiated by President Obama, caused some narrowing of the wealth and income gap.

The article includes cautionary language that points out two relevant facts concerning this data:  First, the wealthy people who had those losses are rapidly recouping.  Second:  the  extent to which these events narrowed the inequality gap was not enough to reverse the longer term trend established by Piketty’s data.

Here is a link to the article:  NY Times

My observation is that many people read headlines and never read the headlined articles.  So this is an article that practically invites dishonest and devious citations out of context.  I therefore urge you to read it, think about it and resist the Phil Gramm/Fox News jackals who will lap it up like cream.

Bob

Piketty and The Elephant

February 15, 2015 § 1 Comment

The Blind Men and the Elephant

The academic, political, journalistic  and intellectual gadfly (like me) reaction to Thomas Piketty’s book, Capital in the Twenty-First Century is like the story we imported from India about the blind men’s first encounter with an elephant.  Here is an English language 19th century version:  Story.  The final verse describes many of those Piketty reactions:

And so these men of Indostan
Disputed loud and long,
Each in his own opinion
Exceeding stiff and strong,
Though each was partly in the right,
And all were in the wrong!

Summary

In the following essay I will try to correct and expand the last post on this blog in which I wrote my own reaction to Piketty’s book.  I will discuss Piketty’s review of his book.  I will also comment  on some of the reactions  of others to his book.

Beyond r>g

Here is a link to Professor Piketty’s review of his book:  Review.  [The entire article is available as a pdf file by clicking on the “full text” button.]

He complains that both his admirers and critics have oversimplified his thesis by narrowly focusing on the relation between return on capital and total growth of the system, expressed symbolically r>g.  He acknowledges that this relationship is an important part of his argument, but he cites other parts of his book that discuss other factors he considers equally, if not more important than the r>g ratio.

He states his purpose was to establish, based on data gleaned from three centuries, that democratic government in developed nations is losing a battle to regulate and control capitalism’s tendency toward increasing degrees of wealth and income inequality. Given that purpose, his book did not limit its argument to wealth inequality.  It was equally concerned with income inequality, a problem related only incidentally to the r>g ratio.  With that in mind, his book includes extensive analysis of institutional characteristics that contribute to income inequality as well as wealth inequality.

Educational Access

For example,  the book analyzes significant financial barriers that limit access to higher education in the United States:  High tuition resulting in steadily increasing student debt.  As technological innovation requires increasing degrees of intellectual skill and learning, these financial demands narrow the gateways to colleges and universities.  The book cites data to show that most students attending top tier universities come from families in top tiers of economic wealth:  Another factor, along with inheritance, tending toward progressively increasing wealth and income inequality.

Belief Systems

Piketty’s review of his book emphatically insists he did not intend to portray capitalism as a system that inevitably results in a plutocratic oligarchy.  I think this was the main error in my previous commentary on his book.  I now realize that his main purpose was, on the contrary, to demonstrate that capitalism could be preserved, but only by making the political and institutional changes necessary for a course correction.  Piketty’s above-cited article elaborates on the destructive forces he believes must be attenuated if capitalism is to survive.

Piketty’s used many references to popular novels and TV programs to illustrate his thesis that cultural attitudes and belief systems were both the result and contributing causes for the evolving reactions to wealth and income inequality.  He made plain his preference for this kind of analysis instead of theoretical analysis based on mathematical models.  He referred to the latter techniques as unrelated to the “real world”.

His book discusses  various cultural ideas that affect the concept of property ownership.  Slavery, for example, was part of that concept in this country until abolished by the Civil War, so a large stock of “capital” was rendered valueless by the Emancipation Proclamation.

Piketty’s book plots the dividing line between public ownership and private ownership and how that line is moving in our culture.  He observes that ownership of the air, the sea, historical monuments and other commonly owned property is now thought by some to be fit for private ownership.

He also discusses the difference between accepted principles of corporate ownership in our country and Germany.  In Germany corporate governing boards commonly include representatives of affected labor unions, non-government organizations and other stake-holders.  As a result the total share value of German corporations is typically lower than U. S.  corporations, but Piketty observes that this difference has no apparent effect on the financial profitability of German corporations.

Ownership of oil is another factor Piketty discusses in his book, along with the cultural attitude toward its  ownership compared to the attitude toward other property owned domestically but located in other countries.  The history of oil ownership includes military intervention to protect it as well as intervention in the governments of countries where it is found.  He regards these attitudes as significant factors affecting the ability of democratic government to control capitalism.

A country’s history of colonialism also affects these attitudes and that, in turn, affects the political effort to control capitalism’s tendency toward wealth inequality.

He traces the way political forces affect attitudes toward wealth inequality.  For example, he describes how the U.S. attitude toward wealth inequality changed dramatically from the five decades beginning in 1940, to the present attitude that began to prevail in 1980.

Corporate Salaries

Piketty’s review highlights his book’s data and discussion of skyrocketing corporate salaries in the U.S..  He cites data to discredit the idea that they are the result of a meritocracy.  This factor contributes significantly to income inequality, but has little relationship to r>g.  I mentioned this in my earlier post, but failed to distinguish it from wealth inequality.

Conclusion

I described my reading of Piketty’s book as similar to taking courses from an exceptional professor.  When I read his review article I realized that, at best, he had given me a C+.  I didn’t get his ideas wrong.  But I failed to recognize their true breadth.  I now understand that I picked what I thought was the theme of his book, based on my college learning of Keynes theory,which involved simple equations involving saving, investment and propensity to consume.  So I didn’t realize all of the factual consequences of  Piketty’s  far broader canvas than Keynes used to paint his picture.  Keynes was prescribing government policy to be implemented in days or months.  Piketty was predicting problems and prescribing solutions in terms of decades or centuries.

This is the second draft of this effort.  I scrapped the first one because it had too much verbal thrashing around and bored me.  I have tried to tighten this up with fewer words while still conveying a few accurate descriptions of Piketty’s review.  I’ll close with my own take on three of Piketty’s critics.

Capitalism is Too Complicated to be Analyzed

Daron Ocemoglu of MIT and James A. Robinson of Harvard University contributed an article to the same journal issue in which Piketty’s review appears. Here is a link to their article:  Ocemoglu [A pdf version of the entire article is available by clicking on the “full text” button.]

They argued that Piketty had merely fallen into the same trap as Adam Smith, Malthus, Ricardo, Marx and Keynes:  He foolishly tried to establish general principles to explain the way capitalism works.  They compared the extent of wealth inequality in South Africa and Sweden based on data covering the period from 1910 to 2010.  Their data showed that graphs plotting the extent of inequality during that time period was similar for those two countries.  Their conclusion was that this proved that very different institutional environments (before and after apartheid in South Africa and during political changes in democratic Sweden) could produce similar progressions of inequality.  Therefore, they argued that any effort to generalize about capitalism’s effect on inequality was fallacious.

Now I confess that I tried, but was unable to read all of this article.  Here is an example of the problem I had:  This is part of their explanation of their method of comparing data from two extremely disparate countries during a time period when those countries were experiencing fundamental changes in their political and cultural environments:

“Table 1 reports regressions using three different measures of r − g. First, we
assume that all capital markets are open and all of the countries in the sample have the same (possibly time-varying) interest rate. Under this assumption, cross-country variation in r − g will arise only because of variation in the growth rate, g. The first three columns in panel A of this table then simply exploit variation in g using annualdata (that is, we set r − g = −g by normalizing r = 0). Throughout, the standard errors are corrected for arbitrary heteroskedasticity and serial correlation at the country level; and because the number of countries is small (varying between 18 and 28), they are computed using the pairs-cluster bootstrap procedure proposed by Cameron, Gelbach, and Miller (2008), which has better finite-sample properties than the commonly used clustered standard errors. (The same results with “traditional”standard errors that assume no heteroskedasticity and residual serial correlation are reported in Appendix Table A1 and show very similar patterns.) In column 1, we look at the relationship between annual top 1 percent share and annual growth in a specification that includes a full set of year dummies and country dummies—so that the
pure time-series variation at the world level is purged by year dummies and none of the results rely on cross-country comparisons.”  By the way, neither I nor Google could divine the meaning of heteroskedasticity. ”

In Piketty’s article he responds to these guys and I’m sure he understood their argument better than I could.  His main reaction was that the time period they analyzed was too small to be dispositive of the issue they were trying to  prove.  But his main rejoinder was that their criticism of his book was mistaken because he fully agreed that institutional changes  were important factors in his analysis of wealth and income inequality.  His point was that, regardless of institutional changes, his data from three centuries showed a drift toward wealth inequality.

An Intelligent Review

The March 31, 2014 issue of the New Yorker had a long review of Piketty’s book by John Cassidy.  Here is a link:  New Yorker

This is a reasonable and intelligent review of the book.  Cassidy expresses doubts about Piketty’s predictions of the future, but he expresses admiration for his analysis of the past.  This is long article and I mention it and add a link in case you want to learn more about the book from the typewriter of a gifted writer who is not out either to canonize or demonize Piketty.  He raises an interesting question:  The outcome of r>g will be substantially affected if the growth rate of the economy significantly increases.  Cassidy observes that, on a worldwide basis, that is happening, partly because of developments in Asia and India.  He wrote about a year ago.  Since then, there are reports that China’s growth rate is declining, although it is still increasing.  He cites technological innovation as a probable stimulus for growth expansion.  Populations in the undeveloped and developing world are gaining more access to knowledge and world markets.

I can imagine alternate results:  Either deflation of wage rates in the developed world due to competition with workers in the developing world; or increased wage rates and diminished poverty in the developing world due to access to more productive agricultural techniques and to more markets for exportable goods.

Piketty has stated that he intends to keep expanding his data mining and revising his conclusions and predictions based on what he finds.

Regardless of these issues, Cassidy credits Piketty with significantly establishing the agenda for economic policy discussion by focusing attention on wealth and income inequality.  That can only be a positive development.

Shameless Propaganda

Several apologists for financial oligarchy have tried to discredit Piketty.  Of course, the Wall Street Journal gets the prize for the most transparently dishonest example.  Here is a link to their article submitted by our own Phil Gramm who, along with his wife, did what he could to enable Wall Street to profit from fraudulent marketing of derivative bundles of residential mortgages, wrapped in phony AAA ratings from stock rating agencies

When Gramm was in Congress he co-authored the Gramm-Leach-Bliley Act that ended the separation of Commercial banking from Investment banking.  His wife, Wendy, as head of the Commodity Futures Trading Commission, issued an order ending regulation of derivative marketing. [I wrote about their destructive careers in a previous post “The Bankinstein Fiends”]

Gramm was, in other words, on WSJ’s speed dial when they needed an author for an article to discredit an economist who published data from three centuries showing an outrageous degree of wealth inequality in developed industrial countries.

Here is a link to Gramm’s response:  Gramm

He couldn’t deny the data cited in Piketty’s book, so he cited other data, based on other criteria to demonstrate that members of the working class in America only imagines that they have seen their standard of living decline while incomes of the top centile and top decile have skyrocketed.  Gramm retorts, “Quit whining.  You’re getting Social Security, EIC money and medicare.  You should be ashamed for engaging in the ‘politics of envy’.  If you want to be rich, go out there and start a new company!”  “So what if you can’t send your kids to college; let ‘em get a loan or go to work at McDonalds”  “If you can’t afford to go to a doctor or the hospital, blame Obama; don’t expect rich people to go without their jet airplanes and 200 foot yachts just so you can feel better.”

You can read this stuff for yourself if you want to clear out your sinuses.  The amazing thing is that so many Americans swallow this garbage.

Afterthought

This will not be the last time I try to absorb Piketty’s message.  I believe he will continue to compile data and to publish the results.  I hope his ideas will become the basis for a more just and equitable division of the wealth created by capitalist nations.

Bob

Capitalism’s Mortality Table

January 26, 2015 § 2 Comments

Summary

This essay is my reaction to Thomas Piketty’s book, Capital in the Twenty-First Century.  Based on a massive database composed of comparative values of labor income, return on capital income and value of capital, Piketty argues that capitalist economic systems trend toward income and wealth inequality.

He warns that, unless this trend is countered by fiscal redistribution of capital values, the trend will, over time, result in intolerable degrees of inequality.  His thesis is generally based on data that shows that the rate of return on capital, which he designates “r” exceeds the growth rate of total income or output generated by the economy, which he designates “g”.  His equation is thus r>g.

Mortality and Economics

We have a unique ability.  We perceive our  own mortality.  As medical science progresses, it becomes increasingly  capable of predicting our life expectancy, based on our life styles, habits and infirmities.  This information, however, is individually specific and typically concerns relatively short time periods.

Mortality tables, instead, are broadly based on aggregate groups based on age, sex and national location.   They analyze longer time periods.

Until recently, we have not had a mortality table to measure the life span of our capitalist economic system.  Thanks to Thomas Piketty, we now have one.

He has compiled, charted and analyzed an unprecedented database of income and wealth measurements in history, gleaned from records kept by industrial capitalist countries including the United States, European nations and Japan.  His data covers the period of time from 1800 to 2012.    Based on that data, he does not furnish us a date certain when capitalism will implode, but he does offer a road map of why it will implode, if several very significant and unprecedented measures are not utilized.

This is an issue that has been the subject of pivotal scholarship since 1776, when Adam Smith’s Wealth of Nations was published.  Smith concluded that capitalism was a perpetual motion machine, guided by “an unseen hand”.  He thought it was immortal.

In 1936, John Maynard Keynes published The General Theory of Employment, Interest and Money.  His book was like Dr. Spock’s 1946 Baby and Child Care.  Keynes diagnosed chronic problems of capitalism and prescribed specific remedies that would avoid their harmful results.  If his directions were followed, the health of capitalism could be maintained, just as Dr. Spock explained how to guide parents’ management of their children’s way through childhood.

Piketty differs from Smith and Keynes in two ways:  He differs from Smith because Smith was not analyzing reality.   He was reasoning a priori, based on unrealistic assumptions about human motivation  and the aggregate effects of that motivation in an unrealistically assumed marketplace.  Piketty, with meticulous discipline, bases his analysis on actual data, acknowledging, step by step, its limits and approximations.

Piketty’s analysis differs from Keynes because his horizons are measured in decades and centuries, while Keynes’ are designed for solutions to problems that  emerge and require solutions in months, sometimes days.

Again, Keynes’ remedies  are  like Dr. Spock’s short term advice for childhood’s time period.  Piketty has constructed mortality tables for use during indeterminate time periods.  [I have not mentioned Marx, but Marx, like Adam Smith, based his prediction of worldwide revolution on assumptions about human motivation that have, so far, proved to be inaccurate.]

A Personal Note

Beginning in February, 2014, I posted four or five essays on this blog about Piketty’s book.  [See Dr. Piketty’s Remedy for Capitalism’s Potentially Terminal Illness and several subsequent posts]  When I wrote those essays I thought the daunting length (over 700 pages) of his book would prevent me from ever reading it.  I also feared my meager knowledge of math would put his analysis beyond my intellectual reach.

Since then two things have happened.  I developed a need for a diversion from worrying about my wife’s health [She has been in hospice care for the past several months.]  So, I bought a Kindle, downloaded the book and began reading.

And, as I delved into the professor’s writing, I discovered that he shared my aversion to complex mathematics, not for lack of ability but because he believes mathematical models have limited utility as tools to explain and analyze macroeconomic phenomena.  He argues that, more often than not, such models are either misleading or irrelevant because they are not firmly rooted in actual data.

He writes, “For far too long economists have sought to define themselves in terms of their supposedly scientific methods. In fact, those methods rely on an immoderate use of mathematical models, which are frequently no more than an excuse for occupying the terrain and masking the vacuity of the content.

And again:  “Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.”

The Piketty Experience

Reading his book is like taking two or three college courses from the same professor, whose syllabus might be entitled “Everything You Ever Wanted to Know About Everything.”  He cites Honore de Balzac and Jane Austin more often than economists.   He refers to the TV series Madmen.  He presents his subject in short essays, using conversational language, punctuated with occasional deadpan humor that surprises you.

He is often at the blackboard, illustrating his lecture with yet another graph.  He weaves his story back and forth from the French Revolution of 1789, to the two world wars and the Great Depression between 1910 and 1950; from the “Gilded Age” to the Great Recession of 2008.   He transitions easily from French politics, to the policies of Margaret Thatcher in Britain, to those of Ronald Reagan in the U.S..

Piketty’s book reminds me of Maurice Ravel’s Bolero.  [If you want to hear what I am referring to, here is a link:  Bolero ][A comment appended to this performance declares that the worst job in a symphony orchestra is drummer during Bolero.]  The professor discusses and analyzes each of the three parts of his argument from every angle, citing several, diverse sources of information about them, but he ties each digression tightly to the relevant elements in his argument.

His message is this:  The return on capital exceeds the growth of the “flow of income” generated by a capitalist economy.  The result is progressively increasing inequality of wealth favoring a dwindling number of very rich people and an expanding number consisting of everyone else.

This happens regardless of periodic cyclical gains and losses.  It happens despite government efforts to counter the dislocations caused by market collapses or periodic “bubbles” resulting from “irrational exuberance”.   The pace of progression may vary and may at times pause but, over time, the direction trends toward inequality.

The reason is twofold:  Those with large stocks of capital cannot consume all  the income generated by their holdings, so they save portions of their income and invest those savings in buying more capital.  And, when they die, they leave their winnings to their heirs, who, thus, begin their lives with an unearned stake which they can invest in still more capital.  So, each generation accelerates the pace and extent of inequality.

Piketty identifies the Great Depression, bracketed by two world wars, as a unique exception to this process.  Those events destroyed so much capital that the trend toward inequality was temporarily interrupted.   His data confirm, however, that the capitalists have recovered and the extent of inequality in western industrial capitalist nations is now equal to or greater than the days of the Gilden Age.

The bottom line is:  Capitalism is like casino gambling:  If  you play long enough you will lose because the house skims off a little of every dollar risked so the odds and the math will get you.  You may escape with some luck and careful decisions, but the crucial decision is to quit while you’re ahead.  In this regard, capitalism is a crueler game than the casino’s:  You can only escape from capitalism by dying.  You could join Edward Snowden in Russia, but that doesn’t look like an improvement.

If you want to review the so-called “laws of capitalism” that Piketty uses to explain his argument,  you can refer to the discussion of them in my “Dr. Piketty” post cited above.  I discussed them and cited an excellent discussion of them in a review of Piketty’s book by Branko Milanovik.

Piketty’s Paradigm Shift

Until I encountered Piketty, I identified the basic difference between liberals and conservatives, in  political terms, as follows:  Liberals believe that government should redistribute income obtained through progressive income taxes to finance expenditures beneficial to the working class.  Conservatives believe that progressive taxation discourages business owners from striving to expand their businesses, invest in innovative improvements in technology, and create the need for employees:  Liberals deride this “trickle-down theory because it assumes that job creation is investment-driven.  Liberals believe job creation is consumer-demand driven and is stimulated by distributing money to lower income workers, who will spend it and, thus create consumer demand.

Piketty has not dissuaded me from these beliefs, but he has convinced me that progressive taxation is insufficient to solve the problem of wealth inequality.  Instead of proposing higher taxes on the wealthy, Piketty proposes to tax capital,  not income.  At first, I didn’t appreciate how fundamentally different this idea is.  If it were implemented, he has convinced me that it would forever change the nature of capitalism.

The free access to investment and encouragement of technological innovation would remain.  But the deception and anti-competition feature of capitalism would be severely thwarted.

Why?  Because, in order to implement the taxation of capital, it would be necessary for the location and existence of capital to become accessible to the taxing authority.  Stringent sanctions would become necessary to prevent the owners of capital from hiding both their property and their ownership.  International agencies, modeled after the International Monetary Fund and other multinational agencies would be employed to deny access to the means of cross-border financing and transfers of funds to any money-storage facility that refused access and disclosure to the capital-taxing authority.

Piketty recognized that taxation of capital would have to be administered multi-nationally.   He proposed a kind of “pilot program” to consist of the Eurozone.  Eventually, he proposed that the taxation be administered on a world-wide basis.  He recognized that this is not feasible now and that much political and educational work must precede such a radical change in the way business is taxed and conducted.

Piketty is like the Surgeon General, warning about cigarettes.  When the first timid warning was issued, nothing much changed.  Smoking was a worldwide habit and business.  It took decades of litigation, research and thousands of warnings and legislative battles before smoking started to decline.

Piketty has notified us that, unless we take steps to redistribute capitalistic wealth, most of us, or our grand-children or their grand-children will be working for, and at the sufferance of a very small group of very greedy people.  And, by that time, the media sources will have convinced everyone that such a system is preferable to all others.

This will not happen if the transparency contemplated by Piketty becomes a source of growing political demand.  The curious thing is that we already have a working model of how it works.  People typically don’t hide their ownership of real property because, if they are not the recorded owners, they cannot use it for collateral to borrow money and, if they don’t pay taxes on it and, thus identify themselves as the owners, the state or someone else may dispossess them.

This system developed here in the U.S.  beginning with the Homestead Act of 1862.  It tolled the end of the “open range” that has been featured in countless western novels and movies.  The history of the development of this system is related in a book, The Mystery of Capital, by Hernando de Soto Polar.  I described my reaction to the book in an essay posted a few years ago.  [See Keeping Up With the Jones’s]

The point is that a system requiring ownership disclosure can be created.  There is no reason why forms of capital other than land could not be subjected to disclosure.   Tax avoiders would not be so eager to transfer their capital to the Cayman Islands if Cayman banks were required to disclose the ownership of it to a multinational taxing authority.  The Piketty tax would be levied on the capital, not on its owner.  But the motivation to hide ownership would be attenuated if stealth could not prevent tax liability.

Perhaps corporate lawyers would transition from being wealth-hiders to property valuation experts.

I don’t want to be too naive about this.  Thomas Kuhn’s The Structure of Scientific Revolutions describes how reluctantly investors wedded to  status quo techniques and “conventional wisdom” yield to new information.  But, they do finally yield, if confronted with undeniable evidence.

Some “ah-ha” Piketty Moments

I know this essay reads like it was written by a college sophomore who just read Walden  or The Theory of the Leisure Class.  As I read Piketty’s book, I did have an echo of that kind of excitement, long since forgotten.  Brain re-wiring is no longer part of my usual intake of information.

1. Piketty has not made me change my moral judgments, but he has given me new ways to see some features of my world.  For example, he explains why he prefers taxation to deficit spending by government:  Deficit spending is paying wealthy investors for money to finance public needs, while taxation gets their money without paying for it.  Public borrowing is justifiable only when there is not enough time for the taxation process to occur.

2.  Inheritance of wealth is a major contributor of wealth inequality.  It is affected by the life expectancy of the population  So, when medical research extends life expectancy, it slows the trend toward wealth inequality.

3.  19th Century fiction featured inherited wealth as a major determinant of a wealthy life style.  20th and 21st Century fiction does not.  The reason is that land is no longer the main component of wealth.  Corporate wealth now dominates.

4.  Piketty writes that we are becoming a culture dominated by managers, not wealthy owners of land who no longer need to work.  He also observes that we now have an elite group of managers who can fix their own salaries, so the size of the salaries is not dependent on the value of the managers’ performance.  At the very top of the economic scale, meritocracy no longer prevails.

5.  One reason the return rate of capital exceeds the growth rate of the economy:  As the size of capital owned by an individual increases, the ability to hire expert financial management dramatically increases.  So, if a person, or a foundation or private fund group owns a billion dollars worth of capital, he or it can easily afford to hire a large team of economic advisers.    A  person owning  a few million dollars worth of capital cannot afford to hire that kind of super-managers with that kind of diverse talent.  And so on, until, as Piketty puts it, the guy with a few hundred thousand dollars to manage has to depend on a CPA and “his brother-in-law”, who furnishes market tips.

The top tier of owners have managers who can find investment opportunities not publicly traded or known to less knowledgeable and less “connected” sources of information.  Piketty cites data to show that the differences between the returns of different sizes of capital ownership are very significant.

Conclusion

I will be returning to the information in this book.  It has already provoked a whole new array of comments, books about it, online interviews and press articles.  I have not yet heard it discussed by politicians or featured on Sunday talk shows.  I may have missed it, because I have limited my weekend commentary to Fareed Zakaria and Steve Kornacki.

My conclusion is:  Piketty has convinced me that the problem he poses is real.  I don’t know how bad it will have to become before it becomes intolerable and his solution becomes feasible.

I am sure of one thing:  Marx’s vision of capitalism’s demise because of the collective outrage of the world’s workers was illusory because it was based on the motives and emotions of its victims.  Piketty’s prediction is based on the internal mechanics of the system.  The implosion will occur, not because of its victims, but because of flaws in the system unless Piketty’s tuneup saves it.

Bob

 

 

How To Incite Violence Redux

December 24, 2014 § Leave a comment

Several Weeks ago I posted an essay entitled “How To Incite Violence”.  It was a response to the decision of Benjamin Netanyahu to demolish the homes of the Palestinians who murdered people at a mosque.  Some of the reaction to the murders of two New York police officers reminds me of that essay.

Solidarity Is Not Served By a Declaration of War

Pat lynch, president of a NY police union, erupted after the murders with a disgusting accusation that NY Mayor de Blasio was complicit with the  murderer because the Mayor has defended the right of New Yorkers to protest the police killing of unarmed black men and, as the husband  in a mixed marriage, has described how he felt obligated to warn his son to regard policemen with extreme caution and some fear.

Lynch, speaking soon after the murders, used a televised interview to spew the following accusation:  “[There is] blood on many hands tonight” [including] “those that incited violence on the street under the guise of protest” [and starting with] “the office of the mayor.”

It is hard to imagine a more irresponsible and ignorant way for a union leader to behave.  While leaders in the black community,  surviving family members of the young men who were killed, the Attorney General and the President of the United States, have denounced violence, but vowed to protect the rights of the protesters, Lynch chose to demagogue the issue by blaming the Mayor and the protesters for the violence of a mentally deranged assassin.

Any fool can see that the most dangerous outcome of the events of the past few weeks is a complete rupture of trust and cooperation between the black communities of America and the police forces upon whom they depend for protection.  That result leads to a perception of the police as an enemy occupying paramilitary force.  The most likely reaction to that perception is the development of guerrilla tactics by the occupied against the occupiers.

That result is not necessary.  No one believes that all, or even most policemen are murderous bigots.  But, when the elected leader of the police declares war on those who are seeking relief from what they see as police abuse by some policemen, as well as on the public figures who acknowledge the reasonableness of their quest, it promotes the idea that, in fact, all the police are the enemy.

Guerrilla wars are brutal, bloody and hard to end or win.  Ask the French about Algiers.  Ask the veterans of the Vietnam war.  Ask the British about the IRA.  We don’t want a guerrilla war against the police in the ghettos of America.  That’s why Pat Lynch is an idiot.

The Real Problem

There is similarity between the reaction of Pat Lynch to the protesters and the reaction of Netanyahu to Palestinian murderers.  Both willfully ignore the real sources of incitement of hostility toward those they represent.  In both cases, the hostility is born of months and years of daily debasement and harassment, occasionally punctuated with episodes of lethal violence.  In Gaza and the West Bank, it consists of annoying check points, travel restrictions, unjustified armed confrontations, and debilitating interference with normal commerce.  In the minority communities of America, it consists of “stop and frisk” policies, unjustified automobile stops by armed police, so called “driving while black” arrests and detention, needless casual violence during these episodes involving having one’s head slammed into the hood of a car and being ordered, at gun point, to prostrate oneself on the ground and being strangled to death if that order is resisted.

Reactions to these practices become, over time, generalized cultural smouldering anger, transmitted from one generation to the next.  They incite hostility, anger and distrust toward those responsible for them.  When this morphs into  organized protests, it is stupid to conclude that the protests incited the hostility, anger and distrust.

This is the kind of absurdity that characterized the claims that “outside agitators” were responsible for the civil rights protests in the South in the 60’s.  Pat Lynch has joined the pantheon of crackers who whined to news interviewers that “These outsiders are just stirring up our nigras and causing trouble.”

A Recommendation

One reason for this rant is an excellent op/ed piece in today’s Haaretz newspaper.  This professional writer expresses these ideas better than I can.

Here is a link:  Haaretz

Bob

 

Professor Kuttner’s Indictment

December 20, 2014 § Leave a comment

I recently finished reading “Debtor’s Prison”, the latest of several books written by Robert Kuttner, editor of American Prospect magazine and visiting professor at Brandeis University.   This was a recommendation from professor Milton Lower, my economics mentor.

This is an angry book but the writer does not waste space expressing his anger.  Instead he paints a vivid picture of a four-century history of stupidity, avarice and oppression that is well calculated to evoke anger in any reader equipped with even a vestigial conscience.

The History of Bankruptcy Law

The book guides you through a history of bankruptcy law,  various economic booms and busts and governmental reactions to them.  It is laced with nuggets of interesting details.

For example, did you know that Daniel Defoe (yes, the one who wrote Robinson Crusoe), played a significant role in redesigning English bankruptcy law by injecting the idea that it might be wise to let defaulting debtors remain free to work and earn money with which to pay their debts, instead of leaving  them to rot in jail?  Neither did I until I read this book.

I will not try to summarize the history that Kuttner narrates.  His thesis is that bankruptcy law was historically designed to rescue investors and business proprietors whose choices and judgments proved to be disastrous.  Individuals, by contrast, who, for whatever reason, found themselves unable to pay debts incurred to finance their consumer purchases, their rent or other private obligations, were regarded as immoral wastrels entitled to no remedy except confinement in prison.

Government Debt

About two-thirds of Kuttner’s book concern the treatment of government debt.  He contrasts two different political reactions to government debt.

The Austerity Solution

One reaction is based on fear that government debt will lead to inflation by increasing the money supply and hence, reduce the value of wealth, including bonds and other forms of contractual debt (e.g. mortgages).  This causes the wealthier segment of society to pressure government to reduce debt.

There are two ways to do that:  raise taxes and cut expenses.  Because we have a progressive tax system, raising taxes is despised even more than government debt by those with wealth.  So, austerity is the constant battle cry of the wealthy, especially the rentier class, whose wealth and income consists of holding and manipulating financial obligations, not producing real goods and services.

The Consumer Demand Solution

The solution favored by Kuttner is to use government expenditures to transfer wealth, obtained either through taxation or by incurring more debt, to the working class segment of society, thus facilitating their demand for goods and services, thus creating more income for those whose businesses satisfy that demand, thus increasing taxable revenue  and thus enabling government to reduce its debt.

In other words, to Kuttner, austerity remedies for excessive government debt is like using gasoline to put out a fire.

The Moral Argument

One idea that recurs throughout Kuttner’s book is his rejection of the argument that affording relief from debt is immoral.  He identifies this morality argument as the basis for many of the harmful policies adopted by governments to deal with debt problems.  He recounts and discusses the Rick Santelli rant that triggered the launch of the Tea Party in U.S. politics.  As the collapse of the housing bubble began, Santelli erupted in a televised angry spiel, complaining that improvident home purchasers should not be helped because that would be unfair to others who had not defaulted on their mortgages.

As Kuttner notes,  Santelli stupidly failed to mention that fire sales of foreclosed homes would drive down neighborhood home values, regardless of whether the owners were current on the their mortgage payments.

Another example:  After WWI, Britain, France and other allies spent decades trying to punish Germany for its “war guilt” by requiring it to pay a huge “war debt”.  This was obviously impossible, because the war left Germany economically prostrate, but the victorious nations, like stupid Santelli, failed to perceive the generalized damage to the entire European economy caused by keeping Germany from regaining economic stability and resuming trade with its neighbors.

Kuttner contrasts the treatment of Germany following WWI with the treatment of Germany, Italy and Japan following WWII, when the Marshal plan and other measures designed to restore their economies to economic health proved beneficial, both to them and to the economies of the allied nations who had defeated them in the war.

Kuttner also identifies the policies of Angela Merkel and her influence on the European Union’s policies toward Greece, Italy and Spain.  He recounts how her insistence on stringent austerity requirements as a price for the EU’s assistance to those struggling economies needlessly condemned their populations to impoverishment and hampered their ability to recover from their financial problems.  Chancellor Merkel, according to Kuttner, suffers from the Santelli stupidity virus.  By extending their impoverishment, their EU trading partners suffer from diminished export markets.

Kuttner also recounts the history of the IMF, beginning with its Bretton Woods birth, when it promised to be a useful central bank with resources available to restore nations from economic crises.  He describes how it was overtaken by bankers who subscribe to the Merkel-Santelli doctrine.  Now it requires that, in exchange for its help, a country must condemn its population to decades of poverty and deprivation.

As a result, in the wake of the current world-wide recession, some nations, notably India, have refused to deal with the IMF, preferring instead to cope with their economic problems with policies of their own.  As a result,  their recovery has been less traumatic and quicker than their neighbors’, who received “help” from the IMF.

Pete Peterson – Man of Many Wrecking Crews

Kuttner’s book includes a remarkable description of how a single wealthy man, Pete Peterson, has been able, over several decades, to be a significant force behind a wide array of America’s fiscal and economic policies.  Kuttner catalogs a remarkable number of ways this billionaire has managed to pick cabinet members, influence Fed policies, buy college and university curricula designed to indoctrinate generations of business school graduates and economists with Peterson’s right-wing ideology.

In this brief summary I can’t do justice to Kuttner’s carefully researched list of Peterson’s accomplishments.  I can only assure you that, as described by Kuttner, Peterson makes the Koch Brothers look like amateurs.  The Kochs merely buy politicians.  Peterson buys the minds of thousands of people who occupy jobs where they can do more damage in a month than a U.S.Senator can do in years.

Referring to Peterson, Kuttner writes:

“A former commerce secretary under Richard Nixon, he is personally close to Democratic economic eminence Robert Rubin.  The two have long promoted the idea of a grand fiscal bargain in which Democrats agree to cut social insurance and Republicans agree to higher taxes.  Peterson served as chairman of the Council on Foreign Relations, and in 2002 he led the search committee that successfully recommended Rubin protege Timothy Geithner as president of the Federal Reserve Bank of New York.  One can assume that Geithner, later Obama’s Treasury secretary, returns Peterson’s calls.

Peterson has spread his money around, giving over $50 million dollars to the influential Institute of International Economics, long headed by Democrat C.Fred Bergsten.  The outfit was duly renamed the Peterson Institute For International Economics, a separate entity from the Peterson Foundation.

This is by no means all of Peterson’s accomplishments.  It is troubling for me to realize how much this man has been able to buy adherence to his ideas and to insinuate them into the operational policies of America.  It is troubling because, as described by Kuttner, they make not the slightest sense except to enrich the wealthy and beggar the rest of us.

Conclusion

This is a useful and important book.  Its revelations enable you to see today’s political debates with a new pair of glasses.  My comments have covered only a small taste of the information in it.  I recommend it if you crave the ability to understand some of the context surrounding the current debates about the deficit, tax reform and the global economic market place.

 

 

 

 

 

 

Follow

Get every new post delivered to your Inbox.

Join 256 other followers

%d bloggers like this: