January 26, 2015 § 2 Comments
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.
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.
September 3, 2014 § 6 Comments
I have a proposal for consideration. I know that, at least for today, it has no chance of any consideration. It may be a permanent “non-starter”, the common euphemism for a fatuous fantasy. Still, because I have been thinking about it, I have decided to own it by posting it on the internet.
I propose that the United States Congress enact a law requiring every citizen of the United States, on the day he or she becomes eighteen years of age, be drafted into public service for a period of two years. No exemptions should be granted for physical impairment (unless the impairment is so severe that the person is unable to perform any useful work). No exemption should be granted to permit the person to attend an educational institution.
The draftee should be permitted to apply for available types of public service and the applications should be approved or denied by boards of citizens residing in the communities where the draftees live (similar to draft boards during WWII).
Those decisions should be based on a quota system established to insure that enough applicants are approved to perform all the tasks and goals set for public service during the period for which the draftee is being considered. One of the categories of public service should be military service. That category should be large enough to insure that the national security requirements of the nation are satisfied.
The non-military categories would consist of such tasks as public park construction and repair; public school construction and repair; teacher aide and student mentoring; expanding the availability of health care to under served communities with supervised health care trainees; and other public service jobs. The model would be the CCC program of the 1930’s.
One feature of this program should be the extension of the GI Bill to insure that each draftee is able to enroll in a college, university, technical school or apprentice program for a period of at least four years. It should provide for payment of tuition and a stipend sufficient to support the draftees who choose to take advantage of the education benefit.
The Draftees’ Reaction
I assume the young people would complain about this idea, but spending two years between high school and college, some job or career wouldn’t damage them as much as they might think. After all, we all live longer now, so they’d have had plenty of time to make mistakes after they reached twenty. Getting a late start wouldn’t be so bad.
When I was eighteen, I had the results of polio and didn’t qualify for the draft. But I would have been happy to join this kind of program. I probably would have married my sweetheart, just like I did. We would have found some way to work together and we would have been fine, probably better than the way it actually happened. Who knows? One thing sure. It wouldn’t have been the end of the world.
This would address five problems.
First, it would moderate the eagerness of our population to goad our government toward military solutions for world problems. If our military forces consisted of a general cross section of our population, mothers would not be so sanguine about going to war.
Second, it would transfer a sizable amount of money to American young people as well as furnishing them with employment alternatives to gang membership, drug culture and irresponsible idleness.
Third, it would enable generations of Americans to get college educations.
Fourth, the transfer of money the program would help to solve the inequality problem presented by Thomas Picketty.
Finally, it would encourage a sense of community and involvement in public service, a counter measure against the current and growing culture that foments division and suspicion, especially based on hatred of democratically elected government.
Well, if you’ve read this far, you’re probably shaking your head and have concluded that Bob has finally lost his last marble. I know this is a fairy tale today. I don’t like professional armies. I don’t like wealth inequality. I don’t like price tags on higher education that limit it to a dwindling elite class. I don’t like military cops and center city crime and a criminal justice system that jails generations of mostly black young men. I think this would address those issues.
What do you think?
June 10, 2014 § Leave a comment
In the last forty eight hours I have read some articles indicating to me that we face a formidable, perhaps insurmountable, problem. It is not a new problem but the arithmetic provided by Thomas Picketty makes our likely future seem especially galling. To illustrate what I mean, let me suggest other , analogous examples.
We have effective vaccines to prevent measles and other forms of childhood illnesses. But a significant segment of our population refuses to vaccinate their children because they have found statements on the web claiming that vaccines are dangerous. No matter how many physicians go on TV to debunk these claims, those parents still insist on “protecting” their children from vaccines.
Another example: The overwhelming majority of respected scientists have been shouting for years that fossil fuel is causing climate changes that threaten significant portions of the planet. We know how to reduce this threat by limiting the use of those fuels But implementing regulations to effect those limits has proved to be politically difficult. It seems likely that, by the time we finally take appropriate steps to protect ourselves, it will be too late to avoid many of the destructive results of climate change.
Another example: Evolution has long been an accepted scientific explanation for the history of our species. Physiology, anthropology, archeology, much of medical research, and virtually all other scientific disciplines are based, to some extent, on the theory of evolution. But Charles Blow, in an article in the NY Times two days ago, reported that a recent poll showed that thirty-two percent of Americans believe that the world was created 10,00 years ago, just as Genesis states. What’s more, since their belief is based on their religious creed, any faltering doubt they might have will, as they see things, threaten them with divine punishment, so confronting them with evidence contrary to that idea is pointless.
And, of course, as I have remarked before: George W. Bush was re-elected in 2004.
So, given these examples and this history, I am pessimistic about the likelihood of a rational response to Picketty’s evidence that we face a worldwide progressive redistribution of wealth to a smaller and smaller group of oligarchs, while the rest of the world’s population languishes in a steadily expanding slough of poverty or near poverty, with no significant prospect of escaping from it. Here is a link to an article that predicts that, during the next five years, the wealth of the world’s population of millionaires, who, in 2013 controlled $8.4 trillion in wealth, will, by 2018 control $13.0 trillion. During that five years, the projected gap between those oligarchs and the rest of us will grow dramatically.
One more bit of news: Like you, I often see any indication of rising wage rates equated with the threat of inflation. Here are some facts that establish, at least to my satisfaction, that rising profits have been the main, in fact the only, source of inflation since the end of the recession.
These facts establish, it seems to me, that our economic system unfairly rewards the rich few and does a poor job of sharing wealth with the working class. Most western countries, where these circumstances prevail, are democracies. That means that there are non-violent means of correcting this obvious injustice. The problem, however, is succinctly stated by a popular comedian, Ron White. His remarks are crude, tasteless and sexist. His message, however, worth considering: Our Picketty problem may be that you can’t fix stupid.
June 6, 2014 § 1 Comment
As my friends know, I am usually more critical than celebratory about religion and its influence on politics. I have had to re-examine that attitude since Francis has become Pope. Recently a Cardinal from Argentina, Cardinal Oscar Rodriguez Maradiaga, made a speech at a conference on Catholicism and Libertarianism held in Washington near he Capitol. Here is a link to some of his remarks: Speech .
You can’t get much plainer than that! Paul Ryan’s next confession should be interesting.
I didn’t wade through the comments, but I read enough to let me see the interesting dialogue that goes on between rank-and-file Catholics and non-Catholics about the Church’s doctrine concerning abortion, homosexuality, contraception and other issues. It is clear to me that, regardless of these issues, the new Pope and his supporters are establishing a new public face of the Catholic Church. As our political interest focuses more on our Chicano bothers and sisters, this is a welcome development.