Anti Thomas Piketty

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Thomas Piketty Is A Darwinian Shill

April 7 2014

The new economics book everyone is talking about is Thomas Piketty’s Capital in the 21st Century. Piketty made his name a few years ago by coining the term the “top 1%.” Now in this volume of 700 pages, he makes the case that the market economy so conduces to inequality that the only corrective is wealth taxes coupled with a steeply progressive income tax.

Piketty praises the United States for being the innovator in progressive taxation. He has a point. The income tax in the United States, birthed in 1913, had a top rate of 77% in 1918, and after a respite in the 1920 through 1931, had top rates of 63%-79% in the 1930s, upwards of 94% in the 1940s, 91% throughout the 1950s, and 70% up until Ronald Reagan in 1981. Today we just about touch 40%.

The golden age of taxing high earners, “1930-1975” by Piketty’s reckoning, accompanied the only compression of inequality in the entire era inaugurated by the industrial revolution centuries ago. Absent high taxes on the rich and high earners, Piketty argues, the record shows that inequality under the aegis of “capitalism” has always been massive. And that kind of inequality, if sustained, is inimical to democracy and the general flourishing of society.

Piketty drops Karl Marx’s name over and over again in this book. Enough to make you think that he’s hiding something. Such as the possibility that he is shilling for Charles Darwin.

Darwin argued, back in the 19th century (just when Marx was writing), that biological species do amazing things to adapt to inhospitable circumstances in order to survive and then prevail. “Social Darwinism” arose to describe how the same processes affect human institutions and affairs.

How does this apply to government?

One of the deadliest threats with which government has ever had to contend, over the entire pageant of human history, was the immense wealth and mass affluence generated by the industrial revolution. The usual metrics point to the exponential growth of goods and services from 1750 until 1914 if not 1929.

Exponential growth of what we call the private or the “real” sector of the economy—everything that is not government—means that government also has to grow exponentially in order even to be detectable. Moreover, one can ask: if exponential real-sector growth occurs over the long run, what possible need could civilization have for government?

By the latter portion of the 19th century, when population was rising at a historic rate, yet nowhere near the rate of economic growth—a trend which had been holding for a century—it became reasonable to consider that the further advance of the industrial revolution would eliminate any kind of justification of government. If there was inequality—fortunes blown on overpriced art, parties, mansions, and lame heirs—it would prove deadly to government if society worked out this problem on its own.

Government was on notice: it had to break the momentum of the industrial revolution, as well as compromise the private sector’s ability to solve its own problems, or else face mortality.

World War I was a keen effort to lure the masses away from their pursuits in the real sector to pursuits in the government sector, which is to say trench warfare. In the offing, the real sector took a big hit (economic production in France dropped by fully a third from 1914 to 1918).

But it remains the Great Depression that has proven the best thing that has ever happened to government in modern times. To this day, memory of the 1930s is still there in the global psyche, convincing people that the market cannot go on unchecked, that government has to be nice and big in order for there to be prosperity and economic justice.

Cui bono—who benefited—from the Great Depression? Government did. Therefore one should ask, did government procure it? Well, yes, says the most advanced thinking. The monetary, tax, regulatory, spending, and trade-restriction powers were all jacked up as the Great Contraction got going 1929-33. Signals got mixed, “capitalism” got the blame, and we haven’t been able to imagine life without government since.

As he accepted the Nobel Prize in 1999, economist Robbert Mundell said, “The deflation of the 1930s has to be seen, not as a unique ‘crisis of capitalism,’ as the Marxists were prone to say, but as a continuation of a pattern that had appeared with considerable predictability before—whenever countries [read: governments] shift onto or return to a monetary standard.” And then this: “Had the price of gold been raised in the late 1920s, or, alternatively, had the major central banks pursued policies of price stability…there would have been no Great Depression, no Nazi revolution and no World War II.”

Interesting. Government could have pursued policies that would have averted the government-engorging events of the 1930s and 1940s. But why would it do that in the face of a real sector with a record of exponential growth? It would have been writing its own death sentence.

Public choice economics has been teaching for half a century now, and care of two Nobel laureates (James Buchanan and Elinor Ostrom, who unaccountably rate no mentions in Piketty’s book), that government’s motives are lower than those of the actors in the real-sector economy. This is so by definition. If an industrial revolution is going on, tossing off abundance like nobody’s business, and you seek out a coercive alternative, something about you is weird and wrong.

The 19th century—Karl Marx’s time—was that of the exponentially-growing economy. The 20th century was that of the government’s wily attempts to regain relevance, at the expense of the fantastic real economy, with world wars and other hideous things thrown in for good measure. We entered the 20th century wondering if government really had a purpose, and in the 21st century we are sure it does. Now Thomas Piketty wants to aggrandize the non-real sector with fat taxation.

These are the rules of the jungle—or more properly, the scam of the blob-parasite that’s trying to get by and ruin things in an otherwise wonderful world. Clearheaded Darwinian animals would just expunge this thing and be done with the threat. The challenge of the 21st century will be to see if we have the courage and the foresight—for we certainly have the means—to permit government to expire.

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All of the reasons why the No. 1 book on Amazon — and the left’s most hyped book of the year — is wrong

Apr. 22, 2014

Last month, we noted that Leftist economist Thomas Piketty’s “Capital in the Twenty-First Century” had gone viral in the progressive intellectual sphere. We also noted that given the institutions lavishing praise on the book, and the hype echoing throughout the blogosphere, that the book could be of primary importance for years to come in justifying the left’s agenda on income inequality, taxation and economics more broadly.

As the book has climbed the charts to No. 1 on Amazon, the articles have not stopped coming, with two glowing profiles of Piketty just this week.

The left’s love-affair with Piketty’s Marx-inspired title should come as no surprise given that the book gives intellectual credence to the argument that inequality is the great problem of our time — the inevitable outcome of capitalism in Piketty’s view — along with a set of progressive policy “solutions” to counteract capitalism’s perceived deficiencies. These solutions include implementing a global annual progressive wealth tax, and levying an 80% tax on incomes of $500,000 or $1 million a year and up.

But various commentators have started to push back on the Piketty phenomenon.
Below is a round-up of some of the arguments being leveled against Piketty’s magnum opus thus far:

Writing in Bloomberg, columnist Clive Crook argues in an article entitled “The Most Important Book Ever is All Wrong,” that as the title suggests, Crook’s arguments are illogical and his primary focus on inequality is misguided:

“There’s a persistent tension between the limits of the data he presents and the grandiosity of the conclusions he draws. At times this borders on schizophrenia. In introducing each set of data, he’s all caution and modesty, as he should be, because measurement problems arise at every stage. Almost in the next paragraph, he states a conclusion that goes beyond what the data would support even if it were unimpeachable.

This tendency is apparent all through the book, but most marked at the end, when he sums up his findings about “the central contradiction of capitalism”:

The inequality r>g [the rate of return on capital is greater than the rate of economic growth] implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future. The consequences for the long-term dynamics of the wealth distribution are potentially terrifying …

Every claim in that dramatic summing up is either unsupported or contradicted by Piketty’s own data and analysis. (I’m not counting the unintelligible. The past devours the future?)”

Piketty views inequality as the crucial issue of our time, which while satisfying a large audience, neglects the more important issue of wages and living standards 

“Piketty’s terror at rising inequality is an important data point for the reader. It has perhaps influenced his judgment and his tendentious reading of his own evidence. It could also explain why the book has been greeted with such erotic intensity: It meets the need for a work of deep research and scholarly respectability which affirms that inequality, as Cassidy remarked, is “a defining issue of our era.”

Maybe. But nobody should think it’s the only issue. For Piketty, it is…

Over the course of history, capital accumulation has yielded growth in living standards that people in earlier centuries could not have imagined, let alone predicted — and it wasn’t just the owners of capital who benefited. Future capital accumulation may or may not increase the capital share of output; it may or may not widen inequality. If it does, that’s a bad thing, and governments should act. But even if it does, it won’t matter as much as whether and how quickly wages and living standards rise.

That is, or ought to be, the defining issue of our era, and it’s one on which “Capital in the 21st Century” has almost nothing to say.”

Writing in Foreign Affairs, Economist Tyler Cowen has a number of issues with Piketty’s book, including but not limited to the following:

Piketty’s main thesis that the rate of return on wealth will outpace the rate of economic growth — leading to growing wealth inequality — is questionable

“…in too many parts of his argument, he seems to assume that investors can reap such returns automatically, with the mere passage of time, rather than as the result of strategic risk taking. A more accurate picture of the rate of return would incorporate risk and take into account the fact that although the stock of capital typically grows each year, sudden reversals and retrenchments are inevitable…it is difficult to share his confidence that the rate [of return on wealth]…is likely to be higher than the growth rate of the economy. Normally, economists think of the rate of return on capital as diminishing as investors accumulate more capital, since the most profitable investment opportunities are taken first. But in Piketty’s model, lucrative overseas investments and the growing financial sophistication of the superwealthy keep capital returns permanently high. The more prosaic reality is that most capital stays in its home country and also has a hard time beating randomly selected stocks. For those reasons, the future of capital income looks far less glamorous than Piketty argues.”

We do not and cannot know what assets (including the capital Piketty focuses on like stocks) are going to provide the greatest return going forward

“economists, such as Friedrich Hayek and the other thinkers who belonged to the so-called Austrian School, understood that it is almost impossible to predict which factors of production will provide the most robust returns, since future economic outcomes will depend on the dynamic and essentially unforeseeable opportunities created by future entrepreneurs. In this sense, Piketty is like a modern-day Ricardo, betting too much on the significance of one asset in the long run: namely, the kind of sophisticated equity capital that the wealthy happen to hold today.”

Piketty’s fear of inherited wealth perpetuating itself for generations is misplaced; wealth circulates and grows

“Far from creating a stagnant class of rentiers, growing capital wealth has allowed for the fairly dynamic circulation of financial elites. Today, the Rockefeller, Carnegie, and Ford family fortunes are quite dispersed, and the benefactors of those estates hardly run the United States, or even rival Bill Gates or Warren Buffett in the financial rankings. Gates’ heirs will probably inherit billions, but in all likelihood, their fortunes will also be surpassed by those of future innovators and tycoons, most of whom will not come from millionaire families…

the success of certain immigrant groups suggests that cultural factors play a more significant role in mobility than does the capital-to-income ratio, since the children and grandchildren of immigrants from those groups tend to advance socioeconomically even if their forebears arrived without much in the way of accumulated fortunes…

many wealth accumulators never fully diversify their holdings, or even come close to doing so…over time such concentrations of financial interest hasten the circulation of elites by making it possible for the wealthy to suffer large losses very rapidly…And in the end, even the most successful companies will someday fall, and the fortunes associated with them will dissipate. In the very long run, the most significant gains will be reaped by institutions that are forward-looking and rational enough to fully diversify.”

A high ratio of capital (or wealth) to income is not necessarily a bad thing for society as a whole, nor is a low ratio the driving factor behind economic progress

“the nineteenth century, with its high capital-to-income ratios, was in fact one of the most dynamic periods of European history. Stocks of wealth stimulated invention by liberating creators from the immediate demands of the marketplace and allowing them to explore their fancies, enriching generations to come…

But his book does not convincingly establish that the ratio is important or revealing enough to serve as the key to understanding significant social change. If wealth keeps on rising relative to income, but wages also go up, most people will be happy. Of course, in the past few decades, median wages have been stagnant in many developed countries, including the United States. But the real issue, then, is wages — not wealth…

Two other factors have proved much more important: technological changes during the past few decades that have created a globalized labor market that rewards those with technical knowledge and computer skills and competition for low-skilled jobs from labor forces overseas, especially China. Piketty discusses both of those issues, but he puts them to the side rather than front and center.”

A global annual progressive wealth tax will have a number of negative effects, which Piketty discounts or completely neglects

“Although he recognizes the obvious political infeasibility of such a plan, Piketty has nothing to say about the practical difficulties, distorting effects, and potential for abuse that would inevitably accompany such intense government control of the economy. He points to estimates he has previously published in academic papers as evidence that such a confiscatory regime would not harm the labor supply in the short term. But he neglects the fact that in the long run, taxes of that level would surely lower investments in human capital and the creation of new businesses. Nor does he recognize one crucial implication of his own argument about the power of nondiminishing capital returns: if capital is so mobile and dynamic that it can avoid diminishing returns, as Piketty claims, then it will probably also avoid being taxed, which means that the search for tax revenue will have to shift elsewhere, and governments will find that soaking the rich does not really work.“

Piketty trusts governments and politicians over successful citizens

“The simple fact is that large wealth taxes do not mesh well with the norms and practices required by a successful and prosperous capitalist democracy. It is hard to find well-functioning societies based on anything other than strong legal, political, and institutional respect and support for their most successful citizens. Therein lies the most fundamental problem with Piketty’s policy proposals: the best parts of his book argue that, left unchecked, capital and capitalists inevitably accrue too much power — and yet Piketty seems to believe that governments and politicians are somehow exempt from the same dynamic.“

Writing in the New York Sun, the paper’s editors argue that the rise in inequality since 1971 — a key focus of Piketty’s book — happens to coincide with Nixon’s ending of any semblance of a gold standard, which Piketty et al overlook:

“what about the possibility that it was in the middle of 1971, in August, that America closed the gold window at which it was supposed to redeem in specie dollars presented by foreign central banks [that income inequality began to rise]. That was the default that ended the era of the Bretton Woods monetary system.

That’s the default that opened the age of fiat money. Or the era that President Nixon supposedly summed up in with Milton Friedman’s immortal words, “We’re all Keynesians now.” This is an age that has seen a sharp change in unemployment patterns. Before this date, unemployment was, by today’s standards, low. This was a pattern that held in Europe (these columns wrote about it in “George Soros’ Two Cents“) and in America (“Yellen’s Missing Jobs“). From 1947 to 1971, unemployment in America ran at the average rate of 4.7%; since 1971 the average unemployment rate has averaged 6.4%. Could this have been a factor in the soaring income inequality that also emerged in the age of fiat money?

This is the question the liberals don’t want to discuss, even acknowledge. They are never going to get it out of their heads that the gold standard is a barbarous relic. They have spent so much of their capital ridiculing the idea of honest money that they daren’t open up the question. It doesn’t take a Ph.D. from MIT or Princeton, however, to imagine that in an age of fiat money, the top decile would have an easier time making hay than would the denizens of the other nine deciles, who aren’t trained in the art of swaps and derivatives.”

Writing at RealClearMarkets, Diana Furchtgott-Roth argues that Piketty is completely wrong on the minimum wage:

“The political biases of Capital are nowhere more obvious than in Piketty’s errors in his account of minimum wage levels in the United States…

[After noting an error in Piketty's commentary on the changes to the federal minimum wage level from 1980-1990] One might overlook one isolated error as sloppiness to which we are all susceptible. But Professor Piketty’s supposed history of changes in the minimum wage is not tarnished by a single error, but by a vast array of systematic errors. His history is pure revisionist fiction, and revisionist fiction with a political purpose: making Democratic presidents look magnanimous and Republican presidents look uncaring…over the past quarter century, the period Piketty describes as showing a dramatic increase in inequality, Republican presidents signed into law larger percentage increases in the minimum wage than did Democratic presidents. Piketty’s analysis of the advantages of increasing the minimum wage neglects negative employment effects on low-skill individuals…Piketty fails to admit is that raising the minimum wage prevents people with skills lower than the minimum from getting jobs…

Piketty writes that “there is no doubt that the minimum wage plays an essential role in the formation and evolution of wage inequalities, as the French and U.S. experience show.” It also plays an essential role in employment. Without a job, you cannot be counted as a player in the income inequality game.”

Writing in the Wall Street Journal, fund manager Daniel Shuchman argues that the policy solutions that Piketty proposes are not meant to remedy income inequality, but to put an end to high-income earners altogether. To wit:

“Mr. Piketty urges an 80% tax rate on incomes starting at “$500,000 or $1 million.” This is not to raise money for education or to increase unemployment benefits. Quite the contrary, he does not expect such a tax to bring in much revenue, because its purpose is simply “to put an end to such incomes.” It will also be necessary to impose a 50%-60% tax rate on incomes as low as $200,000 to develop “the meager US social state.” There must be an annual wealth tax as high as 10% on the largest fortunes and a one-time assessment as high as 20% on much lower levels of existing wealth. He breezily assures us that none of this would reduce economic growth, productivity, entrepreneurship or innovation…

He views equality of outcome as the ultimate end and solely for its own sake. Alternative objectives—such as maximizing the overall wealth of society or increasing economic liberty or seeking the greatest possible equality of opportunity or even, as in the philosophy of John Rawls, ensuring that the welfare of the least well-off is maximized—are scarcely mentioned…

Mr. Piketty is not the first utopian visionary…He says that his solutions provide a “less violent and more efficient response to the eternal problem of private capital and its return.” Instead of Austen and Balzac, the professor ought to read “Animal Farm” and “Darkness at Noon.”

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What Thomas Piketty’s Popularity Tells Us About The Liberal Press

APRIL 23, 2014

As I write this, Thomas Piketty’s book “Capital in the Twenty-First Century” is #1 on Amazon. It’s been deemed an “important book” by a bunch of smart people. Why not? It validates many of the preconceived notions progressives have about capitalism: Inequality is growing. Mobility is shrinking. Meritocracy is dead. We all live in a sprawling zero-sum fallacy. And so on.

The book, as you probably know, has also sparked nonstop conversation in political and media circles. Though it’s best to let economists debunk Piketty’s methodology and data, it is worth pointing out that liberal pundits and writers have not only enthusiastically and unconditionally embraced a book on economics, or even a run-of-the-mill leftist polemic, but a hard-left manifesto.

Now, I realize we’re all supposed to accept the fact that conservatives are alone in embracing fringe economic ideas. But how does a book that evokes Marx and talks about tweaking the Soviet experiment find so much love from people who consider themselves rational, evidence-driven moderates?

Put it this way: It’s unlikely that Democrats would have praised a book like this 20 years ago – or even 10. Nowadays, Jack Lew – better known as the Treasury Secretary of the United States of America - takes time to chit chat with the author.

Piketty, a professor at the Paris School of Economics, argues that capitalism allocates resources efficiently but unfairly apportions income. And the excessive accumulation of wealth by the one percent – nay, the .01 percent — is not only corrupt, but an inequality that makes democracy unsustainable. And it’s going to get worse. So only a massive transfer of wealth could make our nation whole again.

Here is his thesis, boiled down:

When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.

I’d ask if there are any historical examples that prove that skewed wealth in a generally prosperous nation is more damaging to its democratic institutions than the reallocation of wealth by a coercive state. But then I realize, as with any Marxist revival, the answer is: This time we’re gonna do it right!

Judging from the political rhetoric of the day, liberals already believe that higher taxes on the wealthy can create more opportunity for the poor and middle class. While some of us would argue that the nexus between high taxes and economic growth is tenuous, debating whether the top marginal tax rate should be 25 or 33 or 35 percent is well within the boundaries of a centrist debate. But that’s not Piketty’s position.

Here’s how Daniel Shuchman put it in a recent Wall Street Journal review:

Mr. Piketty urges an 80% tax rate on incomes starting at “$500,000 or $1 million.” This is not to raise money for education or to increase unemployment benefits. Quite the contrary, he does not expect such a tax to bring in much revenue, because its purpose is simply “to put an end to such incomes.”

Imagine there’s no rich people. You can say he’s a dreamer, but he’s not the only one.

Piketty also advocates for a 60-percent tax rate on those making $200,000 and an additional worldwide tax on wealth. Do his fans want to eliminate high-wage earners to create a fairer society? Is $1 million too low? How about anyone making $5 million a year? Or $10 million? Does that sound crazy? Well, here’s piece from a well-read pundit advocating for “confiscatory taxation.” We’ll work our way to Piketty’s position.

Fact is, the tax hikes offered by even the most progressive elected Democrats wouldn’t alter the dynamics of “fairness” in a society with a $16 trillion GDP. To put it into perspective, ending Bush-era cuts may net the treasury $80 billion yearly. If Piketty’s clairvoyance is to be trusted, and I’m assured it can — we will need to transfer trillions of dollars from one class to another just save our society from disaster. And none of this, according to the author, will destroy economic growth.

Like many progressives, Piketty doesn’t really believe most people deserve their wealth anyway, so confiscating it presents no real moral dilemma. He also argues that we can measure a person’s productivity and the value of a worker (namely, low-skilled laborers), while at the same time he argues that other groups of workers (namely, the kind of people he doesn’t admire) are bequeathed undeserved “arbitrary” salaries. What tangible benefit does a stockbroker or a Kulak or an explanatory journalist offer society, after all?

Sounds familiar. What is to be done? Do we cap salaries and slot everyone into their proper place, like unions? How do we measure the productivity of a CEO or a bestselling author? Who decides what measurements we should use to determine the relative worth of even less tangible work? A government official? A council of the people? Maybe a quorum of trusted economists?

The thing is, some of us still believe that capitalism fosters meritocratic values. Or I should say, we believe that free markets are the best game in town. Not that long ago, this was a nearly universal position. A lot of people used to believe that even the disruptions of capitalism — the “caprices of technology” as Piketty dismisses them— that rattle “social order” also happen to generate mobility, dynamism and growth. Today this probably qualifies as Ayn Rand-style extremism.

Then again, I haven’t read Ayn Rand since college (or maybe it was high school) but if I still believed she was the most prophetic writer of her generation, I might feel compelled to defend her ideas. But Piketty’s utopian notions and authoritarian inclinations — ones that I’m pretty sure most Americans (and probably most Democrats) would still find off-putting — do not seem to rattle the left-wing press one bit. While Piketty’s economic data might be worth studying and debating, his political ideas are unworthy of discussion.

Despite the extremism of his positions, Piketty has already become a folk hero to inequality alarmists everywhere. So if his popularity tells us anything, it’s that many liberal “thought leaders” have taken a far more radical position on economic policy than we’re giving them credit for.

[Admin]

Whither The Bottom 90 Percent, Thomas Piketty?

17 April 2014

While not quite inducing Beatlemania, French economist Thomas Piketty’s visit this week to America has inspired the Washington analog of teenage frenzy. On Tuesday, the inequality expert spoke here in D.C. (top one percent share: 28%) at multiple events. Wednesday he was in New York (Manhattan top share: 54%), and he will head from there to Boston (36%) and San Francisco (37%). Among those of us interested in inequality, the pump for this visit was primed months ago. Word had trickled (gushed, really) across the pond about Piketty’s book, Capital in Twenty-First Century, released in France last August but the translated version arriving in the U.S. only last month. To a certain crowd that is convinced that inequality is a dire economic problem, it’s kind of like “I Want to Hold Your Hand.”

Piketty’s book lays his cards on the table from the start. He titles it to evoke Marx and begins with an epigraph quoting the Declaration of the Rights of Man and the Citizen to the effect that all inequality should be viewed as suspect. He poses the question in which he is interested as whether capitalism is fundamentally self-correcting in a way that prevents inequality from getting out of control or whether it will produce ever-rising inequality. While he allows that his answer is “imperfect and incomplete,” his modesty goes out the door before that paragraph ends. Piketty’s thesis, in his own words:

When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.

In other words, Piketty is suggesting that we may have entered a period in which concentrated wealth will produce a sort of inequality death spiral. With economic growth sluggish, and the returns to wealth high, owners of “capital”—land, housing, buildings, businesses, and other income-producing property—will receive a rising share of income as they re-invest their returns. Eventually, this dynamic, combined with inheritance, will produce a leisure class of capitalists who do not have to work to grow ever richer, while the bottom half is left behind in intolerable conditions. An earlier quote Piketty gave Daniel Altman of the New York Times on the effect of the Bush tax cuts is particularly revealing. The cuts, he predicted would eventually contribute to rebuild a class of rentiers in the U.S., whereby a small group of wealthy but untalented children controls vast segments of the U.S. economy and penniless, talented children simply can’t compete….there is a decent probability that the U.S. will look like Old Europe prior to 1914 in a couple of generations.

There is a lot to unpack here. Broadly speaking, Piketty’s argument has four parts: (1) his account of trends in inequality and growth, (2) his explanation for these trends, (3) his interpretation of the implications these trends have for the future, and (4) why we should care about these past and future trends. I have thoughts on all four of those components that I’ll share in the coming weeks, but let me focus on his income trend data here and in my next post. While I slowly collect my thoughts on the other parts of Piketty’s argument, you should definitely check out American Enterprise Institute scholar Kevin Hassett’s brilliant critique of Piketty from one of Tuesday’s events—particularly relevant to Piketty’s interpretation of what the future holds.

While Piketty’s efforts to improve our understanding of income concentration have been invaluable, the tax-return-based estimates that he and others have compiled are not without problems for certain applications. At Tuesday’s event at the Tax Policy Center, Piketty rightly discounted evidence presented by Hassett that the consumption share of the top fifth of Americans has not risen. Most household surveys are unlikely to adequately capture trends in income and consumption at the top. They do not capture enough people who are at the very top of the top, who drive the trends in concentration. A sample as large as 120,000 people (such as in the survey Hassett used) would be expected to have no more than twelve households from the top one percent of the top one percent, and year-to-year variations in that small sub-sample can make a big difference in trends. To the extent that surveys do include some of the richest households, sponsors of the surveys blur the information collected on them out of privacy concerns, including capping the amount of their income or consumption reported in the data.

At the same time, it is no less true that tax return data cannot be used to assess trends in income below the top—at least in the U.S., and I suspect elsewhere. The Piketty and Saez data for the U.S. indicate that between 1979 and 2012, the bottom 90 percent’s income dropped by over $3,000. However, the official Census Bureau estimates indicate that the bottom 80 percent of households saw an increase of nearly $3,500. Median income—the income of the household in the middle of the distribution—rose by $2,500. If you are underwhelmed by these initial differences, stick around.

The Census Bureau figures are superior to the Piketty and Saez estimates when looking below the top ten percent in two ways. First, the measure of income derived from tax returns excludes a significant amount of income, and people below the top are disproportionately recipients of that income. Most importantly, in the United States, most public transfer income is omitted from tax returns. That includes not just means-tested programs for poor families and unemployment benefits, but Social Security. Many retirees in the Piketty-Saez data have tiny incomes because their main source of sustenance is rendered invisible in the data. The Census Bureau figures include some transfers, though even they omit non-cash transfers like food stamps, school lunches, public housing, Medicare, and Medicaid.

You might think that that means the Piketty-Saez data still does a good job capturing “market income”—what people make before the government steps in to redistribute. But their data also excludes non-taxable capital gains (such as those accruing to middle-class households when they sell a home), employer benefits (like health insurance), and other sources of non-taxable income. More subtly, it is impossible to get an accurate read on trends in market income concentration when retirees (with little to no market income) are included in the data (as they always are). The share of retirees has been growing for some time, and that puts downward pressure on the market income trend.

One can use the Census Bureau data to estimate trends in market income for households with a head under age sixty (and so unlikely to be retired). Among those with any market income, I find an increase of $3,400 in the median (using the same cost-of-living adjustment as the Census Bureau and Piketty and Saez). This estimate does not include the value of employer-provided health insurance or other fringe benefits and does not include capital gains either.

The second reason that tax return data are inferior to Census Bureau estimates for incomes below the top is that tax returns—or “tax units,” which essentially means potential tax returns if everyone filed—are different from households. The Piketty and Saez data include as tax units all returns filed by dependent teenagers with summer jobs and undergraduates with work-study positions. They count roommates and unmarried partners as separate tax units rather than as one household, ignoring all of the shared living expenses that make living with someone cheaper than living alone. As a consequence, incomes are much lower among tax units than among households.

It’s also worth reiterating that there are ways of improving on income measurement that none of the above figures incorporate. Income trend estimates should account for declines in household size—fewer mouths to feed for a given income—and they should use a better cost-of-living adjustment. When I raised these issues with Saez recently on a conference panel in which we both participated, he agreed that in principle, incomes should be size-adjusted, though he favored adjusting them according to the number of adults rather than the convention of adjusting by the number of adults and children. He also agreed that the inflation measure favored by the Congressional Budget Office and targeted by the Federal Reserve Board (the “Personal Consumption Expenditures deflator”) is more appropriate than the adjustment used by the Census Bureau and by himself and Piketty.

Another improvement to the above income estimates would incorporate non-cash public benefits and employer-provided health insurance. Finally, particularly if we are concerned about inequality, income measures should account for the redistribution that occurs through progressive taxation (as Piketty and Saez have done in less-cited work).

When I incorporate these improvements using the Census Bureau data, I find that median post-tax and -transfer income rose by nearly $26,000 for a household of four ($13,000 for a household of one) between 1979 and 2012. If you don’t like the household-size adjustment, the non-adjusted increase was over $20,000 at the median. If you think that valuing health care as income is problematic, that figure drops to $10,400 under the implausible assumption that third-party health care benefits have no value to households. The income of the bottom 90 percent rose nearly $12,000 under that assumption instead of dropping by $3,000 as in the Piketty and Saez data, and it rose by nearly $21,000 if health benefits are included. For a household of four, median market income for non-elderly households (not counting employer-provided health care as income) rose $9,400.

The distinction between income as measured by Piketty and Saez and more comprehensive definitions of household income measured more accurately matters for how we should think about rising income concentration. The Piketty and Saez numbers for the bottom 90 percent are routinely cited by other researchers and journalists. In response to a remark on Twitter by Timothy Noah, author of The Great Divergence (the last big inequality book), that, “Nobody thinks market income has failed to grow since ’79,” I easily turned up a number of mentions that essentially make that very claim.

The Center on Budget and Policy Priorities has cited the Piketty-Saez data to conclude that “since the late 1970s, the incomes of the bottom 90 percent of households have essentially stagnated.” Economist John Schmitt of the Center for Economic and Policy Research noted that “the average income of the bottom 90 percent barely budged.” The Center for American Progress’s ThinkProgress, citing journalist David Cay Johnston’s computation from the Piketty-Saez data, reported that “average income rose just $59 from 1966 to 2011 for the bottom 90 percent”. The Economic Policy Institute’s president, Larry Mishel, faithfully reported the supposed five percent increase between 1979 and 2007 (which comes to less than $1,700) that the Piketty-Saez data indicate preceded a bigger drop after 2007. My post-tax and -transfer estimates including health benefits show a rise between these years of $18,000.

In short, Piketty seems to draw too strong a conclusion (“terrifying,” in his words) about what continued rising inequality would entail for the bottom 90 percent (at least in the U.S.). Rising income concentration has not been accompanied by stagnation below the top, and there is no reason to think that it will be in the future. (In fact, there are reasons to think that income concentration might level off in the future and incomes lower down might rise more robustly, a point to which I will return in a future post. Those of you who heard my question at Piketty’s Tax Policy Center event already can anticipate it.) The slowdown in median income growth began in the 1970s, years before income concentration began to rise. Indeed, income growth for the top one percent was no better than for the middle fifth between 1969 and 1979.

For that matter, sociologist Lane Kenworthy has found that income concentration and median incomes are only modestly associated looking at changes in both across developed countries—and that correlation disappeared when he allowed for the possibility that income concentration might affect economic growth and redistribution. The correlation across counties in the U.S. between the share of income received by the top one percent of parents and median parent’s income is 0.14, where 0.0 indicates no relationship and 1.0 indicates the strongest relationship possible. The correlation between the top one percent’s share and the 25th percentile of parent income (the income level three-quarters of the way down the income ladder) is 0.07. New York City’s 54 percent top share has not dissuaded people from around the U.S. and the world from putting down roots there. What does Piketty know that they don’t?

If rising inequality is compatible with higher incomes further down, then while income grows more concentrated at the top, everyone else could still end up richer, as they have in recent decades. That would be a very different problem—if a problem at all—than if incomes fall within the bottom 90 percent, which Piketty seems to regard as inevitable.

Next up, I’ll take on the Piketty-Saez trend estimates for the top one percent. While their tax-return-based figures do a much better job conveying the levels of income concentration in the U.S. than survey estimates, they may overstate the rise in income concentration pretty badly.

[Admin]

Liberal Pundits of the World Unite Over Thomas Piketty's New Book
Democratic pundits have enthusiastically and unconditionally embraced Capital in the Twenty-First Century, a book that evokes Karl Marx and talks about tweaking the Soviet experiment.

April 25, 2014

As I write this, Thomas Piketty's book Capital in the Twenty-First Century is the number one seller on Amazon.com. It's been deemed an "important book" by a bunch of smart people. Why not? It validates many of the preconceived notions progressives have about capitalism: Inequality is growing. Mobility is shrinking. Meritocracy is dead. We all live in a sprawling zero-sum fallacy.

The book has also sparked nonstop conversation in political and media circles. Though it's best to let economists debunk Piketty's methodology and data, it is worth pointing out that liberal pundits and writers have enthusiastically and unconditionally embraced not only a book on economics but a hard-left manifesto.
Now, I realize we're all supposed to accept the fact that conservatives are alone in embracing fringe economic ideas. But how does a book that evokes Karl Marx and talks about tweaking the Soviet experiment find so much love from people who consider themselves rational, evidence-driven moderates?

Put it this way: It's unlikely that Democrats would have praised a book like this 20 years ago—or even 10. Nowadays, Jack Lew—better known as the treasury secretary of the United States of America—takes time to chitchat with the author.

Piketty, a professor at the Paris School of Economics, argues that capitalism allocates resources efficiently but unfairly apportions income. And the excessive accumulation of wealth by the 1 percent—nay, the 0.01 percent—is not only corrupt but an inequality that makes democracy unsustainable. And it's going to get worse. So only a massive transfer of wealth could make our nation whole again.

I'd ask whether there are any historical examples that prove that skewed wealth in a generally prosperous nation is more damaging to its democratic institutions than the reallocation of wealth by a coercive state. But then I realize that as with any Marxist revival, the answer is: This time, we're gonna do it right!

Judging from the political rhetoric of the day, liberals already believe that higher taxes on the wealthy can create more opportunity for the poor and middle class. Though some of us would argue that the nexus between high taxes and economic growth is tenuous, debating whether the top marginal tax rate should be 25 or 33 or 35 percent is well within the boundaries of a centrist debate. But that's not Piketty's position.
Here's how Daniel Shuchman put it in a recent Wall Street Journal review:

"Mr. Piketty urges an 80 percent tax rate on incomes starting at '$500,000 or $1 million.' This is not to raise money for education or to increase unemployment benefits. Quite the contrary, he does not expect such a tax to bring in much revenue, because its purpose is simply 'to put an end to such incomes.'"

Imagine there are no rich people. You can say he's a dreamer, but he's not the only one.

Piketty also advocates a 60 percent tax rate on those making $200,000 and an additional worldwide tax on wealth. Do his fans want to eliminate high-wage earners to create a fairer society? Is $1 million too low? How about anyone making $5 million a year? Or $10 million? Does that sound crazy?

The fact is that the tax hikes offered by even the most progressive elected Democrats wouldn't alter the dynamics of "fairness" in a society with a $16 trillion gross domestic product. To put it into perspective, ending Bush-era cuts may net the treasury $80 billion yearly. If Piketty's clairvoyance is to be trusted—and I'm assured it can—we will need to transfer trillions of dollars from one class to another just to save our society from disaster. And none of this, according to the author, will destroy economic growth.

Like many progressives, Piketty doesn't really believe that most people deserve their wealth anyway, so confiscating it presents no real moral dilemma. He also argues that we can measure a person's productivity and the value of a worker (namely, low-skilled laborers) while arguing that other groups of workers (namely, the kind of people he doesn't admire) are bequeathed undeserved, "arbitrary" salaries. What tangible benefit does a stockbroker or a kulak or an explanatory journalist offer society, after all?

The thing is that some of us still believe that capitalism fosters meritocratic values. Or I should say, we believe that free markets are the best game in town. Not that long ago, this was a nearly universal position. A lot of people used to believe that even the disruptions of capitalism—the "caprices of technology," as Piketty dismisses them—that rattle "social order" also happen to generate mobility, dynamism, and growth. Today this probably qualifies as Ayn Rand-style extremism.

Then again, I haven't read Rand since college (or maybe it was high school), but if I still believed she was the most prophetic writer of her generation, I might feel compelled to defend her ideas. But Piketty's utopian notions and authoritarian inclinations—ones that I'm pretty sure most Americans (and probably most Democrats) would still find off-putting—do not seem to rattle the left-wing press one bit. Though Piketty's economic data might be worth studying and debating, his political ideas are unworthy of discussion.

[Admin]

Ten handy phrases for bluffing on Thomas Piketty’s ‘Capital in the Twenty-First Century'

29 April 2014

How do you sound clever and au courant in 2014? Easy. You talk knowingly about Capital in the 21st Century, the seminal, magisterial, definitive, landmark, pick-your-coverblurb-adjective book by French academic Thomas Piketty.

It’s all about the growing gap between rich and poor, you see, and inequality is all the rage. No wonder: it’s fun to get all hot under the collar about the ‘mega-rich’ — especially if you’re secretly cushioned by the knowledge that you’ve got a bit tucked away yourself. Piketty (who must himself be making a mint) even topped the Amazon.com bestseller list last week, not bad for a such a big book on such a heavy subject.

But really, who is going to trudge through 700-pages on economic theory? Even the media primers — the ‘everything you need to know about Piketty’ blogposts and review round-ups — can be quite exhausting to read. Here instead is a primer’s primer, ten things to say about Capital in the Twenty-First Century for the average web-surfing neanderthal who has no intention of ever picking up the book.

‘There’s nothing terribly new about Piketty’s thesis, per se. It’s his data that is groundbreaking.’ Data is the bluffer’s best friend — the trick is to realise that you don’t actually need to know or understand anything. Just talk with confidence about Piketty’s ‘data-sets’ and ‘metrics’ being quite unlike any that have come before.

‘If the 20th century was essentially about labour and capital, the 21st seems to be about income and wealth.’ Warning: not one for the unconfident. Stare your conversationalist dead in the eye as you say it. At the same time, cover yourself by emphasising ‘essentially’ and “seems’ — so as to show you know such statements are sweeping.

‘Inequality will be the defining feature of our time.’ Look tense when you say these words, as if you can see trouble ahead.

‘We are not even talking about the 1 per cent any more but the 0.1 per cent.’ Useful filler. Use in the context of ‘oligarchy’, the ‘super-rich’ and ‘global elites’.

‘It’s been brilliantly translated.’ If successful, this will suggest you’ve read Capital in both French and English— and throw any other faux experts off their guard.

‘Anyone who doubts Piketty’s brilliance should look closely at the “technical appendix.’ Piketty has managed to convince the world he is a great polymath. This remark enables you to ride on his coattails.

‘One slight problem is that Piketty uses “wealth” and “capital” as interchangeable terms — when of course they are not.’ This shows that, while you applaud Piketty’s argument, you can see its flaws. You’ve obviously read other equally important books.

‘Taxing capital has always been a fault line between left and right’. This establishes your wider understanding and shows you realise the ideological significance of Piketty’s work.

‘The question we need to ask is not “Is Piketty right?” but “Why do we all think Piketty must be right?” What’s known as an ‘above-the-frayer’. This remark puts you beyond the left-versus-right guff and suggests you’ve been around long enough to have heard it all before.

For advanced bluffers only. Discuss Piketty’s key equation, the one that ‘everyone’ is talking about — ‘r > g’. This translates as ‘return on capital is greater than economic growth’ but don’t worry about that; just remember the r and the g and say something else about them. Try ‘I always thought one couldn’t be so reductive about r, especially in relation to g.’ Then leave the room before anyone can ask what you mean.

[Admin]

'Rock star' economist whose bestselling book claims the gap between rich and poor is the worst since before the First World War 'got his sums wrong'

24 May 2014

A 'rock star' economist who wrote a bestselling book about the growing wealth gap between the rich and poor appears to have got his sums wrong.

Thomas Piketty, 42, included a number of errors and spreadsheets in Capital in the Twenty-First Century, which has dominated book charts around the world in recent weeks.

The 577-page thesis, which claims wealth inequality has been soaring since the First World War, uses a huge amount of statistics as evidence.

But an investigation found there were errors in transcripts from original sources and incorrect forumulaes.

For example, his figures claim wealth became more concentrated in Britain during the 1980s, but his sources do not back it up.

He is also alleged to have cherry-picked some of the information.

When The Financial Times stripped down the data, they found that there was no evidence of rising wealth inequality from 1970.

In the book, he urges that income taxes should be increased to 80pc on earnings in excess of either £300,000 or £500,000 a year.

'I have no doubt that my historical data series can be improved and will be improved in the future.'

'But I would be very surprised if any of the substantive conclusion about the long run evolution of wealth distributions was much affected by these improvements.

He also argues that the rise in top wealth shares in the US in recent decades has been even larger than what he shows in his book.

The work has received plaudits from economists and politicians around the world.

Ed Miliband told the Evening Standard: 'I’m in the early stages of the book. In a way, he is symptomatic of what people are actually feeling'.

Nobel Prize-winner Paul Krugman from Princeton University said: 'It will be the most important economics book of the year.'