OK, after a long absence, I'm posting this book review just because I feel like it. It's my personal opinion:
Thomas Piketty's bestselling door-stopper Capital in the Twenty First Century notes some facts that he thinks point to a clear problem and solution:
To him, the implication is obvious. Raise taxes back to what they were in the good old days of Les Trente Glorieuses to reduce inequality. The point of the tax is not so much to increase revenues but rather to “expose wealth to democratic scrutiny" (p. 471) and thus "regulate capitalism” (p.518). As with all really popular nonfiction, it hits the zeitgeist because many think democracy and equality are paramount unalloyed objectives, so a big book scientifically proving these noble objectives are under a vicious assault is highly welcome; nothing rallies the troops like news of an attack. Plus, the new tactic is refreshingly more feasible, as making the rich poorer is a lot easier than making the poor richer.
However, the good times he cherishes are what econometricians would call an overidentified event: there are several different correlates that could statistically 'explain' the 1950s. When I was growing up it was common for progressives to caricature the 1950s as a period of bigotry, materialism, and conformism, now those same progressives consider this a golden age; What if the key to reducing inequality is bigotry? Maybe econometrics shows we need to decimate, in the original Roman sense, our young men every other generation to make them hard working and less whiny.
Most importantly for his case is the fact that because marginal taxes, and inheritance taxes, were so high, the rich had a much different incentive to hide income and wealth. He shows marginal income and inheritance tax rates that are the exact inverse of the capital/income ratio of figures, which is part of his argument that raising tax rates would be a good thing: it lowers inequality. Those countries that lowered the marginal tax rates the most saw the biggest increases in higher incomes (p. 509). Perhaps instead of thinking capital and top-income proportions went down when taxes were raised, it was just reported less to avoid confiscatory taxes? Alan Reynolds notes the many changes in the 1980s US tax code that explain the rise in reported wealth and income irrespective of the actual change in wealth an income in that decade, and one can imagine all those loopholes and inducements two generations ago when the top tax rates were above 90% (it seems people can no better imagine their grandparents sheltering income than having sex, another generational conceit).
For example, he writes that Lilian Bettencourt, the richest woman in France and heiress to the L'Oreal fortune (mentioned often, she serves as the archetype of the rich), never reported more than a $5MM annual income on a $30B fortune, a 0.02% annual return. Given his assumed 5% return on capital, and that given Bettencourt's true returns have been above this average, this implies that it is clearly possible for reported income to stray from actual income by a factor of 100 for a long time. Given this feasibility and the incentives given by changing marginal tax rates and various corporate laws, it seems highly possible the whole U-shaped pattern in capital/income and top-decile-income/total income is just people sheltering their income at various intensities given the tax rate over the past century.
He calls the consequences of the long-term dynamics of wealth distribution "potentially terrifying” (p. 571). At one point he notes "15% of income was transferred from the poorest 90% to the top 10%" (p. 297) as if the rich simply took it from the middle class, and so the success of the rich just implies more theft, more injustice. Further, “immense inequalities of wealth have little to do with the entrepreneurial spirit and are of no use in promoting growth. Nor are they of any 'common utility,'" meaning, they do not contribute to growth, nor count in his social welfare function, Mussolini's "everything within the state, nothing outside the state." In sum, his main concern is that the rich don't create wealth, they mainly just take it from others, and so social justice is negatively related to their wealth. Stalin's thoughts on the Kulaks were similar.
Piketty argues against a problem that is theoretically not a problem: the rich getting richer holding all other things equal. It is undoubtedly true that the poor today are rich compared to 50 years ago, having access to microwaves, the internet, air-conditioning, etc. that were the either confined to the rich or not available to anyone, yet it seems to many as if today's poor are worse-off than they were in the 1950s, highlighting that as a practical matter poverty is relative. Standard economic models do not capture that. My book The Missing Risk Premium argues that as a descriptive matter economics is not sufficiently dismal, in that people are more motivated by envy than greed. I never thought one should do this, and think it better for society and your own wealth and happiness to replace envy with greed, and act as most standard economic models assume. That is, most economic models assume people are simple non-envious wealth maximizers, while most people aren't really like that. This is kind of depressing, because if the key to social happiness is merely material equality, there are many ways to do that, most of them terrifying.
Clearly many economists clearly think like Piketty, that we should be more focused on relative status (i.e., envy) over simple absolute welfare. Thus, economics currently is quite confused because all of their canonical models are based on standard utility functions that ignore relative status, yet they don't really believe it. This is a profound confusion, and the profession should focus attention on it because if you are using assumptions you don't really believe, it's rather pointless. Yet, Piketty merely attacks inequality without any serious discussion of how, exactly, wealthier rich people is worse than poorer rich people. It is petty and perverse to assert that a year where the stock market rises 20% is worse than one where it only rises 5%, because of its effects on inequality. Intellectuals generally hate evangelical Christians in good part because they are so similar in temperament and their preoccupation with eschatology; progressives are the new Puritans, whose haunting fear is that someone outside the state may be rich and not even feel guilty.
What is the optimal level of inequality? He notes we cannot know for sure, but then immediately argues we should reduce it because it's too high (many times he qualifies remarks in one place, acts as if the qualifications don't exist in another). If inequality within a country is bad per se, should we curtail unskilled immigration (after all, immigration was much lower in Les Trente Glorieuse)? Is the inequality of capitalism worse than that of politics? Note Chelsea Clinton is currently paid $75K for a speech, surely not due to any trenchant analysis of today's issues, but rather, she's part of a political dynasty. Jeb Bush's son is often mentioned as a potential Presidential candidate, and so too Hillary Clinton. US Vice President Joe Biden's son is on the board of a Ukrainian gas company, probably not because he is expert at energy logistics. Nepotism is less common in business than politics because shareholders lose patience with the founder's grandson much quicker than voters lose patience with the latest Kennedy, Gandhi, or Papandreou.
One of the great things about a market economy and corporations is that it has created a unique pre-eminence of reciprocal altruism over familiar altruism. Corporate institutions need highly developed contractual relationships among strangers, which breeds trust and a lack of corruption, a better society, while its alternative is nepotism (where markets are not strong, trust is low and clans dominate). Further, corporate competition is positive sum because of productivity growth, unlike state competition which often involves war (what's better, a price war or a war war?). Extreme democratic egalitarianism invariably leads to economic stagnation and illiberal tyranny, a bug dismissed by Marx, though its continuance over the next century suggests this has been no accident. I would gladly like to have an experiment where one state emphasized democracy and egalitarianism, the other self-reliance and bourgeois morality, if only so I could move to the latter.
Piketty does admit that “private property and the market economy do not serve solely [my emphasis] to ensure the domination of capital over those who have nothing to sell but their labor”, as demonstrated by the failure of the Soviet Union. This rather weak acknowledgement reminds me of what the esteemed Keynesian economist and communist apologist Joan Robinson said about markets fifty years ago: "the market may not be a good master, it can be a useful servant." Faint praise betrays a deep antipathy.
Liberals consider Piketty's book a must-read, but only because, like Marx's Capital, it's a great safety blanket for Liberal prejudices. The end-game is exactly what progressive conventional wisdom (e.g., the common New York Times or Harvard professor view) has been preaching for over 50 years: enlarge the state. The key point is a highly credentialed academic wrote a long book proving that some abstruse mathematical inequality (r>g) implies we need to raise taxes on the rich and regulate wealth more democratically. It's really the debating tactic called 'spreading', which is to put forth so many arguments, none sufficient or necessary, that you can always claim victory. For example I could question his many empirical assertions, such as how could German inflation have averaged only 14% from 1913-1950 (p. 545) given inflation was 10^10 in 1923, or his theoretical assertions, such as how depreciation affects his r/g=C/I steady state equilibrium, but that would leave another 20 assertions unstained, and so those who want to euthanize renteirs can retain faith in their big picture.
Piketty is a modern progressive, best defined as someone who thinks intellectuals should run everything as the vanguard of the people, which is why academics, journalists, and writers are predominantly progressive. Hayek noted that scribes have always been egalitarian, probably always lamenting the fact that the idiots in power don't write nearly as well as them, and thus, are objectively less qualified but via some tragic flaw in the universe, end up in power. It forms the common reverse dominance hierarchy so common today, where obsequious, hypocritical yet articulate and confident leaders pander to the masses and rule via democracy, focusing their envious eyes on those who aren't interested in that game, such as those concerned with business, religion, or their own family. As Piketty notes, "if we are to regain control of capitalism we must bet everything on democracy” (p. 573), he says from his inegalitarian and very undemocratic position at the Paris School of Economics.
It never occurs to them that the main problem with subjecting markets to democratic control is that those who end up wielding power will be incompetent or tyrannical, and that 'the people' have never ruled directly, only their various proxies. Every totalitarian government of the 20th century has rested on at least the perception of massive popular support, which is why they have all ruled in the name of The People. An unchecked democracy becomes mob rule or ripped apart by factions, why the Founding Fathers, so familiar with Greek history, were careful to put checks and balances in the US constitution and emphasize the republican nature of government.
Democracy, like all things, is good only in moderation; it is a means and not an end. Taken to an extreme it is highly dysfunctional, as decisions are not helped by making them mass plebiscites or town hall meetings. Go to a school board meeting and watch how quickly thoughtful discussions get sidetracked. Philip Howard's Rule of Nobody outlines an interesting consequence to increasing public participation in big decisions. As the number of stakeholders grows each interest group seeks its own group's ends without moderation, they are single-issue advocates nobly advancing their righteous cause (e.g., Native Americans, aquifers, unions), and so veto action unless they are basically paid-off. The result is that usually nothing happens, and so the days when we could build the interstate highway system, the Hoover Dam, or the Empire State Building in only a year, are over. Small 'd' democratic control of property leads to stasis, why government spending today is mainly on transfer payments and studies, not roads and bridges.
Another problem with democracy is that as opposed to decentralizing power to the people it does the opposite. As the Occupy movement showed, unorganized mass movements get nothing done, so successful parties are those that channel public legitimacy into a small set of essential rights too important to be outside state dominion. Go to a school board meeting and watch how insiders anticipate idiotic comments from the rabble, and so control the outcome to make such meetings basically Potemkin village town halls. Eventually the organization-committed people take over the organization and the mission-committed people become frustrated and leave (see a description of the recently created regulator CFPB's quick descent into solipsism). They set up national plans for health care, education, energy, etc., and slander choice and variety as a 'race to the bottom.' Thus, teachers unions and Medicare/Medicaid focus on preventing choices that might take away from centralized power, competition from other providers and exit by consumers is outlawed.
Piketty never delves into the various public choice problems that beset collective action. Progressives are still stuck in the syllogism: democracy is good, the world has problems, therefore we need more democracy. The probable result of the democracy-fetishist end-game is not another Soviet Union, but rather, a Venezuela or Argentina. Venezuela's pathetic case is well-known, but few are aware Argentina was as prosperous and free as the US at the beginning of the 20th century. The Argentine state's role in the economy increased more than average in the twentieth century, reflected in the increase in state-owned property, regulation and higher levels of public spending. They emphasized Keynesian macroeconomic policy, aimed at the redistribution of wealth and the increase of spending to finance populist policies. Most importantly for this book, they implemented a wealth tax around 2000. Currently GDP/capita there is about one-fourth of that in the USA, and this is not compensated by some Bhutanese quality of life metric.
Piketty often quotes Marx, and like Marx he ignores the endogeneity of growth and the return on capital on things like taxes, and simply assumes the growth is basically exogenous. He notes that Africa is poor and has a much lower capital/income ratio than in Europe yet he never explores this, and for a good reason: across countries, the levels and movements in the Capital/Income ratio do not correlate well with income inequality. To think that greater taxes will bring income inequality back to the 1950s via the Trente Glorieuse in Europe and the US correlation of tax taxes and growth is just cherry picking a broad panel dataset to support your prejudices.
His central prescription is a world-wide wealth tax and more democratic regulation of wealth, which would require a global wealth monitoring system, a good scenario for the next Tom Cruise blockbuster (The Piketty Report where Tom and Scarlett Johansen try to move their kid's college fund into bitcoin). He never even considers it a disturbing increase in state control. As Piketty notes, it didn't work at all when Greece tried to raise taxes on its rich in the recent fiscal crisis because the rich could move themselves or their capital abroad, the strategy must be a coordinated, region-wide if not world-wide effort. A strategy that is not coalition-proof is not feasible, and raising punitive taxes on the rich is a good example. Marxists dislike competition, the best regulator and innovating mechanism in human history, so thinking one can avoid it via a global monopoly is consistent with their delusional utopian worldview.
The key to good economics was first shown by Adam Smith: showing the emergent properties of individual behavior. They key is to have good assumptions as to what motivates individuals, and the basic idea of Smith was that people want to make themselves more prosperous, an innocuous assumption with surprising results. Piketty's muse, Marx, on the other hand, was clearly wrong on his assumptions, such as assuming the value of something is directly proportional to the labor it embodies, or supposing that people would float between being artisans, poets, miners, farmers, in the same day. Good assumptions are essential for a useful theory, and Marx didn't have them.
Georg Wilhelm Friedrich Hegel, Marx's muse, was more insightful on human nature. He thought people want recognition from society for one’s labors, as vocations are often chosen and mastered as part of a person’s own search for meaning. Being appreciated by others doing something you were not forced to do, something not everyone can do, gives great satisfaction. When you have to work at something that takes only effort you feel unimportant; your agency is not appreciated by others and when you die you'll be soon forgotten. Hegel noted that in agriculture people are mainly busy addressing immediate material needs. Thus, duty was a strong Protestant ethic because working hard to feed your family was necessary and psychologically onerous, so many found comfort in the thought their hard work was part of God's plan. Given the prerequisites needed for the industrial and scientific revolution, perhaps it was.
Only in what Hegel called the ‘second estate’ of trade and commerce can people become independent and have freedom. Homer's Achilles chose to die with eternal honor rather than to live forever in unimportant obscurity, and it resonates because it exaggerates a choice many of us would make, as impacting others positively is in many ways more important than our own life. The defeat of natural necessity is a prerequisite for the development of the free individual and of ethical life for Hegel. Thus, in spite of the higher mortality rates of cities, people have always migrated to urban areas in their own search for meaning, the chance of life more than mere subsistence was enough to motivate many. People want higher status via their own individual essence. Having children, for example, is probably the most common way people do this, and it should be noted that if people today were simply maximizing their wealth they wouldn't have kids; they clearly want to connect to the future, not just consume.
The beauty of this instinct is that once one discovers they are a great roofer, salesman, or programmer, they can get the double satisfaction of doing well and doing good. The fact that we all cannot be the CEO does not diminish the satisfaction of a man who does his job well, allowing those of various abilities to all reach some satisfaction. Further, the variety of skills needed in an economy imply that while 90% of people are bad at any one thing, most people are good at something. Mickey Kaus wrote a book in 1995 about the concept of multiple social hierarchies, in that modernity allows us to find satisfaction somewhere via the law of comparative advantage; we like doing what we are good at, and via specialization, and the fact that good is relative, we can all find something that we like. It's not your aggregate popularity or wealth that matters, just that you have a circle of friends and acquaintances that provide you with what psychologist Eric Berne called 'strokes' of affirmation obtained via parochial competence (like dogs we like daily petting). It's related to Arthur Brooks' concept of earned success--the belief you are creating value with your life and in other people--as the basis for happiness. Interestingly, Brooks finds most happy people anticipate more success in their job, and a whopping 95% of happy people are satisfied with their jobs. Micromanaging these jobs with more licensing restrictions, regulations, and taxes would not help these people.
Finding one's niche in life needs experimentation and creative license, and this needs low entry costs and autonomy. Government jobs emphasize credentials and make it very difficult to innovate, and government rules impose substantial barriers to entry via licensing restriction often made in collusion with industry groups (in everything from health care to hairstylists). Public teachers today have little ability to produce their own lesson plans, need specific degrees irrespective of their expertise, and are paid basically purely on seniority and whether they have a BA, MA, or PhD, surely a rule not good for students or teachers. Thus those whose job it is to study education and should know better, overweight credentials and experience for hiring and pay because that's what the democratically run system found fair. Decentralizing authority and letting principals hire and fire outside these criteria is anathema, an example of how democracy concentrates power in a gosplan. In the Soviet Union many laborers, disillusioned by their lack of autonomy and the ubiquitous moral hypocrisy, would drink themselves to sleep every night, and so vodka and rum were subsidized in the Soviet Union and Cuba in recognition of the need for this kind of euthanasia; alienation or anomie in a state-run economy is much higher than in any private industry.
The government spends about 35% of GDP in the US today, and heavily regulates the rest. It would be far better if, instead of thinking about new tricky ways to squeeze the rich, we instead set government spending to some fraction (say 35%) of the past 5 years of GDP and no more. The endless arguments about the level would stop, and it's interesting to note that over the past 30 years in the US federal revenues as a percent of GDP has been remarkably consistent across various administrations. By using a moving average of historical GDP this would make spending countercyclical, most importantly instead of politicians being elected for their ability to promise 'more' they would instead focus on 'better.' That is, it would be nice if the politicians argued about better ways to allocate spending rather than about more or less in aggregate; the net result of the 'more' approach has been those who are good at articulating why we need more find they have no idea how to spend it, as when the government had $800B to spend in stimulus, most of it simply went to shoring up state budgets, meaning, state pension deficits, which is just an income transfer to state employees from future taxpayers.
At one point Piketty notes rich countries are poor in that they are all deep in debt and have persistent deficit issues. Piketty insists government needs just a little bit more revenue. Given the historically high levels of absolute and relative spending by rich countries, it's highly likely that if we solved today's deficits with new forms of revenue, spending would rise and we would be back in the same position; governments seem destined to always spend a little more than their revenue.
Hegel argued that Diogenes’ asceticism in the 4th century BC was a product of the luxury prevalent in the social life of Athens at this time, and Hegel himself saw a lot of existential crises in his times circa 1800 as people acquired desires for increasing the opinion of others. Now, those were times when wealth was much less than what Piketty considered 'abysmal' in the mid 19th century--how could they afford existential angst when they were basically literate cave men? Clearly a modest level of food and shelter, much lower than today's poverty line, is sufficient to unleash a man's search for meaning.
People like living together, as Socrates noted that a man that can live alone is either a beast or a god, and banishment from your tribe a fate worse than death. Affective neurologist Jaak Panksepp has documented that seeking social interaction is as biochemically fundamental as the urge for sex and rage, making many mammals intrinsically sociable (or at least, if you've ever done cocaine--which hijacks these circuits--talkative). In addition to our sociability, we also seek status. As documented by anthropologist Dan Brown, status seeking is a human universal, unlike greed, it affects serotonin levels and health outcomes, and fMRI studies show our concern for status is hard-wired. We can assume people want to interact and be esteemed by other people.
The anthropologist Harold Schneider studied hunter gatherers and noted they had an almost absence of hierarchy, which he saw as the resulting from the maxim that ‘all men seek to rule, but if they cannot, they seek to be equal.' It's a reasonable solution for a society without division of labor. Unfortunately many progressives see the world the same way, and thus like the Rawlsian solution that everyone has the same outcome regardless of one's talents or wealth. Now, that's fine for a camping trip, but as a macroeconomic strategy would never work.
Reality shows like Top Chef, Project Ink, Project Runway, or Deadliest Catch show people passionate about activities I do not care about in the least, all private sector jobs. With thousands of different remunerative specialties that complement each other, this allows us to focus and then trade with others to get the benefits of other's specialization focus. In modernity status isn't limited to one dimension, and so you can be an important part of something bigger than yourself without joining a religion: you are part of a complex network of specialists in a market economy of individuals maximizing their status in their own individual way.
Everyone wants to live on in the future in some way, as part of heaven or something worldly that needed or at least appreciated you. If you obey the laws and social norms, including The Golden Rule, and generate more revenue than you cost, you are making your tribe better off. The egalitarian solution where we have a single-payer state for everything has no risk, but like Hegel's farmer, promises little potential for self-actualization or what the Greeks called arête ('excellence'), which in the modern world is consistent with specialization, trade, and productivity growth (arête incents one to do things better than before). We shouldn't base our norms on hunter gatherers, which is why most people don't.
The idea that government spending increases welfare rests on the notion that spending "G" increases output however it occurs, in that G, I, and C all add to GNP. This is highly naive. Some jobs increase value by increasing the amount of goods and services ultimate consumed, and surely bridges and roads fill this function, yet many government jobs are little different than transfer payments because they do not add to the wisdom of any child, or increase the consumer or producer surplus of those in the market. This focus on aggregates and transfers therein encourages dependence on the state and discourages what the ancient Greeks thought were the only way to human flourishing, or eudaimonia, was through virtue and character. Of course, theoretically more people are able to develop themselves via state welfare, but in practice the negative effects outweigh the positive. Indeed, people with neither the ability nor inclination to support themselves basically just create more such people, leading to a depressing end game (see Parfit's repugnant conclusion, where a world of 1 billion human wretches is morally preferred to 50 million Aristotles)
Piketty doesn't spend much time on how the government might use the new revenue he thinks they should get from a new wealth tax, which is understandable because the main point is merely to have fewer rich people. Yet, it should give one pause that even cases where it seems easy to spend money well have not worked out well. For example, theoretically regulators will moderate financial crises, but in practice are inept at best. Consider the CAMELS financial risk metric introduced by regulators in response to the crises of the 1970s and 80s was completely irrelevant to the latest financial crisis; if it were a business it would have died long ago, but it's not, so it just keeps wasting everyone's time. Progressives forget that regulators, academics, and legislators did not merely know about the relaxation of underwriting standards prior to the recent financial crisis, they encouraged them to the point of mandating increased lending to lower-income demographics via reviews of potential mergers and direct legal action. Joseph P. Kennedy bought his way onto the first federal financial regulator job after becoming rich defrauding investors, and so unsurprisingly financial regulators have always been good at preventing competition under the pretext of helping widows and orphans.
A good amount of people are happy with jobs where their tasks are spelled out specifically and discourage innovation. Yet a lot of people find this stultifying, especially if they see the required duties as counterproductive. For example, many teachers are outraged by recent federally mandated Common Core teaching curriculum for high school, because it is inflexible and bizarrely stupid. No wonder that the public sector and unions both have higher rates of absenteeism than the private sector, because when your customers do not have a choice workers are paid but not esteemed, and that's important. At current levels of government we have more than enough jobs that do not require creativity. Not everyone can be a regulator, nor does everyone want to.
To those who merely care about equality, the details about how money is spent on health care or education, how a job is evaluated by those who create it, is of almost no concern, excepting when they occasionally reflect on the quality, which then immediately leads them to lobby for more aggregate spending. For example, progressive economist Lawrence Summers laments New York's dilapidated airports as if the constraint is aggregate spending, but he's focused on the wrong bottleneck, in that case too many stakeholders with impossible demands. Equality and democratic process--i.e., Brahmins applying the latest intellectual wisdom to the masses as settled science--is all that matters, as if the economy is like a fighter jet and so needs a competent pilot. It is a hard thing for intellectuals to acknowledge the great benefits to society from undirected people who never so intended it, as even today the phrase 'invisible hand' is considered a concept on par with 'virgin birth.' It's an understandable instinct, as the majority of economists thought socialism was more productive than market-oriented economies back in the 1950s, because doing something for society seems obviously better than doing it for profit (eg, Einstein thought it obvious).
Capital isn't a thing; it's a ledger, a way of determining who gets the make decisions about various things, and who gets the fruits of those things. The fact that a minority has most of the power to decide and access the fruits is a consequence of a past where individuals anticipated a future where such a ledger would continue to be valid. It's always been popular to think, maybe we should have a jubilee, get rid of those ledgers and start again as equals! Given the power law distribution of wealth at all times such a proposal is perennially popular to those ignorant of history. Yet, if you do this every period, capital isn't owned by any individual, and so would be completely mismanaged as happens in societies without stable property rights. If you do this at all you can expect an immediately higher default premium which would make an economy undercapitalized. Luckily, our Founding Fathers specifically anticipated these problems and so emphasized the republican nature of our government, not making everything a democratic process.
The search for purpose often centers on one's job, and it's essential that most of these jobs have autonomy, which means outside of democratic control. A single-minded focus on equality and democracy misses that, leading to the terrifying future where the ideal is merely that everyone has the same amount of goods and privileges at all times, a world where I would need a lot of vodka and rum. Liberty, decentralized autonomy, and individual responsibility are considered pretexts for selfishness or bigotry, whereas libertarians see these ideas as pillars of a free and prosperous society; I'm sure this debate won't be solved in my lifetime.
A curative to this book is Peter Thiel's From Zero to One coming out this fall. He's a billionaire, one of those whose very existence presents a problem to be solved for egalitarians. Thiel's book bristles with the enthusiasm of an entrepreneur, with tips on how to maximize your chances for success. At only 200 pages, it's a book meant to be read, not referenced. It's like positive psychology, focusing on habits of happy, prosperous people so one can become one. If you have a child graduating college, and he wants to be an intellectual, buy him Piketty's book; if he just wants to be a success in some vague unknowable way, buy him Thiel's.
Thomas Piketty's bestselling door-stopper Capital in the Twenty First Century notes some facts that he thinks point to a clear problem and solution:
- The return on capital over the economic growth rate determines the Capital/Income ratio, where a higher return on capital implies higher level of capital relative to income (r/g --> C/I)
- The rate of return on capital has been pretty consistently around 4.5%,
- The rate of growth grew from 0.9% in the 19th century to 2.4% in the 20th, peaking around 1950
- Growth was 3.8% in Europe in the Les Trente Glorieuses ("The Glorious Thirty") of 1945-75, when marginal taxes and taxes on inheritance were higher, and income became more equally distributed
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| 'Peek-et-ee' |
However, the good times he cherishes are what econometricians would call an overidentified event: there are several different correlates that could statistically 'explain' the 1950s. When I was growing up it was common for progressives to caricature the 1950s as a period of bigotry, materialism, and conformism, now those same progressives consider this a golden age; What if the key to reducing inequality is bigotry? Maybe econometrics shows we need to decimate, in the original Roman sense, our young men every other generation to make them hard working and less whiny.
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| Tax Rates over time |
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| Capital/Income over time |
For example, he writes that Lilian Bettencourt, the richest woman in France and heiress to the L'Oreal fortune (mentioned often, she serves as the archetype of the rich), never reported more than a $5MM annual income on a $30B fortune, a 0.02% annual return. Given his assumed 5% return on capital, and that given Bettencourt's true returns have been above this average, this implies that it is clearly possible for reported income to stray from actual income by a factor of 100 for a long time. Given this feasibility and the incentives given by changing marginal tax rates and various corporate laws, it seems highly possible the whole U-shaped pattern in capital/income and top-decile-income/total income is just people sheltering their income at various intensities given the tax rate over the past century.
Finally, on the Capital/Income ratio trending upward again towards the 6:1 level of the Belle Époque (1871-1914), his idea is that structural forces in the returns on inherited capital are driving inequality. Yet, if you take housing out of his data the recent rise in Capital/Income disappears. Housing is not presumed to be concentrated in the top 1% or 10%, but rather across the top 50%, and further, it seems to have an anomalous trend in his sample (i.e., the housing bubble over the past 30 years), so if housing is the cause of recent capital ratio increases, it's not the driver increasing top incomes, the 'r>g' explanation fades into a distraction. So while I agree inequality is increasing, his diagnosis of the genesis (an abnormally high return on inherited wealth relative to economic growth) seems unlikely, and with a bad diagnosis, his cure is worthless.
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| The 1% of the Deep |
Piketty argues against a problem that is theoretically not a problem: the rich getting richer holding all other things equal. It is undoubtedly true that the poor today are rich compared to 50 years ago, having access to microwaves, the internet, air-conditioning, etc. that were the either confined to the rich or not available to anyone, yet it seems to many as if today's poor are worse-off than they were in the 1950s, highlighting that as a practical matter poverty is relative. Standard economic models do not capture that. My book The Missing Risk Premium argues that as a descriptive matter economics is not sufficiently dismal, in that people are more motivated by envy than greed. I never thought one should do this, and think it better for society and your own wealth and happiness to replace envy with greed, and act as most standard economic models assume. That is, most economic models assume people are simple non-envious wealth maximizers, while most people aren't really like that. This is kind of depressing, because if the key to social happiness is merely material equality, there are many ways to do that, most of them terrifying.
Clearly many economists clearly think like Piketty, that we should be more focused on relative status (i.e., envy) over simple absolute welfare. Thus, economics currently is quite confused because all of their canonical models are based on standard utility functions that ignore relative status, yet they don't really believe it. This is a profound confusion, and the profession should focus attention on it because if you are using assumptions you don't really believe, it's rather pointless. Yet, Piketty merely attacks inequality without any serious discussion of how, exactly, wealthier rich people is worse than poorer rich people. It is petty and perverse to assert that a year where the stock market rises 20% is worse than one where it only rises 5%, because of its effects on inequality. Intellectuals generally hate evangelical Christians in good part because they are so similar in temperament and their preoccupation with eschatology; progressives are the new Puritans, whose haunting fear is that someone outside the state may be rich and not even feel guilty.
What is the optimal level of inequality? He notes we cannot know for sure, but then immediately argues we should reduce it because it's too high (many times he qualifies remarks in one place, acts as if the qualifications don't exist in another). If inequality within a country is bad per se, should we curtail unskilled immigration (after all, immigration was much lower in Les Trente Glorieuse)? Is the inequality of capitalism worse than that of politics? Note Chelsea Clinton is currently paid $75K for a speech, surely not due to any trenchant analysis of today's issues, but rather, she's part of a political dynasty. Jeb Bush's son is often mentioned as a potential Presidential candidate, and so too Hillary Clinton. US Vice President Joe Biden's son is on the board of a Ukrainian gas company, probably not because he is expert at energy logistics. Nepotism is less common in business than politics because shareholders lose patience with the founder's grandson much quicker than voters lose patience with the latest Kennedy, Gandhi, or Papandreou.
One of the great things about a market economy and corporations is that it has created a unique pre-eminence of reciprocal altruism over familiar altruism. Corporate institutions need highly developed contractual relationships among strangers, which breeds trust and a lack of corruption, a better society, while its alternative is nepotism (where markets are not strong, trust is low and clans dominate). Further, corporate competition is positive sum because of productivity growth, unlike state competition which often involves war (what's better, a price war or a war war?). Extreme democratic egalitarianism invariably leads to economic stagnation and illiberal tyranny, a bug dismissed by Marx, though its continuance over the next century suggests this has been no accident. I would gladly like to have an experiment where one state emphasized democracy and egalitarianism, the other self-reliance and bourgeois morality, if only so I could move to the latter.
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| Bad People |
Certainly the eras that gave us our scientific and intellectual heritage were very unequal, with not just an aristocracy but often slavery. If some inequality is inevitable, how much is too much or too little? When the West was beginning its industrial revolution and creating an unprecedented growth in productivity and social welfare, giving us the railroad, electricity, indoor plumbing, the internal combustion engine, etc., Piketty notes wages were 'objectively miserable' in the 19th century as if they could have been higher but for elite cupidity, and the Belle Époque evokes the specter of exploitation. The fact that the average height was rising and infant and maternal mortality rates were falling at an unprecedented rate after stagnating for centuries if not a millenium, supposedly means little. So too the great increase in technology that economist Robert Gordon notes was not only unprecedented, but singular, never to be achieved again. In Piketty's mind it's an unbearable time, reminding me of the scene in Monte Python's Life of Brian where John Cleese says, apart from the aqueduct, sanitation, peace, roads, etc., "what have the Romans done for us?"
Piketty does admit that “private property and the market economy do not serve solely [my emphasis] to ensure the domination of capital over those who have nothing to sell but their labor”, as demonstrated by the failure of the Soviet Union. This rather weak acknowledgement reminds me of what the esteemed Keynesian economist and communist apologist Joan Robinson said about markets fifty years ago: "the market may not be a good master, it can be a useful servant." Faint praise betrays a deep antipathy.
Liberals consider Piketty's book a must-read, but only because, like Marx's Capital, it's a great safety blanket for Liberal prejudices. The end-game is exactly what progressive conventional wisdom (e.g., the common New York Times or Harvard professor view) has been preaching for over 50 years: enlarge the state. The key point is a highly credentialed academic wrote a long book proving that some abstruse mathematical inequality (r>g) implies we need to raise taxes on the rich and regulate wealth more democratically. It's really the debating tactic called 'spreading', which is to put forth so many arguments, none sufficient or necessary, that you can always claim victory. For example I could question his many empirical assertions, such as how could German inflation have averaged only 14% from 1913-1950 (p. 545) given inflation was 10^10 in 1923, or his theoretical assertions, such as how depreciation affects his r/g=C/I steady state equilibrium, but that would leave another 20 assertions unstained, and so those who want to euthanize renteirs can retain faith in their big picture.
Piketty is a modern progressive, best defined as someone who thinks intellectuals should run everything as the vanguard of the people, which is why academics, journalists, and writers are predominantly progressive. Hayek noted that scribes have always been egalitarian, probably always lamenting the fact that the idiots in power don't write nearly as well as them, and thus, are objectively less qualified but via some tragic flaw in the universe, end up in power. It forms the common reverse dominance hierarchy so common today, where obsequious, hypocritical yet articulate and confident leaders pander to the masses and rule via democracy, focusing their envious eyes on those who aren't interested in that game, such as those concerned with business, religion, or their own family. As Piketty notes, "if we are to regain control of capitalism we must bet everything on democracy” (p. 573), he says from his inegalitarian and very undemocratic position at the Paris School of Economics.
It never occurs to them that the main problem with subjecting markets to democratic control is that those who end up wielding power will be incompetent or tyrannical, and that 'the people' have never ruled directly, only their various proxies. Every totalitarian government of the 20th century has rested on at least the perception of massive popular support, which is why they have all ruled in the name of The People. An unchecked democracy becomes mob rule or ripped apart by factions, why the Founding Fathers, so familiar with Greek history, were careful to put checks and balances in the US constitution and emphasize the republican nature of government.
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| Good People |
Another problem with democracy is that as opposed to decentralizing power to the people it does the opposite. As the Occupy movement showed, unorganized mass movements get nothing done, so successful parties are those that channel public legitimacy into a small set of essential rights too important to be outside state dominion. Go to a school board meeting and watch how insiders anticipate idiotic comments from the rabble, and so control the outcome to make such meetings basically Potemkin village town halls. Eventually the organization-committed people take over the organization and the mission-committed people become frustrated and leave (see a description of the recently created regulator CFPB's quick descent into solipsism). They set up national plans for health care, education, energy, etc., and slander choice and variety as a 'race to the bottom.' Thus, teachers unions and Medicare/Medicaid focus on preventing choices that might take away from centralized power, competition from other providers and exit by consumers is outlawed.
His central prescription is a world-wide wealth tax and more democratic regulation of wealth, which would require a global wealth monitoring system, a good scenario for the next Tom Cruise blockbuster (The Piketty Report where Tom and Scarlett Johansen try to move their kid's college fund into bitcoin). He never even considers it a disturbing increase in state control. As Piketty notes, it didn't work at all when Greece tried to raise taxes on its rich in the recent fiscal crisis because the rich could move themselves or their capital abroad, the strategy must be a coordinated, region-wide if not world-wide effort. A strategy that is not coalition-proof is not feasible, and raising punitive taxes on the rich is a good example. Marxists dislike competition, the best regulator and innovating mechanism in human history, so thinking one can avoid it via a global monopoly is consistent with their delusional utopian worldview.
The key to good economics was first shown by Adam Smith: showing the emergent properties of individual behavior. They key is to have good assumptions as to what motivates individuals, and the basic idea of Smith was that people want to make themselves more prosperous, an innocuous assumption with surprising results. Piketty's muse, Marx, on the other hand, was clearly wrong on his assumptions, such as assuming the value of something is directly proportional to the labor it embodies, or supposing that people would float between being artisans, poets, miners, farmers, in the same day. Good assumptions are essential for a useful theory, and Marx didn't have them.
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| Don't Blame Him |
Only in what Hegel called the ‘second estate’ of trade and commerce can people become independent and have freedom. Homer's Achilles chose to die with eternal honor rather than to live forever in unimportant obscurity, and it resonates because it exaggerates a choice many of us would make, as impacting others positively is in many ways more important than our own life. The defeat of natural necessity is a prerequisite for the development of the free individual and of ethical life for Hegel. Thus, in spite of the higher mortality rates of cities, people have always migrated to urban areas in their own search for meaning, the chance of life more than mere subsistence was enough to motivate many. People want higher status via their own individual essence. Having children, for example, is probably the most common way people do this, and it should be noted that if people today were simply maximizing their wealth they wouldn't have kids; they clearly want to connect to the future, not just consume.
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| Mickey Kaus |
Finding one's niche in life needs experimentation and creative license, and this needs low entry costs and autonomy. Government jobs emphasize credentials and make it very difficult to innovate, and government rules impose substantial barriers to entry via licensing restriction often made in collusion with industry groups (in everything from health care to hairstylists). Public teachers today have little ability to produce their own lesson plans, need specific degrees irrespective of their expertise, and are paid basically purely on seniority and whether they have a BA, MA, or PhD, surely a rule not good for students or teachers. Thus those whose job it is to study education and should know better, overweight credentials and experience for hiring and pay because that's what the democratically run system found fair. Decentralizing authority and letting principals hire and fire outside these criteria is anathema, an example of how democracy concentrates power in a gosplan. In the Soviet Union many laborers, disillusioned by their lack of autonomy and the ubiquitous moral hypocrisy, would drink themselves to sleep every night, and so vodka and rum were subsidized in the Soviet Union and Cuba in recognition of the need for this kind of euthanasia; alienation or anomie in a state-run economy is much higher than in any private industry.
At one point Piketty notes rich countries are poor in that they are all deep in debt and have persistent deficit issues. Piketty insists government needs just a little bit more revenue. Given the historically high levels of absolute and relative spending by rich countries, it's highly likely that if we solved today's deficits with new forms of revenue, spending would rise and we would be back in the same position; governments seem destined to always spend a little more than their revenue.
Hegel argued that Diogenes’ asceticism in the 4th century BC was a product of the luxury prevalent in the social life of Athens at this time, and Hegel himself saw a lot of existential crises in his times circa 1800 as people acquired desires for increasing the opinion of others. Now, those were times when wealth was much less than what Piketty considered 'abysmal' in the mid 19th century--how could they afford existential angst when they were basically literate cave men? Clearly a modest level of food and shelter, much lower than today's poverty line, is sufficient to unleash a man's search for meaning.
People like living together, as Socrates noted that a man that can live alone is either a beast or a god, and banishment from your tribe a fate worse than death. Affective neurologist Jaak Panksepp has documented that seeking social interaction is as biochemically fundamental as the urge for sex and rage, making many mammals intrinsically sociable (or at least, if you've ever done cocaine--which hijacks these circuits--talkative). In addition to our sociability, we also seek status. As documented by anthropologist Dan Brown, status seeking is a human universal, unlike greed, it affects serotonin levels and health outcomes, and fMRI studies show our concern for status is hard-wired. We can assume people want to interact and be esteemed by other people.
The anthropologist Harold Schneider studied hunter gatherers and noted they had an almost absence of hierarchy, which he saw as the resulting from the maxim that ‘all men seek to rule, but if they cannot, they seek to be equal.' It's a reasonable solution for a society without division of labor. Unfortunately many progressives see the world the same way, and thus like the Rawlsian solution that everyone has the same outcome regardless of one's talents or wealth. Now, that's fine for a camping trip, but as a macroeconomic strategy would never work.
Reality shows like Top Chef, Project Ink, Project Runway, or Deadliest Catch show people passionate about activities I do not care about in the least, all private sector jobs. With thousands of different remunerative specialties that complement each other, this allows us to focus and then trade with others to get the benefits of other's specialization focus. In modernity status isn't limited to one dimension, and so you can be an important part of something bigger than yourself without joining a religion: you are part of a complex network of specialists in a market economy of individuals maximizing their status in their own individual way.
Everyone wants to live on in the future in some way, as part of heaven or something worldly that needed or at least appreciated you. If you obey the laws and social norms, including The Golden Rule, and generate more revenue than you cost, you are making your tribe better off. The egalitarian solution where we have a single-payer state for everything has no risk, but like Hegel's farmer, promises little potential for self-actualization or what the Greeks called arête ('excellence'), which in the modern world is consistent with specialization, trade, and productivity growth (arête incents one to do things better than before). We shouldn't base our norms on hunter gatherers, which is why most people don't.
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| Piketty Wants More Bubbles |
Piketty doesn't spend much time on how the government might use the new revenue he thinks they should get from a new wealth tax, which is understandable because the main point is merely to have fewer rich people. Yet, it should give one pause that even cases where it seems easy to spend money well have not worked out well. For example, theoretically regulators will moderate financial crises, but in practice are inept at best. Consider the CAMELS financial risk metric introduced by regulators in response to the crises of the 1970s and 80s was completely irrelevant to the latest financial crisis; if it were a business it would have died long ago, but it's not, so it just keeps wasting everyone's time. Progressives forget that regulators, academics, and legislators did not merely know about the relaxation of underwriting standards prior to the recent financial crisis, they encouraged them to the point of mandating increased lending to lower-income demographics via reviews of potential mergers and direct legal action. Joseph P. Kennedy bought his way onto the first federal financial regulator job after becoming rich defrauding investors, and so unsurprisingly financial regulators have always been good at preventing competition under the pretext of helping widows and orphans.
A good amount of people are happy with jobs where their tasks are spelled out specifically and discourage innovation. Yet a lot of people find this stultifying, especially if they see the required duties as counterproductive. For example, many teachers are outraged by recent federally mandated Common Core teaching curriculum for high school, because it is inflexible and bizarrely stupid. No wonder that the public sector and unions both have higher rates of absenteeism than the private sector, because when your customers do not have a choice workers are paid but not esteemed, and that's important. At current levels of government we have more than enough jobs that do not require creativity. Not everyone can be a regulator, nor does everyone want to.
To those who merely care about equality, the details about how money is spent on health care or education, how a job is evaluated by those who create it, is of almost no concern, excepting when they occasionally reflect on the quality, which then immediately leads them to lobby for more aggregate spending. For example, progressive economist Lawrence Summers laments New York's dilapidated airports as if the constraint is aggregate spending, but he's focused on the wrong bottleneck, in that case too many stakeholders with impossible demands. Equality and democratic process--i.e., Brahmins applying the latest intellectual wisdom to the masses as settled science--is all that matters, as if the economy is like a fighter jet and so needs a competent pilot. It is a hard thing for intellectuals to acknowledge the great benefits to society from undirected people who never so intended it, as even today the phrase 'invisible hand' is considered a concept on par with 'virgin birth.' It's an understandable instinct, as the majority of economists thought socialism was more productive than market-oriented economies back in the 1950s, because doing something for society seems obviously better than doing it for profit (eg, Einstein thought it obvious).
Capital isn't a thing; it's a ledger, a way of determining who gets the make decisions about various things, and who gets the fruits of those things. The fact that a minority has most of the power to decide and access the fruits is a consequence of a past where individuals anticipated a future where such a ledger would continue to be valid. It's always been popular to think, maybe we should have a jubilee, get rid of those ledgers and start again as equals! Given the power law distribution of wealth at all times such a proposal is perennially popular to those ignorant of history. Yet, if you do this every period, capital isn't owned by any individual, and so would be completely mismanaged as happens in societies without stable property rights. If you do this at all you can expect an immediately higher default premium which would make an economy undercapitalized. Luckily, our Founding Fathers specifically anticipated these problems and so emphasized the republican nature of our government, not making everything a democratic process.
The search for purpose often centers on one's job, and it's essential that most of these jobs have autonomy, which means outside of democratic control. A single-minded focus on equality and democracy misses that, leading to the terrifying future where the ideal is merely that everyone has the same amount of goods and privileges at all times, a world where I would need a lot of vodka and rum. Liberty, decentralized autonomy, and individual responsibility are considered pretexts for selfishness or bigotry, whereas libertarians see these ideas as pillars of a free and prosperous society; I'm sure this debate won't be solved in my lifetime.
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| Problem or Solution? |
21 comments:
I wanted to be persuaded by this post, but 3 paragraphs in you'd already engaged false equivalency (which ironically you treat as a tautology in support of your argument), circular logic, and misdirection.
You list what you think are the salient points, but you missed the real ones:
Inequality is at historic levels, is unsustainable, and ironically is self-perpetuating unless interrupted.
r>g is the basic signifier showing that the "American Dream" is being crushed by oligarchical wealth.
Another salient point is that the super-managers and lobbyists disrupt democracy and free market principles.
Another salient point is that the shrinking of the Middle Class and its buying power will have crushing consequences for all Americans, including the ones living behind large iron gates.
When you ended the article with a push for a billionaire's upcoming self-help book, I laughed audibly. What a false equivalency to end with!
You missed the point about 300 years of aggregate trends and data in favor of snark and willful blindness. That's fine. Individuals like you and I will continue to live as we will. Mr. Piketty's book is about the large scale direction of things and what policies can influence those positively or negatively.
glad to see another post. feel free to continue 1x per month.
there hasn't been much intelligent criticism of piketty out there. this is chock full with about a dozen ideas with depth behind them.
it's funny that elites are taken with a wealth tax right now. i guess it is something brave they can support that is almost never going to happen, except in cases of national insolvency, in which case confiscation might be the only answer.
i think showing you care about a wealth tax, and inequality in general, is a nice way to distract discussion from the actual government policy that is most directly driving the trend (and which could easily be stopped) - the federal reserve.
i'm intrigued by all the ways that a centrally planned interest rate creates all kinds of downstream distortions. i'm sure your thoughts are more interesting to read. keep it up if you can!
Piketty is crazy. But then so is most of the right:
"i think showing you care about a wealth tax, and inequality in general, is a nice way to distract discussion from the actual government policy that is most directly driving the trend (and which could easily be stopped) - the federal reserve."
I hear that a lot and it is idiotic, because even if Fed driven bubbles exist they are temporary by definition.
Unlike the "Fed causes inequality" idea, which violates logic and empirical evidence across time and space, the "people are unequal" is too obviously true to be popular. Sure, globalization and robotocization might increase the spread, but inequality exists in the first place because people are unequal- unequal in easily statistically predictable ways.
The "government policy that is most directly driving the trend" ain't QE, it is immigration, particularly from groups with predictably poor outcomes.
Too bad for the inequality obsessed Left that the folks who actually understand inequality, and could lessen it, are nasty old white guys like Pat Buchanan, whom are so far off the radar that neither the Left nor Right bothers refuting them anymore.
Rambling comment ahead, sorry. The idea is that free marketism isn't sufficient to refute Piketty....
Ideas spread when they're affirmed frequently and loudly.
The frequency with which an idea is loudly affirmed depends on many things like, a) plausibility, b) desirable signaling characteristics, c) careerist personal incentives, like ideological fit w/in existing organizations.
Truth/plausibility are just one criteria among many.
Problem is, the most obvious and important non-conventional truths are reputation and career destroyers. And if an idea doesn't have champions, no matter how obviously true it is, it won't be widely believed.
I believe in free markets and agree w/ all Eric has to say about them. But it's not the 60's and 70's anymore. Like Civil Rights, free marketism has won the arguments it's capable of winning.
Everyone's looking for the next Milton Friedman. Defined as "a guy who successfully popularizes big important new ideas, w/ pro growth/freedom implications", the next Friedman is the guy who successfully and publicly unifies economics and genetics. That Pinker, Greg Clark and Sailer are the closest examples suggests this might be impossible.
i'm honored to have a blog argument on a blog that gets so few comments. i actually agree with you that immigration is the #1 driver of immigration. didn't think that was fair game for discussion.
i do think the fed is probably #2 in terms of driving inequality. making it possible to buyback stock more cheaply than capex to drive earnings. it's basically a way for the guys at the top to take money from the company's pocket and put it into theirs. the entire private equity industry basically runs on this concept.
the line: "even if Fed driven bubbles exist they are temporary by definition. " - i'd like to hear eric opine on that. i guess in the 100 year view they are temporary, but the US has been in a fed-driven market for decades now.
As someone recently banned from Caplan et al's Econlog, I want to say I encourage comments of all sorts, only requiring a modicum of civility (no swear words).
I agree that 'decades' would be longer than any bubble I'm aware of historically. Bubbles are by definition zero or negative cashflow schemes, attractive only via the expected price rise. I can't think of any that have gone on longer than 10 years. However, I think the next debt crisis in the US will be unprecedented on many levels, so with hindsight maybe one will be revealed within government debt. That's so speculative, however, I wouldn't trade on it (again, my personal musing).
i don't have the scientific definition of bubbles that you do - so i'm using lazy empiricism to make that statement - but i think 1987, 1999, 2007 as essentially monetary phenomenons, which is how I get "decades".
having read both your books and almost every post on this blog - I would be really interested to see your speculations on how things unwind from here.
i agree that an unprecedented debt crisis may well be in the offing, but If the fed continues asset purchases, and as druckenmiller recently said, continues "unprecedented" steps even 5 years into a recovery - what are the odds on a hyperinflation - complete destruction of USD purchasing power. Eg - we were so afraid of a deflation caused by taking our foot off the gas, that we got the opposite.
some of the more informed opinions i've seen are that the taper is being forced because the fed owns so many bonds - not much else to buy - and the tin foil crowd is currently speculating that the lack of collateral will dry up repo which reduced ability to transmit leverage in the markets - eg, QE leads to deflation rather than hyperinflation.
Of course, as someone who's mesmerized by the very word "market" you'd miss most of Piketty's argument. But Adam Smith is the wrong man to use to refute him. It was Adam Smith who said that you couldn't get two businessmen in the same line together for five minutes without their entering into a conspiracy against the public.
Meanwhile, states that cut taxes on the rich like Kansas are now in deep trouble while those that enacted a wealth tax are doing much better. Proponents of deficit reduction take note.
American prosperity is based on a strong middle class that has money to spend in the marketplace. When it is decimated, as it has been by all rational measures continuously since Reagan, the newly swollen assets of the rich are no substitute.
In sum, don't be too quick to sneer at Piketty. He sure makes a lot more sense than a vanity screed from a paper-thin noise machine like Thiel.
To the extent the Fed drives bubbles, it is not via low nominal or real rates, not via liquidity, nor excessive monetary growth. Not primarily at least.
Rather, almost paradoxically, bubbles (or high valuations) are most likely when the Fed does its job well, and minimizes volatility in NGDP, RGDP and inflation for extended periods of time.
Money was excessively easy in the 1970's- but you didn't get a bubble.
Inflation was contained, and output was non-volatile during the great moderation, and naturally valuations rose.
The 'fed drives bubbles' camp can't see that the fed can't simultaneously target real variables and asset market variables. Gotta pick one. I choose real variables!
Eric, what did econlog ban you for?
anon said:
"having read both your books and almost every post on this blog - I would be really interested to see your speculations on how things unwind from here."
Same here. I think- but I could be wrong- that sumner and the market monetarists have changed eric's mind a bit (or weakened his convictions) re macro and money. The market monetarists aren't scared of monetary unwinding, they're scared of an ad hoc discretionary fed targeting whatever suits their fancy. The game isn't about yes/no QE; X% rate monetary growth; y% interest rates. Rather, it is about targeting something sensible like NGDP, communicating that target and the mechanisms by which you'll achieve it, and then REMOVING ALL DISCRETION.
Anyway, hope the new gig is going well, eric.
heh. Sumner wrote about open boarders, and I commented this:
"If you look at Parfit's repugnant conclusion, 1B of human morons and pirates is better than 1M Platos."
That was it, too 'rude and irrelevant' (me: whatever, pretext). It actually supported Sumner, but would be adverse to Caplan and probably others over there. It's funny because I share most of their prejudices.
Lots of blogs delete critical comments (and commenters), which I find silly. Who cares that someone disagrees with you? Any thoughtful person will disagree with a lot of the people a lot of the time. If you want to comment here that I'm wrong, go for it, I might learn something.
Thanks for returning to Falkenblog.
The shoddiness and selectivity behind Piketty's r>g thesis has been well described elsewhere but more importantly you argue quite convincingly here that personal human happiness is maximized by personal productivity/purposefulness which is the product of personal niche finding which is the product of personal liberty.
Bob Dylan (of all people) touched on this in a semi-recent interview.
Also, I think that to a considerable extent, among the Piketty Left "capitalism" is simply a euphemism or stand-in for "meritocracy" whether they realize it or not. Our understanding of the world has changed a lot since Marx's day. We now consider bloodline aristocracy to be an arbitrary and unnecessary constraint on human potential and capital vs. labor doesn't accurately describe the strongest forces behind economic dynamics. However, it is getting harder to ignore, in light of empirical evidence, the intractable and often unpleasant reality that some people are simply born with and are therefore able to develop certain traits (including superior cognitive abilities) which give them a much higher likelihood of achieving certain things and attaining certain outcomes in life. The efficiencies of modern technology now give these people the ability to leverage their talents like never before which exacerbates the income/wealth/power gap even if it also benefits "the greater good" in the long run. It is now simultaneously the case that while many tens of millions of mid and low-skilled workers languish in a state of un- or under-employment, much smaller numbers of people with the right skills or potential will simply and inevitably be found by Google's Human Resources dept., (even if they're hiding in a cave) and presented with a six or seven figure offer letter. This kind of thing has never happened before in human history. It's a very good thing in many ways but I can see how it can lead to serious problems too. Few explicitly campaign against meritocracy but in a near pure form I don't see why it couldn't lead to a semi-permanent caste system similar in many ways to those which we are so proud to have overcome.
The best solution I think will follow the realization that the liberty-maximizes-productivity-and-happiness model is actually most important and crucial for the less advantaged/privileged among us and not for smarty-pants, rich libertarians who want to shoot guns from their yachts while whimsically deploying capital and resources without government interference.
Welcome back to blogging. You have always had some of the best ideas and commentary that I can find.
Your focus on envy as opposed to utility has a fantastic amount of explaining power in many areas and especially with books like Piketty's.
Pathetic on econlog's part.
"Who cares that someone disagrees with you?"
Well, Brad DeLong does, when he's mathematically proving that racial differences in skin color *can't* exist, and some 180 IQ physicist/geneticist shows up in his comments and starts ripping him a new one. Deleting comments makes sense if you talk out of your ass a lot.
Welcome back.
Episodic bloggers are the best!
I don't think Thiel is the good example of Piketty's worries. What about Paris Hilton? His argument is that she and her type get a disproportionate share of the goodies, at the expense of both the general public and Thiel-types. Even if he comes there from an egalitarian viewpoint and you from a meritocratic one, can't you guys agree that birth lottery is not a desirable thing to reward?
Re bubbles, interesting point that pure fundamental-free bubbles rarely if ever last more than 10 years. It's very plausible (attention span etc), but then it follows that Japanese Government Bonds are not in a bubble, and neither are Treasuries(/Bunds/etc) if they follow the same path, as seem pretty plausible too...
cig: true, Thiel isn't Lilian Bettencourt, but Thiel's fortune would have been severely constrained by the taxes Piketty is proposing. Alas, any example is both vivid and presumably typical, but also anecdotal and thus irrelevant. It was a minor point, that billionaires aren't just wet blankets, but often our most energetic and insightful people, especially new ones.
cig: The “accident of birth” argument isn’t really accurate which I’m sure you’re aware of but it nonetheless helps encourage the perception that which parents you are born from is the result of pure chance which is not the case at all.
Paris Hilton could only have been born to her parents. The “lottery” part involves gender, which particular sperm fertilized which particular egg and other uncontrollable factors that make each individual offspring unique. We have all “won” the lottery in the sense that we were born instead of millions of other potential babies our parents might have produced together. Paternity is certainly a variable but generally this is not the result of purely random chance either and even then it’s only 50% of the equation. I suspect that large numbers of people actually believe that each person could have been born to any number of parents in the world but that is simply not the case. The larger point is of course that Paris Hilton herself had no control over what circumstances she was born into and doesn’t deserve or hasn’t earned anything in this regard but that’s not synonymous with “accident” or “random”.
Similarly, “Survival of the fittest” is often taken to mean survival of the strongest, fastest, smartest etc. but that is only the case when those qualities happen to be the best fit for a particular environment. Sometimes being weak, dumb and slow are the superior characteristics for propagation of the species. The senior Hiltons themselves are by some measures among the “fittest” of our species in the current environment containing various natural and artificial selection pressures. On the other hand they have only reproduced at replacement rate which is much less than many other sexually mature adults who might otherwise be considered less fit.
If the Hiltons had produced 13 children their wealth would presumably end up being a lot less concentrated. Paradoxically humans tend to have fewer and fewer offspring the more “fit” they are (as measured by achievement, affluence, quality of life etc.). This seems pretty unique in the animal kingdom. On the other hand you can probably demonstrate, in various ways, that the “fittest”, high-achieving humans are (on a net basis) more productive than those who are less so and that their productivity ends up benefitting all or most people in the world one way or another even though the optics of bank account inequality seem to tell a different story.
It would be interesting to see what would happen a few generations down the road if tax policy allowed rich people to keep more of their wealth if they had more children.
@Eric, it's debatable whether a wealth tax would impair the fortune of Thiel-types.
If we take that people care about rank more than about their absolute score -- you've written an entire book making that point! -- the best metric of Thiel's wealth is his position in say the Forbes billionaire list, not the number of zeros in his portfolio valuation. On first order effects, wealth taxes preserve that rank, so are essentially harmless to the wealthy.
On second order effects, would a wealth tax help Thiel-types go up in the ranking and Hilton-types go down? If yes, this would be a positive result from a meritocratic viewpoint.
It seems to me that it's likely the case: basically you take capital from everybody who has some and turn it into spending money (the poor have a high propensity to spend) so business-types will be given the opportunity to collect back some of their capital and (critically) that of the rentier-types in the form of profits obtained from selling Stuff to the masses who spend the collected tax. Arguably the poor end up with some Stuff they wouldn't otherwise have, but Thiel's utility may be better maximised by his leaving the rentiers behind in the Forbes list, than if he had kept a higher absolute score and remained behind the rentiers.
@Mercury, the lottery is as seen from the individual as principal agent: people have no input in choosing their parents, so anything good (or bad) that comes from that channel is luck, it is like the outcome a lottery.
What hapened? Did you leave pine river? will you blog more?
It's a big topic, so it's not getting into anything tactical. I just figured after spending so much time reading this book I might as well write up a review.
cig: did you note Hilton's grandpa gave away 97% of his wealth to a charity a while back?
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