More on Picketty

I’m finding so much interesting analysis of the Picketty book, but I’m not really capable of synthesizing it into anything particularly coherent, nor do I have the qualifications or, frankly, the time and interest to do so.  Instead, I will offer up the links as well as any quotes that show some of the unique thoughts within the posts:

From Heather Boushey at Challenge Magazine, a 13 page review.  This quote, referencing the “postwar golden age,” is referring to the 3 decades following WWII in which inequality did not increase.

It is important to note that unlike
many scholars, Piketty does not think
that this postwar golden age was the
result of labor wins on the shop floor
or the expansion of the welfare state,
important as those were. For him, it
was the destruction of capital caused
by the two world wars and taxes
levied on high incomes and estates
to pay for those wars. Politics led to
policies that meant that, for the first
time, the rate of return on capital
fell below the rate of growth. This is
a stunning revelation. The success of
the welfare state is not due to what
it buys in the form of social stability
but, rather, to the taxes to pay for it,
which regulate capital in a highly
functional way.
The conclusion that taxes are the answer then leads to this gem:
A first step would be for governments
to begin to compile data on
capital income, in the same way
that they have data on income from
earnings. Knowing who owns capital
could help societies understand how
they want to respond to today’s high
inequality. The government already
tracks every tweet I send; I don’t
think it’s unreasonable to follow
the money and know who owns the
wealth. This policy recommendation
is certainly not revolutionary,
but that does not mean it will sail
through Congress. One advantage
that we have, however, is that we live
in an era where developed economies
are governed by democratically elected,
capable states with the proven
power to tax incomes.

What the Saez-Picketty work together suggests is that Income inequality is a two-headed monster. It occurs when the rich get

richer in absolute (capital income) terms, as well as when middle class and below households experience a decline in their

(earned wage & salary) incomes; or when both occur simultaneously which of course has been the case in the past three

decades at least. However, while identifying wage stagnation or decline, neither Picketty or Saez offer much explanation

as to why or how this decline has been occurring. It is one thing to identify wage stagnation and decline; it is another to

explain why and how it is occurring—and accelerating of late.

So how are the wealthiest 1% households becoming not merely ‘very rich’ but ‘super-rich’ and ‘mega-rich’? What are the

fundamental causes behind the trend? How is their income being generated at the source—thereafter ensuring it is ‘passed

through’ by an ever-generous treatment of corporate and personal capital incomes by a restructuring tax system?

The Dual Origins of Rising Capital Incomes

Their accelerating income and wealth is generated, in increasing part, from the manipulation of global financial assets

and speculative financial trading, on the one hand. That is, from returns on capital from global stock & bond trading,

foreign exchange speculation, interest, real estate, commodity futures, structured finance and derivatives in myriad

proliferating forms, rents, and so forth—to mention just a short list. This is just ‘money making money’ and doesn’t

involve shifting income from workers by reducing their real wages, cutting their health care and retirement benefits,

stealing all their productivity gains, and the many other ways their corporations shift income from the working class to

themselves.

This second of the twofold process, i.e. reducing of labor costs across the board, are therefore a second major way in

which income has been growing for the wealthiest 1%. Income and wealth is not only generated from financial

speculation, but from the transfer of income from workers through the conduit of their corporations to them in the

form of capital gains, dividends, interest and rent. One of the hallmarks of the past decade globally is that Corporate

‘profit margins’ (i.e. profits from reducing operating costs) are at consistent, record annual levels. Corporate income

taxes are then in turn reduced by governments to increase the ‘pass through’ of these growing corporate net income

gains to their major stockholders, the wealthy 1% households who are almost exclusively ‘investor’ households and

not earners of wages & salaries. Governments then further reduce their personal income taxes as well, in order to

ensure they can keep an ever growing percentage of the profits that their corporations pass through to them.

As both Saez and Picketty have understood, Capitalist tax systems are central to both of the more basic processes

of income creation noted above. Tax cuts on corporate and personal investor income taxes both result in more income

accruing to the wealthiest 1%. But the underlying processes are different. One involves the increase in transfer of

share of national income from workers to owners of capital; the other involves owners of capital manipulating the

financial system and financial asset prices for gain. One involves increasing the exploitation of labor, and the other

involves the manipulation of asset prices and exchange.

Both Saez and Picketty focus on the tax system as central to the growing concentration of income in favor of the

wealthiest 1%. However, neither examine the more fundamental processes at play—i.e. the growing relative

weight of financial speculation in global Capitalism or the simultaneous growing intensification of labor exploitation

and income transfer between classes that is occurring in the U.S. and globally as well.

Ken Rogoff has written a brief note on the book, and I wish he would write more about it.  He’s a more traditional economist type, and
his main issue with the book is that it does not include any model of how these processes work.  The lack of a model means that you
can’t test to see if 80% taxes are really a good thing or not, and it also means that you can’t test to see if maybe there are other factors at
work as contributors or even main drivers of inequality.
Thomas Frank at Salon thinks that Piketty’s forgotten the real heroes, which in his mind are the unions.  It seems to me that unions,
as they mature, tend to behave much as the rent seeking owners of capital do.  Check out this article in the New Yorker on how unions
(and other cronies) have stymied progress in Newark, NJ schools.
But to be fair, this chart from a speech by Jason Furman support’s Mr. Frank’s views:
income vs union
The speech is well worth reading – it includes some analysis of productivity, and how that has been an issue in incomes for Europe in
particular, and a wonderful detailed discussion of the contributions of capital income vs. labor income, and the changes in those, to inequality.
Piketty observes that over the next century g will slow because of demographic and potentially other factors as well. If r does
not fall by as much as g, then Piketty argues that wealth will become proportionately more important than income, raising the
share of income going to capital and thus raisi ng overall inequality. Piketty further argues that the increased importance of wealth
will also result in the increased importance of inherited wealth.  This thesis is intriguing and an important source of concern,
although it is unclear how likely it is.
Piketty’s prediction is that the capital share of income will rise, pushing in the direction of increased inequality. But this is only
one of the determinants of inequality. While the trends may continue to shift in that direction, a more important factor to date has
been the inequality within labor income , and while Piketty implicitly takes this to be fixed, there is no a priori basis to predict
whether it will rise or fall in the future because it is a function of unpredictable technological developments, norms, institutions,
and public policies.
Furman’s speech also includes some discussion of the effect of inequality on growth, which I think is the weakest part of his presentation.
He discusses  a bunch of theories, details the specific weaknesses of one, and then uses it to generalize and claim victory in the last 5 years.
Which is really weird considering that inequality has increased in that time.  He’s saying, it could have been worse.  There’s a logical error
in there but I don’t know the right name for it.  Statistically, I would call it an outside the sample extrapolation error.  He concludes with a
4 pronged approach to policies that are intended to improve growth and (maybe) reduce inequality.  Some of them outright conflict.
Most of them are non controversial, and yet, have yet to be acted on by our lame ass congress.  The most redistributionist suggestions
are expansion of EITC, increased minimum wage, and reduction of tax deductions (i.e. tax increase) for higher income individuals.
Then you get people who want to justify some pretty radical redistribution on moral grounds.  Umair Haque at Harvard Business
Review, please show me this desert:
Imagine a bountiful forest. And then — no one can say quite why — a small handful of the trees suddenly grow tall. Much taller.
They became so tall and strong and broad that they block the sunlight from all the other trees. The other trees begin to wilt, and
wither, and disappear. Their roots crack, and split, and turn to dust. And one day, not long after, even the roots of the tallest trees
can find no water, can grip no soil. They begin to fall. Soon the whole forest becomes a desert.
And while I could not agree more that corporate boards are failing to do their jobs, I think that if they were even only serving investors
properly, the outrageous compensation packages would not occur.  But Lucy Marcus at World Economic Forum thinks they should
pretend they are the janitor or the floor level worker of the company they are directing.  That’s just going way overboard:
For example, if we didn’t know whether we would be working long days at a fast-food counter or overseeing the entire
organization, we would think differently about compensation structures and the ever increasing gap between the most senior
management and the most junior staff members. If we didn’t know whether we would be working on a factory floor in Bangladesh
or in a shiny head office in the United States, no one would disavow responsibility for the health and safety of Bangladeshi
workers.The list goes on. If board members were making choices from behind the veil of ignorance –not knowing their position
in the company – they would want everyone to have opportunities to implement change or be entrepreneurial. Not knowing
whether they were male or female, they would ensure pay equity and better policies concerning parental leave and child care.Likewise, knowing that they might be the customer would make them look differently at cost-cutting measures that weaken

product testing and consumer protection. If they believed that they might live in a community affected by an oil spill, they

would want robust, not minimal, environmental safety standards, and they would not seek to circumvent the rules.

There is a danger of taking this thought experiment too far. Getting caught up in factoring in all of the different perspectives

would cause decision-making to gravitate toward the lowest common denominator, with outcomes that achieve very little for

anyone. That is not the point. The point is to step outside of one’s comfort zones, distance oneself from the voices around the

table that sound just like one’s own, and remember that board members are responsible for the direct and indirect impact of their decisions.

However, Piketty and Saez do not really offer a model; nor does this new book. And the lack of a model, combined with a focus on the world’s upper-middle-class countries, matters a lot when it comes to policy prescriptions. Would Piketty’s followers be nearly as enthusiastic about his proposed progressive global wealth tax if it were aimed at correcting the huge disparities between the richest countries and the poorest, instead of between those who are well off by global standards and the ultra-wealthy?

Piketty argues that capitalism is unfair. Wasn’t colonialism unfair, too? In any event, the idea of a global wealth tax is replete with credibility and enforcement problems, aside from being politically implausible.

Though Piketty is right that returns to capital have increased in the last few decades, he is too dismissive of the wide-ranging debate among economists concerning the causes. For example, if the main driver is the massive influx of Asian labor into globalized trade markets, the growth model put forth by the Nobel laureate economist Robert Solow suggests that eventually capital stocks will adjust and the wage rate will rise. Retirements from an aging labor force will eventually drive up wages as well. If, on the other hand, labor’s share of income is falling because of the inexorable rise of automation, downward pressures on that share will continue, as I discussed in the context of artificial intelligence a few years ago.

Read more at http://www.project-syndicate.org/commentary/kenneth-rogoff-says-that-thomas-piketty-is-right-about-rich-countries–but-wrong-about-the-world#CciotAYF6dyi8Wm9.99

However, Piketty and Saez do not really offer a model; nor does this new book. And the lack of a model, combined with a focus on the world’s upper-middle-class countries, matters a lot when it comes to policy prescriptions. Would Piketty’s followers be nearly as enthusiastic about his proposed progressive global wealth tax if it were aimed at correcting the huge disparities between the richest countries and the poorest, instead of between those who are well off by global standards and the ultra-wealthy?

Piketty argues that capitalism is unfair. Wasn’t colonialism unfair, too? In any event, the idea of a global wealth tax is replete with credibility and enforcement problems, aside from being politically implausible.

Though Piketty is right that returns to capital have increased in the last few decades, he is too dismissive of the wide-ranging debate among economists concerning the causes. For example, if the main driver is the massive influx of Asian labor into globalized trade markets, the growth model put forth by the Nobel laureate economist Robert Solow suggests that eventually capital stocks will adjust and the wage rate will rise. Retirements from an aging labor force will eventually drive up wages as well. If, on the other hand, labor’s share of income is falling because of the inexorable rise of automation, downward pressures on that share will continue, as I discussed in the context of artificial intelligence a few years ago.

Read more at http://www.project-syndicate.org/commentary/kenneth-rogoff-says-that-thomas-piketty-is-right-about-rich-countries–but-wrong-about-the-world#CciotAYF6dyi8Wm9.99

However, Piketty and Saez do not really offer a model; nor does this new book. And the lack of a model, combined with a focus on the world’s upper-middle-class countries, matters a lot when it comes to policy prescriptions. Would Piketty’s followers be nearly as enthusiastic about his proposed progressive global wealth tax if it were aimed at correcting the huge disparities between the richest countries and the poorest, instead of between those who are well off by global standards and the ultra-wealthy?

Piketty argues that capitalism is unfair. Wasn’t colonialism unfair, too? In any event, the idea of a global wealth tax is replete with credibility and enforcement problems, aside from being politically implausible.

Though Piketty is right that returns to capital have increased in the last few decades, he is too dismissive of the wide-ranging debate among economists concerning the causes. For example, if the main driver is the massive influx of Asian labor into globalized trade markets, the growth model put forth by the Nobel laureate economist Robert Solow suggests that eventually capital stocks will adjust and the wage rate will rise. Retirements from an aging labor force will eventually drive up wages as well. If, on the other hand, labor’s share of income is falling because of the inexorable rise of automation, downward pressures on that share will continue, as I discussed in the context of artificial intelligence a few years ago.

Read more at http://www.project-syndicate.org/commentary/kenneth-rogoff-says-that-thomas-piketty-is-right-about-rich-countries–but-wrong-about-the-world#MeH27Rj4WzGM7K5S.99

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