The misleading ‘elephant curve’ graph

Click to enlarge.

This widely-circulated graph supposedly shows that the great growth in income of the world’s richest 1 percent is justified because the world’s poorest people also are making great gains under the present system.

The problems of poor and middle-class people in rich countries are supposedly a necessary sacrifice to make this happen.

What makes this chart misleading is that it deals with percentages rather than amounts (dollars, euros, etc.)  So a tiny gain in income for a poor person in, say, Bangladesh or Sudan is a large percentage, even though it is a small amount.

Annotations by the famous French economist Thomas Piketty, in his book, Capital and Ideology, show the true picture.  The poorest 50 percent of the world’s population got only a one-eighth share of the growth in world income over a 38-year period.

The next 49 percent, even though their proportionate gain was less, enjoyed more than sixth-tenths of the amount of the gain.  The world’s richest 1 percent got more than a quarter of the gain.  The richest 0.01 percent got the biggest proportionate gain of all.

The graph does show that the poorest 50 percent of the world’s population made some gains.  A lot of that consists of progress in just one country, China.  A lot of it may consist of people moving from a barter economy to a money economy, and from the “informal” off-the-books economy to the visible economy.

Many of the world’s poorest people may be slightly better off than they were 40 years ago. It’s possible. Even if this is so, there should be a better way to improve their lot than the trickle-down system illustrated by this chart.

LINKS

World Poverty Is NOT Decreasing by Ian Welsh.

No, the World Isn’t Getting Better for Everyone by Ian Welsh.

Worldwide inequality report shows gap between rich and poor by Sam Meredith for CNBC

Thomas Piketty on inequality in education

Source: IMF e-Library

In the present-day USA, young people are told they have no economic future unless they have college educations.  Unless their parents are relatively affluent, the only way they can afford tuition is to go into debt—debt that literally can follow them all their lives.

Many of the top jobs in management, academia and government are only open to graduates of prestigious colleges.  So the educational system reinforces inequality.

Thomas Piketty

Thomas Piketty, in his new book Capital and Ideology, shows that this pattern exists across the Western world, including his native France.

It wasn’t always this way, he noted.  During the decades following the Second World War, the progressive and socialist political parties opened up higher education to working people in a way that hadn’t been done before.

Many of the beneficiaries of these programs became leaders of the moderately progressive and socialist parties.  They became what Piketty called the Brahmin Left, an educational elite, which, according to him, lost touch with the wage earners without college degrees.  He said in an interview:

If you look at education policies, in the 1950s, 1960s and 1970s, there was a relatively egalitarian platform of investing in primary and secondary education for all and bringing everyone to the end of secondary school. Gradually, in the 1980s and 1990s there was the rise of higher education, but this egalitarian platform has been abandoned in some cases.

There is a lot of hypocrisy in terms of access to universities. I show in the book that if you look at a country like the United States, there is data now available on the relationship between parental income and access to education that shows if your parents are poor, you still have a 25% chance to enter higher education, but when your parents are rich, you have a 95% chance.

Actually, this is understating the impact on equality of opportunity because of course the universities that those with rich parents have access to are not the same as the universities that those with poor parents have access to.

If you look at the amount of education investment, you find that even in a supposedly more egalitarian public system like France, the picture is unequal.

Thomas Piketty on corporate co-determination

I’ve written a good bit about Thomas Piketty’s new book.  Click on the Capital and Ideology tag to read my previous posts about it.  In this post, I’m going to discuss his ideas on corporate governance.

Great corporations typically begin with an individual who has a vision—a Steve Jobs, a Walt Disney, a George Eastman, a Henry Ford, a Soichiro Honda or a Jack Ma.

The drive and creativity of the individuals make the companies what they are.  Over time, though, the companies devolve into authoritarian bureaucracies, little junior watered-down versions of the Soviet Union.

Click to enlarge.  Source: Oxford Law Faculty

The goal of reform would be how to prevent corporate abuse without stifling enterprise and beneficial innovation.  Piketty’s solution is to adopt German-Scandinavian co-determination, under which corporations of a certain size have to allow employees to choose a certain number of corporate directors.

In Germany, according to Piketty,  all firms with more than 2,000 employees must reserve half the seats on their oversight committees to worker representatives.  All firms with 500 to 1,999 employees must reserve a third of their oversight committee seats to worker representatives.  There also are factory committees with union representatives who have a say one work rules and training.

However, in Germany, the oversight committees only supervise day-to-day operations of companies.  Policy is set by directorates, on which workers have no representation.

Other countries reserve one-third of seats for workers on companies of a certain size.  In Sweden, the threshold is 35 employees; in Norway, 50 employees; in Austria, 500 employees.

In April 2018, according to Wikipedia, U.S. Senators Tammy Baldwin, Elizabeth Warren and Brian Schatz sponsored the Reward Work Act,  which would amend federal legislation to require all companies listed on national stock exchanges to have one-third board representation for workers.  Polls showed majority support among Americans for the measure.

In August 2018, Elizabeth Warren sponsored a new Accountable Capitalism Act that would require 40 percent of the board of directors be elected by employees in federal corporations with taxable incomes over $1 billion.

In Britain, the Bullock Report in 1977, during the Harold Wilson administration, called for co-determination in big businesses based on the formula 2x + y. In this, workers and stockholders would have equal representation on boards of directors, but there would be two government representatives to break a tie.  It never became reality.

In practice, even though workers have a voice, the final authority rests with the owners.  I think there still is a benefit to having worker representatives.

Employees usually know things about how companies operate that the top managers don’t.  This can be valuable in avoiding the Stupidity Paradox, in which layers of bureaucrats demand good news and truthful information doesn’t filter up.

It’s also good for employees, especially union representatives, to have access to the same information that top management has.  Of course all these desirable goals can be thwarted by a sufficiently cunning and authoritarian management.

Thomas Piketty on equality through taxation

Thomas Piketty’s Capital and Ideology is the most comprehensive study I know about the causes of economic inequality.  He gathered a vast amount of data and made sense of it.  To read my comments on his research, click on this, this, this and this.

In the last chapter, he outlined proposals for a “participatory socialism” to make society less unequal.  He saw three main ways to do this: (1) taxation, (2) reform of corporate governance and (3) educational reform.  This post will be about taxation.  I will take up the other two later.

His plan is based on steeply graduated income taxes, inheritance taxes and new taxes on wealth.  These were to be used to finance a wealth endowment of 60 percent of average wealth to every citizen at age 25 and a guaranteed income of 60 percent of average income.

He does not make absolute equality his goal, but he would allow a much narrower band of inequality than exists today.

I’ve long been indignant at the growing extremes of inequality in my country and the abuses of power of the very rich.  Reading Piketty forces me to think about just how much equality I want and how much I would give up to attain it.

∞

Piketty wrote in earlier chapters of Capital and Ideology about how higher taxes have often been the key to greater national power and wealth.

One of history’s mysteries is how it was that European nations could defeat great Asian empires, such as the Ottoman Empire, the Mughal Empire in India or the Manchu (Qing) Dynasty in China, when, prior to the Industrial Revolution, they were equal in wealth and technology to the European nations.  It was the Chinese, for example, who invented gunpowder.

Piketty’s answer is that the Europeans gained an advantage through a higher level of taxation.  Tax revenue across Europe and Asia prior to the modern era was roughly 1 to 2 percent of national income.  This gave a king or emperor enough revenue to reign, but not to exercise tight control over his realm.

This changed in Europe, during the wars of the 16th and 17th centuries, when military competition forced kings to increase their revenues to 8 to 10 percent of national income.

Click to enlarge

The greater revenue enabled kings to become absolute monarchs, exercising almost as much control over their citizens as a 20th century president or prime minister.  It also enabled them to put armies in the field that the Turks, Persians, Indians, Chinese and Japanese could not match.

Western governments’ revenue was bumped up again in the early 20th century, to 30 to 50 percent of national income.  This made possible the total wars of the early 20th century.  But it also gave governments enough money to pay for universal public education, old age pensions, public health and the other services of the welfare state.

This was only tolerable because the Western nations had grown rich enough that their people could give up a big fraction of their incomes to government and still enjoy a high material standard of living.

It would not have been possible in, say, France in the time of Louis XIV.  The taxes he levied to finance his wars reduced the peasantry to misery and, in some cases, starvation (because the nobles enjoyed most of the national income, but paid no taxes).

The same conditions may exist in poor African countries today.  But in rich Western countries, it is technologically and economically feasible to raise taxes revenues to 50 percent of national income, which is necessary for PIketty’s program.

Piketty’s stats and the problem with class conflict

The late Saul Alinsky used to say that politics is a struggle among the haves, the have-nots and the have-a-littles.  He said the outcome usually depends on which side the have-a-littles choose.

Reading Thomas Piketty’s big new book, Capital and Ideology,  reminded me I’d forgotten this important truth.

The USA and much of the rest of the world is governed in the interests of a political and economic elite and not a majority of the public.  I want a politics that represents the interests of the majority of the population.

But there are objective reasons why this is harder than it seems.  If you look at economic class in terms of a top 10 percent in income or wealth, a middle 40 percent and a bottom 50 percent, you see that there is a difference between the middle class (the have-a-littles) and the lower class (the have-nots)

I had come to think that the big problem of American politics is that so much of it is a conflict of the top 0.1 percent of income earners with the next 9.9 percent, leaving the rest of us behind.

The top 0.1 percent, in this interpretation, are the millionaires and billionaires that Bernie Sanders denounces.  The next 9.9 percent, very roughly speaking, are highly paid professionals, the “professional managerial class,” who tend to be more socially liberal, but whose economic interests are different from the majority.

Matthew Stewart wrote a good article about this in The Atlantic a couple of years ago.  The conclusion is that we the American majority have to stop thinking we have to choose between the plutocrats and the PMC and unite in our own interests.

That would make sense if economic inequality were the same as it was in Britain, France or Sweden around the turn of the previous century, as reflected in the chart above (taken from Piketty’s book)

But it’s not.  There is now a big middle class, in between the top 10 percent and the bottom 50 percent, as shown in the chart below (taken from an article co-authored by Piketty).

Click to enlarge.

In western Europe and the USA, the middle 40 percent aren’t doing too badly.  They’re open to the politics of a Margaret Thatcher or a Ronald Reagan.

Instead of claiming a larger share from the haves, they’re told they need to worry about the claims of the have-nots.  Even in parts of the world where economic inequality is greater than in Europe or the USA, there is a middle class with something to lose.

Thomas Piketty and the politics of inequality

Reasonable people differ on the amount of economic inequality that is tolerable.  But I think almost anyone would set some upper limit.

In today’s USA, a single individual, Bill Gates, is wealthy enough to buy the city of Boston for the assessed value of its property.  The size of Jeff Bezos’ wealth is almost unimaginable.

Meanwhile four in 10 Americans lack enough cash on hand to meet an unexpected $400 expense without going into debt.

Why is this acceptable?  I’ll describe the ideas of the great French economist Thomas Piketty in his new book, Capital and Ideology.  Then I’ll discuss some of the things Piketty left out.

Piketty said the fall of Communism in the Soviet bloc and China discredited egalitarianism and validated the market economy.  Leaders of Western capitalist countries felt they were in a position to tell the working class that there is no alternative.

Even before that, the economic stagnation of the late 1970s discredited the welfare state.  The USA had both high unemployment and high inflation, which was considered theoretically impossible.  One diagnosis was that the welfare state had reached its limit, that it was in a state of deadlock because of the inability to satisfy all claimants.  This had been predicted by Friedrich Hayek in The Road to Serfdom.  He said that only a fascist dictator would be able to break the deadlock.

Click to enlarge

Ronald Reagan and Margaret Thatcher presented a different answer.  Dial back to welfare state, cut upper-bracket tax rates and allow rich people and corporations to accumulate wealth.  They will invest that wealth and the workings of the free market will assure that this works for the benefit of all.

As Piketty pointed out, none of this worked out as promised.  Cuts in marginal tax rates did not result in job creation, economic growth or anything else that was promised.

So why do Reaganism and Thatcherism still prevail?

One reason is that the historic left-wing parties abandoned the working class.  The Democrats in the USA, the Labour Party in Britain and the French socialists came to represent an educated elite rather than laborers and wage-earners.

Politics in these countries has come to be a conflict of elites, between what Piketty called the Merchant Right and the Brahmin Left.  It is like the conflict between the nobility and the clergy in the European Middle Ages and the conflict between landowners and business owners in 19th century Britain.

In the USA, many progressives see today’s politics as a conflict between the plutocracy, whose power is based on wealth, and the professional-managerial class, whose power is based on their academic credentials and their positions in organizations.  Wage-earners are not represented.  Piketty showed that the same conflict exists in other countries.

Piketty on the sacredness of property rights

When English settlers first dealt with American Indians, there was a fundamental misunderstanding of the nature of property rights.

The Indians had no idea of buying the exclusive right to use a tract of land, keep everybody else off it and sell the land to someone else.

Thomas Piketty pointed out in his new book, Capital and Ideology, that, in fact, this was a fairly new idea even for the English and other Europeans.

The idea of absolute property rights did not exist in the European middle ages. Someone might have a hereditary right to grow crops on a certain tract of land, a second person the right to 10 percent of all crops grown on the land, a third person the right to grind grain produced on the land for a fixed fee, and so on.

Furthermore the right to land use was not so much bought and sold as inherited.

Medieval France was what Piketty called a “ternary” society—a society in which political power and property ownership were divided between a hereditary noble class who “fought for all” and a priestly class who “prayed for all,” leaving very little for a lower class who “worked for all.”

The “ternary” system existed in the Islamic world, India and many other parts of the world, and it casts its shadow over the present world.  Saudi Arabia and the Gulf states (mostly Sunni) are ruled by hereditary monarchs while Iran (mostly Shiite) is ruled by clerics.  In India, the descendants of Brahmins (priests) and Kshatriyas (warriors) are richer and more influential than the Vaishyas (farmers, craftsmen and traders) and Shudras (laborers).

In Europe, uniquely, priests were celibate.  They could not found dynasties.  This mean that the Roman Catholic institutions had to be corporations.  They had to have a continuing existence that was independent of who was in charge.  It’s not accidental that business corporations originated in Europe.

The French Revolution overthrew hereditary property rights and established what Piketty called “proprietarianism” or “the ownership society”—the idea that property rights were sacred, provided that the property was acquired through legitimate purchase.

The accepted story in France is that the revolutionaries divided up the aristocrats’ estates among the peasants and turned France into a nation of small landowners.  In fact, according to Piketty, the revolutionaries made arbitrary distinctions between land that was owned through hereditary privilege and land acquired through voluntary contract, and, in many areas,  property ownership remained almost as concentrated as before.

Piketty wrote that the revolution was one of history’s “switch points.”  He thinks it could have been more radically egalitarian than it was.

In fact, concentration of wealth in France at the beginning of the 20th century was even greater than at the time of the French Revolution.

Piketty’s new book on economic inequality

The French economist Thomas Piketty made a big splash with Capital in the 21st Century (published 2013, translated into English 2014).  He showed why, all other things being equal, the rich will get richer and the rest of us will get less.

In different countries in different historical periods, the rate of return on income-producing property exceeded the rate of economic growth.  This was true whether the income-producing property was real estate, government bonds, corporate stocks or something else.

What this meant was that, in the absence of revolution, war or something else that wiped out the value of their assets, the rich would get richer and everybody else would be left behind.

Piketty’s new book, CAPITAL AND IDEOLOGY  (published 2019, translated 2020), is more ambitious and complicated.  He thinks it is an even better book that its predecessor and I agree.  It is a great work.

He looked at all the forms that economic inequality has taken in the past few centuries and all the different ways that inequality has been rationalized.  While his earlier book was based mainly on data from France, Great Britain and the United States, the new book tries to be global in scope.

He said it is important to understand not only the forms of economic inequality, but the reasons why people accept them.

His book covers several kinds of “inequality regimes”:

• “Ternary” societies in which most wealth is controlled by hereditary kings and aristocrats and an established church or religious institution.
• “Ownership” societies in which property ownership is regarded as a sacred right, superseding everything else.
• Slave and colonial societies.
• “Social democratic” societies, which limit the rights of property owners.
• The hyper-capitalism of today, which is a backlash against social democracy and Communism.

The degree of inequality in any nation or society is not the result of impersonal economic law, he wrote; it is the result of choices that could have been different.  History does not consist of class struggles; it consists of a struggle of ideas and a struggle for justice.

To understand inequality, he wrote, it is necessary to understand the reasons for choices at various “switch points” of history—the French Revolution, the British constitutional crisis of 1911, privatization in Russia after the fall of Communism.

Piketty on the merchant right and Brahmin left

The French economist Thomas PIketty is famous for his best-selling book, Capital in the 21st Century, which explained why inequality constantly increases.

Thomas Piketty

The explanation is the formula r>g.  It means that the rate of return on assets over time exceeds the rate of economic growth.  That means the wealthy get an ever-larger share of the economic pie until and unless something happens to destroy the value of their assets—war, revolution or a financial crash.

Piketty has just published a sequel, Capital and Ideology. in France.  It will be published in English translation next March.  Reviewers say it takes a more global view than the first book and advances more radical ideas for reducing inequality.

The part that’s getting the most attention is Piketty’s notion that politics in the USA, UK and France are polarized between a “Brahmin left,” representing the highly-educated, and a “merchant right,” representing great wealth—two elites who have more in common with each other than with the majority of working people..

Initially, left-wing parties represented poorly educated wage-earners, while right parties represented owners of capital and the professional classes.  Over time, left-wing parties helped children of wage-earners advance into the educated middle class, and their children supposedly became the liberal elites, whom Piketty calls the “Brahmin left.”

The Brahmin left occupy high positions in organizations—government, corporate, educational, “non-profit”— based on their educational credentials.  Their counterparts, the merchant right, have power based on their ownership of businesses and financial assets.

Both believe their power and position is based on merit.  Both embrace global competitiveness, immigration and dismantling of trade protections and the social safety net, which leave working people with lower wages and greater insecurity..

This has produced a nationalist backlash.  Americans elected Donald Trump as President, the British voted to exit the European Common Market and Marine le Pen’s National Rally has a substantial following among French voters.  What they have in common is opposition to globalization and immigration.

The nationalist backlash is not yet a serious threat to the financial elite.  But it has driven immigrants and racial minorities into the left-wing parties in all three countries.  By championing minority rights, the Brahmin left can convince themselves they are still on the side of the underdog.

Piketty thinks the “Brahmin left” and “merchant right” may merge, and true workers’ parties may emerge in opposition to them, as the original British Labor Party emerged in opposition to the Conservative and Liberal parties in the early 1900s.

More about the Brahmin left and merchant right

Democrats in the U.S., the Labor Party in Britain and left-wing parties in France no longer primarily represent the interests of wage earners, according to Thomas Piketty, the famous French economist.

Instead they represent an educated elite, which he calls the Brahmin left, while the conservative parties represent a financial elite, which he calls the merchant right.

The educated elite are not an intellectual elite.  Having advanced college degrees don’t make you an intellectual any more than owning stocks and bonds makes you an entrepreneur.

I agree that there is less conflict of interest between the educated elite and the financial elite than there is between the two elites and the majority of wage-earners.

In a typical Fortune 500 corporation, the CEO, the board of directors and the institutional stockholders would be the merchant right.

Salaried middle management, the highly-paid consultants and most especially the human resources department would be the Brahmin left.  Their income would not come from financial assets, but from their rank in an organization, for which they would qualify by means of educational credentials.

The human resources department of an organization usually determines the organizational culture.  Typically HR people are big on diversity training and being LGBTQ allies because these things do not affect the wealth of stockholders or the power of top management.

American non-profit organizations such as universities and hospitals and also government agencies are adopting a  corporate model.

This means a well-paid top-heavy administrative overhead along with lower pay, higher demands and less security for those who do actual work.   Adjunct teachers, hospital nurses and letter carriers are treated just the same as factory workers.

Just to be clear, I’m in favor of sticking up for the rights of minorities, women and other groups that are targets of prejudice.  What’s wrong is using this as cover for lower wages, longer hours, expansion of contingent work and a fight against labor unions.

Such are my observations about American institutional life.  I don’t know how true these observations are true of institutions in Britain and France, or whether they are true at all, but I wouldn’t be surprised if they were.

Left-wing parties win college grads, lose workers

Click to enlarge

Left-wing parties in the UK and France, as well as the USA, are gaining support of the educated classes while losing support of blue-collar workers.

The French economist Thomas Piketty said politics in these three countries is a conflict between the “Merchant Right” and the “Brahmin Left,” a high-incom elite vs. a high-education elite.

I don’t know about the specific situation in France, but it’s clear to me that the leaders of Democratic Party in the USA and the Labour Party in the UK care more about the material interests of a professional class than they do about the material interests of workers.

LINKS

Brahmin Left vs. Merchant Right: Rising Inequality and the Changing Structure of Political Conflict by Thomas Piketty.

How the left stopped being a party of the working class by Simon Wren-Lewis for his Mainly Macro blog.

Trump, Macron tax plans both favor the rich

Donald Trump, the populist, nationalist President of the United States, and Emmanuel Macron, the sophisticated, cosmopolitan President of France, may seem like mirror opposites.

And, indeed, Trump in 2017 spoke favorably of Macron’s opponent, Marine Le Pen, while Macron has been highly critical of Trump.

But they both represent the interests of the economic elite, according to Thomas Piketty, the famous economist who wrote Capital in the 21st Century. 

They both support changes in the tax laws that will increase the share of income of the wealthiest Americans and French.

Piketty says the American and French economic elite have taken almost all the benefit of income growth in the past few decades, and don’t need any more.  Both countries’ new tax laws would—

• Leave working people feeling even more alienated from their governments than before.
• Leave the public feeling even more unwilling to make sacrifices need to curb global warming.   If rich people can live even more lavishly than before, why should the rest of us accept the burden of a carbon tax?
• Leave governments even fewer resources to reduce poverty, either on a national or a global scale.

As Piketty wrote, economic policies that benefit the economic elite at the expense of everybody else, in addition to being bad in themselves, are like to lead to a nationalist backlash that benefits nobody.

This is not an issue that is limited to the USA and France.

LINK

Trump, Macron: same fight on Le blog de Thomas Piketty.

How much equality do we want?

Grant that extreme economic inequality is a bad thing.  Grant that ever-increasing economic inequality is a bad thing.

Grant that complete equality of incomes is not feasible and maybe not desirable.  How much equality is enough?

The economist Friedrich Hayek wrote in The Road to Serfdom (as I recall) that it is impossible that people could reach a consensus on what each and every person deserves.   Once you reject complete equality, he  wrote, the only acceptable distribution of income is what results from the impersonal working of the free market.

A democratic government could never determine a distribution of income that is satisfactory to everyone, or even a majority, Hayek thought; if it tries, the result can only be gridlock and a breakdown of democracy.

But there are ways to reduce inequality that neither set limits on any individual’s aspirations nor give some group of bureaucrats the power to decide who gets what.   Some that come to mind immediately are:

1. Prosecute those who get rich by lawbreaking.
2. Set limits on unearned income.
3. Break up monopolies.
4. Empower labor unions and cooperatives.
   
5. Provide good public services to all, regardless of income.
6. Provide decent jobs for all who are willing and able to work.

What are your ideas?

Can economic growth overtake rising inequality?

Via emptywheel.

The French economist Thomas Piketty has a strong and obvious argument as to why the rich usually get richer and the rest of us not.

Via U.S. Economic Snapshot.

He points out that so long as the return on assets—of whatever kind—is at a higher rate than the rate of economic growth, wealth and income will flow to owners of capital, not to wage-earners.

If you see gross inequality as a problem, there are two possible solutions:

1.  Raise the top tax brackets to reduce the share of the capitalists.
2.  Increase the rate of economic growth to increase the share of the workers.

An economist named Gerald Friedman concluded that Bernie Sanders’ economic policy would produce 5.3 percent annual economic growth.  Other economists say that is over-optimistic to the point of being crazy.  But even if Friedman is right, it would still be less than the historic rate of return on capital.

If Piketty is right, it means economic growth alone will not stem the growth of economic inequality.  It will be necessary to reduce return on capital, not to zero, but to a rate less than the rate of economic growth.

One way to do this is to raise upper-bracket taxes to 1950s levels.  Regulation of interest rates and subprime lending would help.  Prosecution of financial fraud and enforcement of antitrust laws might have an effect.

Historically, as Piketty noted in Capital in the 21st Century, there have been other ways in which concentrations of wealth have been destroyed.  They have been destroyed by means of wars, revolutions and devastating economic depressions.

‘Why spy? It’s cheaper than playing fair’

The French economist Thomas Piketty believes that if the gap between rich people and the majority becomes as wide as it was before the French Revolution, there could be another such revolution.

But Cory Doctorow, writing in The Guardian, says the financial elites are aware of the danger of revolution and their response is to press governments to spend money on the police, the military and government surveillance, rather than on measures that would allow a more broadly shared prosperity.

Piketty is trying to convince global elites (or at least the policymakers beholden to them) that it’s cheaper to submit to a redistributive 1% annual global wealth tax than it is to buy the guards to sustain our present wealth disparity.

There’s an implied max/min problem here: the intersection of a curve representing the amount of wealth you need to spend on guards to maintain stability in the presence of a widening rich/poor gap and the amount you can save on guards by creating social mobility through education, health, and social welfare is the point at which you should stop paying for cops and start paying for hospitals and schools.

This implies that productivity gains in guard labor will make wider wealth gaps sustainable.

Improvements in military and surveillance technology tilt the balance against economic reform.

Why spy? Because it’s cheaper than playing fair.

I think Doctorow is right.  I think the reason so many known suspicious characters are able to commit acts of terrorism is that the U.S. government and other governments are more concerned about putting down social unrest.

LINKS

Technology should be used to create social mobility – not to spy on citizens by Cory Doctorow in The Guardian.

Why salaries don’t rise by Harold Meyerson for the Washington Post.

 

Austerity: the global reach of a bad ideology

The Western world is in the grip of a bad idea that its governments can’t seem to shake off—although its peoples are starting to.

The idea is called “austerity.” It is the belief that public goods must be destroyed in order to increase private wealth.

Banks impose this policy on indebted nations such as Greece.  They say the governments must curtail public services, including schools and public health, while raising taxes and adopting economic policies that will result in higher prices and lower wages.

Supposedly the money saved can be used to pay off the nation’s debts.  The problem is that so-called austerity destroys the nation’s ability to generate new wealth, and so, as long as countries accept the “austerity” meme, they stay in debt indefinitely.

Nations that default on their debts, as American states frequently did in the era before the Civil War, are threatened with loss of credit.  But the fact is that the banking system literally has more money than the bankers know what to do with.  In practice, lending always starts up again after a few years.

Members of the European Union that use the Euro as their currency have a special problem.  Historically the exchange rates of currencies fell when the issuing nation had a balance of payments deficit.  This tended to bring the balance of trade into balance, because their exports became cheaper in relation to foreign currencies and their imports became more expensive.

Under austerity, nations attempt to achieve the same thing by increasing prices, lowering wages and cutting government services.  Unlike with change in the exchange rate, the burden does not fall upon the whole nation equally, but only on the less wealthy and politically powerless.

Austerity involves raising taxes, but never taxes on the wealthy.  That is because the wealthy are considered to be the “job creators” who must be catered to in order to bring about economic recovery.

The “job creator” philosophy is popular here in the USA.  The saying is, “No poor man ever gave me a job.”  The conclusion is that the key to jobs is to have more and richer rich people.

Well, we Americans have made that experiment, repeatedly, and it hasn’t worked.

If we want mass prosperity, we need to invest in the things that create wealth—education, public infrastructure and scientific research—and then see that the benefits of the new wealth are widely spread, so as to create markets for private business.

We Americans once made that experiment, too, and it did work.

The new normal: Links & comments 7/29/14

Soak the Rich: An exchange on capital, debt and the future by David Graeber and Thomas Piketty, translated and reprinted by The Baffler.

David Graeber is an anthropologist and radical anarchist known for his book, Debt: the First 5,000 Years, which looks at the origins of money, taxes and debt.   Thomas Piketty is a politically moderate economist known for his book, Capital in the 21st Century, which looks at the persistence of gross inequality during the past few centuries.

I admire them for their opposite virtues—Graeber for his bold and original speculation, Piketty for his research and his refusal to assert anything that can’t be backed up by data.

Graeber believes the capitalist system is doomed.  Once it goes away, people will have a chance to create a new system without fear of bosses or police, and Graber does not see any point in trying to describe the specifics of what that new system will be.

Piketty says history indicates that capitalism has proved amazingly resilient in the face of change, and that there is no reason to think this time is different.  Furthermore, he said, any society has a need for capital, the means to invest accumulated wealth into the means of creating new wealth.  (This is a different definition of capital from the one in his book).  His attitude toward capitalism is: Mend it, don’t end it.

One thing they do agree on is the centuries-old tendency for wealth to be concentrated in a few hands, and the danger this poses to a democratic society.

On the Causes of Investment Decline in the U.S. Economy by Dr. Jack Rasmus, the Green Party’s shadow Federal Reserve chair.  Hat tip to Bill Harvey.

I have long thought that increasing the earning power of average Americans would make many things fall into place.  If people had more money to buy stuff, merchants would sell more stuff and manufacturers would make more stuff, and this would be to everybody’s benefit.

Jack Rasmus suggests that maybe this isn’t so.  Maybe getting people into debt and putting the squeeze on them is more profitable that creating useful goods and services.  If that’s so, we can’t look to private enterprise to recreate a high-wage, full-employment economy.

His solution is a massive public works program, which I agree is needed, but doesn’t address the problem he describes.

Defending Trade Unions While the Justices Are Away by David Coates.  Hat tip to Labor News in Rochester, NY.

Labor unions helped maintain American prosperity in the mid-20th century by fighting for good wages and job security.  But the union movement is handicapped by laws and court decisions that increasingly restrict unions while freeing corporations of responsibility.

In Harris v. Quinn, the Supreme Court ruled that home health-care workers in Illinois could not be required to pay dues the Service Employees International Union, but they were still entitled the benefits of the SEIU contract and to SEIU representation.  It is as if the Supreme Court ruled that I could not be required to pay my Rochester Gas and Electric bill, but RG&E is still obligated to supply me with gas and electricity.

Chris Dodd Warns of Coalition Between Populist Democrats and Republicans by Zach Carter for the Huffington Post.

Ex-Senator Chris Dodd, a Connecticut Democrat, gave a speech warning against trying to strengthen the Dodd-Frank financial reform bill.   He said in a speech to the Bipartisan Policy Center that opening up the bill to amendments would open a “Pandora’s box” that would be dangerous the financial services industry.

He said warned against right-wing Republicans and left-wing Democrats teaming up against Wall Street.   He probably was thinking of a bill co-sponsored by Senator Sherrod Brown (D-Ohio) and David Vitter (R-Louisiana) to break up the “too big to fail” banks, an unacceptable type of bipartisanship.  Dodd said breaking up big banks is unnecessary.

As Court Fees Rise, The Poor Are Paying the Price by Joseph Shapiro for National Public Radio.

The criminalization of poverty by Radley Balko for the Washington Post.

A majority of U.S. states have recreated the equivalent of debtors’ prisons.  They are trying to make their criminal justice system self-financing by charging fees for public defenders, the cost of a jury trial, room and board for jail and prison time, and parole and probation costs.   Poor people who can’t pay these fees go to jail, even though this has been ruled unconstitutional.

 

The passing scene: Links & comments 7/16/14

The case for shutting down Stuyvesant High School, the best public high school in New York by Reihan Salam for Slate.

Stuyvesant High School in New York City is a highly selective public school which admits fewer than 1 in 100 applicants, based solely on test scores.  The newest class is 71 percent of Asian origin and less than 3 percent black and Latino, even though blacks and Latinos are the overwhelming majority of New York City’s eighth graders.

Reihan Salam, a graduate of Stuyvesant, does not believe that blacks and Latinos will be helped by changing admissions policies.  Even in its glory days, he said, not every Stuyvesant student flourished in its highly competitive, sink-or-swim environment.

Because of differences in background, gifted black and Latino students are likely to need more backup and support from the school system than gifted Asia students did, Salam wrote.  He said the best thing would be to have a diverse range of high schools that serve the differing needs of students.

Piketty is the Anti-Marx by Noah Millman for The American Conservative.

Thomas Piketty’s Capital in the Twenty-First Century deals with the same subject as Karl Marx’s Capital more than a century before, but his approach and conclusions are the opposite.

Marx wrote about how capitalism was revolutionizing everything, and concluded that humanity was on the verge of a new stage of development.  Piketty wrote about how, despite revolutionary changes, the concentration of wealth and income remains the same.

Marx was a revolutionary.  Piketty wants the minimum change necessary.  Marx was a bold and original theorist.  Piketty is a cautious researcher, whose great merits are his compilation of new data and his reluctance to go beyond what the data show.

Israel’s bombing of Gaza is morally justified—and eminently stupid by Damon Linker for The Week.

Gaza War: Tunnels, Targets and Rockets | IJ Strategy and Tactics by Ahmed Hadi for Al Akhbar English.   Hat tip to Informed Comment.

The rocket attacks on Israel by Hamas and Islamic Jihad do not threaten Israeli power.  All they do is provoke retaliation.   The Israeli bombardment of Gaza does not threaten the power of Hamas and Islamic Jihad.  Their leaders are hidden in underground tunnels.  Nothing will change except that many civilians will be dead and peace will be even more unlikely.

 

Reflections on Piketty’s inequality argument

The novels of Jane Austen, Honore de Balzac or Henry James, in which civilized life was confined to a small percentage of the population and the only way most people could acquire significant wealth was to inherit it or marry it.

According to Thomas Piketty’s Capital in the Twenty-First Century, there is nothing to stop that kind of world from coming back.

Piketty’s basic argument goes as follows:
•    If the rate of return on investment is a higher percentage than the rate of economic growth, which he expresses as r > g,  the owners of investment property will get an ever-larger share of national income.
•    R > g is the normal state of affairs.
•    Ownership of wealth is distributed even more unequally than income.   The higher the share of income that comes from wealth, the more unequal it will be.
•    The larger the amount of wealth you own, the faster it is likely to compound.   So not only do the rich become richer at a faster rate than ordinary people, the super-rich become richer at a faster rate than the ordinary rich.
•    At some point the process levels off, but the leveling-off point may not come until inequality reaches a point that we associate with 18th century Europe or the Third World

The economic prosperity and relative equality during 1945-1975 were made possible by the destruction of capital during the Great Depression and the two World Wars, according to Piketty.   Of course war and depression left everybody worse off, not just rich people, but when economic growth resumed, a lesser share went to the economic elite.

Piketty’s conclusions are backed up by archival research that traces income and wealth distribution in France, Britain and the USA for two centuries and many other countries for shorter periods of time.  That research shows that r > g is the typical state of affairs in most countries and most periods of history for which information is available.

One striking finding is that there is just as much inequality among the elite as there is among the public at large.  In the USA, the top 10 percent have about half the wealth, the top 1 percent have about half the wealth of the top 10 percent, and the top 0.1 percent have about half the wealth of the top 1 percent.

Another finding, based on comparisons of American university endowment funds, is that the larger the amount of wealth you have to invest, the higher your rate of return is likely to be.   This is probably because the richer you are, the better financial managers you can hire, the better able you are to diversify your investments and the better cushion you have when you make high-risk, high-return investments.

Piketty proposes to deal with inequality by means of a graduated tax on wealth to go along with graduated taxes on inheritance and income.  But there are other ways.

You could figure out ways to increase the rate of economic growth, for example.  Or you could figure out ways to achieve a wider distribution of wealth, such as through employee stock-ownership plans or worker-owned enterprises.   Or you could strengthen labor unions, increase minimum wage or take other measures to increase the incomes of the middle class, working people and the poor.

It’s important to keep in mind that Piketty only deals with one specific issue, the concentration of income and wealth in a small elite—an important issue, but not the only one.   Piketty does not tell us how to raise people out of dire poverty, nor how to achieve better productivity, or economic growth, or better education, or a cleaner environment, or any other goal.

And taking money away from the economic elite will not in and of itself make anyone any better off.   A lot of financial wealth was destroyed during the Great Depression and and a lot of tangible wealth was destroyed during World War Two, but this did help anybody at the bottom of the economic scale.  Piketty thinks that destruction of wealth cleared the way for the prosperity of the 1950s and 1960s, but I don’t think anybody who lived through the 1930s and 1940s would have said it was worth it.

Piketty’s inequality argument in six charts

Thomas Piketty’s book, Capital in the Twenty-First Century, has stirred up a lot of controversy.  As well it should.  If he is right, there is nothing to stop a tiny elite from growing richer and richer at the expense of the rest of us.

The important thing to remember of Piketty’s argument is that it is not based on economic theory.   It is based on years of research on sources of wealth and income through history in different countries.   And, as quantitative information, it lends itself to charts.

I think Piketty’s research is important to understand for the future of our country and the world.   I’m reproducing six charts based on Piketty’s data from an article by John Cassidy in The New Yorker, which sum up Piketty’s findings well.

The first chart shows the share of American income taken by the best-paid 10 percent.

The chart shows that half of the income earned by all Americans went to the top 10 percent just prior to the stock market crash of 1929, that their income share fell to between 30 and 35 percent between 1945 and 1975 and now it is going back up again to 1920s levels.

Piketty explained this with his equation, r > g.   When the rate of return on investment is a higher percentage than the rate of economic growth, the holders of capital will get an ever-increasing share of income.   For the purposes of his book, Piketty has a special definition of capital, which is different from economists’ standard definition.  He defines capital as anything you can own that will give you an income, including agricultural land, government bonds, houses (which you can rent), common stocks or anything else.   In the Old South, prior to the Civil War, slaves were a form of capital.

Income distribution in the 20th century USA became more equal for a time partly because the Great Depression destroyed the value of so many financial assets, but mostly because of the high rate of economic growth following the Second World War.

Of late the pay of financiers and corporate executives has gone up much faster than the pay of middle-class and poor people, but, as the following chart shows, inequality in ownership of financial assets is a bigger factor in the income share of the top 1 percent than inequality in wages and salaries.

The next chart shows that same trend exists among the top 1 percent in all the major English-speaking countries.

The next Cassidy chart shows the income shares of the top 1 percent in some of the developing countries.

Thomas Piketty on democracy and capitalism

Tom Ferguson on Piketty and the Democrats

Does Earth have a trade deficit with Mars?

Cumulative trade surpluses or deficits, 1980-2008, in billions of dollars. Source: Wikipedia. Double click to enlarge.

Among the world’s rich countries, the United States has a continuing trade deficit, Germany and Japan have continuing trade deficits and the other rich countries move up and down, slightly above and slightly below the break-even point.  But the French economist Thomas Piketty, in his new book, Capital in the Twenty-First Century, pointed out that, if you add them all up, the rich countries as a group have a trade deficit.

Are the rich countries in debt to the poor countries?  No, said Piketty.   If you lump all the poor countries together, they, too, have a combined trade deficit.

In other words, the whole Earth has a trade deficit.  But according to basic economic theory, any nation’s deficit is a surplus for some other nation or group of nations.   Could this mean that Earth has an unfavorable trade balance with Mars?

No, Piketty said.  The problem is that not all the world’s trade is accounted for — in particular, the trade that winds up in hidden accounts in the world’s tax havens.  If it was known how much it is, and who owns it, we probably would realize that the world’s super-rich hold an even higher percentage of the world’s wealth than we think.

One of the benefits of a global tax on capital would be to bring this hidden wealth to light, he said.  Even if you don’t accept the idea of a tax on capital, there is a need for international cooperation on financial reporting and prevention of tax evasion.  World trade treaties, instead of protecting international corporations from national governments, should provide for sharing information on wealth, and for boycotting jurisdictions that don’t meet international standards for reporting.

Piketty on the power of inherited wealth

In Balzac’s story Pere Goriot, set in the early 1800s, the struggling law student Rastignac lives in the same boarding house as the master criminal Vautrin and the impoverished former millionaire Goriot.   Vautrin explains to Rastignac the odds against his ever achieving success sufficient to earn a life with dignity, and advises him to woo and wed a rich heiress instead.

In the charts above and below, Thomas Piketty, in his book Capital in the Twenty-First Century, showed the gap in those days between inherited wealth and wealth achieved through one’s own efforts.   He didn’t have comparable data for the United States, and doesn’t think the flow of inherited wealth was as great in the USA.

That gap has narrowed, Piketty warned that there is nothing to prevent those days from returning.  A Sam Walton may build a retail empire through his own efforts, but all his children and grand-children have to do in order to be rich is simply to mess up.  His research indicates that great wealth compounds faster than moderate wealth, because the ultra-rich can diversify their investments and call upon the best expert advice.

Protecting wealth vs. promoting growth

There’s no single principle that explains everything, but there is great explanatory power inn the French economist Thomas Piketty’s idea that inequality always increases whenever the rate of return on investment exceeds the rate of growth of the economy, that is, when r > g.

This is not something that results from impersonal economic forces.  During the past 30 years, the policy of the U.S. government, and of governments that follow the U.S. lead, has been to prioritize return on investment over economic growth.

The U.S. Congress and many state governments are in the process of cutting back scientific research, education, maintenance of public works and other things that are needed for our nation’s economic future, in order to keep tax rates low for corporations and upper bracket taxpayers.

These are the same “austerity” policies being enforced by the World Trade Organization, International Monetary Fund and European Central Government on vulnerable governments, which are forced to sacrifice the well-being of their citizens in order to satisfy powerful financial institutions.   In both cases, there is a tradeoff to sacrifice economic growth in order to maintain returns on investment.

One part of austerity is to sell off government property at bargain rates and delegate public services to corporations.  Most of the time this amounts to a transfer of wealth from taxpayers to well-connected business owners, who have no financial incentive to maximize service.

Some other ways that government policy fosters investor income at the expense of economic growth are (1) bailing out banks that have failed due to reckless financial speculation, (2) refusal to prosecute financial fraud by the “too big to fail” banks or claw back profits due to fraud, (3) expansion of patent and copyright monopolies, (4) failure to regulate cable and telecommunications laws, (5) failure to enforce antitrust laws, (6) the ban on student loan refinancing or bankruptcy …. The list goes on.

Increasingly corporate management seeks profit not by increasing the size of the economic pie, but by giving investors and executives a larger part of the pie — through financial manipulation and excess fees in the case of banks, through driving down wages and increasing executive compensation in the case of corporations in general.  I don’t say all corporate managers behave in this way.  I say that this has become common and acceptable.

The result has been a concentration of wealth and income in a tiny minority of the population, and economic stagnation for everybody else.   So the first step in reducing inequality is to stop promoting it.

Piketty’s preferred solution to undue concentration of wealth is a progressive tax on capital, sufficient to prevent the wealth of the economic elite from expanding at a faster rate than the economy as a whole, along with progressive taxes on income and inheritance.  I don’t object to any of these, but higher taxes on the rich do not, in and of themselves, benefit the middle class, wage-earners or the poor.   I think it is more important to  strengthen labor unions, raise the minimum wage, maintain essential public services and invest in the future.