Posts Tagged ‘wealth’

Piketty, Inequality, Envy, and Fairness

August 16, 2015

Unknown-1The rich-hating left went orgasmic over Thomas Piketty’s book Capital in the Twenty-First Century. I previously discussed the controversy. Now I’ve read the book.

Not the thunderbolt of lefty wet dreams, it’s mainly dry economic history and analysis. Much I found interesting and informative. But it’s one of the most poorly organized books I’ve ever read, meandering repetitively to and fro.

Piketty’s big “revealed truth” is r>g – that is, return on capital (r) exceeds economic growth (g), which leads to capital accumulation, and thus rising inequality. His data does show r>g through most of history. Well, not data exactly, but mostly assumptions and estimates. UnknownBut never mind. A bigger problem is that for the last century, 1913-2012, g>r! Piketty says this was due to the 1914-45 “shocks” (wiping out many fortunes) but that past norms are returning. So the future will more resemble the 19th century than the 20th? However, taxes were negligible before the 20th century. Thus in order to project future after-tax r>g, Piketty makes the heroic assumption that taxes on capital and its return will fall to zero! Even while he advocates greater taxation.*

imagesThat r exceeded g through most of history is hardly news because g (economic growth) was practically zero, while capital would nevertheless earn some return, typically farm produce or by lending money at interest. Now we have significant growth that, for the past century at least, has exceeded return on capital. But why let facts spoil a pretty theory?

Inequality may also rise from pay gaps. Piketty focuses on corporate “supermanagers,” whose pay he doubts is justified by merit or productivity. Unknown-2I agree – it’s due to incestuous boards of directors. But even if “supermanager” pay were drastically cut, would that money then flow toward the bottom of the income distribution? Surely not. It would go to shareholders; the rich would still get richer.

Much inequality talk casts the rich as squeezing the share of productivity begrudged to employees. That’s not how the economy works. By and large jobs pay what the market dictates, in order for businesses to attract and keep the needed workforce. They can’t just arbitrarily pay less; but nor can they pay more; if they want to stay competitive and employ anyone at all. Worker pay is not what’s left after the rich have “taken” their “share” (or more than their share).

Piketty’s constant use of the words “take” and “share” implies a zero sum game where one person’s larger share makes others smaller. Similarly, the language of “distribution” implies a pot of pre-existing wealth to be divided up, as though some god ladles out portions. But that’s not how an economy works either. In the main wealth is not “taken” but gained from other people handing it over willingly – in exchange for something (a product or service) they value even more. No zero sum game, that makes everyone richer. The pot grows.

Unknown-3In today’s world, not just “supermanagers” but top performers in any field earn much more than the nearly-as-good. Take LeBron James. It might seem absurd to earn so much for something so meaningless as getting a ball through a hoop. But millions enjoy watching it, and willingly pay, in various ways. So LeBron gets rich. Is that social injustice?

We can debate who deserves what income, and I’d agree with Piketty that much high pay is undeserved. But should it be forcibly confiscated (as Piketty urges) in conformance to those debatable opinions? By what right may I (or anyone) dictate what’s fair for others to earn? I eschew such arrogant presumption.

Meantime Piketty acknowledges that bare mathematical inequality tells us little. In the past a small minority lived well (to the extent technology allowed), while most lived wretchedly. Today the whole picture has shifted dramatically to a higher level of overall societal wealth: the rich are even richer (hence mathematically more unequal), but the rest are much richer too. Indeed, their living standard is actually comparable to that of the past’s wealthiest (if not better, considering health and longevity).** That today’s inequality might mathematically equal 1800’s says nothing.

Yet Piketty writes as though modern inequality exactly parallels that of centuries past. Relative living standards are no part of his analysis. images-2Piketty’s focus is entirely upon the wealthy, analyzing their situation in depth; the non-wealthy are present only as shadows, with no discussion of their situation and its changes. A Martian reading this book would have no idea how much ordinary lives have improved.***

The book indeed omits any analysis of economic inequality’s goodness or badness. The answer might seem self-evident. But clearly, perfect equality of wealth and income would not be just but unjust because different people earn/deserve differing outcomes; not to mention the matter of incentives for people to be productive (hardly theoretical in the experience of communist societies). The real question is what kind of inequality is acceptable. Some writers have attempted to grapple with this, but not Piketty. All he does is to project rising mathematical inequality – which he himself cautions tells us little.

Yet he’s terrified that the 1% will monopolize all wealth, with the 99% having nothing. The absurdity of such dystopian fantasies is simply this: who will buy all the goods and services whose sale undergirds the 1%’s wealth?

Unknown-4Their wealth is not a problem, nor is high inequality, so long as most people can live decent lives; and helping those who can’t does not require knocking down the rich. They don’t get their wealth at the expense of the rest. Steve Jobs impoverished no one but got rich through products that benefited millions. Had he not, all that wealth would not have been “distributed” to others. It would never have existed. Indeed, we would all have been poorer.

This book, obsessed with the rich and oblivious to the lives of others, would be better titled Envy. unknown1 Resentment at others’ success (especially when seemingly undeserved) is a powerful human emotion, often underlying egalitarian politics. Life is unfair, and we must work for fairness – but by building people up, not tearing others down. Envy and fairness don’t mix well.

* Rising inequality is often blamed on tax cuts, the top mid-century U.S. income tax rate having exceeded 90%. But never discussed is what rich people actually paid. Piketty himself notes they can legally avoid having taxable income, allowing returns to accumulate untaxed instead. So in practice nobody ever paid anything like 90%. Yet Piketty forgets this in claiming that lower taxes have raised inequality. (Rich people still pay far the lion’s share of income taxes.)

** This actually applies even to the poorest in advanced societies; especially taking into account government benefits. Today’s U.S. “poverty” line equates to a middle class living standard of just a few decades ago. Poverty ain’t what it used to be. And even in developing countries, the almost universal abject deprivation of the past is inexorably going away, afflicting now only a small minority of world population.

Photo by Walker Evans

Photo by Walker Evans

*** Nor would many Earthlings, romanticizing the “good old days.” But read, for example, Evans and Agee on the extreme poverty of rural 1930s Alabama. The work was grinding; the food disgusting; clothes made from used burlap sacks; copulation the only recreation. And those were white folks.

Piketty Poo

May 20, 2014

                  For to everyone who has, will more be given, and he will have an abundance. But from the one who has not, even what he has will be taken away. — Matthew 25:29

Piketty

Piketty

French economist Thomas Piketty’s Capital in the 21st Century is the latest book sensation. Confession: I haven’t actually read it. But I’ve read plenty about it (both pro and con) — hardly avoidable lately. “Progressives” are gaga over it*, a confirmation bias feeding frenzy. People love having their pre-existing beliefs flattered. Piketty strokes the left’s inequality obsession: he predicts the gap worsening, saying returns on capital tend to outpace economic growth, so wealth tends to concentrate; and to combat this he proposes a worldwide wealth tax and punitively high (80%) income tax rates for the rich.

images-1Piketty’s predictions of slow growth and consequently increasing inequality have been challenged for faulty economic assumptions and analysis. The Left imagines a coming dystopia where a corporate 1% hogs all the wealth and the 99% have nothing. The absurdity is: who would buy all the products and services that make the 1% rich?

Meantime, Piketty’s fans also strangely overlook a glaring political correctness no-no. The book is Western-centric, focusing on the “First World” and pretty much ignoring the rest. But this is no mere cosmetic flaw — it goes to the heart of Piketty’s presentation. Wealth and equality are global matters, and if you only look at part of the globe, you can’t get it right. The big story is that while inequality may indeed be rising in Pikettyland, it’s not rising, in fact it’s falling, globally.

That’s unarguable fact, because for some time, Western economic growth rates have been materially exceeded in the poorer countries, notably India and especially China (together comprising over a third of world population). That means the global gap between rich and poor must be narrowing (even if within countries it’s not).

Moreover (fatal to Piketty), trends in rich nations and poor ones are not unrelated. As we know well in America, a big reason for rising inequality is the disappearance of high-paying factory jobs that used to raise up the less affluent. images-2Many of those jobs have gone to poorer countries — raising up their lower classes. In other words, global inequality is shrinking because wealth is shifting from richer countries to poorer ones; though it’s flowing from the less wealthy people in the rich countries which thus become more internally unequal. So the U.S. lower and middle classes are being hurt more by poor foreigners than rich Americans.

Piketty calls rising inequality “terrifying.” It would be, if the poor were getting poorer; yet they’re not. While the rich are getting richer, so are the world’s poor, albeit not as fast, but with hundreds of millions rising out of poverty in recent decades. Even in advanced countries, the poor are not falling, what with all the social safety nets. (Entitlements to Social Security, Medicare, and other government benefits are a form of wealth Piketty seems to ignore.) And poverty ain’t what it used to be: the living standard of Americans now classed as “poor” would have been considered solidly middle class a few decades ago (and would be considered rich in much of the world today).

But inequality is really the wrong concern, because the problem of the poor is not that others are rich. The problem of the poor is instead their poverty, which cutting down the rich won’t solve. images-2The left’s big error is thinking the rich “extract” their wealth from the rest; that there’s a lump of wealth to be divided up. Not so; wealth is created by productive effort. Steve Jobs got rich because people gladly paid more for his products than they cost to make. That added value made everyone richer. Had Jobs and his products never existed, his wealth would not have been spread among everyone else; it would not have existed either!

True, if you simply grab money from the rich and hand it to the poor, they’d be less poor and unequal — for the moment. But it won’t solve why they’re poor in the first place. What’s needed is not redistribution of wealth, but of the ability to earn wealth. That would be good for everyone, and without taking anything away from anyone; but it’s a much tougher problem. (Piketty does acknowledge that expanding education must be part of the answer.)

UnknownYet the left’s inequality obsession is not truly a social conscience thing. It’s not so much compassion for the poor as envy and hatred for the rich. It’s wealth and the power it brings that they find so intolerable (because they lack it), and are so rabid to tear down. Thus their swoon for Piketty’s global wealth tax proposal (how innovative). How to use the tax revenues, to raise incomes at the bottom, is barely a concern; it’s mainly to make the rich less rich.** And of course Piketty and his fans ignore how their vendetta against the rich, if enacted, would gum up the economic growth machine. Now that would really be terrifying — for rich and poor alike.

But in a commentary on Piketty, in Salon, Jesse Myerson says the solution to inequality is really simple. Instead of letting the returns on capital assets flow to their owners, we can just have the returns flow “democratically” to, well, everybody! imagesAs Red Green would say, “It’s just that easy!” Why didn’t Piketty think of that?

If you don’t find Myerson enlightening, you might try more of Robinson: here, and here.

* Visiting SF’s famed City Lights bookstore last week, the guy ahead of me was buying their last copy.

**This was demonstrated by the string of hostile comments to a version of this review on Amazon. It was all “the rich this” and “the rich that” and why they should be made less rich, with nary a word about making anyone less poor. Will there be similar comments here?