Issue #33, Summer 2014

The Inequality Puzzle

Thomas Piketty’s tour de force analysis doesn’t get everything right, but it’s certainly gotten us pondering the right questions.

Capital in the Twenty-First Century by Thomas Piketty; Translated by Arthur Goldhammer • Belknap/Harvard University Press • 2014 • 696 pages • $39.95

Once in a great while, a heavy academic tome dominates for a time the policy debate and, despite bristling with footnotes, shows up on the best-seller list. Thomas Piketty’s Capital in the Twenty-First Century is such a volume. As with Paul Kennedy’s The Rise and Fall of the Great Powers, which came out at the end of the Reagan Administration and hit a nerve by arguing the case against imperial overreach through an extensive examination of European history, Piketty’s treatment of inequality is perfectly matched to its moment.

Like Kennedy a generation ago, Piketty has emerged as a rock star of the policy-intellectual world. His book was for a time Amazon’s bestseller. Every pundit has expressed a view on his argument, almost always wildly favorable if the pundit is progressive and harshly critical if the pundit is conservative. Piketty’s tome seems to be drawn on a dozen times for every time it is read.

This should not be surprising. At a moment when our politics seem to be defined by a surly middle class and the President has made inequality his central economic issue, how could a book documenting the pervasive and increasing concentration of wealth and income among the top 1, .1, and .01 percent of households not attract great attention? Especially when it exudes erudition from each of its nearly 700 pages, drips with literary references, and goes on to propose easily understood laws of capitalism that suggest that the trend toward greater concentration is inherent in the market system and will persist absent the adoption of radical new tax policies.

Piketty’s timing may be impeccable, and his easily understandable but slightly exotic accent perfectly suited to today’s media; but make no mistake, his work richly deserves all the attention it is receiving. This is not to say, however, that all of its conclusions will stand up to scholarly criticism from his fellow economists in the short run or to the test of history in the long run. Nor is it to suggest that his policy recommendations are either realistic or close to complete as a menu for addressing inequality.

Start with its strengths. In many respects, Capital in the Twenty-First Century embodies the virtues that we all would like to see but find too infrequently in the work of academic economists. It is deeply grounded in painstaking empirical research. Piketty, in collaboration with others, has spent more than a decade mining huge quantities of data spanning centuries and many countries to document, absolutely conclusively, that the share of income and wealth going to those at the very top—the top 1 percent, .1 percent, and .01 percent of the population—has risen sharply over the last generation, marking a return to a pattern that prevailed before World War I. There can now be no doubt that the phenomenon of inequality is not dominantly about the inadequacy of the skills of lagging workers. Even in terms of income ratios, the gaps that have opened up between, say, the top .1 percent and the remainder of the top 10 percent are far larger than those that have opened up between the top 10 percent and average income earners. Even if none of Piketty’s theories stands up, the establishment of this fact has transformed political discourse and is a Nobel Prize-worthy contribution.

Piketty provides an elegant framework for making sense of a complex reality. His theorizing is bold and simple and hugely important if correct. In every area of thought, progress comes from simple abstract paradigms that guide later thinking, such as Darwin’s idea of evolution, Ricardo’s notion of comparative advantage, or Keynes’s conception of aggregate demand. Whether or not his idea ultimately proves out, Piketty makes a major contribution by putting forth a theory of natural economic evolution under capitalism. His argument is that capital or wealth grows at the rate of return to capital, a rate that normally exceeds the economic growth rate. Thus, economies will tend to have ever-increasing ratios of wealth to income, barring huge disturbances like wars and depressions. Since wealth is highly concentrated, it follows that inequality will tend to increase without bound until a policy change is introduced or some kind of catastrophe interferes with wealth accumulation.

Piketty writes in the epic philosophical mode of Keynes, Marx, or Adam Smith rather than in the dry, technocratic prose of most contemporary academic economists. His pages are littered with asides referencing Jane Austen, the works of Balzac, and many other literary figures. For those who don’t like or trust economics and economists, Piketty’s humane and urbane learning makes his analysis that much more compelling. As well it should: The issues of fairness of market outcomes that he deals with are best thought of as part of a broad contemplation of our society rather than in narrow numerical terms.

All of this is more than enough to justify the rapturous reception accorded Piketty in many quarters. But recall that Kennedy seemed to hit the zeitgeist perfectly but turned out later to have missed his mark as the Berlin Wall fell and the United States enjoyed an economic renaissance in the decade after he wrote; similarly, I have serious reservations about Piketty’s theorizing as a guide to understanding the evolution of American inequality. And, as even Piketty himself recognizes, his policy recommendations are unworldly—which could stand in the way of more feasible steps that could make a material difference for the middle class.

Piketty’s argument is straightforward, relying, as he says in his conclusion, on a simple inequality: r>g, in which the rate of return on capital exceeds the growth rate. Its essence is most easily grasped by thinking about population growth. Think first of a world where couples have four children. In that case, an accumulated fortune will dissipate, as the third generation of descendants has 64 members and the fourth has 256 members. On the other hand, if couples have only two children, a fortune has to be split only 16 ways even after four generations. So slow growth is especially conducive to rising levels of wealth inequality, as is a high rate of return on capital that accelerates wealth accumulation. Piketty argues that as long as the return to wealth exceeds an economy’s growth rate, wealth-to-income ratios will tend to rise, leading to increased inequality. According to Piketty, this is the normal state of capitalism. The middle of the twentieth century, a period of unprecedented equality, was also marked by wrenching changes associated with the Great Depression, World War II, and the rise of government, making the period from 1914 to 1970 highly atypical.

This rather fatalistic and certainly dismal view of capitalism can be challenged on two levels. It presumes, first, that the return to capital diminishes slowly, if at all, as wealth is accumulated and, second, that the returns to wealth are all reinvested. Whatever may have been the case historically, neither of these premises is likely correct as a guide to thinking about the American economy today.

Economists universally believe in the law of diminishing returns. As capital accumulates, the incremental return on an additional unit of capital declines. The crucial question goes to what is technically referred to as the elasticity of substitution. With 1 percent more capital and the same amount of everything else, does the return to a unit of capital relative to a unit of labor decline by more or less than 1 percent? If, as Piketty assumes, it declines by less than 1 percent, the share of income going to capital rises. If, on the other hand, it declines by more than 1 percent, the share of capital falls.

Economists have tried forever to estimate elasticities of substitution with many types of data, but there are many statistical problems. Piketty argues that the economic literature supports his assumption that returns diminish slowly (in technical parlance, that the elasticity of substitution is greater than 1), and so capital’s share rises with capital accumulation. But I think he misreads the literature by conflating gross and net returns to capital. It is plausible that as the capital stock grows, the increment of output produced declines slowly, but there can be no question that depreciation increases proportionally. And it is the return net of depreciation that is relevant for capital accumulation. I know of no study suggesting that measuring output in net terms, the elasticity of substitution is greater than 1, and I know of quite a few suggesting the contrary.

There are other fragmentary bits of evidence supporting this conclusion that come from looking at particular types of capital. Consider the case of land. In countries where land is scarce, like Japan or the United Kingdom, land rents represent a larger share of income than in countries like the United States or Canada, where it is abundant. Or consider the case of housing. Economists are quite confident that the demand for housing is inelastic, so that as more housing is created, prices fall more than proportionally—a proposition painfully illustrated in 2007 and 2008.

Does not the rising share of profits in national income in most industrial countries over the last several decades prove out Piketty’s argument? Only if one assumes that the only factors at work are the ones he emphasizes. Rather than attributing the rising share of profits to the inexorable process of wealth accumulation, most economists would attribute both it and rising inequality to the working out of various forces associated with globalization and technological change. For example, mechanization of what was previously manual work quite obviously will raise the share of income that comes in the form of profits. So does the greater ability to draw on low-cost foreign labor.

There is also the question of whether the returns to wealth are largely reinvested. A central claim by Piketty is that a country’s wealth-income ratio tends toward s/g, the ratio of its savings rate to its growth rate. Hence, as he argues, a declining growth rate leads to a higher wealth ratio. But this presumes a constant or rising saving ratio. Since he imagines returns to capital as largely reinvested, he finds this a plausible assumption.

I am much less sure. At the simplest level, consider a family with current income of 100 and wealth of 100 as opposed to a family with current income of 100 and wealth of 500. One would expect the former family to have a considerably higher saving ratio. In other words, there is a self-correcting tendency Piketty abstracts from whereby rising wealth leads to declining saving.

The largest single component of capital in the United States is owner-occupied housing. Its return comes in the form of the services enjoyed by the owners—what economists call “imputed rent”—which are all consumed rather than reinvested since they do not take a financial form. The phenomenon is broader. The determinants of levels of consumer spending have been much studied by macroeconomists. The general conclusion of the research is that an increase of $1 in wealth leads to an additional $.05 in spending. This is just enough to offset the accumulation of returns that is central to Piketty’s analysis.

A brief look at the Forbes 400 list also provides only limited support for Piketty’s ideas that fortunes are patiently accumulated through reinvestment. When Forbes compared its list of the wealthiest Americans in 1982 and 2012, it found that less than one tenth of the 1982 list was still on the list in 2012, despite the fact that a significant majority of members of the 1982 list would have qualified for the 2012 list if they had accumulated wealth at a real rate of even 4 percent a year. They did not, given pressures to spend, donate, or misinvest their wealth. In a similar vein, the data also indicate, contra Piketty, that the share of the Forbes 400 who inherited their wealth is in sharp decline.

But if it is not at all clear that there is any kind of iron law of capitalism that leads to rising wealth and income inequality, the question of how to account for rising inequality remains. After Piketty and his colleagues’ work, there can never again be a question about the phenomenon or its pervasiveness. The share of the top 1 percent of American income recipients has risen from below 10 percent to above 20 percent in some recent years. More than half of the income gains enjoyed by Americans in the twenty-first century have gone to the top 1 percent. The only groups that have outpaced the top 1 percent have been the top .1 and .01 percent.

Piketty, being a meticulous scholar, recognizes that at this point the gains in income of the top 1 percent substantially represent labor rather than capital income, so they are really a separate issue from processes of wealth accumulation. The official data probably underestimate this aspect—for example, some large part of Bill Gates’s reported capital income is really best thought of as a return to his entrepreneurial labor.

So why has the labor income of the top 1 percent risen so sharply relative to the income of everyone else? No one really knows. Certainly there have been changes in prevailing mores regarding executive compensation, particularly in the English-speaking world. It is conceivable, as Piketty argues, that as tax rates have fallen, executives have gone to more trouble to bargain for super high salaries, effort that would not have been worthwhile when tax rates were high (though I think it is equally plausible that higher tax rates would pressure executives to extract more, so as to maintain their post-tax income levels).

There is plenty to criticize in existing corporate-governance arrangements and their lack of resistance to executive self-dealing. There are certainly abuses. I think, however, that those like Piketty who dismiss the idea that productivity has anything to do with compensation should be given a little pause by the choices made in firms where a single hard-nosed owner is in control. The executives who make the most money are not for most part the ones running public companies who can pack their boards with friends. Rather, they are the executives chosen by private equity firms to run the companies they control. This is not in any way to ethically justify inordinate compensation—only to raise a question about the economic forces that generate it.

The rise of incomes of the top 1 percent also reflects the extraordinary levels of compensation in the financial sector. While anyone looking at the substantial resources invested in trading faster by nanoseconds has to worry about the over-financialization of the economy, much of the income earned in finance does reflect some form of pay for performance; investment managers are, for example, compensated with a share of the returns they generate.

And there is the basic truth that technology and globalization give greater scope to those with extraordinary entrepreneurial ability, luck, or managerial skill. Think about the contrast between George Eastman, who pioneered fundamental innovations in photography, and Steve Jobs. Jobs had an immediate global market, and the immediate capacity to implement his innovations at very low cost, so he was able to capture a far larger share of their value than Eastman. Correspondingly, while Eastman’s innovations and their dissemination through the Eastman Kodak Co. provided a foundation for a prosperous middle class in Rochester for generations, no comparable impact has been created by Jobs’s innovations.

This type of scenario is pervasive. Most obviously, the best athletes and entertainers benefit from a worldwide market for their celebrity. But something similar is true for those with extraordinary gifts of any kind. For example, I suspect we will soon see the rise of educator superstars who command audiences of hundreds of thousands for their Internet courses and earn sums way above the traditional dreams of academics.

Even where capital accumulation is concerned, I am not sure that Piketty’s theory emphasizes the right aspects. Looking to the future, my guess is that the main story connecting capital accumulation and inequality will not be Piketty’s tale of amassing fortunes. It will be the devastating consequences of robots, 3-D printing, artificial intelligence, and the like for those who perform routine tasks. Already there are more American men on disability insurance than doing production work in manufacturing. And the trends are all in the wrong direction, particularly for the less skilled, as the capacity of capital embodying artificial intelligence to replace white-collar as well as blue-collar work will increase rapidly in the years ahead.

Where does this leave policy?

Piketty’s argument is that a tendency toward wealth accumulation and concentration is an inevitable byproduct of the workings of the capitalist system. From his perspective, differences between capitalism as practiced in the English-speaking world and in continental Europe are of second order relative to the underlying forces at work. So he is led to far-reaching policy proposals as the principal redress for rising inequality.

In particular, Piketty argues for an internationally enforced progressive wealth tax, where the rate of tax rises with the level of wealth. This idea has many problems, starting with the fact that it is unimaginable that it will be implemented any time soon. Even with political will, there are many problems of enforcement. How does one value a closely held business? Even if a closely held business could be accurately valued, will its owners be able to generate the liquidity necessary to pay the tax? Won’t each jurisdiction have a tendency to undervalue assets within it as a way of attracting investment? Will a wealth tax encourage unseemly consumption by the wealthy?

Perhaps the best way of thinking about Piketty’s wealth tax is less as a serious proposal than as a device for pointing up two truths. First, success in combating inequality will require addressing the myriad devices that enable those with great wealth to avoid paying income and estate taxes. It is sobering to contemplate that in the United States, annual estate and gift tax revenues come to less than 1 percent of the wealth of just the 400 wealthiest Americans. With respect to taxation, as so much else in life, the real scandal is not the illegal things people do—it is the things that are legal. And second, such efforts are likely to require international cooperation if they are to be effective in a world where capital is ever more mobile. The G-20 nations working through the OECD have begun to address these issues, but there is much more that can be done. Whatever one’s views on capital mobility generally, there should be a consensus on much more vigorous cooperative efforts to go after its dark side—tax havens, bank secrecy, money laundering, and regulatory arbitrage.

Beyond taxation, however, there is, one would hope, more than Piketty acknowledges that can be done to make it easier to raise middle-class incomes and to make it more difficult to accumulate great fortunes without requiring great social contributions in return. Examples include more vigorous enforcement of antimonopoly laws, reductions in excessive protection for intellectual property in cases where incentive effects are small and monopoly rents are high, greater encouragement of profit-sharing schemes that benefit workers and give them a stake in wealth accumulation, increased investment of government pension resources in riskier high-return assets, strengthening of collective bargaining arrangements, and improvements in corporate governance. Probably the two most important steps that public policy can take with respect to wealth inequality are the strengthening of financial regulation to more fully eliminate implicit and explicit subsidies to financial activity, and an easing of land-use restrictions that cause the real estate of the rich in major metropolitan areas to keep rising in value.

Hanging over this subject is a last issue. Why is inequality so great a concern? Is it because of the adverse consequences of great fortunes or because of the hope that middle-class incomes could grow again? If, as I believe, envy is a much less important reason for concern than lost opportunity, great emphasis should shift to policies that promote bottom-up growth. At a moment when secular stagnation is a real risk, such policies may include substantially increased public investment and better training for young people and retraining for displaced workers, as well as measures to reduce barriers to private investment in spheres like energy production, where substantial job creation is possible.

Look at Kennedy airport. It is an embarrassment as an entry point to the leading city in the leading country in the world. The wealthiest, by flying privately, largely escape its depredations. Fixing it would employ substantial numbers of people who work with their hands and provide a significant stimulus to employment and growth. As I’ve written previously, if a moment when the United States can borrow at lower than 3 percent in a currency we print ourselves, and when the unemployment rate for construction workers hovers above 10 percent, is not the right moment to do it, when will that moment come?

Books that represent the last word on a topic are important. Books that represent one of the first words are even more important. By focusing attention on what has happened to a fortunate few among us, and by opening up for debate issues around the long-run functioning of our market system, Capital in the Twenty-First Century has made a profoundly important contribution.

 

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Issue #33, Summer 2014
 
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Frances Stewart:

There is also the issue of demand. As capital share increases and is saved, growth in consumption falls behind growth in output. Why should investment be sustained sufficiently to keep pace with savings in that situation? Consumer debt can help but cannot expand indefinitely without leading to a crisis.

May 14, 2014, 12:27 PM
Steve Roth/Asymptosis:

"It is plausible that as the capital stock grows, the increment of output produced declines slowly, but there can be no question that depreciation increases proportionally."

This seems to presume that 1. financial assets "depreciate" (which they don't, and they can't be consumed like real capital) or 2. That the stock of financial assets has a one-to-one correspondence with the stock of real capital.

The stock of financial assets is a function of:

1. Government deficit spending.

2. Net bank lending (chartered by government).

3. The extent to which real assets (not just fixed -- human, organization, natural, etc.) have been financialized/indebted.

4. Animal spirits: the market's perception of the value of financial assets relative to the funancialized and unfinancialized real assets that they are claims upon.

Piketty defines "capital" as synonymous with wealth. Should have called it Wealth in the 21st Century, but that's not so catchy. Summers falls into the same conceptual quagmire.

As a study of wealth, Piketty is utterly brilliant. As a study of "capital," not so much.

May 14, 2014, 12:38 PM
Eric E:

An excellent review,not least in emphasizing plausible and possible policy reforms.

Still, it's fun to see the "Piketty Panic" (Krugman) in action!

May 14, 2014, 12:44 PM
Conscience of the society :

Alfred N.Whitefield wrote;
' experiment is nothing else than a mode of cooking the facts for the sake of exemplifying the law'. What Piketty undertaken was exemplifying an already known old fact, now supported with huge data of evidence. The final solution advised by him is sensible governmental action. How could modern democracies that depend exclusively on capitalists for country 'development', undertake actions to tame the very capital ? Final olution of the problem is reinventing modern democratic order that now partner capital. More than inequality of income, what should be addressed is the ending of the inequality of social relevance and individual dignity ! Income is only a means that leads to social relevance and individual dignity of citizens. Please read our reply to Piketty on these lines, for understanding modern problem of inequality in a new light, at link: http://whatequalityshouldmeanindemocracy.blogspot.in/2014/05/the-root-element-of-equality-as-model.html

May 14, 2014, 12:51 PM
Nic Rosato:

Re: The displacement of labor due to technological advances. Should we be addressing population growth? What would the effects of a smaller population be on a market-based economy?

May 14, 2014, 12:54 PM
Sandwichman:

Inequality has "microfoundations."

http://econospeak.blogspot.com/2014/05/microfoundations-of-inequality-and.html

May 14, 2014, 12:57 PM
Patrick Hickey:

This essay numbed my mind to the point I had to admit that Summers actually had little of significance to say.

As a "big picture" thinker, I'm looking for changes that sweep me off my feet!

The change is already infiltrating our economy, and nobody is really focusing on the significance of the displacement of human workers with robotics.

First of all, how can the economy sustain itself if all the productivity belongs to robot workers who must be "owned" by some elitists or other.

Very few productive human beings will be required for production, so very few human beings will have the resources necessary for consumption of goods and services.

If redistribution of the wealth doesn't occur, how will this challenge be dealt with?

Of course, somehow we all could concentrate on realizing our human potential, such as envisioned by the 20th century psychologist/philosophers Abraham Maslow, Carl Rogers, and others. All life could be a stage, or we could paint, create gardens, sing and dance.

I suppose today's anal-retentive economists would rather see the planet destroyed through violence and exploitation.

Personally, I couldn't care less about what Summers thinks about it, or even Piketty, because I'm glad I've already left their world of capitalistic fixation behind!

May 14, 2014, 1:29 PM
Sandwichman:

I'm not sure how "comprehensive" Lawrence Summers's take on Piketty's arguments is. Inequality has "microfoundations" to use the "dry technocratic prose of most contemporary academic economists." And those microfoundations have been both concealed by the technocratic prose and reinforced by the resulting policy advice of academic economists, prominently including Dr. Summers.

Nearly a century ago, Thorstein Veblen offered insights into one important mechanism underlying the concentration of wealth that he termed "industrial sabotage" or the "conscientious withdrawal of efficiency" by business. The basic idea is that the pursuit of maximum pecuniary gain is not the same thing as maximizing output of product. Veblen's intuition is compatible with the neoclassical analysis of imperfect competition, but, as Warren Samuels noted twenty years ago, the dry technocratic academic economists who developed theories about efficiency wages and equilibrium unemployment didn't seem to care that the "shirking" they contemplated was entirely one-sided. Lawrence Summers was among those self-styled "New Keynesians."

There is much, much more to say about these "microfoundations." I have explored them in a series of blog posts at EconoSpeak titled "Microfoundations of Inequality and Sabotage."
http://econospeak.blogspot.com/2014/05/microfoundations-of-inequality-and.html

May 14, 2014, 1:33 PM
Xin:

Regarding superstar educators, Larry should turn himself into the first data point, if not to be richer, then just to prove his point.

May 14, 2014, 1:34 PM
Charles A:

Summers says he is for "the strengthening of financial regulation to more fully eliminate implicit and explicit subsidies to financial activity."

This from the man who slandered a regulator proposing to do something about derivatives. He said she "cast the shadow of regulatory uncertainty over an otherwise thriving market - raising risks for the stability and competitiveness of American derivative trading."

A Marxist review of Piketty's book is at
http://mltoday.com/professor-piketty-fights-orthodoxy-and-attacks-inequality

May 14, 2014, 2:28 PM
Mr. Econotarian:

Global income inequality, enhanced by entrenched communism in China and planned democratic economies in India, is now going down. Our concerns about inequality in the West is going to be a small part of the global picture.

By the way, Delta just spent $1.4 billion to redo JFK Terminal 4, and it is wonderful!

May 14, 2014, 2:36 PM
Adams:

Paul Kennedy did not forecast the imminent decline of the USA. His analysis was historical and long-term, and is even more relevant to the military adventurism and overreach of foreign policy of the USA now than it was then. In the next chapter China eats our lunch, unless they ignore Piketty and allow wealth to concentrate at the top as we are almost certain to continue doing.

May 14, 2014, 2:51 PM
Daniel G:

Doesn't Picketty's theory completely fit the argument that executives do earn their high salaries? The returns on capital accumulated by corporations are the basis for the high executive salaries. I thought that was his whole point regarding managers.

May 14, 2014, 3:41 PM
The Hat of the Three-Toed Man-Baby:

Steve Roth seems quite dumb.

May 14, 2014, 4:11 PM
iBlorch:

I detect a preoccupation with personal wealth in this analysis of inequality. Chock it up to envy but nobody seems to get their panties in a wad fretting over the obscene wealth accumulating in the balance sheets of global corporations like Apple or Exxon. Likewise for endowment funds like Harvard School. Where is the hand wringing over CALPERS 291 billion in assets.

It seems to me any concentration of wealth, whether it be to an individual or some other entity presents society with the same set of problems. Again, the preoccupation with wealthy individuals as a product of envy is a distraction from larger issue: Obscene concentrations of wealth anywhere is a threat to society everywhere.

May 14, 2014, 5:09 PM
Bob Higgins:

Summers declares that "our politics seem to be defined by a surly middle class," while no such thing is true, as I'm sure he's aware. Our politics are defined by a voracious and criminal class of capitalists for whom no amount of power and wealth will ever be sufficient. He offers his mercilessly long winded and largely opaque screed, scattered with tidbits of the arcane jargon of economic alchemy with which I admit I'm not familiar. But in the end he misses the main point which is unalterably simple.

The plutocrats, with his assistance, have stolen our money, our labor, and our government. We will reclaim all three. Whether this is done through negotiation, regulation and taxation or in the French style is open to question.
Yes, the working classes, the "piss boys" are somewhat restive and though we may not be schooled in abstractions like s/g or r>g, many of us do understand BS. We don't have to read it, we can sniff it out at a distance.

May 14, 2014, 5:47 PM
ezra abrams:

how can someone as smart as LS say something as silly as most wealth coming from work ?
S Jobs, B Gates, M Zuckerberg, not to mention Hedge fund guys
did
NOT
get their money from work; their money came from some wierd roulette like system coupled with rules that the wealthy have forced on the rest of us (eg, why on earth are cap gains taxed lower then ordinary income ? just crazy)

May 14, 2014, 9:13 PM
Sandwichman:

"...some wierd roulette like system coupled with rules..."

It's called "intellectual property," which is secret code for a MONOPOLY granted by the state. Of course, these monopolies encourage innovation (of course they do.) We know it is so because the monopolists tell us it is so.

May 14, 2014, 9:32 PM
Corbin:

Sometimes, the best insight comes from reading your own words - it's like tea leaves, honestly. So, author, try... 'much of the income earned in finance does reflect some form of pay for performance; investment managers are, for example, compensated with a share of the returns they generate' (ha! ha!), and also 'Look at Kennedy airport. It is an embarrassment as an entry point to the leading city in the leading country in the world. The wealthiest, by flying privately, largely escape its depredations... If... (now) is not the right moment to (renovate and invest), when will that moment come?' (double ha! ha!) You've got your own answers in there, don't you know!

May 14, 2014, 10:34 PM
danberg:

No one as far as I know has as yet looked at China through the "Piketty lens;"

May 15, 2014, 2:06 AM
Dexter Bland:

And why not a wealth tax? Societies get rich from the exchange of goods and services. Hoarding of assets is detrimental to the economy. So why do we tax those who earn and consume, and not those who hoard assets and use these to accumulate more assets?

Neither do we need wealthy individuals to finance new ventures. Kickstarter and others show how this can be done in a far more democratic way.

Summers is right, Picketty is just a starting point. But also a good opportunity to do something a little more radical than just the tinkering suggested above.

May 15, 2014, 3:30 AM
Guenter:

Thank you for neatly summing up Piketty's book. I found it unbearably tedious to read and gave up, according to my kindle, after about 10%. I do agree that the subject, as well as Piketty's research, is highly important.

May 15, 2014, 7:15 AM
PerryM:

Inequality is when you have something I want.

Next hard question........

May 15, 2014, 8:12 AM
Emelks:

The assumption that the average American is consumed with rage at those "evil" 1%ers is the fatal flaw in the entire structure. My family is firmly in the middle middle class and not one of us could care less how much someone else's bank account holds. The complaints of those who obsess over such matters strikes us as envy and an attempt to gain power over others.

We do care, and quite a lot, when self-serving bureaucrats, politicians and "activists" attempt to tell us they know how much money our bank account should contain and how we must use that money. We see quite clearly how the demand that a bureaucrat control the mysterious 1% will one day end in that same bureaucrat controlling the remainder with the same "logic."

Mr Summers and Mr Piketty and those who follow both have a steep climb ahead of them to convince us that they know best how everyone should manage their financial lives. We trust Steve Jobs over Piketty any day of the week, and ourselves over Steve Jobs every hour of the day.

May 15, 2014, 9:35 AM
Nick van der Burg:

@PerryM Not if you can offer me something in return that I want.

Inequality is that I have hardly anything to offer that you want, while you have a lot to offer that I want.

It's not the same as 'envy', as conservatives think.

May 15, 2014, 9:37 AM
Michael McDonald:

Professor Summers has written a brilliant review of Piketty's book, the best by far I have seen.

May 15, 2014, 9:40 AM
Frank Shifreen:

I start with the the quote from the article- about the Forbes list "When Forbes compared its list of the wealthiest Americans in 1982 and 2012, it found that less than one tenth of the 1982 list was still on the list in 2012, despite the fact that a significant majority of members of the 1982 list would have qualified for the 2012 list if they had accumulated wealth at a real rate of even 4 percent a year
Any cursory examination of the Forbes list- and I have- can show that much of the wealth is now hidden. In 1982 there was less of an incentive to hide investments. Much of the wealth is percolated through trusts, hidden investments and dodges that were not needed in 1982. Check the list and see. I think Piketty would be validated.

May 15, 2014, 9:58 AM
Patrick:

Larry Summers got it all wrong in the 2008 financial debacle. Why do we keep consulting him when his judgment has been so poor, with devastating effect. It isn't enough to be very smart - let's find some other smart person to do reviews that also made the right call in 2008.

May 15, 2014, 10:12 AM
Mittymo:

"The question of how to account for rising inequality remains." Really?

People that get good educations, work hard, abstain from drugs, stay out of trouble with the law, & regularly save & invest part of their earnings constantly widen the gap between themselves and persons that don't do those things.

To me the answer is fairly obvious.

May 15, 2014, 10:18 AM
Anthony:

The above critique, though positing thoughtful counter points to Piketty's theme, at bottom subtly justifies/rationalizes inequality outcomes inherent (r>g) to capitalism per se but function of other factors/trends correlative to capitalist dynamic.

May 15, 2014, 10:26 AM
Nathan Shewmaker:

Steve Roth makes the excellent point that Piketty's "capital" is wealth, not the capital found in the production functions. Eventually, though, if returns on wealth are based on fundamentals (which it seems like they should be over the long run), then the two returns should converge. Also, it seems puzzling that levels of capital vs income and capital's share of income have both risen in recent years, yet no study can find the right coefficient in the model that would produce this result. Maybe there's a problem with the studies.

May 15, 2014, 10:51 AM
Matthew Lykken:

In a capitalist system earnings flow to capital save to the extent that labor has the power to demand a share. While we may have been able to absorb the decline in labor market power from automation, globalization both undercut market power and destroyed the ability to bolster labor by minimum wage laws or labor unions, since jobs could be exported (while local service jobs are undercut by badly controlled immigration, as can be demonstrated by charting the differential between incomes of sub-high school employees (immigrant heavy) and some-college employees (heavily native) against immigrant rates for the 50 states. We need to respond withpolicy that attracts high-value jobs to America and gives market power to workers. this can be done in part by the Shared Economic Growth proposal. See http://sharedgrowth.blogspot.com/?view=magazine and http://www.nytimes.com/2014/05/03/opinion/end-corporate-taxation.html?_r=1 and https://www.law.columbia.edu/null/download?&exclusive=filemgr.download&file_id=55888

May 15, 2014, 11:45 AM
Dave Thomas:

How much inequality does the marriage rate, level of education, marital status at time of childbirth, age at time of childbirth, and number of parents residing at home.

How does a tax of any kind provide the stability of a marriage, improve the level of individual education, end teenage pregnancy, end single parent homes, or end out of wedlock births?

In other words how does a tax tackle the major causes of inequality?

May 15, 2014, 11:48 AM
DRMustang:

Larry Summers, Alan Greenspan, Robert Rubin - all largely responsible for the recent financial collapse while at the same time attaining riches beyond anyone's wildest dreams. Listening to any of them is a mistake for the 99.9% and their opinions are beneficial only for the 0.1%. Rather try Piketty's lessons than continue the insanity of engaging in the same policies proposed by the same same people that created the financial collapse and expect a different result.

May 15, 2014, 1:02 PM
Michael Thaddeus:

Of all the injustices, of all the failings in our current economic order that could be righteously denounced, Summers singles out, in his conclusion, the shabby condition of Kennedy Airport. That speaks volumes about the man and his values.

May 15, 2014, 1:14 PM
Arthur Martin:

When capitalism works as intended, money makes money (there is overall profit, growth, accumulation). And when (as has always been the case) a relatively small minority of the population controls most of the money, then those people make most of the money that money makes. In other words, when capitalism works, wealth (and the power that comes with wealth) concentrates in the hands of a relative few. Thus, capitalism appears to be inherently plutocratic.

May 15, 2014, 4:20 PM
Arthur Martin:

@Dave Thomas: the problem is plutocracy -- a social system (government, economy, public sphere, social structures) organized and run by and for the wealthy, and specifically the money makes money logic of capital accumulation that is the fundamental value of capitalism. Your implication that if the poor would just act more like upper middle class people, plutocracy (which is the source of the degree of inequality we suffer) would disappear is economically ridiculous and morally flawed. The problem is not the poor people with the least power; it's the self-righteousness, greed, and anti-social attitudes of those with the most power.

And contrary to the delusions of self-righteous plutocrats like Mitt Romney and commenters like "emelks" above, the issue for most of us has nothing to do with "envy," it's an issue of politics and morality: do Americans want to live in a plutocracy or a democracy? That is the basic moral issue of our time that the plutocrats are desperate to obscure because they (at least the smart ones) know they can't win a fair debate based on honest dealing and clear thinking.

May 15, 2014, 5:27 PM
Arthur Martin:

@Dave Thomas: the problem is not poor people, it's plutocracy -- a social system (government, economy, public sphere, social structures) organized and run by and for the wealthy, and specifically the money makes money logic of capital accumulation that is the fundamental value of capitalism. Your implication that if the poor would just act more like upper middle class people, plutocracy (which is the source of the degree of inequality we suffer) would disappear is economically ridiculous and morally flawed. The problem is not the poor people with the least power; it's the self-righteousness, greed, and anti-social attitudes of those with the most power.

And contrary to the delusions of self-righteous plutocrats like Mitt Romney and commenters like "emelks" above, the issue for most of us has nothing to do with "envy," it's an issue of politics and morality: do Americans want to live in a plutocracy or a democracy? That is the basic moral issue of our time that the plutocrats are desperate to obscure because they (at least the smart ones) know they can't win a fair debate based on honest dealing and clear thinking.

May 15, 2014, 5:30 PM
Michael Pintar:

Great review and he brings up the most important point that others, such as Martin Wolf, have also alluded to. It is why should we care about inequality? I think it is actually the most important issue economically not just socially. There is clearly lack of demand in not just the US economy but also in the global economy. This is despite and perhaps because of record profit margins and zero interest rates in a very large part of the developed world. These facts should point to an ever increasing share of the economy going to a smaller and smaller subset of the population. And this subset's propensity to consume is much, much less than the majority.

I am actually surprised that Summers and Wolf would bring up this question as if they did not know that this has been a recurring problem throughout history. Following every boom leading to a rise in inequality is a bust due to lack of demand. The prototypical example being the 20's leading to the 30's.

May 15, 2014, 7:48 PM
y81:

But surely, when it comes to Kennedy airport, the people have spoken. However grotty the airport, it's a lot nicer than the airplane you get onto once you're there. And yet, airlines make more money with ever smaller and tighter seats, sold at lower prices. Luxury, or even middle-class, travel is simply not a good that any significant number of people are interested in buying. That being so, there is no good reason to tax them to supply something they don't want, especially since middle class taxes are already a lot higher than they were 50 years ago.

May 15, 2014, 9:00 PM
Ted Schrey Montreal:

"...why has the labor income of the top 1 percent risen so sharply...? No one really knows."

Come now, no one? The top 1 percent surely does? I am quite sure people who earn a hundred million buckeroos didn't just walk around outside, on a windy day, and got hit by a whopping bundle of cash?

No,no; it's the usual disingenuousness of economists--which appears to be part of the job. No one really knows.

Yes, my foot. There are people on this planet who operate within arm's reach of the trough and as a matter of routine they dip into it.

Everyone really knows.

May 15, 2014, 10:12 PM
Arthur Martin:

It seems pretty obvious that money managers are the highest paid profession because their work -- making the money of the wealthy make more money (thereby concentrating the wealth of the wealthy) -- is the most highly-valued role in society in the opinion of the people who get to decide -- the people with the money!

The fact that money manager/ investment banker types are the highest paid is exactly what one would expect in a plutocracy. Which is what we, as a capitalism-based society, are.

[Apologies for the double post above. A difficult captcha messed me up.]

May 16, 2014, 2:34 AM
lewis:

It's pretty clear that Mr. Summers didn't actually read past the introduction.

May 16, 2014, 10:29 AM
Rui Sousa:

Summers analysis has one massive glaring flaw: he confuses the INEQUALITY of capital DISTRIBUTION with the TOTAL INCREASE in capital. We can continue to have high returns on capital even as the rich accumulate more and more of it because, as the non-rich have less and less of it, in aggregate the total amount of capital will increase at a slower rate than in a system where capital was more evenly distributed. In fact, the rich actually favor systems in which total capital increases more slowly since, in that way, their share becomes that much more valuable. This is why the rich (and the right; they share the same ideology) inveigh so strongly against inflation and money printing schemes for economic stimulus. They understand, quite rightly, that increasing the money supply will diminish the value and return (interest rates) that they can get on the own hordes.

So an r>g return on capital can be sustained (barring the catastrophes or gov interventions Summers mentions) indefinitely because it does not have to lead to a situation (in fact trends against it) where total capital growth > GDP growth; it may simply lead to a situation in which TOTAL capital grows slower than it should but is increasingly concentrated in fewer hands and therefore becomes even more valuable and yields a greater rate of return.

May 16, 2014, 10:55 AM
Sandwichman:

"There are people on this planet who operate within arm's reach of the trough and as a matter of routine they dip into it."

Bingo! That wasn't so hard.

May 16, 2014, 11:12 AM
Ralph Lynch:

Easy, just set the maximum wage lower than the minimum wage and nobody will have to work at all.

May 16, 2014, 6:26 PM
emelks:

@Arthur Martin

And contrary to the delusions of self-righteous plutocrats like Mitt Romney and commenters like "emelks" above, the issue for most of us has nothing to do with "envy," it's an issue of politics and morality: do Americans want to live in a plutocracy or a democracy? That is the basic moral issue of our time that the plutocrats are desperate to obscure because they (at least the smart ones) know they can't win a fair debate based on honest dealing and clear thinking.

I want neither of your fallacious options. I want to continue to live in a Constitutional Representative Republic.

Speaking of "clear thinking" why don't you stop spouting platitudes and meaningless labels like "plutocrats" and try some real numbers. Just how much of one's earnings is one "allowed" to keep? Where will the diverted earnings end up? More welfare? A few hundred thousand more bureaucrats? And most importantly, who decides that I or anyone else has earned "too much" and must be punished for that?

It seems to me that it's your side that hides behind meaningless tripe and vague labels while encouraging others to get angry when a BMW drives past. So prove me wrong. Answer my questions.

May 17, 2014, 1:09 AM
Eugene Patrick Devany:

Mr. Summers is right about "Capital" being an important start of issues and data that needs to be considered in tax reform.
A true American wealth tax can be "optional". Consider a flat income tax rate of 26% (plus gift and estate taxes) or a taxpayer choice of paying a low 8% income tax rate (and no 7.65% payroll tax) combined with a 2% wealth tax (excluding $500,000 retirement savings and $15,000 cash). Ninety-nine percent of taxpayers would elect to pay the 2% wealth tax to take advantage of the 8% income tax rate and elimination of gift, estate and capital gains taxes.

A complementary business tax reform would consist of an 8% C corporation rate and 4% VAT.

As a bonus, the replacement of payroll taxes would also create full employment, higher wages and a robust economy.

May 17, 2014, 9:09 AM
Arthur Martin:

emelks (if that is your real name):

Here are answers to your questions, which, I'm sorry to say, reveal the persecuted rich person world-view that I have no hope to penetrate, but do hope having drawn you out and now responding will help demonstrate to others the moral vacuity of your positions:

(1) One is "allowed" to keep as much of one's earnings as the people in charge of one's society decides is appropriate. For the very rich, that is likely to be more in a plutocracy and less in a democracy. It's a political issue, not a philosophical one. (Although some very smart people have proposed that one is only entitled to "own" after-tax income [i.e., pre-tax income is not even yours] because that income is available only because of the social structures and governmental interventions that allow you to make any income at all. That's a more philosophical position. [See Liam Murphy and Thomas Nagel, The Myth of Ownership: Taxes and Justice.])

(2) If society wants to retain capital accumulation as a fundamental value AND be a real democracy, as opposed to a plutocracy, wealth from the top will have to be distributed down the wealth scale, presumably through a variety of taxing and spending policies, such as is done in the social democracies of Scandinavia. Not perfect places, but much better economically for average and poor citizens than my country, the USA.

(3) Your insistence that being taxed for the overall good of society (e.g., to lower inequality, to minimize poverty, to provide decent universal services) is "punishment" suggests a lack of social responsibility that no successful society can survive. You are a canary in a coal mine alerting people paying attention to the moral collapse of America -- and it's collapsing from the top, not the bottom.

Plutocracy is the problem; democracy is the answer -- not only for society as a whole, but for your (emelks') angry delusions of rich guy persecution. (Another possible answer for your self-righteous, anti-social delusions: find a New Testament with red words and read them.)

May 17, 2014, 2:15 PM
Clegg:

@emelks says "My family is firmly in the middle middle class and not one of us could care less how much someone else's bank account holds."

This is the low information citizen who is eating out of Summers' hand. What this "middle class" person doesn't realize is that, for the last 35 years, the 1% class, via supply side fiscal policy, has been redistributing middle class wealth into their pockets at an average rate of around 0.5% per year.

In 1976, the 99% (emelks) owned 80% of this country. Today, the 99% own just 63%. In 10 years, at current "trickle down" trend rate, the 99% will own just 56% of America.

The last time we saw 1% / 99% wealth ratios this out of balance (according to Piketty's data) was 1929, which triggered the Great Depression.

If Joe Emelks 6-pack middle America doesn't understand the socioeconomic reality upon us, and continues to be satisfied by media sound bites and 1% talking points, then no political action will follow.

The conversation needs to find a way. Piketty seems to be opening new debate, and that's a good thing.

May 17, 2014, 9:40 PM
Carl Legg:

@emalks "Where will the diverted earnings end up? More welfare? A few hundred thousand more bureaucrats? And most importantly, who decides that I or anyone else has earned "too much" and must be punished for that?"

Emelks, I encourage you to do a comparative study of American tax rates and fiscal policy. Compare the period 1945-1980 and the period 1980-present. Your fears are unwarranted, and frankly just parrot 1% talking points.

Piketty shows that different periods of history had different class-wealth ratios. For instance, in the aristocratic period, the 1%-class owned in excess of 50% of a nation's capital, which led to widespread impoverishment and gross social inequity. Piketty shows how the 1945-1980 period of U.S. history was perhaps the healthiest, most vibrant socioeconomic experience in world history. Multi-millionaires were created daily. Hugely successful businesses were built and low unemployment was standard. Wealth flowed everywhere, and truly "trickled down" to all socioeconomic classes. U.S. infrastructure became the envy of the free-world. But here's the most important thing: the broad American middle-class was HEALTHY and THRIVING. By 1976, the 99% (you) OWNED 80% of America. Let that sink in. Economists call this the Golden Era of American socioeconomics. Even America's poor were the richest poor on the planet. Truman-Eisenhower fiscal policy was brilliant.

This healthy and proper distribution of wealth did NOT go to "a few hundred thousand more bureaucrats". It did not go to "welfare", at least not in the manner you imply with your statement. The proper distributions of income and wealth went to the American people via higher wages, lower taxes (for the middle), better quality jobs, higher mobility, more realistic ratios of labor-to-management salaries, etc.. Read Piketty if you want a better understanding of how this works.

America then made a radical fiscal policy change in the 1980s. It was called "trickle down" (little different than Harding-Coolidge tax policies of the Roaring 20's). But, since the 1980s, American wealth has been steadily trickling UP from the 99% to the 1%. In 1976, the 1% owned 20% of America. Today, the 1% own 38% of America, and continue to suck 0.5% of total U.S. wealth from the pockets of the 99% (that's you, emelks) every year. At this rate, by 2025, the 1% will own 43% of American wealth, which approaches the aristocratic wealth ratios of pre-revolutionary France, and which matches the 1% / 99% wealth imbalance we experienced in 1929, which triggered the Great Depression.

As 1% ownership of America has risen dramatically, 99% socioeconomic class-wealth ratios have NOT risen proportionately. Not even close. Study the income growth parity charts from 1945-1980 (they are in parity). Then study what happened after 1980 (a massive disconnect of the 1% from the 99%). What grew to be the strongest broad-based socio-economic group in world history (1945-1980) by every metric (% of total wealth, absolute value of wealth, spending power, capital acquisition, income mobility, etc.), has been decimated by every metric (% of total, abs value, income growth slope parity, purchasing power, etc.). Since 1980, middle class income (households within 50% of median income) has shrunk 18% relative to 1980 dollars and spending power.

http://big.assets.huffingtonpost.com/MiddleClass_6.png

Today, America's middle class is no longer the envy of the world. Today, America's poor are no longer the "richest poor" in the western world. You can see the 35 year slide from true American exceptionalism (the world leader at ALL socioeconomic levels), to a country whose 1% has sucked, and continues to suck, the common wealth from the 99% --- which has NOT "risen all boats" but in fact has decimated our country. Here's the sad truth, in raw data, if you're interested:

http://www.nytimes.com/2014/04/23/upshot/the-american-middle-class-is-no-longer-the-worlds-richest.html

May 17, 2014, 10:36 PM
emelks:

To Arthur Martin

Here are answers to your questions, which, I'm sorry to say, reveal the persecuted rich person world-view that I have no hope to penetrate, but do hope having drawn you out and now responding will help demonstrate to others the moral vacuity of your positions

I am far from "rich." I am hoping to remain in the middle class by the end of 2016. Persecuted? Anyone who works for a living and sees their earnings consumed by every imaginable tax and fee imposed from on high is by your definition holding a "rich person world view." No, we're just sick to death of very level of government taking our earnings from us to fund nonsense. The "LOOK! SQUIRREL!" tactic of diverting our attention from our own tax load to look at what someone else owns or does simply doesn't work.

(1) One is "allowed" to keep as much of one's earnings as the people in charge of one's society decides is appropriate. For the very rich, that is likely to be more in a plutocracy and less in a democracy. It's a political issue, not a philosophical one.

And here we have the crux of the issue. You insist that the fruits of one's labor are not theirs to use they see fit--the very definition of slavery. Instead you believe that the fruits of one's labor belong to some mysterious group of "people in charge" and they will deign to allow one to keep some portion of their labor, predicated upon nothing more than their whim.

You may think it's a political issue. I and everyone I know consider it a philosophical and moral issue. There is no middle ground here. I will never believe that my and others' labors belong to that shadowy cabal, and you will never believe that individuals have absolute right to their labors and the results thereof.

If this country ever moves to your way of thinking me and mine will be seeking better abodes outside of the US. I hope it never comes to that but I will not be a slave to you or the government you desire.

(2) If society wants to retain capital accumulation as a fundamental value AND be a real democracy, as opposed to a plutocracy, wealth from the top will have to be distributed down the wealth scale, presumably through a variety of taxing and spending policies, such as is done in the social democracies of Scandinavia.

You keep saying "democracy" as if it means the US political system. We are not a "democracy," thank God. Democracy is two wolves and a lamb voting on what to have for lunch. We are a Representative Republic governed by a Constitution. That Constitution protects each individual from the government and more, from the rapaciousness of a mob. How do you plan to get around that obstacle?

Not perfect places, but much better economically for average and poor citizens than my country, the USA.

Interesting. Given that there is nothing stopping anyone from emigrating to Scandinavian countries one wonders why the exodus hasn't begun.

(3) Your insistence that being taxed for the overall good of society (e.g., to lower inequality, to minimize poverty, to provide decent universal services) is "punishment" suggests a lack of social responsibility that no successful society can survive. You are a canary in a coal mine alerting people paying attention to the moral collapse of America -- and it's collapsing from the top, not the bottom.

I completely reject your notion of "social responsibility." I can be responsible for only those things over which I have control. Since I have no control over "society" I cannot be held responsible for it. I can't be responsible for the homeless drunk guy downtown because I have no control over him and the choices he made to end up where he is. I cannot be responsible for the illiterate 16 year old male on the basketball court because I have no control over his upbringing. I can't be held responsible for anything you'd like to force on me because I cannot control the factors that lead to the problems you'd cite.

I am responsible for ensuring my children grow up into intelligent, educated, law abiding adults and I've done that. I'm responsible for providing myself and my family food, shelter, clothing and all other necessities and I've done that. I'm responsible for those things because that's what I have direct control over.


Plutocracy is the problem; democracy is the answer -- not only for society as a whole, but for your (emelks') angry delusions of rich guy persecution. (Another possible answer for your self-righteous, anti-social delusions: find a New Testament with red words and read them.)

Democracy is no answer, it's a poison pill. As for "plutocracy" you throw the tag around as a given but I reject your assumption that we have a plutocracy. We definitely have an out of control government and if that's what you call "plutocracy" I'll gladly concur. Yet I doubt that you define it that way since you want government to exercise control over every aspect of human life.

You and I have two completely opposite views of human life and how it should be structured. We disagree on all the fundamentals.

May 17, 2014, 10:39 PM
Jerry Hartnett:

This is the most well written thought provoking analysis I have read. If all of Summers' implied and actual questions were addressed and answered as objectively as his analysis we would have a very clear starting point in how to fix our economic structure. If only Mr. Summers was not so political in his personal behavior.

May 18, 2014, 8:57 AM
Carl Legg:

@emelks "You insist that the fruits of one's labor are not theirs to use they see fit--the very definition of slavery."

No. That's the exact opposite of what is being suggested. You're missing the central idea, which is that fiscal policy, over time, determines wealth-class ratios. Not a political party. Not some special interest group.

Today's ratios are approaching historically unhealthy levels (French Revolution, Great Depression, etc.). The 99%, and especially the broad middle and lower classes, are becoming more and more "slave-like" to the 0.1% classes, simply due to profoundly imbalanced wealth ratios (and getting worse).

Maybe you've never realized that a nation's tax structure DETERMINES (over time) the relative wealth ratios between socioeconomic classes in a free-market. Look, here's a question and an exercise for you. Question: Do you think there's such thing as an unhealthy ratio of wealth between classes? Yes? No? If yes, what is a fair ratio or range of fairness? And how do we determine that ratio as a moral or ethical polity?

Assuming you answered "yes" to above, here's an exercise in determining a fair range of 1% to 99% wealth ratio. Let's start with the 1% class owning over 50% of a country's capital wealth. Historically, when has this happened? We know that it happened just before the French Revolution. We know that allowing 50% of a nation's wealth to flow into the hands of a tiny minority results in horrific suffering of the common citizen. Agreed? No? Tell me why.

So how about 45% of a nation's wealth in the hands of the 1%. Is that healthy? Why or why not? What does history tell us? We know that, in the early 1920s, top marginal tax rates were reduced from 75% to 25%. We know this allowed 1%-class wealth holding to shoot up from 30% to 45% in just ten years (with a corresponding 15% drop in 99%-wealth in those same 10 years). The result was a Great Depression.

We understand the disastrous results of tax codes creating too much wealth in the hands of too few, and the fatal consequences. This is not about some political party deciding "how much each class should own". It's not about some moral philosophy determining "what is fair". We're simply looking at the HEALTH of a nation, defined as reasonably shared prosperity and well-being.

As we've learned, the healthiest socioeconomic period in world history was USA 1945-1980. This period was created by a fiscal policy that prevented a tiny minority from amassing excessive and unwarranted wealth, but kept an OPTIMUM balance of wealth among all classes. If you don't think this is true, please tell me why. We're all students here, I hope.

May 18, 2014, 5:19 PM
Arthur Martin:

dear emelks:

(1) I never said you were rich, but that you expressed a persecuted rich person world-view. The fact that you're not rich just makes your positions more tragic, as noted by Clegg above.

(2) If you raise your reading comprehension game a little, you will see that I have not advocated any form of government in my comments beyond the idea of democracy, which is not really a form of government but the principle that the people being governed get to decide how, including the fundamental values upon which any governing will be based. In my opinion, a Scandinavian type social democracy would be better than the rampant plutocracy under which we Americans suffer, but that does not mean I advocate that form of governance. That would be "reform," like FDR's new deal, that would leave in place the basic structures of capitalism, but try to temper them with policies aimed at ensuring the wealth society generates is to some extent fairly shared throughout society, as opposed to hoarded at the top through the money makes money logic of accumulation that defines capitalism. Although at one time I hopefully imagined the possibility for reform, and came up with an idea for a more democratic form of America's system of government, including proportional representation using cumulative voting, I have come to believe, based in part on exposure to views such as those you have expressed, that reform is not viable and we need to head beyond reform and straight to "regroup." In my mind, this would entail giving up on the "nation-state" as a form of social organization and decentralizing into not-specifically-geographic polities of like-minded people (more like churches) who would be free to work together to create the kinds of societies and ways of living that best suit them, as long as, of course, they do not interfere with other groups' abilities to do the same. See, I have no interest in imposing my views on you; I believe you and yours should be able to live as you see fit -- as long as you don't infringe on any one else's right to do the same. My interest is actually in being part of a society where I don't have to deal with people like you (meaning people who reject the concept of social responsibility). (It would be interesting to see what kinds of polities anti-social people like you would come up with; some would probably change and be happy to be socially responsible as long as the group did not include the "others" conservatives love to hate...)

3) I agree our views are fundamentally at odds. People who are anti-democracy typically either don't understand what it means or are elitists who think they are part of some select group that should get to rule over the majority (surely American racism plays a role in the existence of this view, particularly among the non-wealthy). This anti-democracy "elite rule" view is so contrary to the founding idea of America as inscribed in the Declaration of Independence, it is absurd for anyone holding it to consider themselves a patriotic American (as I have a sneaking suspicion you do, emelks, although that is an assumption based on stereotyping). It's true that some of the drafters of the Constitution of 1787 were concerned with restricting democracy and keeping the reins of power in the hands of the wealth-holding class, but unfortunately for those who share that anti-democratic impulse, the ideal of democracy predates the Constitution, which cannot take away the fundamental right of Americans (there since the very beginning in 1776) to abolish any form of government that is not operating in our interests and to institute new government based on values reflecting those interests. (Read the text if you don't believe it.) That is the basic idea of democracy, and no one can deny it is at the root of what America is all about. You can philosophically reject that founding value, but you cannot reasonably deny it's existence or that your rejection of it constitutes a rejection of the idea upon which the American nation was founded.

4) Finally, if you cannot see that America is a plutocracy -- a society ruled by and for the wealthy -- I would assert that you either aren't looking or you have some kind of ideological or psychological blinders on, perhaps similar to the blinders that led many non-affluent Southern white people to support the slave owners' rebellion in 1860.

May 18, 2014, 6:13 PM
emelks:

@Carl Legg

The conversation needs to find a way. Piketty seems to be opening new debate, and that's a good thing.

I'd be happy to engage in conversation but this platform is utterly incapable of hosting it. Do you know of another place, preferably a forum, where posts aren't delayed for hours and editing functions are a bit easier? I can code HTML if I must but it gets old fast.

I'd like to respond in depth to your several posts but really, this comment section is just terrible for that kind of conversation.

In answer to:

Question: Do you think there's such thing as an unhealthy ratio of wealth between classes?

No, I do not believe there is a numerical ratio of wealth between classes that is "unhealthy." There are far too many assumptions buried in that question.

My first thought upon reading your initial post to me is that until recently, I was not forced under penalty of law to do business with ANY entity other than the government-run utilities like electric companies, telephone companies, etc. Being forced by law to pay money to a business for a product came into being with the PPACA in 2010.

In light of that fact, how has anyone managed to take any of my personal income or assets without my knowledge? I've read others claim that the upper classes have somehow reached into my life and snatched away a portion of my paycheck but I have yet to catch them at it. The only entity that reaches into every paycheck and takes my earnings is, yes, government. I'd be interested in hearing how those dastardly 1%ers managed to take my money, property and/or assets without my awareness.

"You insist that the fruits of one's labor are not theirs to use they see fit--the very definition of slavery."
No. That's the exact opposite of what is being suggested.

You must have missed where on May 17, 2014, 2:15 PM Arthur Martin wrote:

(1) One is "allowed" to keep as much of one's earnings as the people in charge of one's society decides is appropriate.

I am quite serious about engaging in a rational conversation on this topic. If you know of a venue, please post a URL. Thanks in advance.

May 18, 2014, 10:31 PM
Emelks:

@Arthur Martin

See, I have no interest in imposing my views on you; I believe you and yours should be able to live as you see fit -- as long as you don't infringe on any one else's right to do the same.

I cannot fathom how you wrote this with a straight face after thousands of words advocating government dictating the financial lives of citizens.

But on the bright side, I would love to see a society where people live their lives as each sees fit without the government forcing behaviors and compelling actions upon the entire population. A return to pre-1930s jurisprudence would be perfect. Allow a man to grow wheat for his own consumption and keep the federal government out of it altogether.

Prior to the Federal scope creep, the states served as the pseudo-churches you described. A return to state sovereignty and the principle of subsidiarity would go a long way toward reaching your desired goal. On that we can also agree.

As for the rest, if Mr. Legg has a better platform for a serious discussion I'll address the remainder of your post there. This platform is entirely too unwieldy for this sort of interaction. I imagine Mr Legg wouldn't object to your input.

May 18, 2014, 10:40 PM
Clegg:

@emelks "I do not believe there is a numerical ratio of wealth between classes that is "unhealthy.""

Let's try a little exercise. If there is no unhealthy wealth ratio between the 1% and 99% classes, let's consider a tax code that cycles virtually ALL wealth to the 1%. Over time, that puts 99% ownership of America in the hands of 1% of the population.

Is that healthy? No? (this is a textbook description of pure Plutocracy - not possible to sustain in reality, but an good illustration)

How about 90/10? or 80/20? If 99/1 isn't fair, then what is? And how do we make that determination as a polity?

IMPORTANT: If you don't understand that a nation's fiscal policy (its tax code) absolutely determines, over time, this fundamental class-wealth ratio. this conversation will make no sense to you. If you have any doubt about this, please state your reasons, with historical examples if possible.

This comment site is indeed SLOW.

May 19, 2014, 1:52 AM
emelks:

Mr Clegg--

How in the world can a tax code "cycle virtually ALL wealth to the 1%"? Taxes are collected by government and distributed by that same government. Are you saying that the government is transferring tax dollars to the bank accounts of that mysterious 1% of individual income earners? I would very much like to see evidence of this. Are you saying that the federal government is not collecting taxes from that 1%? If so, that's easily disproven by the IRS. Source from the IRS tables at http://www.irs.gov/uac/SOI-Tax-Stats-Individual-Income-Tax-Rates-and-Tax-Shares#_pagi
One could say that companies like GE are receiving loads of tax dollars for questionable government acquisition, in addition to legislated purchase of their failing produce (CFL lightbulbs, etc.) In that I'd agree and would go further. In my opinion the federal government is at the cusp of outright fascism (defined as "a governmental system led by a dictator having complete power, forcibly suppressing opposition and criticism, regimenting all industry, commerce, etc., and emphasizing an aggressive nationalism and often racism." http://dictionary.reference.com/browse/fascism?s=t)

But we aren't talking about companies. We are talking about individuals and I know of not one instance wherein a wealthy individual receives tax dollars from the Treasury for the sole purpose of passing tax money to "rich" people. I know several people who do receive thousands of dollars of tax money that they did not pay via the EITC, which is in fact the Treasury sending tax dollars to an individual for no other reason than to send money to "poor" people, but that doesn't fit your scenario either.

Perhaps you're talking about things like tax breaks, etc. If that's the case, one must be a tax attorney to even begin to flesh out that nightmare. I am in favor of a flat 10% tax on all individual earnings and the elimination of FICA and the gazillion other federal taxes we all pay (eg the Spanish American war tax on phone bills.) That removes politicians' ability to write tax exemptions since the politicians do not have the power to grant waivers to this group over that group. Limiting the power of the federal government limits the federal politicians' ability to favor one over another and as a side effect eliminates a great deal of lobbying.

IMPORTANT: If you don't understand that a nation's fiscal policy (its tax code) absolutely determines, over time, this fundamental class-wealth ratio. this conversation will make no sense to you. If you have any doubt about this, please state your reasons, with historical examples if possible.

Somehow we went from fiscal policy to tax code. The two are not synonymous. Please clarify which you are referencing. If you want to talk about the tax code I can talk in generalities but because I am not a tax attorney I can't be in-the-weeds specific about a particular part of the tax code. If you want to talk in generalities that's fine.

You've made a few assumptions that I don't hold. First, you assume that your definition of "class" is 1) universal, 2) defined, 3) static and 4) immutable. You also failed to define "wealth." What are we talking about? Assets? Assets plus income? Assets, income and debts? What exactly do you mean by "wealth?"

Next, you assume that there is a numerical proportion that describes the "perfect" distribution of vague "wealth" among undefined "classes" that will in some unspoken way prevent a mysterious, unspecified evil. I've yet to parse precisely what that threat might be, but some commentors seem to suggest that civil war and/or violence will occur if they don't get their way politically. Is that what you are saying?

In my particular case, I have no problem with anyone owning whatever they've earned. I have grown my own economic situation into a comfortable position with which I am content. I have no envy or anger at anyone who owns more than I, or whose checking account is larger, or whatever. I recognize that threats to anyone else's economic condition based solely upon governmental decree of "fairness" is a great and imminent threat to my own economic condition. I worked hard to pay for my home and property and will not accept anyone's claim to a part of it due to "fairness." I can't expect anyone else to accept a similar claim unless I'm willing to accept it myself, and that will never happen.

This comment site is indeed SLOW.

Undoubtedly. If I work up a generic forum would you be willing to go there to continue? This commenting format is incredibly frustrating.

I appreciate your courtesy and avoidance of adolescent name calling and the like. It's rare to find an adult on the opposite side of an issue who is willing to have a rational discussion. Thank you.

May 19, 2014, 5:43 PM
emelks:

Mr. Clegg--

I decided to open a generic forum to continue this conversation. If you register, please copy the posts you'd like me to respond to over there and we can converse there. If you don't register, I don't want to spend the time responding in depth.

Oh, and I set it up for admin registration approval to keep the spammers out. I'll approve your registration ASAP.

http://rationalpiketty.freeforums.org/index.php

May 19, 2014, 6:33 PM
joyce:

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May 20, 2014, 7:52 AM
Carl Legg:

"How in the world can a tax code "cycle virtually ALL wealth to the 1%"?"

Sorry, you're not getting the fundamentals. Of COURSE a government can't cycle ALL wealth to the 1%. That's exactly my point. There is a LIMIT as to how much of a nation's wealth a tiny oligarch class can acquire before that nation implodes. We actually know those ratios.

In 1800 France, the 1% class wealth ratio rose to over 50%, which triggered the French Revolution. In USA, 1% class wealth grew from 30% (1918) to 45% (1929), which (in part) triggered the Great Depression. History suggests that the "red line" of 1% wealth imbalance starts around 40%. The wealth class can only suck so much wealth from the bottom 99% before you destroy the foundation of a country, which is its middle class.

Piketty suggests that the optimal 1% wealth ratio is around 15%. My own research shows closer to 25% (20-30% range). In any case, today, we're approaching 40% in USA (red line), and our lower and middle class socioeconomic metrics are clearly in free-fall.

www.nytimes.com/2014/04/23/upshot/the-american-middle-class-is-no-longer-the-worlds-richest.html

http://www.princeton.edu/main/news/archive/S39/81/99O06/index.xml?section=topstories

http://big.assets.huffingtonpost.com/MiddleClass_6.png

http://www.infohow.org/wp-content/uploads/2012/11/Plutocracy-Reborn.jpg

Yes, tax code is part of fiscal policy, and tax code is a key reason for America's growing wealth class imbalance. For now, forget all the definitions of wealth, etc.. Simply look at relative socioeconomic health among all American classes. Compare 1945-1975 period, with the worsening trickle-down period that has followed.

In 1945-1975, ALL our socioeconomic classes were the healthiest in the world. Today, our lower and middle classes have fallen, and continue to fall. You need to understand this reality, and the trend lines, and the fiscal reasons for it. If you don't see this and acknowledge it, then there is no reason to continue a conversation about wealth inequality.

May 20, 2014, 8:36 AM
emelks:

Mr Legg--

Sorry, you're not getting the fundamentals.

I am not an ecomonist and therefore cannot discuss with any degree of certainty the fine details of economic theory. I approach this topic as a reasonably educated taxpaying adult whom others are attempting to persuade to adopt this economic theory and vote it into law via the policial process. If my ignorance of detailed economic theory means we cannot converse on the topic, so be it. I never claimed to be an economist. I do claim to be representative of the people you must convince in order to implement your preferred theory and so far I'm not at all convinced.

Of COURSE a government can't cycle ALL wealth to the 1%. That's exactly my point. There is a LIMIT as to how much of a nation's wealth a tiny oligarch class can acquire before that nation implodes. We actually know those ratios.

You've yet to explain to me precisely how that "oligarch" class is forcibly taking money from me without my knowledge. How exactly is that happening? Earlier you said that money is being "transferred" to the 1% via tax rates. I asked how that can possibly be happening. Please explain how that happens in detail. If I'm missing something critical I'd like to be made aware of it.

In 1800 France, the 1% class wealth ratio rose to over 50%, which triggered the French Revolution. In USA, 1% class wealth grew from 30% (1918) to 45% (1929), which (in part) triggered the Great Depression. History suggests that the "red line" of 1% wealth imbalance starts around 40%.

Ah, so you're saying that if your preferred political solutions aren't implemented there will be violence and/or mass suffering in the future. Interesting.

The wealth class can only suck so much wealth from the bottom 99% before you destroy the foundation of a country, which is its middle class.

You keep saying this but you've yet to explain in any detail precisely how the wealthy are "sucking" money from anyone. You are assuming that it's happening, which is fine if you want to make that assumption, but you can't expect everyone else to just nod their heads.

I keep asking for an explanation of precisely HOW those people are forcibly taking my money from me. No one has yet offered an explanation. You can't expect me to simply accept your claim simply because you say so.

You are asking me and others to accept a huge risk to our own lives, financial and otherwise, in order to prevent some violence or suffering in the future. Some are even insisting that we accept a complete paradigm change in the nature of the relationship between government and citizen. Surely you realize that extraordinary claims require extraordinary evidence. Thus far I see only statistical assertions and political assumptions, neither of which qualify as extraordinary evidence.

Yes, tax code is part of fiscal policy, and tax code is a key reason for America's growing wealth class imbalance.

Tax codes are part of fiscal policy but fiscal policy is not simply tax codes. There is much more to fiscal policy than that.

For now, forget all the definitions of wealth, etc.. Simply look at relative socioeconomic health among all American classes. Compare 1945-1975 period, with the worsening trickle-down period that has followed.

You are grossly simplifing the cause and effect of global conditions during that time period. In 1945 most Western economies were decimated by WW2. It wasn't hard at all for the US to be first in economic output since Europe was a smoking ruin and Aisa had yet to become industrialized. You aren't accounting at all for the advent of production in Asia during the '70s and the effect of that on the US, and you skipped the impact of unions on the situation as well. Then there is the demographic issue. It's a very complex topic that cannot be distilled into simple tax rate comparisons, and attempting to draw economic and political conclusions from a grossly simplified comparison is inherently dangerous.

My conscious memory of economic conditions began in the mid to late 1970s. I distinctly recall waiting in gas lines, the adults talking around the table about a car loan with an interest rate of 22%, my mother crying in the grocery store because she didn't have enough cash to cover the cart contents and cursing Jimmy Carter for a fool. I remember seeing blindfolded kidnapped people on the TV and some guy in black robes speaking in a strange language, and my mother telling me he was saying "death to America." Before the mid to late '70s I wasn't around or sufficiently capable of understanding events around me, but I can safely say that my personal experience and the experiences passed down in my family doesn't match with the notion of economic nirvana pre-1975, or pre-1980 (which you referenced earlier.)

If you choose not to continue with this conversation, that's fine. Disappointing but not unexpected since no one has ever answered my basic questions on this topic, not only here but in other venues. If you choose to leave the conversation I appreciate your taking the time and communicating in a rational manner.

May 20, 2014, 9:40 AM
Luke Lea:

Inequalities of wealth or of income are not the real problem. Inequalities of wealth are. Wage subsidies financed by a graduated expenditure tax is the only market-friendly answer.

I suspect Summers knows this deep down. He needs to use his considerable influence to get the international community started down the difficult road of implementing a global GET.

May 20, 2014, 3:37 PM
Cindy:

emelks -
In response to your request for an explanation "You've yet to explain to me precisely how that "oligarch" class is forcibly taking money from me without my knowledge. How exactly is that happening? Earlier you said that money is being "transferred" to the 1% via tax rates. I asked how that can possibly be happening. "

There are two factors involved:
People who have accumulated more wealth than they need to live are able to continue to accumulate at even higher rates because the capital gains tax rate is lower than the income tax rate. You may say that has nothing to do with taking money from you, but it does in subtle ways. For example, we all need roads, defense, schools, etc. because the people with great wealth are not paying their fair share of taxes to support our common infrastructure, the rest of us are shouldering a heavier burden. You may say, but my taxes are lower now than they were [insert previous time here]. But there are also a lot of hidden burdens we are shouldering (or our children will be carrying later) for example, the VA is under-funded, the national debt is rising, etc.

The second way they are taking money from you is also subtle. It is in the excessively high pay (including stock options, etc) the top 1% has been able to claim and the reduced income tax on their earnings. The pay increases operating costs for the company which has some effect on wages available for other workers and on product costs.

May 20, 2014, 6:40 PM
emelks:

Cindy--

Thank you for providing an answer for my question.

My first reaction was that your answer is quite different than the hyperbolic claims made earlier. There is a huge difference between "the 1% are stealing money from everyone else!" and "tax policy favors high earners." Hysterical and unfounded assertions don't serve the cause of those attempting to implement this system well at all.

I do take issue with several aspects of your answer.

People who have accumulated more wealth than they need to live are able to continue to accumulate at even higher rates because the capital gains tax rate is lower than the income tax rate. You may say that has nothing to do with taking money from you, but it does in subtle ways. For example, we all need roads, defense, schools, etc. because the people with great wealth are not paying their fair share of taxes to support our common infrastructure, the rest of us are shouldering a heavier burden.

First, please define "fair share." A numerical definition would be perfect.

Then please define how you calculate how much money an individual "needs to live." Please include the assumptions you're using to arrive at that number. For example, how many cars does a family "need to live," how many square feet of housing does a family "need to live," etc.

Then please explain how taking more money from a small percentage of the population will address enormous Federal budget shortfalls.

Finally, please explain why the enormous and ever exploding federal budget (or rather endless "continuing resolutions") regularly fails to address the items you mentioned. I've heard that complaint for decades and no matter how high the tax rates or how huge the federal budget, it's always the same complaint.


The second way they are taking money from you is also subtle. It is in the excessively high pay (including stock options, etc) the top 1% has been able to claim and the reduced income tax on their earnings. The pay increases operating costs for the company which has some effect on wages available for other workers and on product costs.

Interesting. So under your preferred system the company that is writing the paychecks isn't allowed to determine compensation levels for executives. Who is allowed to make that determination? What legal and moral reasoning permits that entity to forcibly take that function from a private company?

Why would you limit this to the "top 1%?" How will you limit that entity to those people only? Logically that entity will have the authority to determine compensation for all employees. There is no logic that limits the control to that 1% of earners.

Have you considered that the government (which I assume is the entity you'd task with determining "appropriate" executive compensation) would become truly fascist if the government took over this task?

This is precisely the sort of thing that makes people like me stop and take note. You are in effect saying that in order to make others pay their "fair share" we must relinquish control of our own financial lives, in this case the compensation for our labors, to yet more bureaucrats. Do you see why we refuse to go along with such a system?

Frankly I don't think executive compensation has much at all to do with an "effect on wages available for other workers and on product costs." If there is an effect it is incredibly small and far overshadowed by other impacts, eg. government mandates, global economic situations, raw material access, etc. That is an entire topic of its own.

I do appreciate you addressing my question. Though I disagree with your assumptions and conclusions I do recognize that you alone of all other commenters have tackled the question head on. Thank you.

May 21, 2014, 9:23 AM
Mark:

All of this from a man who did more than anyone else to make Wall Street the casino it is today.

Someone wanted to regulate it in the late 1990s and mr Summers launched a vicious campaign of slander against her on behalf of his Wall Street buddies.

Not forgetting also when he was with some IMF or World Bank or whatever it was and forced poorer countries to prioritize payments to Goldman and JPM over national healthcare and all that.

And also, why are crime lords Blankfein and Dimon not doing hard time? Care to answer that?

May 25, 2014, 5:58 AM
Spin:

I would like to suggest that the "golden era" for the American Middle class (1945 - 1976) was partially due to the fact that the USA had reduced global competition. Europe and asia were devastated by WW2. Post war USA was a lender nation and the UK was on its knees.

May 25, 2014, 2:27 PM
emelks:

Mr. Legg--

Since you haven't signed up for the forum I created to continue our discussion I'm having it deleted. No sense in taking up v-space unnecessarily.

May 26, 2014, 9:07 AM
vageiger:

I wish that both Piketty and summers had read Graebers"s Debt: The First 5000 Years. The increases in the financial sector come totally from indebting others and creating a largely mystical stream of return. Credit cards, student loans, mortgages (again) and the use of fraudulent means such as credit default swaps to hide the lack of real liquidity. If the Fed raised the interest rate even 1% the whole house of cards comes tumbling down and we have another of the crises Piketty pointed to that reduced the inequality. Hence the never ending Fed policies. summers infrastructure answer is good but the window on that low rate of borrowing is closing, and some time soon, way before the ignorant US congress we have can act, the window will close.

May 27, 2014, 9:09 PM
charles zigmund:

Establishment economist par excellence Summers, along with his fellow experts like Alan Greenspan and Robert Rubin, fathered policies that brought about the Great Recession. Having Summers review this book is like a having Dick Cheney or Paul Wolfowitz edit a scholarly compendium on the Iraq War.

May 28, 2014, 11:44 AM
Max Wagy:

In 2005 the director of the FBI went before Congress requesting more funding to investigate, in his words, "an epidemic" of securities fraud, securities ratings fraud, mortgage fraud, etc., naming each waystation in what is now called the securitization of "subprime" mortgages. What do the economists have to say about the effect of wholesale and unending looting by the new elites? What do the historians say will be the result when these economic looters, who have been given incontrovertible proof by the government that they are now "untouchable" by the laws of the land, succeed in economically "sucking all the oxygen out of the room?"

May 30, 2014, 4:12 AM
Pinkybum:

I'm sure this review has some good analysis in it but I had to stop reading after Summer's stated the following:

"Especially when it exudes erudition from each of its nearly 700 pages, drips with literary references, and goes on to propose easily understood laws of capitalism that suggest that the trend toward greater concentration is inherent in the market system and will persist absent the adoption of radical new tax policies. "

Really? "Radical" tax policies? I don't think so. Maybe we should go back to those tax policies we used to follow such as , Fifty percent Estate Taxes, Capital Gains tax and a 93 percent top marginal rate. And I am sure such policies would reverse the creeping massive inequality but they wouldn't be "radical". They would be traditional American policies.

Jun 1, 2014, 3:51 AM
Luis de la Calle:

Alternative explanations:

1. Baumol disease on steroids
2. Massive subsidy to Wall Street courtesy of Federal Reserve

Jun 3, 2014, 3:49 PM
annoporci:

Nice review: overly critical in parts, I think, but interestingly so: While Piketty's book is huge, there is much he has written about on the topic that isn't included in the book. Summers makes it sound like Piketty doesn't know the evidence about elasticities, but Summers doesn't seem to know that Piketty has been teaching a course on inequality for about a decade that addresses the empirical literature (you can find the biblio on Piketty's website in case you worry he hasn't read the literature).

In any case, my main point is this: the proof of the pudding is in the eating (a Krugman phrase): the observation that, in the aggregate, the wealth-to-income ratio has increased in peace time, in low-inflation time, in great-moderation time, etc. is sufficient to make any micro-based study of spending propensities, how do they say: moot.

Jun 4, 2014, 3:43 AM
HTD:

As Professor Summers states: "the period from 1914 to 1970 "[was] highly atypical. For a starting point we need to examine former tax policies that kept equality in better balance, at least in terms of a Pareto ratio of 20% owning 80% of the wealth and not around 6% owning that much as now appears to be the case.
We should not only look at higher income and inheritance taxes, but also at a 10% luxury tax (or more) as was the case directly after WWII.
So Jay Leno would have to cut back to 18 cars instead of 20 and umpteen motorcycles. At the same time such tax revenues would go far in cutting back the US National Debt and simultaneously raise the exchange value of the US Dollar against all other major currencies, going far in preserving it as a genuine world reserve currency.
I, increasingly, find it to be the height of arrogance for so many wealth-backed politicians trying to cut back on social security or transfers to the poor and sickly, so that they can continue on with their unquenchable greed for greater wealth without any regard for the pain and suffering of so many in America.
They and their ancestors made their fortunes on the back of Corporate America and its the favorable business climate, the large number of poorly paid refugees and the suffering of many American soldiers whose blood stopped their businesses from being destroyed by foreign aggressors.
Without the American base, most of their wealth would never have been accrued elsewhere.
No American can reasonable say that they made their fortune without standing on the shoulders of the many who came before them, whom provided a favorable environment for them to accumulate their wealth.
As the saying goes "The stature of any nation is judged by how it treats its weakest citizens".

Jun 4, 2014, 5:47 AM
Frank Hollenbeck:


How can you take seriously a book that says that the return to capital has been over 4.5% for 1800 years (data set and graph). If that was true, the capital base would be trillion times larger than the 240 trillion estimated by Credit Suisse. How can you take seriously an author who admits that some of the date in his book was just made up? How can you take seriously an author who does not seem to understand microeconomics 101: the return to capital and the return to labor are linked. Robinson Crusoe marginal productivity, or his standard of living, will be higher if he takes time from fishing with his hands and builds a net. His productivity will be even higher if he builds two nets, etc.
http://www.mises.org/daily/6653/How-Central-Banks-Cause-Income-Inequality

Jun 14, 2014, 3:42 AM

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