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April 22, 2014

Shockingly, a Pro-Marxism Book by a Leftwing French Economist Has Taken America's Don't-Call-Them-Socialist Progressive Establishment By Storm

I haven't read the book and don't plan to. I further don't believe I'd be able to critique it as I did-- while the book is written in layman's language, one would still need an advanced understanding of economics and statistical analysis to say it's right or wrong.

But it's a huge thing now, especially on the We're Not Socialists But Boy Do We Love Socialism left, so I thought I should at least post about it.

It's almost entirely about -- wait for it...! -- income inequality, and why that's bad, and why it will get worse unless we Do Something About It.

Robert J. Samuelson wrote about it, more or less approvingly, if a little skeptically in the end:

Piketty presents Scandinavian countries in the 1970s and ’80s as examples of “low inequality.” Still, the richest 10 percent commanded about 25 percent of national income and the poorest 50 percent got only 30 percent; the “middle class” — the 40 percent below the top 10 percent — received 45 percent of income. These days, the distribution in the United States is far more unequal. In 2010, the top 10 percent received about 50 percent of national income, and the bottom 50 percent got 20 percent; the middle 40 percent got 30 percent. European nations are typically in between, with the top 10 percent taking 35 percent of income.

What Piketty also shows is that in the last 30 years, inequality has exploded almost everywhere, especially in the United States and the United Kingdom. This finding disproves the so-called Kuznets Curve. In 1954, American economist Simon Kuznets (1901-85) argued that income inequality would fall as societies modernized. Workers would move from low-paid farm jobs to better-paid industrial jobs. Gaps would narrow.

This seemed to have happened in the United States. From the 1920s to the 1950s, the income share of the richest 10 percent fell from around 50 percent to about 35 percent. But now it’s rebounded to the late 1920s’ level. This stunning fact, published previously in academic journals, helped make inequality a big political issue.

Piketty's big suggestion (more about this later) is that we tax yearly incomes of $500,000 (or $1,000,000; I guess he isn't sure on the threshold) at an 80% rate, and tax accumulated wealth at similar rates.

He is ideologically opposed to gaining wealth by investment -- he uses the word "rentier" as a derogatory term for such people.

Though Piketty is an economist, his book is essentially a work of political science. He objects to extreme economic inequality because it offends democracy: Too much power is conferred on too few. His economic analysis sometimes seems skewed to fit his political agenda.

Sameulson quibbles with some of Piketty's claims, such as (wait for it...!) that confiscatory tax rates on high incomes and accumulated capital won't reduce growth rates, but, as you can see, he's largely impressed with the work.

Now for some people who aren't so impressed.

Clive Cook headlines "The Most Important Book Ever Is All Wrong."

It's hard to think of another book on economics published in the past several decades that's been praised as lavishly as Thomas Piketty's "Capital in the Twenty-First Century."

...

So what's the problem?

Quite a few things, but this to start with: There's a persistent tension between the limits of the data he presents and the grandiosity of the conclusions he draws. At times this borders on schizophrenia. In introducing each set of data, he's all caution and modesty, as he should be, because measurement problems arise at every stage. Almost in the next paragraph, he states a conclusion that goes beyond what the data would support even if it were unimpeachable.

This tendency is apparent all through the book, but most marked at the end, when he sums up his findings about "the central contradiction of capitalism":

The inequality r>g [the rate of return on capital is greater than the rate of economic growth] implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future. The consequences for the long-term dynamics of the wealth distribution are potentially terrifying ...

Every claim in that dramatic summing up is either unsupported or contradicted by Piketty's own data and analysis. (I'm not counting the unintelligible. The past devours the future?)

Cook goes on to note that Piketty's own findings contradict his central hypothesis. Piketty argues that when r (rate of return on investment) is significantly higher than g (economic growth rate), it results in a sort of Climate Change-like feedback loop in which r grows more and more outsized compared to g. The system becomes unstable; more and more money flows to the "rentiers."

But that's not what his data shows, at least not in some very important cases:

The trouble is, he also shows that capital-to-output ratios in Britain and France in the 18th and 19th centuries, when r exceeded g by very wide margins, were stable, not rising inexorably.

Cook also notes what Samuelson did-- that this is more of a political tract than an economic text:

As I worked through the book, I became preoccupied with another gap: the one between the findings Piketty explains cautiously and statements such as, "The consequences for the long-term dynamics of the wealth distribution are potentially terrifying."

Piketty's terror at rising inequality is an important data point for the reader. It has perhaps influenced his judgment and his tendentious reading of his own evidence. It could also explain why the book has been greeted with such erotic intensity....

At the WSJ, Daniel Schuman focuses on that "80% tax rate" business.

He notes Piketty shares the idea with Barack Obama that confiscatory tax rates are not primarily about bringing in money to the state, but rather about simply destroying other people's wealth. For Justice, you understand.

A professor at the Paris School of Economics, Mr. Piketty believes that only the productivity of low-wage workers can be measured objectively. He posits that when a job is replicable, like an "assembly line worker or fast-food server," it is relatively easy to measure the value contributed by each worker. These workers are therefore entitled to what they earn. He finds the productivity of high-income earners harder to measure and believes their wages are in the end "largely arbitrary." They reflect an "ideological construct" more than merit.

...

While America's corporate executives are his special bête noire, Mr. Piketty is also deeply troubled by the tens of millions of working people—a group he disparagingly calls "petits rentiers"—whose income puts them nowhere near the "one percent" but who still have savings, retirement accounts and other assets. That this very large demographic group will get larger, grow wealthier and pass on assets via inheritance is "a fairly disturbing form of inequality." He laments that it is difficult to "correct" because it involves a broad segment of the population, not a small elite that is easily demonized.

But that won't stop them from trying.

So what is to be done? Mr. Piketty urges an 80% tax rate on incomes starting at "$500,000 or $1 million." This is not to raise money for education or to increase unemployment benefits. Quite the contrary, he does not expect such a tax to bring in much revenue, because its purpose is simply "to put an end to such incomes." It will also be necessary to impose a 50%-60% tax rate on incomes as low as $200,000 to develop "the meager US social state." There must be an annual wealth tax as high as 10% on the largest fortunes and a one-time assessment as high as 20% on much lower levels of existing wealth. He breezily assures us that none of this would reduce economic growth, productivity, entrepreneurship or innovation.

Schuman has a couple of funny barbs in there, like Piketty's use of Jane Austen's "Sense and Sensibility" as an economic text (proving something about the mad scramble to marry rich) and about his distinction between those who don't really earn their outsized fortunes -- CEO's -- and those who just might possibly actually earn their fortunes, such as entrepreneurs and, as luck would have it, academics who write best-selling Marxist economics texts.

Incidentally, and I'm sure this is entirely coincidental, but as socialism is on the rise in America, middle-class after-tax incomes are falling.

The American middle class, long the most affluent in the world, has lost that distinction.

While the wealthiest Americans are outpacing many of their global peers, a New York Times analysis shows that across the lower- and middle-income tiers, citizens of other advanced countries have received considerably larger raises over the last three decades.

After-tax middle-class incomes in Canada — substantially behind in 2000 — now appear to be higher than in the United States. The poor in much of Europe earn more than poor Americans.

Instapundit suggests that there is a top-and-bottom coalition against the middle class.

The bottom wants to take the middle class' stuff because they just want stuff. The top earners want to take the middle class' stuff because the middle class threatens their status.

And this is all going on as America partially embraces Piketty's prescriptions.



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posted by Ace at 03:28 PM

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