Posted on 05/04/2014 11:22:53 AM PDT by Kaslin
The economist offering this “solution” has been feted by the Obama White House economic staff, the International Monetary Fund, and by many of the people running world economies today. His ideas are definitely “in play.”
Thomas Piketty, the forty-two year old French economist whose book, Capital in the Twenty-first Century, became an overnight sensation and unexpected bestseller, is being hailed as the new Keynes, an economic thinker who can lead us out of our current economic malaise, just as Keynes is alleged by his followers to have lead us out of the Great Depression.
Keynes’s keynote book, The General Theory, is loaded with economic theory. There are only two pages of data in that book, and Keynes dismisses the scant data he cites as “improbable.” By contrast, Piketty’s new book, Capital in the Twenty-first Century, is stuffed with data. Indeed Piketty considers himself a successor to the economist whose data Keynes dismissed, Simon Kuznets. Almost everyone admits that Piketty’s theoretical case is weak — but, his supporters say, look at all this data. You can’t argue with this mass of historical evidence!
Let’s take a closer look. Piketty’s primary argument is that wealth (which tends to be concentrated in few hands) grows faster than the economy, so that those with a lot of wealth keep getting richer relative to everyone else. This is supposed to be an inescapable feature of capitalism. (If this sounds familiar, it should be. It echoes both Marx and Keynes, although we should remember that Keynes mocked most of what Marx said as “hocus-pocus.”)
So what then is the evidence that wealth has grown faster than the economy?
We’ll start with the chart below, adapted from Piketty’s book. The top line is return on capital and the bottom line is the economic growth rate. The top line is supposed to be how the rich are faring and the bottom line how the average person is faring. Note that the lines on the far right are just a projection of Piketty’s, and not actual history.
This chart is astonishing for many reasons. First of all, it suggests that capital earned a 4.5 percent or higher return for the years 0-1800 C.E. This is a crazy number. If the human race had started out with only $10 in year 1 and compounded it at 4.5 percent a year for any series of 1,800 years, by now we would have much, much more than a trillion times the entire world’s wealth today, which is estimated at $241 trillion by Credit Suisse.
The 4.5 percent or higher number is also crazy because Piketty is right that there was negligible economic growth prior to the industrial revolution, and such high returns for the rich are just not consistent with so little growth. The truth is that rich people for most of those years were interested in spending or hiding their wealth, not in investing it, because wealth out in the open was likely to be stolen, if not by bandits, then by government.
If you look closely at the more modern part of the chart and ignore the projection into an unknown future, you will see that the lines do not support Piketty’s thesis. His idea that the rich will always necessarily get richer relative to everyone else under capitalism is not supported by the data he presents.
The next chart shows the share of wealth of the 10 percent richest in Europe over time (dark-blue, top line), the share of wealth of the 10 percent richest Americans (the light-green, second line from top), the share of wealth of the top 1 percent Europeans (the light-blue, third line from top), and the share of wealth of the top 1 percent Americans (the dark-green, fourth line from top). This chart doesn’t support Piketty’s thesis either. Yes the share of the rich has grown since 1970, but only after falling previously.
The next chart is one that I have commented on in an earlier article. It shows the income of the top 10 percent in the US over time as a percent of all income. Income in this case includes capital gains which arguably are not true income, but rather the exchange of one asset for another, and excludes government transfer payments which make a considerable difference to the results. Even so, once again we do not see an inexorable rise in the income of higher earners over time, far from it.
What we actually see is two peaks for high earners, right before the crash of 1929 and again before the crash of 2008. These are the two great bubble eras in which government printed too much new money, which led to a false and unsustainable prosperity. These were also crony capitalist eras, as rich people with government connections used the new money to become even richer or benefited from other government favors.
Unfortunately world central banks have blown up yet another bubble in capital markets following the crash of 2008, which has again brought the high earners share back to 50 percent in 2012, based on data that became available after the book’s publication. This newest bubble too will eventually burst and bring the share back toward the 40 percent level of 1910, the start of the chart.
Perhaps the most astonishing claim in Piketty’s book is that government bureaucracies need to be reformed so that they can make most efficient use of all the new income and wealth taxes that are recommended. The assumption is that almost complete government control of the economy would be best, but that the machinery needs some fine tuning.
Economist Ludwig von Mises demonstrated almost 100 years ago that a state managed economy will simply not work, because among other problems it cannot set workable prices. Only a consumer run economy can do that. Socialists have been trying to disprove Mises’s thesis ever since, but have never succeeded. Piketty should at least read Mises.
A state managed economy is also unable to save and invest, especially invest with intelligence. This is crucial, because it is quality, not quantity of investment that matters most for job creation.
Piketty says that taxing away the savings of private individuals is a better choice than alternative ways of controlling inequality such as communism, protectionism, or capital controls. But none of these approaches will control inequality; they will just create poverty for everyone, rich and poor alike, without ending inequality.
A significant wealth tax would be self-defeating from the start. It would destroy the stock, bond, and real estate markets. With many sellers and few buyers, wealth would simply evaporate.
Read more at Against Crony Capitalism.org
This guy’s a nut-job.
Freedom for low-techs to build houses and start small manufacturing shops would fix it, but no political constituency will allow that.
Something tells me the “wealth tax” would be efficient at capturing 401k/IRA assets and poor at finding hedge fund/private equity gains.
I think the current communist president of France is trying his theory ..... seems to be working out well for neighboring countries but disastrous for France. You don’t have to be born stupid .... you can achieve it by attending elite colleges.
Let's pay everyone $1,000,000 (actors, athletes, and burger flippers), and then make everything cost only $1.
Think of all the money people will have.
-PJ
Start with ending all tax breaks for Hollywood.
I am ready. Itching, even. I want to GO.
Yep, with a little "fine tuning" it will work this time. Similar sentiments were expressed in Japan some years ago, paraphrasing, "The economy is just too important to leave in the hands of business, it needs 'expert' government control. " The result turned Japan's post-war economic boom into a stagnant mess.
I stopped reading the second I came to “French economist”.
Non-sequiturs. You start with a semi-truism, certainly an experienced successful investor is going to be presented with better investment opportunities both from their experience and others who are banking on them succeeding again. Next you state a conclusion: "we need a more progressive income tax" that does not follow from the truism unless you merely want to punish success. But then you come up with new rationale "we are losing our freedom".
Loss of what freedom? And how does that justify a more progressive income tax. Finally you explain that freedom is being lost due a kind of economic feudalism. Now finally after the socialist blather there is a germ of original thought in your writing. Better late than never I suppose.
Yes there is a kind of economic feudalism. It is created by politicians and realized mainly through the Fed. The Fed prints up money and hands it to the politicians who hand it out to the politically connected: construction firms to build new spy agency buildings filled with fancy equipment and good-looking contractors. They hand it out to politically connected scams like "green" energy or anything else green related. Mostly the Fed props up large banks which props up the market but mainly for short term momentum plays that contribute little to economic growth. The politicians also control the economy with the highest corporate tax rate in the world combined with politically motivated cuts to that rate for favored industries.
The answer to that kind of economic feudalism is to slash the corporate income tax and generally reduce politicians ability to rig the markets. Getting rid of the Fed would be difficult and may result in more politically generated monetary problems. But certainly the Fed should not be allowed to print money and hand it to politicians to give mainly to the already wealthy.
What we need is confiscatory taxes for productive individuals and exemptions for our rightful masters. That pretty much sums up Leftist neo-feudalist economics.
How do you think feudalism got its start?
In the beginning, the more land you ruled, the stronger you became.
The stronger you became, the more land you could acquire.
The people living on the land you acquired, became your serfs.
And today, the more money you acquire, the stronger you become.
And the stronger you become, the more money you can acquire.
Until you and the other fraction of the 1% own the country, while the rest of us depend on the crumbs from your table.
Once the banksters, movie stars, rock musicians, sports stars, and the like, have their income reduced to be more in line with the much lower proportion they got in the 1950s and 1940s . . .
Then like the in the ‘40s and ‘50s, they have to acquire their status some way other than by flaunting wealth.
Like by helping other people and making sacrifices for their country.
Instead of always starting from the premise “Government Knows Best”, why not start from the more accurate view that “Government Knows Nothing?” :)
That certainly works in places like Haiti, is somewhat applicable in Mexico and is one of strongman Obama's goals. The difference between your generalisms and reality here in the US is people have a somewhat predetermined and non-capricious amount of money that will be taken from them at the end of the barrel of the gun.
But along comes "Age of Reason" to suggest that the government doesn't take enough from the "rich". Full of righteous socialist rhetoric about crumbs but without a freaking clue as to the cause of widening income disparities.
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