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Piketty’s Focus is in the Wrong Place
It says something about how much attention the French economist Thomas Piketty’s new book, Capital in the Twenty-First Century, is getting — and something about how deeply flawed Piketty’s thinking is — that I have, for the second straight week, dedicated my column at Defining Ideas to rebutting the arguments made in the book. As I’ve noted before, one of Piketty’s greatest errors is focusing on inequality to the exclusion of economic growth. We should welcome any increase in wealth to the rich or the poor that does not leave other people worse off, whether that change increases or narrows the gaps in wealth between rich and poor—any such Pareto improvement meets the gold standard of economic welfare.
As I write in this week’s column:
Unfortunately, Piketty’s preoccupation with inequality blinds him to the huge hit to growth that comes from union organization and, more generally, from regulations across the labor, product, and real estate markets that artificially set wages, prices, or the terms of trade. Ignoring these mid-level institutions leads Piketty to assert that overall growth rates are constrained by some invisible Malthusian hand so that “there is ample reason to believe that the growth rate will not exceed 1– 1.5 percent in the long run, no matter what economic policies are adopted. “
What economic nihilism! Countless systems of direct taxation and regulation reduce gains from trade in countless economic areas. One key way to spark growth is to reduce the repressive income and growth taxes that Piketty favors because, ironically, he thinks that overall growth is not sustainable. It would also do him a world of good to look more closely at current schemes of industry-specific direct regulation that result in the inefficient deployment of capital. He might, for example, consider the adverse impact on pharmaceutical innovation that arises from the unduly risk-averse attitude of the Food and Drug Administration, or the perverse distortions of energy markets from the equally misguided efforts to subsidize wind and solar energy in ways that make it harder to take advantage of the enormous advances in traditional fossil fuel technologies.
You can read the whole thing here.
Published in General
Just as well we don’t have someone with these views running the country – Oh, wait…
Inequality – This will be the battle cry for the 2014 elections, and will be raised to symphonic levels for 2016. The groundwork is being laid so that the term, in whatever form, e.g., social inequality, becomes part of our everyday speech. One cannot pick up a newspaper, magazine, or peruse the web without the word(s) bombarding the eyes. Now comes Thomas Piketty’s new book – which few will read, but many will quote. Sadly, there are also some whispering into (sorry to say) the Pope’s ear for reasons that may not completely fit his overview on the subject, but nevertheless serve those who do not have people’s best interest at heart – i.e., freedom.
And let’s not kid ourselves. Unless tamped down, climate change could rear its ugly head, election-wise, as well – and, of course, for the same reasons.
It’s going to take more than conservative think tanks churning out articles and giving speeches to the choir. We need to think damn creatively about this.
We can start to fight back by refusing to use the word “inequality” in these discussions, because the term is already freighted with agency and morality. IF there is inequality in incomes THEN it was the result of the economic system, and THEREFORE this system can be tweaked to reduce the disparity. But nothing is equal. Nevermind apples and oranges; no apple is equal to another.
There’s a populist approach that might work, if phrased right: the problem isn’t a guy with a million dollars net worth; he didn’t take anything away from anyone. It’s the person with a 100K salary in DC writing regulations that eliminated a middle-class job, and the spouse who works in journalism for another 100K who thinks it’s a good idea because the regs might prevent global warming in 2145 AD, and doesn’t bother to wonder whether the regs kill jobs.
P J O’Rourke ( noted author and Rolling Stone’s former “Investigative Humorist”) always seems to sum things up nicely:
“Economics is not zero-sum. There is no fixed amount of wealth [in the economy]. That is, if you have too many slices of pizza, I’m not left having to eat the box. Your money does not cause my poverty. Refusal to believe this is at the bottom of most bad economic thinking.”
To that we add James Lileks’ ideas about regs and the media. There. That pretty much says it all. (Yeah, maybe there’s a bit more – politicians who want to save their seats more than they want to save the country.)
I’d move right past income inequality and start talking about income mobility. Here’s an example:
The key findings of this study include:
• There was considerable income mobility of individuals in the U.S. economy during
the 1996 through 2005 period as over half of taxpayers moved to a different income
quintile over this period.
• Roughly half of taxpayers who began in the bottom income quintile in 1996 moved
up to a higher income group by 2005.
• Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent –
only 25 percent remained in this group in 2005. Moreover, the median real income of
these taxpayers declined over this period.
• The degree of mobility among income groups is unchanged from the prior decade
(1987 through 1996).
• Economic growth resulted in rising incomes for most taxpayers over the period from
1996 to 2005. Median incomes of all taxpayers increased by 24 percent after
adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over
this period. In addition, the median incomes of those initially in the lower income
groups increased more than the median incomes of those initially in the higher
income groups.
The above link is a little dated (1997-2006), but income inequality is a snapshot, like taking a picture of a NASCAR race at lap 15. Things are changing even as you take the snapshot.
It’s not that someone makes more money than you do. That will always and forever be true no matter where you are in the economic strata. It’s the possibility, the opportunity to do more based on whatever it is you choose to do – like work harder, get more education or training, start your own business. Those things make the difference.
What does not make a difference are politicians caterwauling about the latest hashtag issue du jour, which is just a fig leaf for the expansion of federal spending. Half the country pays no net income taxes, and we’re talking about “inequality”? If you really want to talk about inequality, why is harder and higher-paying work penalized at a higher tax rate? Shouldn’t I be rewarded for performing at a higher level?
We are swimming in lunacy these days.
What if, methodologies kept changing in such a way as to always have an upside bias, which hides inflation and unemployment, and dramatically overestimates growth?
There are cases to be made towards these ends. We are arguing about measures. What if the ruler is unreliable?
What if we are living in a nation with a shrinking pie, high inflation, AND growing inequality? What would the conservative response be to this?
There is no static pie. But there are government policies to keep the economy from growing at a healthy rate, one of the worst being barriers to business entry into the market – from pipelines to flower shops. Add to that the regs imposed and an overall decrease in energy production and growth is stymied.
We really shouldn’t use the term ‘pie’ as that implies something to divvy up. That leads to people thinking about inequalities. And that leads to people thinking they aren’t getting their ‘fair share’ of government goodies.