Saturday, May 17, 2014

Piketty: A Social State for the 21st Century

Globally, wealth inequality might easily spiral out of control.  That's what Thomas Piketty asserts in Capital in the Twenty-First Century by assuming that the rich accumulate capital almost without limit.  Something must be done, of course, and to build his case for high taxes for the global rich on their capital and income he now proposes the outlines of a ideal "social state" for the rest of the century.
"Can we imagine a twenty-first century in which capitalism will be transcended in a more peaceful and more lasting way"?

To Piketty, the "ideal policy for avoiding an endless inegalitarian spiral... would be a progressive tax on capital."  The reports and form-filling needed for such a tax "would expose wealth to democratic scrutiny" necessary for "effective regulation" of international capital. Since a global tax is hardly likely, a "regional or continental tax might be tried".

The crisis of 2008 might have been as bad as the crash of 1929 but it wasn't because "this time the governments and central banks... agreed to create the liquidity" necessary to avoid the widespread bank failures of the 1929-33 collapse. There were no "liquidationists" like President Hoover this time.  But the response to the crisis did not resolve the problems -- lack of transparency and inequality -- that led to the "first crisis of the globalized patrimonial capitalism of the twenty-first century."

Of course there is enormous disagreement about what to do, and those that want to increase the role of the state are hindered by its current "level of complexity".  If nobody understands what the modern state is doing how can reformers persuade citizens that "new tools" are needed? So Piketty undertakes to tell us the social democratic Story So Far.

In the 70 years after 1910, taxation in the rich countries went from a steady level of 10% of national income to new higher levels: 55% in Sweden, 50% in France, 40% in Britain, and 30% in the United States.  See chart.  At 10%, taxation supported a "regalian" state with "police, courts, army, foreign affairs, general administration". At the new stabilized levels government provides an array of services that breaks down into two major sectors: "one half goes to health and education, the other to replacement incomes and transfer payments."  The first half covers much of the cost of education and health care; the second part mostly goes to pensions.  In Europe "public pensions are the main source of income for at least two-thirds of retirees".  The remainder of the transfer payments go for unemployment and other income support, but this is the most controversial, with welfare questioned in both the US and Europe.  All told, state spending on health and education can hit 10-15% of national income and transfer payments 10-20% of national income. This amounts to the establishment of a "social state."

The social state of the 20th century was built on a foundation of rights, writes Piketty.
Modern redistribution is built around a logic of rights and a principle of equal access to a certain number of goods deemed to be fundamental.
The classic articulation of these rights can be found in the US Declaration of Independence of 1776 and the French Declaration of the Rights of Man and the Citizen of 1789.  For Piketty, the "statement that 'social distinctions can be based only on common utility'" is decisive, if "broadly" interpreted.  Actually everyone agrees working for "real improvement in the living conditions of the least advantaged".  The disagreement is how to do it "through democratic deliberation and political confrontation."  But whatever the disagreements, the modern state "is based on a set of fundamental rights" to education, health, and retirement." No important political force proposes paring down the state to "its regalian functions" at 10-20% of national income.  But few people support expanding the social state at its 1920-1980 growth rate.  When income was increasing at 5% a year it was easy to get people to agree to social spending; not so when growth is much smaller.

There is a need for a fairer tax system and there are growing needs for education and health, but people also have real personal needs.  And a large public sector has "serious problems of organization."  Issues of organization are legitimate but beyond the scope of the book.  Piketty proposes only to discuss access to education and the future of pay-as-you-go retirement systems.

Supposedly, state education is to promote social mobility.  But does it?  It's hard to measure, but generational mobility seems highest in Scandinavia and lowest in the United States, the land of "American exceptionalism".  Perhaps this is due to high tuition fees at elite US universities.  Income for Harvard parents is currently $450,000 per year, in the top 2%; parents of Sciences Po students (Institut d'études politiques de Paris) earn €90,000, putting them in the top 10% in France. National meritocracy doesn't seem to hold up on examination of the facts.

Now for retirement. Today's PAYGO retirements systems are based on a "principle of intergenerational solidarity" where "today's workers pay benefits to today's retirees in the hope that their children will pay their benefits tomorrow".  But these systems are facing problems from the falling growth rate while the return from capital goes up. Piketty rejects the idea that the PAYGO systems should be replaced by a capitalized system where worker contributions are invested rather than paid out immediately to retirees. Firstly, the generation of retirees in the middle "is left with nothing."  Then he worries "that the return on capital is in practice extremely volatile."  It would "bet everything on a roll of the dice."  A PAYGO system based on wage growth would be "5-10 times less volatile" than one based on capital appreciation. With the French system so complex, the important thing to do is "to establish a unified retirement scheme" with equal rights for everyone.

In the emerging countries there is a real question whether they can create the social state enjoyed by the rich countries, but part of the blame lies with rich countries.  First there was the disaster of decolonization and then the post-1980 neo-liberal wave "forced poor countries to cut their public sectors".  At any rate, today's poor countries seem to have difficulty moving to the high-tax state of the rich countries.


The postmodernists have taught us that "narratives" are usually an apology for power.  Thomas Piketty, graduate of a "grande ecole" and darling of the French establishment, is nothing if not good at pushing the center-left official French narrative.  So the Crash of 2008 is the fault of capitalism and the growth of the welfare state is a program of rights not a cynical grand strategy of power by the emerging educated ruling class.

Piketty's analysis of crashes is disappointing.  It's true that the Federal Reserve System (not President Hoover) failed in its task as a lender of last resort.  Perhaps that's because it was staffed by political place-men instead of people that had read Walter Bagehot's Lombard Street. Back in the Crash of 2007, banker J.P. Morgan got the richest men in the US into a room and got them to fund his triage plan: no money for winners, no money for losers, but help for companies that could be saved by an injection of capital.  But Piketty seems to have no clue about the follies of the 2000s Fed lashed to the time-bombs of Fannie and Freddie.  These geniuses, bullied by the political ruling class, were forcing the banks to lend low down-payment loans to sub-prime borrowers.

If, for instance, the education system, that was supposed to deliver social mobility, has failed then maybe the problem is with government-run education.

If "divergence", the notion of the rich getting richer because they make so much money on their filthy capital, is a problem, then maybe the answer is to get the working class into the game with a true retirement savings program that build actual personal capital and -- cover your eyes, girls -- lets them will actual red-in-tooth-and-claw capital to their children when they die.  But no, Piketty can't get past the transition problem between a pay-as-you-go system and a capitalized system.  And the risk!

I've actually thought about these issues.  First, education.  Back before government education young people without fortune didn't moulder away their teenage years in schools being drugged out of their gourds to keep them quiet.  They went out into the world and worked at apprenticeships.  They worked for nearly nothing while they learned a trade.  Imagine!

Second, pensions.  The current system sequesters the savings of workers for their entire working life.  There is a word for this, and maybe slavery is too strong a word.  But "indentured servitude" isn't too far off the mark.  What about volatility and risk?  It's really not that hard.  If you want to retire, say, at the bottom of the market in 2009, you say to yourself: forget it, I must keep working for a couple of years until the economy and the stock market improves.  How hard is that?  It is a system of real intergenerational solidarity where people don't retire until they can support themselves as rentiers.  If the economy is toast, and stays that way, it means that nobody can retire; everyone must work and contribute to get the economy back on track.

Come on lefties!  If the rich are getting rich on their stinking riches, because r > g, how about giving the wage workers a chance at stinking riches and a shot at the magic of compound interest?  The workers have nothing to lose but their chains!


Part One: Income and Capital

Income and Output

End of Growth

Part Two: The Dynamics of the Capital/Income Ratio

Changes in Capital

New World Capital and Slavery

Capital/income Ratio in the Long Run

Capital's Share of Income

Part Three: The Structure of Inequality

Inequality and Its Concentration

Two Worlds: France and the US

Inequality of Labor Income

Inequality of Capital Ownership

Merit and Inheritance in the Long Run

Global Inequality of Wealth in the 21st Century

Part Four: Regulating Capital in the Twenty-First Century

A Social State for the 21st Century | Rethinking the Progressive Income Tax

A Global Tax on Capital | The Question of the Public Debt

Conclusion: Anti-Piketty

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