Piketty: The End of Growth

After building a theoretical framework for income and output and the rate of return on capital, Thomas Piketty turns to growth: demographic growth and economic growth.

His idea is that the current era shows a bell-curve of growth.  It starts with the demographic bulge that started after 1700 and the economic bulge the started after 1800.  Obviously, he writes, it's all going to end.

Piketty points out that there were about 600 million humans on the earth in 1700 and 7 billion right now.

If this pace were to continue for the next three centuries the world's population would exceed 70 billion in 2300.

The fact is that the world population growth rate peaked at about 1.8% per year in about 1950-1990, according to a chart on page 80.  Now the growth rate is coming down, and it's expected to continue to go down.

Piketty thinks that economic growth is on a similar path.  Growth in Europe and North America peaked in 1950-1990 and in the last 20 years from 1990-2012 it has trended lower.  The rest of the world will go the same way once it has caught up to the West.

Thus (in a chart on page 100) Piketty forecasts that world per-capita economic growth will peak at 2.5% per capita per year in 2012-2030 and will be down to 1.2% per capita per year by the end of the century.

A world of slow growth, economic and/or demographic, is a world where opportunity to rise is reduced.  This means that the world will return to the world of Jane Austen and Balzac novels.  Back in those days, before 20th century inflation and modern growth, the average person subsisted on about £30 per year. But the average Austen or Balzac family knew that you needed about £600 to £1,000 a year to live "free from need."  Mostly, they inherited their wealth.

In those days, before the modern era, where the population and the economy were both pretty static, inequalities persisted from generation to generation.

In the last century we have see persistent inflation; this has obscured the monetary benchmarks of the pre-inflationary world.  But the future is likely to return to something similar, wealth through inheritance rather than wealth through growth, unless we do something about it.

Introduction

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

Piketty: Income and Output

Is foreign capital investment a good thing?  After telling us that he's going to propose a global wealth tax, Thomas Piketty in Capital in the Twenty-First Century shows us that income and output aren't the same thing.

For the developed countries, income and output are about the same, but for poor countries, output can very often be substantially more than income, because the return on capital investment gets transferred abroad.  And this causes political problems between political parties that want to expropriate the foreign capitalists and the parties that want to encourage them.

And that's why Piketty opens his chapter on Income and Output with a description of the 2012 Marikana miners' strike in South Africa.

In Piketty's telling, the "South African police intervened in a labor conflict between workers... and the mine's owners... Thirty-four miners were killed."  The miners wanted to double their wages from 500 euros to 1,000 euros a month.  But in Wikipedia's telling things were a bit more complicated than that.

The strike occurred against a backdrop of antagonism and violence between the African National Congress-allied National Union of Mineworkers (NUM) and its emerging rival, the Association of Mineworkers and Construction Union (AMCU). According to a Guardian columnist, the NUM was closely linked to the ruling ANC party but lost its organisational rights at the mine after its membership dropped from 66% to 49% and its leadership began to be seen as 'too close' to management.

If you read Howard Zinn's A People's History of the United States or Emile Zola's Germinal you find that usually there are radical suits behind the great strikes.  The radical suits -- we call them community organizers today -- lead the workers into bloody confrontations with the owners.  And then head off to their next gig.  The workers are usually worse off than before.  It's the eternal refrain of the modern era. Capitalism works on the individual's surrender to the market, but the workers, emerging from feudal collectivism, still think you have to fight with your fists to win a livelihood.

The other Big Thing that Piketty wants us to know is the "First Fundamental Law of Capitalism." It is this:

(Share of national income from capital) = (rate of return on capital) x (capital/income ratio)

You can see what is going on here.  Piketty is not interested in just describing what capitalism does.  He wants to rush immediately to the result.  Are the capitalists getting a fair share on the national income? Is the capitalist share going up?  So what are we going to do about it?

And what about the capital/income ratio?  That's the "total wealth owned at a given point in time" divided by the "quantity of foods produced and distributed in a given period."  In the Nineteenth century the ratio was high, about 600%.  Then after the World Wars it came down to 300%.  Now it's gone back up to 500%.

We shall see what Piketty wants to do with these notions in future posts.  But you can see what is coming.  If the income of the poor nations is less than their output, then maybe the rich nations should return the surplus they have ripped off back to the poor nations.  Because inequality.

Stay tuned.

Introduction

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

Piketty: Inequality is the Problem, Government is the Cure

You get the point pretty early on in Thomas Piketty's Capital in the Twenty-First Century. On the first page of the Introduction he writes:

When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.(p.1)

It does?  But, writes Piketty, there "are nevertheless ways democracy can regain control over capitalism and ensure that the general interest takes precedence over private interests"(p.1).

Thank goodness for that!  Notice the assumption: capitalists work for private interests; government works for the general interest.  You mean like Sen. Harry Reid (D-NV)?

Piketty develops his larger argument in the introduction.  First, he cites David Ricardo, who argued in 1817 that the natural scarcity of land would result in the almost unlimited  rise in the value of land and therefore rents.  The landlords would inherit the earth, "upsetting the social equilibrium."  So Ricardo proposed a "steadily increasing tax on land rents."(p.6)

Then  came Marx.  He extended Ricardo's principle of accumulation of land rents to capitalism as a whole, the "inexorable tendency for capital to accumulate and become concentrated in ever fewer hands, with no natural limit to the process."(p.9)  He proposed an "apocalyptic end" to capitalism.

In other words, both Ricardo and Marx proposed that wealth would concentrate without limit and that something should be done about it.  Remember this was before Stein's Law that if something cannot go on forever, it will stop.

But then after World War II along came Simon Kuznets, who showed that, since World War I, inequality had been declining, so there was nothing to worry about.  Let capitalism do its thing.

Unfortunately, writes Piketty, the reduction in inequality stopped right after World War II.  On page 24 he shows a chart of the top 10% share of US income from 1910 to 2010.  It's 40 percent from 1910 to 1920, rises in the 1920s to 45 percent and stays there right through the Great Depression.

Then suddenly, the top 10% share drops off a cliff from 45 percent to 35 percent in two years between 1941 and 1943 at the start of World War II.  It stays there for the next 40 years until the 1980s.  Since 1980 the top 10% share has gone steadily up, hitting 40 percent of income around 1990, 45 percent in the late 1990s and briefly hitting 50% right before the Great Recession.

Then Piketty shows a chart of capital/income ratio in Europe for 1870 to 2010 on page 26.  It shows that the "market value of private capital" in the late 19th century was 6 to 7 times national income.  Then after the two world wars it crashed to two to three times national income.  Ever since 1950 the ratio has been climbing.  In France and Britain the ratio is back to 5 times national income.  In Germany it's back to 4 times national income.

In other words, "the process by which wealth is accumulated and distributed contains powerful forces pushing towards... an extremely high level of inequality."(p.27) and these "forces of divergence" may be getting the upper hand unless we do something about it.

Discussion Points

1. What does it mean when the "rate of return on capital" exceeds the growth in "output and income"?  Does it mean that the capitalists are grabbing the goodies, or is capital income the price we pay for growth?
2. It's pretty obvious why the top 10% share of income in the US dropped in 1941-43. Income taxes, with the top rate going to 90 percent, where it stayed until the tax rate cuts started in the late 1970s.  Over the next 20 years taxes on income and capital were reduced again and again. But what does the spurt in top 10% income share mean?  Does it mean that the most able grabbed more income?  Did they hide their income in the high tax years?  Or does it mean that capitalism automatically rewards achievers?
3. Piketty takes it for granted that inequality is a scandal.  But is it?  Put it this way.  In the agricultural era the landed warriors collected rent because they had seized the land and forced the peasants to pay them for the privilege of farming the land.  OK, bad, bad, bad, as in barons of the crags.  But capitalism is different.  Today people with savings put money into commercial and industrial ventures.  If the venture succeeds (i.e., provides products and services that people want) the investors reap huge benefits.  If it fails they lose their money unless government comes in and bails them out.
4. What about the notion in economics that interest on a loan is an example of "time preference?"  Money in the here and now is worth more than money in a year, so you have to compensate someone to forego spending money now.  We pay workers to forego their leisure; we pay capitalists to forego immediate spending.  What's the scandal? (In a later chapter Piketty writes that time preference is "simplistic."

But I still have my question.  What does it really mean when capitalists are making tons of money?

Introduction

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

Waiting for Piketty

If I were home right now I could be at home reading Thomas Piketty's Capital in the Twenty First Century.  But I'm not at home.  So I have to wonder about the alleged argument of his book.  That capitalists make 4-5 percent on their money, but the GDP only increases 1.5 percent per year.  Therefore inequality.



Heather Wilhelm argues today that the fuss over Piketty reflects the frustration of the up-and-coming professional in a lefty city. She quotes David Brooks.

“If you are a young professional in a major city, you experience inequality firsthand,” Brooks wrote. “But the inequality you experience most acutely is not inequality down, toward the poor; it’s inequality up, toward the rich.”



Frustrated up-and-comers, he notes, mix and mingle with the wealthy, brushing elbows at cocktail parties, facing the constant indignity of having other people’s privilege shoved in their faces: “You wait in line at the post office,” he writes, “but they have staff to do it for them.”

Yes.  It must be insupportable to have to kow-tow to rich guys like Donald Sterling.



But I wonder what the Piketty thesis means.  What does it mean that capitalists are making 4-5 percent on their money?  What is the 4-5 percent compensating them for?  Is it too much or too little?  Or put it this way?  How much return on capital is economically necessary to yield 1.5 percent real GDP growth?  Return on capital is a tricky thing.  At one end it is the return on widow-and-orphan bonds, supposedly secured by bond covenants and collateral.  Those chaps don't deserve anything.  Right?  At the other end it is a reward for risk, taking a flier on an uncertain future.  How much is enough for that?



And that is to say nothing about whether we should do anything about inequality, let alone use it as a reason to give governments more money.



So I sit here and wait.  For the moment when I get to read what the New York Times calls "the big-think book of the moment."

A Word for Paul Ryan: White Women

Recently snarky BuzzFeed reporter MvKay Coppins followed Rep. Paul Ryan (R-WI) around as he worked to build outreach to blacks.



Yeah.  Whaddya know. Ryan was uncomfortable relating to black male convicts.  But when he went on to a lunch with businessmen he had all the one-liners down perfect.



I think it's wonderful that Paul Ryan, who is my idea of a worthy and principled politician, is trying to find ways of connecting to black voters.  It's not going to yield much in the way of votes for a long while, I'm afraid.



But there is something for more important out there for Paul Ryan to work on.  White women.  And I'll tell you why.



I attended a reunion at the consulting firm I used to work for up until 1996.  It was an engineering firm, and most of the folks there were practicing or retired engineers.  Salt of the earth guys, and all that.



But one thing hit me between the eyes.  I talked to some of the women there, technicians and assistants mostly, and a couple of them said they were "looking for work."



These are women in their fifties to sixties.  And they are looking for work.



Hello Obama economy.



Here is my advice to Paul Ryan and the Republican presidential contenders. Forget about the black vote for now.  Get to work on the white women vote.  Because white women are getting hammered, and I reckon they are up for grabs in 2014 and 2016.



What are these women thinking?  What do they think has gone wrong?  How can Republicans communicate the idea that government is not the solution?  How can Republicans gently shift them away from the idea that Hillary Clinton needs to be the First Woman President?



The problem is that women more than men are suckers for the liberal line in everything from the schools to the local news to the War on Women propaganda.  Women are more social; they are more conformist; they go with the program.



But we conservatives and Republicans are asking women to buck the local news, show the finger to cries of sexism, ignore their aggressive liberal women friends, and try something new and dangerous.



We are asking women to buck the collective consensus on women's victimhood that lets government take care of things.  Instead we want them to become responsible individualists and vote for small government and large people.



We want them to buck the idea that free contraception and unlimited abortion are the keys to women's liberation.



We want them to back away from government schooling, global warming, hyper-regulation of business, when all the government experts are telling women to go with the program.



How do we do that, Rep. Ryan?  That's far more important and necessary than a worthy -- and necessarily long term -- effort to find common ground with African Americans.

Telling it like it is: The Obama Purges

If we go back to the good old days of the Stalin Purges in the 1930s, what do we learn?  What made them different from just good old jailing of regime opponents?



After all, with modern police and incarceration methods, a repressive government can easily jail and disappear its opponents.  That's what the Argentine generals did to the lefty Montoneros back during their military junta days.  Argentine lefties are still complaining about it.



For Stalin, merely arresting his co-Bolshevik revolutionaries and disappearing them wasn't enough.  They had to confess.  There had to be a conspiracy against the father of his people, Comrade Stalin.  The heretics had to grovel before being tossed into the auto da fè.



So the Stalin Purges echoed the spirit of the Spanish Inquisition, another enforcer of orthodoxy.  Actually, in modern terms, the Spanish Inquisition was pretty mild.  It usually never got further than showing its victims the instruments of torture.  That was enough to get them to confess to horrible crimes and heresies.



When Barack Obama was elected as the United States First Black President many Americans thought that the long national nightmare on race was over.  We thought that the lion would lie down with the lamb and the race wars would be consigned to the dustbin of history.  We instinctively thought that the president would tell the race baiters to cool their jets.



In fact the opposite has occurred.  Whenever there is a race incident, from a black professor being stopped and frisked at his house in Cambridge, Massachusetts, or a black kid getting gunned down by a White Hispanic, or a rich sports-team owner spewing racial epithets at his mistress, the president steps in and amps up the outrage.



Now you would think that, fifty years after the end of government-sponsored racial segregation that we could draw a line under racism and say, look, there are a lot of white people that don't like black people.  But the fact is that they don't have political power.  There are laws to penalize racist acts.  Let's not get too overheated about what is in peoples' hearts and minds.



Government, after all, is not supposed to be worrying about hearts and minds, but the law.  That's what Janet Reno told us when the mood took her.



Forget government, it is religion that is supposed to worry about hearts and minds.



But our modern secular religions combine politics and religion into a single proto-totalitarian cult of the state.  Therefore in a modern secular liberal society, it does too matter what people are thinking.  And it does too matter that racist and sexist thoughts are swirling around out there.  It follows that they should be expunged, and that proper confessions should be made after people have been shown the instruments of torture.



President Obama has set a clear example to his co-religionists.  Heretics should be hunted down and publicly shamed.



With the example of their lightbringer before them, the followers of President Obama diligently search not just for criminal acts against the government of secular liberalism, but heretical thoughts against the gods of race, gender, and class.



Do they ever.



So we are justified in calling the present era the years of the Obama Purges.



President Obama and his supporters are eager to teach their ideological opponents a lesson.  Resistance is futile, they communicate in word and deed.



Maybe so.  But the problem with repression is that there are two responses.  One is to knuckle under to the new world order.  The other is to form a movement of resistance.  Some people conform; others rebel.



Which response will win out?

The Real Inequality Problem

Liberals are all worked up about inequality, and we know why.  They want more power.



Thus we can expect the argument for all liberal proposals to give liberals more power and control over the American people to be: Because inequality.



But there really is an inequality problem, writes Cathy Reisenwitz, and Republicans need to face up to it.  You can't just dismiss is as class warfare.  Otherwise the battlefield will belong to Democrats.

Googleing “income inequality” brings up a host of non-jealousy related reasons to care about it. One reason is that it hurts economic growth when the rich see their incomes rise but the poor don’t. The reason? The poor spend their extra wages, unlike the wealthy. Another reason is that income inequality hurts class mobility by making it more difficult for kids to go to college.

You can agree or disagree with those ideas, but people believe them.



I haven't read Thomas Piketty's Capitalism in the Twenty-first Century yet, so I can't comment on his idea that capitalist earn 4-5 percent on their money in perpetuity, while ordinary stiffs get back 1-2 percent because that how fast GDP growth works.  My copy arrives May 2.



But Piketty's reported solution is a laugher.  A global wealth tax?  So the Google guys will pay 1 percent of their wealth per year so politicians can spend it on programs rather than the Google guys on better software?



I don't think so.  Politicians spend money on their supporters, not on growing the economy to reduce inequality.



And really, looking at inequality without looking at the operations of government is clueless. (But then Piketty wouldn't have had the success he's had if he proposed to curb government!)



Let's enumerate a few ways in which government promotes inequality, while accepting the idea that the capitalists have an unfair advantage.

1. Social Security.  This is a government transfer program not a wealth builder.  Let's reform Social Security so that people have private accounts that they can pass on, tax-free, to their descendants.
   


2. Medicare.  This is a government transfer program that encourages seniors to consume excessive amounts of routine healthcare.  Let's reform Medicare so that people save in their working years for Medicare, and pay for routine health care in retirement out of their personal capital income.  Then they get to pass the residue on to their descendants, tax-free.
   


3. Unemployment, Workers Comp, Disability.  All these programs take money out of the hands of working people and give the monies to politicians.  Suppose people had their own personal unemployment account.  Then they could forego their right to long periods between jobs and get a new job quicker.  They would end up richer and could enjoy the capitalist income that the rich enjoy.  Then they could pass on their filthy lucre to their descendants.
   


4. Crony capitalism.  All the cool things that government does, from mass transit to renewable energy, benefits rich, well-connected supporters of politicians.  How unequal is that?

Yeah.  And so on.  So now let's just segue to Charles Murray, who is now too controversial to speak at Azusa Pacific University.  Murray has been writing the same book for 30 years.  First it was Losing Ground.  Now it's Coming Apart.  Murray makes the point, again and again, that the welfare state is really cool for the top 25 percent.  We 25% guys are educated, have cool jobs, stay married and send our kids to college.  But the further down you go, the more you are talking about government benefits and less marriage and less work and less community.



You wanna talk about inequality, you need to talk about the murrain that the liberal welfare state has sown among the poor.



But liberals don't want to talk about that, and they don't want anyone else to talk about it either.  Because inequality.