The Trouble with Keynes Is Us

Why has Keynesianism survived down to the present day?  Most TV commentators understand the economy in orthodox Keynesian terms.  The survival of Keynesianism is not that hard to understand, according to Sheldon Richman.

I’d have said it’s because Keynesianism gives intellectual cover for what politicians would want to do anyway: borrow, spend, and create money.

Another explanation Richman offers is from Lawrence H. White of George Mason University. Keynes gave people hope in the black despair of the Great Depression.  For economists, it gave them hope that they could solve the unemployment problem without going to totalitarianism.



My view is that the power of Keynes is to give not just politicians and economists but ordinary people the hope that they can continue doing what they are doing without making the wrenching changes that they desperately fear they must make.  Hey, no problem, the politicians can say!  Just sit back and let us do a bit of stimulus here, and a bit of quantitative easing there, and presto, it's recovery summer!  Because everyone wants to keep doing what they are doing until there is no longer any possible hope to continue in the old way.



The orthodox Austrian explanation of the business cycle centers on the idea that a recession is an inevitable consequence of the previous easy credit boom, because investments that looked solid in the boom are suddenly revealed as malinvestments.  Thus the people and resources marshalled into the lines of business now revealed as malinvestments must be liquidated, sooner or later. But nobody wants to hear that!  They don't want to confront what they know they must eventually do.  They want to continue in the old ways, and they sensibly elect politicians that will let them do it.



Of course it is the ordinary people that suffer losses to their wealth in the subsequent inflation and they lose their jobs in the malinvested industries anyway.  Then they will blame the politicians and the whole cycle can begin again.



We can excuse the politicians: theirs is the art of the possible, and if there is no majority for a party that offers orthodox capitalism with sound money and no freebies then a politician is a fool to offer it.



But the economists have no such excuse.  They know the problems with Keynesianism, or they ought to if they are as smart as they claim.  But we know why they are on the Keynesian train.  It is the same reason that the climate scientists are all aboard the global warming train.  It is money, power and the love of beautiful women.  That is one side of the coin.  But there is another reverse side of the coin.  If you don't get with the program you will get the brush off.  There won't be any professorships or adviser jobs for you.  So you'll abandon your economics Ph.D. and get into another line of business, and nobody wants to do that.



So what about the Obama economy?  How long can this miserable "recovery" continue?  Nobody knows.  But you can imagine that by November 2016 the American people will think it is "Time for a Change."  But the ghost of Keynes will still be with us.

Anti-Piketty: VA is part of the "social model"

Our liberal friends like to talk vaguely about "working families," although their core voters are often neither workers nor families. But euro-lefties like Thomas Piketty, he of Capital in the Twenty-First Century, are more direct about their agenda.  They call it the European Social Model.  They mean that the state provides basic services like free education, free health care, pay-as-you-go pensions, and income supplement.  And this is a good thing, even if it costs 40, 50 percent of GDP in taxes.

Just like the US Veterans Administration.  It runs a cafeteria of free services for US veterans.  Want health care?  Go to the VA hospital.  It's run just like every government department: for the benefit of the managers and the bureaucrats.

So the VA is hiding its waiting lists.  So President Obama is shocked, shocked that waiting lists are going on.  So everyone is piling on.

Who are we kidding?  The VA operates a government-furnished, government-run "free at the point of delivery" health care system.  Which means that there will be waiting lists.  There's no mystery about this.  It doesn't take dysfunctional bureaucrats or incompetent managers to muck up waiting lists. It's a basic fact of life, courtesy of Economics 101.  Supply and Demand, baby.  If you price some thing at zero, the demand for that thing will be infinite.

Every scarce thing in this world must be rationed.  You can ration it by price, or you can ration it by waiting lists.

And that applies to the VA and everything else in the European Social Model.

Now I know that for our graduates of the French grandes écoles like M. Piketty, there is nothing more progressive or more just or more social that the "social state" and its "social model".  But you may have a tiny little question mark in the back of your mind about it.  I certainly do.

Because there is an interesting thing about the European Social Model and all its brothers and sisters and cousins and aunts.  It's indistinguishable from the Looting and Plunder Model.

So you're the Frankish king sitting in you capital city of Trier, just west of the Rhine, way back in the good old days of the Frankish empire.  It's spring and it's time for the campaigning season.  What do you do?  You say to your noble supporters and your peasants: Hey, pal, want some loot and plunder and free stuff?  Follow the Frankish banner and come and get it.  So when the snows clear and the forest paths harden up you lead your merry band of pranksters into Saxony and teach the Teutons a lesson.  In the fall you return to Trier with your bags full of grain and silver and loot.

You tell me what is different with the modern politician and his supporters.  What does he say once the election campaigning season comes around?  He offers his supporters free stuff. Health care for the uninsured!  New subsidies for community college students!  No cuts to Medicare!  Higher minimum wage! And at the end of the campaign after the office is won, then it's time to divide the spoils.

Now there is a very advanced and sophisticated way to look at this.  It is the pragmatic method that William James taught us over a century ago.  He said: never mind about realism or transcendentalism or any of that stuff.  Think of things pragmatically.  If the way you deal with A is the same as the way you deal with B, then A and B are, for all practical purposes, the same.

So if the European Social Model is indistinguishable from the Looting and Plunder Model, maybe it's because they, for all practical purposes, the same.

Of course, there's a middle way in this, the medieval feudal system.  In those days the supporters were mostly serfs.  They weren't recruited for loot, but served in the feudal host as part of a system of loyalty and obligation.  They served the lord, and the lord protected them from other lords and the Vikings.  And the lord kinda sorta looked after them, throwing them a few bones every now and again.

But today we are trying to blunder a way out of the Loot and Plunder model to a new system. It's not a looting system, or a servile system, or a free-stuff-social-model system.  It's the system of individual responsibility.  It's completely upside down from the old system.

In the old system you were recruited and you joined up for the loot, the free stuff.  And you fought or worked in the fields in order to get your loot, your right as a loyal servitor.

But in the new system you start not with your loot but with your contribution.  You have to figure out: how can I make myself useful, how can I add value in this crazy, complex world?  How can I make a difference?  How can I find a niche to fill?  Then, you hope, the money will follow.  It's a great system because it doesn't need a great lord divvying up the spoils in some complicated administrative system with its waiting lines and waiting lists.  It just requires people eager to serve and people willing to pay them for their service.

The problem at the VA will not be solved with more money and better administrators.  It will be solved only when we abandon the free-stuff model.  Let's offer the veterans a choice.  You can stay with the free-stuff model, or we can give you an equivalent chunk of change so you can buy health insurance on the open market.

Oh dear.  I see there's a problem with that.  President Obama and his Democratic army just overran the open market for health insurance with their centralized bureaucratized costly unaffordable uncaring unprotected Patient Protection and Affordable Care Act.

So the president and his party are making things worse instead of better, for veterans and for everyone else.  They are turning the clock back to the days of serfdom and looting and plunder.

And so it goes.

And so it will continue to go until the advanced progressive ruling class finally gives in and abandons its primitive free-stuff model and joins the modern era and its radical idea of individual responsibility.

When that day dawns we may truly say that the state has become social.

Anti-Piketty: Because Conservatives Hate Compulsion

It's been a rough two weeks, but somebody had to do it. I just finished reading through Thomas Piketty's Capitalism in the Twenty-First Century and lived to blog about it.  You can start the blog commentary here. Now it's done and I've broken through into open country.



I get what Piketty is all about.  He's a bright young chap, darling of the French ruling class, and he's returning the compliment, as a good bribed apologist should.  What's needed, to save the authoritarian welfare state -- euphemistically called the "social state" or the "European Social Model" -- is force.  Its debt is way too large and so we must take money from the rich; that's OK, because their wealth is currently spiraling out of control. We must conduct a searching "financial cadaster" of all the world's private wealth and then bravely tax it.  Only thencan we resume the wonderful work of providing free education and health care.  And pensions.



No wonder our liberal friends love this Frenchy's ideas.



But I hate 'em.  The ideas, not the liberals.  Not so much because of the tendentious idea that the whole thing is due to r > g, that the return from capital is greater than the economic growth rate.  Of course it is!  Piketty's r and his g are apples and oranges.  The rate of return on capital is time discount + risk + surprise.  The growth rate is what's left.  They have nothing to do with each other.



No, what I hate is the compulsion.  Here we are, social animals as we are, and the only thing that a brilliant lefty can think to do in the current emergency is to bellow Captain Kirk's insistent request of Scotty for more power?  Just hand over 15-20 percent of your wealth and we'll fix everything?  You think I'm dumb or something?  Don't you lefties realize that your centralized one-size-fits-all model always ends up at the VA with secret waiting lists and people dying waiting for treatment?



But I can see the advantage of pretense, the pretense that this time with this trillion dollar program we have a perfect system to deliver... whatever: health care for our veterans, or to the uninsured, or to the traditionally marginalized.  Because then President Obama can always do the Casablanca line and be shocked, shocked that there are death panels going on at the VA.



Of course, I realize that we have our present centralized system because that's what most of the American people want.  They may be living in the modern capitalistic era but they think and feel like tribesmen. They look to the tribal leader as the powerful patron to keep them safe.  And so they whine and moan about the service and about "them".  But they are too cheap to turn away from the "free stuff" and pay their own way.



Let's turn away from this dysfunctional swamp and think beautiful thoughts.  Conservative thoughts.



Conservatism says that government is force.  So you have to face the truth that everything the government does is force.  If you do that it clears the mind.



You think educating little children can only be achieved confining them for twelve years in government child-custodial facilities with no time off for good behavior?  Really?



You think that the only way to get health care to the poor is by forcing everyone in society into a comprehensive and mandatory system run by bureaucrats and politicians?  Really?



You think that intergenerational solidarity means that old people get to vote to force young people to give them pensions?  Really?



That's the point about conservatism.  It starts with the faith, against all odds, that there must be a better way to deliver the benefits of society -- social services, if you will -- than force.



Because the problem with government is that the only thing that government knows is force.  And that means that it turns every question, every issue, into a war.  Now governments have always been pretty keen to go to war with the neighboring states.  No mystery about that: border war is in our genes, going all the way back to the chimpanzees.  Our problem is that if our government doesn't have a foreign war to fight it will stir up an argument at home.  It will conjure up some mortal peril, like inequality, or climate change, or the uninsured, that can only be overcome with the overwhelming force, mobilizing every citizen to fight the foe.  It could be spiraling inequality or it could be a rising sea level.  It doesn't matter, because the only thing needful is for government to have a war to fight.



Our lefty friends are firmly convinced that they are on the side of Peace and Justice.  Only first, of course, it will take a war on want, on poverty, on inflation, on bigots, on denialists, on racists, before the Heavenly Kingdom on Earth can begin.



Conservatives say that, if we are going to have a war, let's at least have a war against Commies in Russia or Islamists in the Middle East.  Let's not declare war on each other.



Why, we might end up in a real civil war and end up killing each other.

Piketty: Anti-Piketty

The "social state" in in a bit of a jam in the aftermath of the Crash of 2008, because public debt in the rich countries is sitting at about 100 percent of national income, according to Thomas Piketty in Capital in the Twenty-First Century.  The best way to pitch out of the jam is to assess the rich 15-20% of their wealth and pay off the debt.  No problem because private wealth is about six to seven times national income.

So Piketty's #1 bestselling book is not really about capital in the 21st century.  It is about getting the project of the global educated ruling class out of the ditch.  Because if the governments have to cut back on benefits, a policy called "austerity," then the poor would pay for the follies of their rulers, and that would never do.

Let's rehearse Piketty's argument backwards, from the goal of his argument back to his premise.  Because, like most things in this world, it is the end that justifies the means.

1. A progressive tax on capital is the right way to reduce or eliminate rich country public debt.
2. The heavy public debt is the fault of capitalism run amok in the 2000s and wise government policy to prevent another Great Depression.
3. Something must be done else the "social state" won't be able to deliver education, health care and pensions.
4. The richest capitalists can afford it because the capital/income ratio is over 6 in the developed countries.
5. Tapping the rich is a good idea because wealth inequality is spiraling out of control.
6. Wealth inequality is spiralling out of control because r > g (r = rate of return on capital greater than g = rate of economic growth) and the rich save a chunk of their income.
7. So a progressive tax on capital would be a good thing, because inequality.
8. But first we need a "financial cadaster" of all private wealth so governments know who owns what.

There is in Thomas Piketty an almost sweet naivete that assumes the modern educated class's right to rule, that assumes the moral authority of the authoritarian welfare state, that elides the fundamental fact of government, that government is force.  If there's a problem, such as poverty and ignorance in 1900, then the solution is to force everyone to contribute to a government program of education, health care, and pensions.  If there's a problem of sky-high public debt in 2014, then the solution is to force everyone to pay down the debt.  But first we need to know exactly what everyone owns so we know where to go and get it.

Why is this?  Because the only thing government does is force, government is forever looking for a project that requires force.  Thus everything it does turns into a war.  So the solution to the public debt crisis is a war on wealth.

Let's go down the list of Piketty's assumptions and deal with them one by one.

The large public debt. If you ask me there is only one reason for a government to get into debt: to fight a war.  For government to get itself so indebted in peacetime is a failure of leadership.  What if there were a real war?  What would we do then?

The crash of 2008. Piketty says that governments did a good job in the recent panic.  I say they flunked.  First of all, if central banks are supposed to be "lenders of last resort" then how come Lehman Brothers was allowed to fail?  Second, the same thing happened in the 1929 crash only the bureaucratic bunglers at the central banks were even worse.  That's because it was the political hacks' first try at a big panic since the creation of the Federal Reserve and they whiffed it.  Third, the cause of the crash was not Wall Street speculation or government regulation but US government policy that hosed cheap mortgage money at overleveraged sub-prime borrowers.  Imagine: after the music stopped there were trillions of mortgage debt on which: a) many borrowers couldn't pay and b) the collateral couldn't pay off the loan.

The social state is not social.  It is compulsory.  It is force.  I would say that the education of little children should not be conducted under the color of government force.  I would say that health care should not be parceled out under the color of government force, except basic public health questions like sanitation and clean water and quarantine and vaccination that keep our cities safe.  I would say that people should save for their own pensions, because the intergenerational solidarity of people saving so that they can create jobs for the next generation is higher and nobler than the intergenerational solidarity of the welfare state in which seniors vote to tax the next generation and force them to pay for their parents' pensions.

Wealth inequality.  Piketty believes in the Marxian fallacy that wealth increases by saving and accumulation. E.g., r > g. No it doesn't.  Wealth comes from innovation and surprise.  A guy invents a steam engine; pretty soon poor people can afford to cross the oceans in steamships.  A bunch of guys develop horizontal drilling and hydraulic fracturing for oil and gas wells.  Pretty soon they have transformed the global energy equation.  But when people don't innovate you get the world from 0-1500 AD.  No innovation.  No wealth "accumulation." No growth.  Stagnation.  The way you get rich in that world is by conquering other peoples' land, enjoying the lamentation of their women, and putting the peasants to work.

Financial cadaster. Thomas Piketty, like many in the ruling class, is disturbed that capital can flow to where it's most welcome, and he hates the tax competition between nations that has led to a race to the bottom.  The solution for him and his pals in the global ruling class is to create a financial cadaaster, a government database of all personal wealth: who owns it and where it's located.  Only then, he argues, will policy-makers have the tools to respond to crises like the Crash of 2008 and the Greece sovereign debt issue and the Cyprus bank meltdown.  But this is nothing new.  Governments have always wanted to make their subjects "legible."  It makes them easier to tax, to control, and to conscript.  And it gives the ruling class the tools it needs to paint an aesthetically pleasing state-scape.  See Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed by James C. Scott.

Thomas Piketty's book has been received in certain liberal and lefty circles as a gift from the gods. Here at last is a cogent argument for the fight against inequality.  And so it is, if you want to go to war over inequality.

But the brighter lights on the left know that there is a problem with all this:  Domination.  If the only response to every problem is to call for new measures of political domination, then you must be missing something.  Horkheimer and Adorno realized this in Dialectic of Enlightenment.  They wrote:

What men want to learn from nature is how to use it in order wholly to dominate it and other men.  That is the only aim.

The problem with everything on the left from Marx to Piketty is that they cannot think of any response to domination except counter-domination.  But there is another way.  It has been developed, of all things, by a lefty, Jürgen Habermas.  His solution to the problem of domination is to balance domination with communication.  He imagines two worlds, systems world and life-world.  Systems world is the age-old battle against the world for food and shelter. Life-world is the social world of human-to-human communication and cooperation.  The beginning of a shared life-world is language, of which Wittgenstein said: there is no private language.

When I look at the world using Habermas's ideas, I see that the "social state" of Thomas Piketty is not social, because it is a bureaucratic hierarchical state of command and control.  It is the compulsion state.

There has to be a better idea.  There is. Start here: The Crisis of the Administrative State.

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: Anti-Piketty

Piketty: The Question of the Public Debt

A global tax on capital is the one thing needful to complete the progressive tax picture, one that would curb the spiraling explosion of large fortunes, according to Thomas Piketty in Capital in the Twenty-First Century.  Now Piketty turns towards the real elephant in the room, the public debt in the developed world that, in the aftermath of the Great Recession, is everywhere hitting 100% of national income.

Governments typically fund themselves with taxation and with debt, and taxation is more appropriate: more just and more efficient.  Debt, significantly, is normally borrowed from those with the means to lend and it must usually be paid back.  So it's "preferable to tax the wealthy rather than borrow from them."  But governments still borrow and accumulate debt, and right now the rich countries have a debt problem.

The current debt level at about one year of national income is not unprecedented: Britain's debt hit twice the national income after the Napoleonic wars and World War II.  But with national wealth hitting five and six times national income the public debt problem is not national poverty. "The rich world is rich, but the governments of the rich are poor."  And Europe is in the worst position.

There are three methods to reduce public debt: "taxes on capital, inflation, and austerity." A tax on capital would be best.

An exceptional tax on private capital is the most just and efficient solution.  Failing that, inflation can play a useful role: historically, that is now most large public debts have been dealt with. The worst solution in terms of both justice and efficiency is a prolonged dose of austerity--yet that is the course Europe is currently following.

 Right now, "national wealth in most European countries is close to six years of national income", with "60 percent of the total owned by the wealthiest 10 percent", so there's plenty of resource to solve the problem.

Since total public assets are about the same as total public debt, the European countries could solve the problem by selling the public assets to pay off the debt, and the wealthiest households "would become the direct owners of schools, hospitals, police stations, and so on."  But this is nonsense: public facilities must be owned by the public.

Piketty would prefer a one time "exceptional tax on private capital", say 15% of private wealth, enough to redeem the entire public debt.  This would be like a debt repudiation only better, because it's hard to know who will pay the cost of debt repudiation.  The tax could be progressive, even with exemptions for the first 100,000 euros. But first, the tax authorities would have to know exactly who owned what. "Without such a financial cadaster, every policy choice would be risky." If the exceptional tax idea is too radical, the debt could be retired gradually with an annual progressive tax on capital capturing about 2 percent of national income per year.

The next option is inflation.  Even a small increase in the inflation rate can "significantly reduce the real value of the public debt."  Without an exceptional tax on capital the alternative is to run a budget surplus for decades, as Britain did after the Napoleonic Wars.  In "this period British taxpayers spent more on the debt than on education."  It was good for the bondholders, but was maybe the educational deficit was "responsible for the country's decline in the decades that followed."  Should today's Europe spend several percent of national income on its debt when it only spends one percent on universities?

But inflation has "undesirable side effects." It can get out of control, and be "hard to stop."  In France after 1945 "millions of small savers were wiped out" leading to "poverty among the elderly in the 1950s."  Germany was "traumatized" by its two inflations.  On the good side, inflation penalizes "idle capital" and encourages people to put their money in "real economic assets".  But inflation is "crude and imprecise"; better to impose a progressive tax on capital.

In the middle of the inflation question are the central banks.  Back under the gold standard, central banks had limited power.  But today the central banks have potentially unlimited power to create money, and "must therefore be strictly limited."  But sometimes central banks take this strict limitation too seriously, as after the Crash of 1929 when "they refused to create the liquidity necessary to save troubled banks".  Since then "everyone agrees" that the central banks must supply liquidity to avoid financial collapse as "'lenders of last resort'".

Milton Friedman, in his Monetary History of the United States, is unequivocal: the restrictive policy of the Federal Reserve turned the stock market crash into the Great Depression. But that encouraged people to think that the only thing needful to balance the economy was a well-run Federal Reserve.  For Piketty, a "properly functioning" Fed should be a complement to "a properly functioning social state and a well-designed progressive tax policy."

In the 2007-2008 crisis the central bankers followed the new consensus and did the right thing, with only Lehman Brothers failing. But there is no consensus about the "unconventional" monetary policies following such a crisis.  Central banks can create trillions in seconds in a financial panic, but then what?  They could buy up "firms and real estate, finance the transition to renewable energy, invest in universities," etc.  But they don't, because they "lack the democratic legitimacy to try them."  So it was the federal government that bailed out General Motors and not the Federal Reserve.

But then there is the whole question of the euro, the currency without a state, epitomized by the Greece and Cyprus crises.

In Europe the recession of 2008-2009 created a sharp rise in public debt (Greece and Italy) and a deterioration in bank balance sheets (Spain). The crises are linked because banks hold government bonds of unknown value.  But the regulators don't have access to banking data, and rich people, e.g., in Greece, could avoid a capital tax by moving their assets.

Then there was the Cyprus mess.  Rich Russians deposited money in Cyprus banks, and the banks invested their money in Greek government bonds, now written down, and real estate, now worthless.  What to do?  Without proper "statistics" and "tools they need to move forward" the Troika of the EC, ECB and IMF came up with a crude tax on bank deposits in Cyprus, with the same rate on small savers and Russian oligarchs.  The Cypriots voted that down, so the first 100,000 euros of deposits was exempted from the tax.

The Cyprus episode "illustrated the limits" of central bank operations.

Their strength is that they can act quickly; their weakness is their limited capacity to correctly target the redistributions they cause to occur.

Obviously, a progressive tax on capital would have solved the problem.  But let's not forget the bigger problem.

What is deeply shocking... is that the authorities did not even seek to equip themselves with the tools needed to apportion the burden of adjustment in a just, transparent, and progressive manner. 

That's why Piketty wants a complete financial cadaster of personal wealth.

But that still does not resolve the problem of the euro, a multistate currency without a state.  How did this disaster happen?  Mainly because people thought, after the 1970s, that the central bank's job was to control inflation.  The crisis of 2008 changed all that and revealed that the current setup can't do the job.  The European Central Bank (ECB) has a unique problem because it must deal with 17 public debts and 17 national governments, but nobody thought before 2008 that interest rates could start to diverge and people would start to "speculate on national interest rates" and trigger large and destablizing capital flows.

The only way out is for the Eurozone countries to "pool their public debts."  Then the question is how to pay down the pooled debt; it would need a "European 'budgetary parliament'" different from the current European Parliament to make decisions about the debt problem in a "public, democratic, and sovereign manner".  Without such a change, or a "progressive tax on capital", the Eurozone crisis would have no end.

Another possibility is a "tax on corporate profits" and an end to tax competition in Europe.  Corporations would make a "single declaration of their profits at the European level" and be taxed in a way "less subject to manipulation" than the current system where corporations can assign profit to subsidiaries where taxes are low.  Piketty's tax on capital could be administered the same way, taxed in the nation where the business activity occurs.  The goal is to "construct a continental political authority" to control "patrimonial capitalism" and "advance the European social model".  Otherwise the current tax competition and race to the bottom will continue.

Let us now think about how much capital accumulation is appropriate for the rest of the century. Ideally we would want to eliminate the inequality r > g and (r = rate of return on capital and g = growth rate) approach the "golden rule of capital accumulation" where r = g. But that would require a capital/income ratio of 20-30 times national income.  Piketty thinks that the best option is to tax capital and reduce the inequality r > g that way.

If the golden rule on capital accumulation is misleading what about the Maastrict stipulations that "deficits would be less than 3 percent of GDP and that total public debt would remain below 60 percent of GDP"?  The rule was an attempt to finesse the problem of the stateless euro.  With a budgetary parliament, "sovereign and democratic", it would not be appropriate or necessary "to enshrine budgetary restrictions in statutory or constitutional stone."  Think of a new crisis, or conservative "constitutional judge".  Policy-makers would need the power to act.

Anyway, with Europe so rich, solving the debt problem is not that hard.  It's time for a "sovereign parliament" to make the decision: a "progressive one-time tax on capital" or inflation.

Another big issue is climate change.  Under the Stern report in 2006 governments are supposed to spend several percent of GDP per year to mitigate climate change in the future.  Should governments implement an "ecological stimulus" with interest rates so low? On this view the public debt is not such a problem. What is needed is to "increase our educational capital" and stop damage to "natural capital." But "[d]o we really know what we ought to invest in and how we should organize our effort?"  No one knows.

More broadly, it's time to develop "new forms of property and democratic control of capital" in between the "polar paradigms of purely private capital... and purely public capital".  But Piketty's real interest is to increase transparency, not merely of individual income and wealth, but the "detailed accounts of private corporations (as well as government agencies)."  Only that, and "the right to intervene in corporate decision-making" would allow democracy "someday to regain control of capitalism".

Discussion

In this chapter Thomas Piketty reveals his real agenda.  His progressive project, the "social state," has run aground and needs money to refloat itself.  Since the current sources of revenue are maxed out it's time to find a new one: a progressive tax on capital.  Since his faith declares that the lower 50 percent never has to pay, the money must come from the rich, and since their wealth is spiraling upwards out of control, it just makes sense to tap the wealthy to bring things back to normal.

Governments need money to dial back their public debt, to do useful things like expand universities and combat climate change.  But first governments need much more information about their citizens, so they can make them legible, and, though Piketty is too modest to admit it, secure the means to seize assets without warning.

A couple of quibbles.  The failure of the Fed in 1929 was that monetary policy was in the hands of political hacks that didn't know what they were doing.  Ever since Walter Bagehot's Lombard Street in the 19th century everyone knew that the central bank's role was to be the "lender of last resort" to maintain liquidity.  But the Fed of 1929 whiffed it.  And if it comes to that so did the monetary authorities of 2008.  How come that Lehman Brothers was allowed to fail?  Where was the "lender of last resort?"  Bernanke?  Paulson? The US political system wandered around for a couple of weeks getting Congress to pass the TARP bill while the financial system fell through the floor.  What was that all about?  Without the TARP delay the Crash would probably have been half as big.

Let us grant Piketty's argument, that capital accumulates, and spirals up into the moneybags of the rich, increasing already unjust inequality.  So let's increase democratic control of "patrimonial capitalism" just like he says.

Very good.  Let's open a conversation on a different argument, that elite political power accumulates, and spirals up, giving today's rather unimpressive ruling class more and more power to fix things after messes like the financial crisis of 2008.  Here's a radical idea. Let's increase democratic control of "patrimonial elitism" and curb the ever-increasing power of governments to resort to force, to regulation, and seizure in order to cover up their corruption and their incompetence.

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: Anti-Piketty

Piketty: A Gobal Tax on Capital

What is needed to stop the vice of spiraling "supermanager" compensation is an income tax rate of 80% on incomes over $500,000 to $1 million, according to Thomas Piketty in Capital in the Twenty-First Century.  Now it's time to let the other shoe drop and consider the advantage of a global tax on capital, both to raise revenue and also prevent the uncontrolled spiral of wealth inequality that Piketty has developed in previous chapters.

But how would it work?  Obviously it would require a "very high degree and no doubt unrealistic level of international cooperation."  But it would avoid dangerous capital controls and protectionism.  A global tax on capital is "an ideal form of regulation... preserving economic openness... and justly distributing the benefits among and within nations."  And all it requires is some sort of international cooperation similar to the present "automatic sharing of banking information".

The global tax on capital would be a tax on net assets, the "market value of all financial assets... and non-financial assets" like real estate.  It could be zero below 1 million euros, 1% below 5 million, and 2 percent above 5 million.  It could be made more progressive, of course, with a rate of 5-10% tax on fortunes above 1 billion euros.  The tax would differ from current "property" taxes which are taxed at a flat rate on gross value without taking debt into account.

The revenue would not be that much, 3-4% of national income, for its primary job is not to raise money but to regulate capitalism.  Its first goal is to "stop the indefinite increase of inequality of wealth". But it will also "impose effective regulation on the financial and banking system to avoid crises."

To achieve these two ends, the capital tax must first promote democratic and financial transparency: there should be clarity about who owns what assets around the world.

We need to know the "distribution of wealth." National, international and statistical organizations "would at last be able to produce reliable data about the evolution of global wealth." Needless to say, "truly democratic debate cannot proceed without reliable statistics."

The whole thing could start with a 0.1% tax on capital that amounted to a "compulsory reporting law".  People would need to make the report to be "recognized as the legal owner" of their assets as after the French Revolution.  It's all quite simple: "national tax authorities should receive all the information they need to calculate the net wealth of every citizen."  Banks already have to inform tax authorities about bank accounts; all that is needed is an expansion of this system, but it would have to overcome the objections of tax havens.  A model of this is the US Foreign Account Tax Compliance Act (FATCA).  But "automatic sanctions not only on banks but also on countries" would be needed to get universal compliance.

Once the 0.1% tax reporting law is in place, what next?  What is the point of a progressive tax on capital?  There are two: contributory and incentive.  Many wealthy people -- for instance the L'Oréal heiress -- declare income that is 1% or less of their wealth.  Taxing their capital gets to tax their real ability to contribute.  Other wealthy people are content to park their wealth in investments making at most 2-3% a year. A capital tax would force the idle rich to sell assets to more dynamic investors.  There is a caveat: a capital tax would fall heaviest on individuals and corporations experiencing losses.  Thus the tax system should balance an incentive logic (taxing capital) and an insurance logic (taxing realized income from capital).

A capital tax cannot be levied at a high rate, like the once-a-generation estate tax or the French tax on capital in 1945. But a tax in Europe maxing out at 2% per year for fortunes over 5 million euros would affect about 2.5% of people and collect about 2 percent of GDP: not enough to finance the social state, but significant.  But there must be no escape, else countries will not be able to establish a tax that raises serious money.  And only after the tax is established will it be possible to talk about higher rates on the largest fortunes.

How has capital been taxed down the ages?  The Greek philosophers "were in two minds about interest" but laws against usury usually created problems.  The church never had a problem with land rent, from which the church benefited.  It was worried about infinite accumulation, and "commercial and financial adventures" tempting people from the true faith.  With Marx and abolition of private ownership of the means of production the private rate of return on capital could be reduced to zero and was reduced to zero in the Soviet Union.  No more r > g as capital was eliminated and growth was everything.

Unfortunately... private property and the market economy do not serve solely to ensure the domination of capital over those who have nothing to sell but their labor power. They also play a useful role in coordinating the actions of millions of individuals.

In other words, without that "useful role" you find that under socialism r is zero and so is g. Piketty's tax on capital would avoid the disaster of Marxist communism while asserting control over capitalism in the name of the general interest.  The idea of a tax on wealth is nothing new; the only innovation is the progressive idea, child of the 20th century.

Is there no other way to control capitalism, such as by capital controls and protectionism?  No.  Protectionism does not deliver prosperity and does not reverse the inequality spiral.  Capital controls are another thing, since many countries need to insulate themselves from financial crisis.  China has a peculiar system, with a non-convertible currency and strict controls on incoming and outgoing capital.  Chinese billionaires cannot take their money and move to Switzerland. Its capital controls "are one way of regulating and containing the dynamics of wealth inequality."

The question of "petroleum rents" is a special problem of capitalism and inequalities.  Ideally there would be a global tax to redistribute these rents "in an equitable manner."  Since there isn't, we get redistribution in less peaceful ways, such as Middle East wars.  And we get Saudi Arabia with trillions and Egypt next door spending a mere $5 billion a year on education in a nation of 85 million people.

Of course, one way to achieve redistribution is through immigration.  The US is less unequal than Europe because it has redistributed its wealth to successive waves of immigration.  But with all the immigration in the world, the problem of inequality remains.

Redistribution through immigration postpones the problem but does not dispense with the need for a new type of regulation: a social state with progressive taxes on income and capital.

Piketty imagines that the "less advantaged members of the wealthier nations" will accede to immigration if there are institutions in place "to insure that the benefits of globalization are shared by everyone."

Discussion

In developing his idea for a global tax on capital, Thomas Piketty proposes without irony a vast new apparatus of penetration into the lives of every person on the planet.  It's necessary to peer into every life, he says, to provide proper transparency and democratic oversight of the rich.  And of course, once you have convinced yourself that inequality is the problem, that wealth accumulation without limit is already in progress, and that capitalists are sneaking away into tax havens to hide from their democratic responsibilities, then a global program of reporting and control only makes sense.

There is a counter view.  It was developed in Seeing Like a State by James C. Scott.  A state always wants to know more about its people, to make them "legible." Once the people are legible then you can tax them, control them, and conscript them into your wars.  Every state, everywhere wants to do this, and it usually does.  It seldom lacks for bribed apologists to write books making its program of power the very height of reason and justice.  And that is exactly what Thomas Piketty does, for the modern ruling class, without any sense of shame or irony.

But suppose he is wrong.  Suppose that his r > g is rubbish.  Suppose that fortunes don't increase without limit, but instead rise and fall like the tides.  Suppose that the capitalists, for all their financial power, merely get rich from giving the consumer what she wants, and lose their fortunes as soon as they fail to do so.  Suppose the real problem was politicians and their technical experts building staggeringly inefficient schools and second-class health care and paying their functionaries outrageously high salaries and pensions while letting the poor moulder away in want and ignorance.

If that were true then Piketty and his pals would be the most exploitative and unjust rulers the world has ever seen, and hanging, in the words of Agatha Christie's Captain Hastings, would be too good for them.

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: Anti-Piketty

Piketty: Rethinking the Progressive Income Tax

The welfare or "social state" of the 20th century was and is good, according to Thomas Piketty in Capital in the Twenty-First Century  It might need a little tweaking and reorganization, but nothing like a radical conversion of pay-as-you-go pension plans into genuine savings plans to deliver real wealth to the workers.

But it is certainly appropriate to rethink the progressive income tax, born in a muddle during and after World War I and jerked around by overwrought Anglo-Saxons.

Typically we consider three types of tax: income, capital, and consumption.  Then there's a fourth, "contributions to government-sponsored social insurance programs", really special income taxes on labor.  We call a tax "proportional" if its rate is the same for everyone, progressive if it is fall more heavily on those who earn own or consume more, regressive if "its rate decreases for richer individuals".

Clearly, a progressive tax on incomes and wealth can have a big effect on inequality.  That's why inequality in the 20th century never returned to its levels in the Belle Époque.  The relaxation of progressive rates in Britain and the US after 1980 "probably explains much of the increase in the very highest incomes."  And tax competition in a world of "free-flowing capital" has led "governments to exempt capital income from the progressive income tax... in a race to the bottom", i.e., regressive taxation at the highest income levels.  In France, for example:

The bottom 50 percent of the income distribution pay a rate of 40-45 percent; the next 40 percent pay 45-50 percent; but the top 5 percent and even more the top 1 percent pay lower rates, with the top 0.1 percent paying only 35 percent.

All signs indicate that taxes elsewhere "follow a similar bell curve", and this "fiscal secession of the wealthiest" could lead the middle class to question the "social state" and ask how come they are left holding the baby.  The consequence is hardly to be borne: "Individualism and selfishness would flourish". Maintenance of a progressive tax system would also help convince the lower-skilled workers impacted by globalization to accede to free trade.

The progressive tax is "crucial". It was central in the reduction of inequality, and is needed to underpin the "social state in the future."  But today it's under attack, intellectually and politically.

The problem is that progressive taxes were introduced in the chaos of World War I and "its various purposes were not sufficiently thought through."  Piketty's chart shows tax rates in the US, Britain, France, and Germany bouncing up during and after the war, then mostly settling down in the 1920s, before ratcheting up by World War II to high levels in Europe and very high levels in the US and Britain.  In Germany and France the top income tax level slowly came down after World War II, but in Britain and the US they stayed above 90 percent from the 40s to the 60s.  Then after 1980 Britain and the US slashed their tax rates to 30-40 percent, below France and Germany.  Inheritance tax rates followed a similar trajectory, going up to 20-30 percent in France and Germany in 1920, ratcheting up to 70-80 percent in Britain and the US before starting down after 1970 and eventually rejoining the Europeans.

It was the Americans that invented the confiscatory income tax.  In the 1910s Irving Fisher, the economist, wrote in favor of a "heavy tax on the largest estates".  And the Great Depression inspired the New Dealers to sock it to the rich.  The Brits were not far behind.

Piketty's key point is that executive salaries exploded after 1980 and that this had nothing to do with greater productivity.  Tax rates were low, so corporate executives could pay themselves more and take their winnings home with them.  And they did.  In collaboration with Emanuel Saez and Stephanie Stantcheva Piketty determined that low marginal tax rates encouraged executives to bargain for "skyrocketing executive pay", that "luck" was more important than "talent", and that the marginal tax rate explains why executive pay went up in some countries and not in others.  If you don't like high executive pay, the solution is to increase executive taxes.

The solution is clear: "the only way to stem the observed increase in very high salaries" is "confiscatory rates on top incomes".  The right confiscatory rate would be about 80 percent, more or less.  Applied on incomes above $500,000 or $1 million it would not collect much in taxes; it would just keep down executive pay.  But Piketty does not expect much change.  "Without a radical shock, it seems fairly likely that the current equilibrium [on tax rates] will persist for quite some time."

Discussion

I'm inclined to accept Piketty's research that the sky-high executive salaries of the post 1980 age don't represent productivity but pure executive bargaining power.  But does it matter?

It all depends on your faith.  If you think that economic inequality is a nightmare, and likely to bring the people into the streets, then you want to do something about it.

For my part, I'm not exercised by economic inequality, but I am exercised by political inequality.  I'm charmed when I drive down A1A in South Florida and look at all the mansions.  But I don't like politicians, activists, little Hitlers, and their bribed economist apologists ordering me around.  So I'm much more inclined to go to the barricades to fight against big government and crony capitalists and billionaire hypocrites like Tom Steyer than against Bill Gates and the L'Oréal heiress.  But that's just me.

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: Anti-Piketty