Hudson on the Piketty Phenomenon

[Woodsman]

Re: Hudson: Piketty vs. the Classical Economic Reformers

The World’s Richest Man Defends Income Inequality

A review of French economist Thomas Piketty’s best-selling book “Capital in the 21st Century” by the world’s richest man is too delicious to ignore. The main takeaway from Piketty’s book, of course, is that we need to worry about the growing concentration of capital, in which people like Microsoft co-founder turned megaphilanthropist Bill Gates and his children will control the bulk of society’s wealth. Gates, however, doesn’t quite see it this way...

[astonas]

Re: Hudson: Piketty vs. the Classical Economic Reformers

The ability of people to see themselves as adding more value than others appears to be an inherent flaw in the human species, not just in Gates, though I agree it is in fine form in his review.

I suspect that to the extent that a person lives their values, and has different values than someone else, they must also diminish the relative contribution of that someone, in their own minds. To do otherwise would be self-inconsistent. I don't think that's something we can do anything about.

Of course, when a few people have an outsized impact on the political process, and those share similar (if highly unrepresentative) values, they will be able to create a massive distortion, even to the point of damaging the stability of the overall system.

That is something I think we can affect.

[gwynedd1]

Re: Hudson on the Piketty Phenomenon

This is a great interview and Hudson nails some real key points - especially focusing on "fictitious capital", what I call Fiat Capital.

This kind of capital is at all times related to the creation of a liability and a burden on another with the expectation that the person will produce. Easily demonstrated by the capital value of a slave which is lost upon freeing them. One hundred freemen with nothing cannot borrow what a master and ninety nine slaves can. Serving as fungible commodities they become valuable. All because of coercion.

[vt]

Re: Hudson on the Piketty Phenomenon

Too much emphasis on FIRE still hurts job creation for the middle class. But Piketty has an update:

Piketty Corrects the Inequality Crowd

The economist’s book caused a sensation last year, but now he says the redistributionists drew the wrong conclusions.

By ROBERT ROSENKRANZ

March 8, 2015 7:40 p.m. ET
‘Capital in the 21st Century,” a dense economic tome written by French economist Thomas Piketty, became a publishing sensation last spring when Harvard University Press released its English translation. The book quickly climbed to the top of best-seller lists, and more than 1.5 million copies are now in circulation in several languages.
The book’s central proposition, that inequality in capitalist societies will inevitably grow, can be summed up with a simple equation: r>g. That is, the return on capital (r) outpaces the growth rate of the economy (g) over time, leading inexorably to the dominance of inherited wealth. Progressives such as Princeton economist Paul Krugman seized on Mr. Piketty’s thesis to justify policies they have long wanted—namely, very high taxes on the wealthy.

Now in an extraordinary about-face, Mr. Piketty has backtracked, undermining the policy prescriptions many have based on his conclusions. In “About Capital in the 21st Century,” slated for May publication in the American Economic Review but already available online, Mr. Piketty writes that far too much has been read into his thesis.

Though his formula helps explain extreme and persistent wealth inequality before World War I, Mr. Piketty maintains, it doesn’t say much about the past 100 years. “I do not view r>g as the only or even the primary tool for considering changes in income and wealth in the 20th century,” he writes, “or for forecasting the path of inequality in the 21st century.”


ENLARGE
ILLUSTRATION: DAVID G KLEIN


Instead, Mr. Piketty argues in his new paper that political shocks, institutional changes and economic development played a major role in inequality in the past and will likely do so in the future.

When he narrows his focus to what he calls “labor income inequality”—the difference in compensation between front-line workers and CEOs—Mr. Piketty consigns his famous formula to irrelevance. “In addition, I certainly do not believe that r>g is a useful tool for the discussion of rising inequality of labor income: other mechanisms and policies are much more relevant here, e.g. supply and demand of skills and education.” He correctly distinguishes between income and wealth, and he takes a long historic perspective: “Wealth inequality is currently much less extreme than a century ago.”

All of this takes the wind out of enraptured progressives’ interpretation of Mr. Piketty’s book, which embraced the r>g formulation as relevant to debates playing out in Congress. Writing in the New York Review of Books last May, for example, Mr. Krugman lauded the book as a “magnificent, sweeping meditation on inequality.” He wrote that Mr. Piketty has proven that “we haven’t just gone back to nineteenth-century levels of income inequality, we’re also on a path back to ‘patrimonial capitalism,’ in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties.”

The r>g formulation always struck me as unconvincing. First, Mr. Piketty’s definition of r as including “profits, dividends, interest, rents, and other income from capital” conflates returns on real business activity (profits) with returns on financial assets (dividends and interest).

Second, it ignores the basic rule of economics that when supply of capital increases faster than demand, the yield on capital falls. For instance, since the great recession, the money supply has grown far more rapidly than the real economy, driving down interest rates. Returns on government bonds, the least risky asset, are now close to zero before inflation and negative 1% to 2% after inflation. In today’s low-return environment, with the headwinds of income and estate taxes, it becomes a Herculean task to build and transmit intergenerational wealth.
Many mainstream economists had reservations about Mr. Piketty’s views even before he began walking them back. Consider the working paper issued by the National Bureau of Economic Research in December. Daron Acemoglu and James A. Robinson, professors at the Massachusetts Institute of Technology and Harvard, respectively, find Mr. Piketty’s theory too simplistic. “We argue that general economic laws are unhelpful as a guide to understand the past or predict the future,” the paper’s abstract reads, “because they ignore the central role of political and economic institutions, as well as the endogenous evolution of technology, in shaping the distribution of resources in society.”

The Initiative on Global Markets at the University of Chicago asked economists in October whether they agreed or disagreed with the following statement: “The most powerful force pushing towards greater wealth inequality in the U.S. since the 1970s is the gap between the after-tax return on capital and the economic growth rate.” Of 36 economists who responded, only one agreed.

Other critics have questioned the trove of statistical data Mr. Piketty assembled to chart trends in income and wealth in the U.S., U.K., France and Sweden over the past century. Are such diverse data comparable, and have the adjustments that Mr. Piketty introduced to make them comparable distorted the final picture?

After an extensive review, Chris Giles, the economics editor of the Financial Times, concluded in May last year that “Two of Capital in the 21st Century’s central findings—that wealth inequality has begun to rise over the past 30 years and that the U.S. obviously has a more unequal distribution of wealth than Europe—no longer seem to hold.”

Mr. Piketty is willing to stand up and say that the material in his book does not support all the uses to which it has been put, that “Capital in the 21st Century” is primarily a work of history. That is certainly admirable. Now it is time for those who cry that we are heading into a new gilded age to follow his lead.

Mr. Rosenkranz is a financier and economist who promotes civil discourse as founder of the Intelligence Squared U.S. debates.

http://www.wsj.com/articles/robert-rosenkranz-piketty-corrects-the-inequality-crowd-1425854415?mod=hp_opinion

[vt]

Re: Hudson on the Piketty Phenomenon

It's not the top 1%; it's the top .1% and especially the top .01%: "The income distribution data referenced in a multitude of articles that often misuse it to demonize the top 1% is from the Paris School of Economics. The data set covers tax years from 1913 to 2012. You can download the data from this link: http://topincomes.g-mond.parisschoolofeconomics.eu/ I always go to source data when it is available, and downloaded the data set a year or so ago after being flooded with headlines that obviously distorted it for partisan purposes. If you do the same, you'll see that the vast majority of the growth cited for the top 1% is from the top 0.1%, and literally all of that growth is from the fewer than 15,000 taxpayers that make up the top 0.01%. In 1913, the earnings reported (all data includes capital gains) by the top 1%, exclusive of the top 0.1%, represented 9.4% of total U.S. reported earnings. The top 0.1% represented 8.6%, and out of that, the top 0.01% represented 2.8% of the total. In 2012, the top 1%, exclusive of the top 0.1%, represented 11.2%, the top 0.1% represented 11.3%, and out of that, the top 0.01% represented a whopping 5.5%. This means over that period, the share of the top 1%, exclusive of the top 0.01%, increased by 19.1%, the share of the top 0.1% increased by 31.4% and the share for the top 0.01% increased by a staggering 96.4%. Now, let's dissect the data of the top 0.1%. If we look at the top 0.1%, exclusive of the top 0.01%, we can see it represented 5.8% of total earnings (including capital gains) in 1913. Interestingly, that is exactly what the data shows for this group in 2012. In other words, there was no growth in the percentage of total earnings for the 0.1% when you remove the fewer than 15,000 taxpayers that make up the 0.01%. To take this a step further, let's evaluate how the top 1% fared exclusive of the 0.01%. When we remove the top 0.01% from the top 1% the remaining taxpayers saw their share of total earnings climb from 15.2% of the total in 1913 to 17.0% of the total in 2012. That represents growth of 11.8%. However, as noted above, the top 0.01% saw their share growth from 2.8% to 5.5%, which is just short of doubling (a gain of 96.4%). To be in the top 1% in 2012, a taxpayer would have to report total earnings (including capital gains) of $394 thousand. The threshold for the top 0.1% was $1.9 million, and for the top 0.01% it was $10.3 million. For 2012, there were a total of 144.8 million tax returns filed for individuals, so it's pretty easy to do the math to figure out how many fit into each set. With these data we can also evaluate what has changed in the top 10% exclusive of the top 1%. To be a part of the top 10% a taxpayer would have needed to report total income and earnings of $114 thousand in 2012. For the top 5% it would have taken $161 thousand. The data for the top 10% only goes back to 1917 when this group of taxpayers represented 22.8% of total earnings including capital gains. This grew to 27.9% in 2012. This means the top 10%, exclusive of the top 1%, saw their share of earnings grow 22.4% from 1917 to 2012. Interestingly, that is roughly double the growth we saw for the top 1% exclusive of the top 0.01%. There are many reasons for the growing income disparity at the very top brackets - some is attributable to the amazing growth we've enjoyed in technology (the long-tail gives entrepreneurs more reach and leverage), but ironically, even more is attributable to our government's policies that have increased fixed costs, and as any good economist knows, a higher proportion of fixed costs favors larger competitors. In some industries, the government has boosted fixed costs so much it has not only led to massive consolidation, but has also eliminated the competitive threat of new market entrants. The moral of the story is if you follow the money you'll probably eventually find the truth." Paul Williams

[vt]

Re: Hudson on the Piketty Phenomenon

26 year old student shows where Piketty was wrong:

http://www.washingtonpost.com/blogs/...ut-inequality/