Friday, May 09, 2014

More on Piketty

         Capital in the 21st Century is interesting for its policy prescriptions, which I shall get to eventually, but its greatest value, I would suggest, is simply as a record of what the economies of the advanced countries have been like over the last two centuries.  And what is rather extraordinary is how little things have changed.  Growth became faster as a result of the industrial revolution, but for most of the last two centuries it hasn't varied very much, staying at 1-2% per capita for most of that time, with the exception of the period 1946-80 or so.   Inequality of wealth and income dropped in the middle decades of the twentieth century but they have rebounded now and are threatening to reach the highest levels ever once again.  All of this, Piketty argues convincingly, is driven remorselessly by the nature of capitalism in general and the capital-income ratio in particular, which in turn is a function of of the difference (nearly always positive) between the annual return on capital on the one hand and economic growth on the other.  Piketty is in many ways at least as deterministic as Marx, at least with respect to economics, although he is much less so with respect to politics.

          I would like to begin today by reviewing some of the most interesting things I learned from the book--all of them very specific data.  One of my first shocks related to income disparities between regions.  Thus, the United States and Canada lead the world, at present, with a per capita income of 40,000 euros a year.  (The dollar has been falling against the Euro, I'm sorry to say, and a euro is now worth $1.38.)  But the per capita income in Latin America is only 10,000 euros a year, which is almost exactly the world average.  A similar situation prevails in Europe, where the major western European nations--the original EU, before 1989--average 31,000 euros per capita income, while the former Warsaw Pact countries earn just 16,000 euros a year per capita, and Russia and Ukraine only 15,000.  North Africans earn an average of 5,700 euros a year, but sub-Saharan Africa trails the field at 2,000.   The Japanese are essentially tied with western Europe at 31,000 euros per year, while the Chinese have reached 7,700, making China still considerably poorer than Latin America at this point, and the Indians 1200.  In short, despite massive inequality in the United States and the European slump, the nations bordering on the North Atlantic are still more than twice as rich as any other part of the world (except Australasia).  Nor is there really any reason to expect most of the world to catch up in the lifetime of any person now alive.

           A second staggering set of facts concerns the distribution of income and wealth.  To say that the US leads the world with a per capita income of 40,000 euros ($52,000) is true, but extremely misleading.  The top 1% of the United States receives 18% of total per capita income today (up from 8% in 1980), and the top .1 % (or "top decile," as Piketty puts it) has almost half of that, 7.5% of the total.  The top 10% of the nation receives 45% of annual income; the next 40%, which is the real "middle class" in the United States, receives 35%; and the lowest 50% of the population receives 20% of the total.  In other words, as I figure it--correct me if I am wrong--the top 10% is receiving an annual per capita income of 4.5 times the national average, or $234,000 a year; the next 40% is 1/8 below the average of $52,000, that is, about $46,000 per person per year; while the bottom half of the population averages 10% of the total, or $21,000 per capita.  Meanwhile, real growth is only 1-2% a year, and crucially, most of the proceeds of that growth are going to the top 10% and increasing inequality,  This is the nature of the modern American economy.  The situation inthe other most advanced countries of western Europe and Japan is not quite so bad, but it is headed at in the same direction.   The situation has deteriorated, from the standpoint of equality, in recent decades, although there was never a time in which it was all that much better for the bottom half of the population.

The situation regarding the distribution of wealth--which, to repeat, is increasing faster than income--is even worse.  The top 10% of the US population, which, to repeat, earns 45% of total income in the US every year, owns 70% of the wealth, down from an estimated peak of 80% around 1910.  (The top 1% owns nearly half of that.)  The nest 40% of the population owns the other 30% of the nation's wealth. The bottom half of the population has no significant wealth.  They may own cars or household appliances, but they have no significant equity in houses, much less any stocks, bonds, or IRAs.  Once again, the situation in the other advanced countries is more equal, but they are headed rapidly in the same direction as the US, and the situation in poorer countries is no better and in some cases even worse.  These are huge inequalities, and they are much greater than other inequalities upon which we are often focused, such as those between men and women or between generations.

That is not all. In a truly chilling chapter, Piketty presents pretty good evidence to show that enormous fortunes--those in the billions--tend to increase at least twice as fast as capital on the average, earning as much as 10% a year over most of the last 35 years.  This applies not only to large private fortunes like those of Bill Gates, but also to the endowments of Harvard, Yale and Princeton--one of my favorite subjects, as many of you know.  Moreover, in one of his most acerbic passages, Piketty notes that between 1990 and 2010, the fortune of Liliane  Bettencourt, the l'Oreal cosmetics heiress, who "has never worked  day in her life," increased just as quickly as that of Bill Gates, earning a real return of about 11% a year.  

What I would like to do now is to reflect a bit on these statistics, and analyze what they say about our current economic debates--before getting either next week or the following week into the question of exactly how things might be improved.  These are not questions about which Piketty has too much to say. He is, after all,a Frenchman, not an American, and he speaks with understandable condescension about many aspects of American politics without seeming to know exactly how bad things are at the moment.  Nonetheless I will take his remarks as a starting point.

Piketty notes many times that wealthier members of western societies--and particularly of the United States--seem almost desperate to argue that they deserve their greater wealth and income.  In my opinion, this results mainly from a bad conscience.  I firmly believe, for better or for worse, that within every human being lurks an acute sense of the fundamental equality of us all.  That is certainly true of myself and it probably explains why I have been happiest in settings where genuine equality was enforced, such as the U.S. Army (where I served in a non-combatant status.)  And thus, the luckier of those among us cannot help but feel some guilt, which they seek to expunge with supposedly rational explanations of  their success.  Piketty notes that the two favorite explanations of well-to-do Americans are those of greater marginal productivity, which is absolutely impossible to document for managers of firms, or their superior human capital, that is, education and training.  That explanation he rejects, on the grounds that managers in other advanced countries seem to do just at their jobs as Americans without receiving such extravagant compensation.  Well-to-do Americans, as Theda Skocpol and Vanessa Williamson found in their book about the Tea Party, also like to believe that they are morally superior and attained their wealth through a better work ethic.  Lastly, many conservative economists argue that managers and capitalists need their high compensation for the benefit of the rest of us. This, of course, was Ayn Rand's argument in Atlas Shrugged, a dreadful book which I reviewed here at length a couple of years ago, but it is a staple of Republican rhetoric, which attacks any move to tax "job creators" on the grounds that it will hurt us all.

Piketty should explode that myth once and for all, although I am afraid that will not be possible.  To put it bluntly, the vast majority of those who accumulate capital do not create jobs.  Capital is accumulated more rapidly when economic growth is slow, and thus, it is in the interests of capitalists to keep it slow.  That is why, as I shall discuss in a later post, the nation grew more rapidly and shared income more fairly in the era when the federal government taxed its citizens more heavily and put the money into labor intensive enterprises such as dams, schools, the interstate highway system, and yes, even wars.  To allow capital to accumulate more rapidly will slow growth still further. That is exactly what has happened since the 1980s.  It is incredible that the Republicans ever sold the country on the idea that Reagan launched an era of more rapid growth, when he actually did exactly the opposite, in part, I have no doubt, because he redistributed the tax burden from wealth to income.  The critical fact is this: there is absolutely no reason to expect that the economic policies we are now pursuing will give us a better economy than the one we have now.  In fact, they will give us a worse one, especially if the Republicans get control of the government and cut taxes still further.

A second critical fact, however, concerns entitlements.  As we have seen, roughly half of our population has little or no chance of accumulating significant wealth over its working lifetime.  Yet life expectancy is much higher.  Thus, rather obviously, Social Security and Medicare are literally the only things allowing half the American people to survive after retirement.  Yet the Republican Party wants to privatize or cut both of them. Privatizing them would in some way allow the money that goes into them be used for the accumulation of wealth, which is not now possible.  (Although a few doctors have gotten very rich off of Medicare, its reimbursement rates are generally quite low.  Indeed, I am convinced, having just crossed the Medicare threshold myself, that the working population subsidizes the elderly by paying more for the same treatments.)  That will increase the inequality within our economy still further. The much-touted Ryan plan to turn Medicare into vouchers would almost surely deprive many elderly persons of health care completely.  This is the part of the Republican program that is most unpopular among the Tea Party, which is composed largely of elderly Americans, and it is the part that makes the least sense to me.  While it's easy to see why corporate interests want to reduce wages and benefits to the lowest possible point in order to accumulate more capital, it's not clear to my why anyone would like to fill the homes of younger Americans with sick and aging relatives who can't support themselves, or turn those elder Americans out into the streets.

Another implication of his ideas which Piketty says almost nothing about relates to the financialization of the American and British economies.  The financial industry, it seems to me, is by definition the most capital-intensive activity in our society.   It handles enormous amounts of money while employing very few people.  As such, to the extent that it is profitable--and it is--it exacerbates the fundamental trend around which Piketty built his book: the way in which the accumulation of capital occurs at the expense of economic growth.  Tears nearly come to my eyes when I recall that Larry Rubin and Larry Summers talked Bill Clinton into deregulating the financial industry in order to allow Wall Street to compete globally with other financial markets.  From the standpoint of the future of the American economy, that was perhaps the worst thing they could have done.  The nation that hosts the largest financial firms is not doing its people any favor.

There is, in short, no reason at all to assume that the course we are on will lead to better things--on the contrary.  There is even less reason to see why Republicans would want to make things even worse--but that is what their platform would do.  Yet there is another critical dimension to Piketty's book.  Things have been somewhat different. Capital has shrunk relative to income, incomes have become more equal (partly, but not wholly, with the help of taxation), and economic growth has been much higher than it has now.  In succeeding weeks I shall give you my own analysis of why that was so from the 1930s through the 1970s, and what it would take to bring a similar era back again.



Mourned_Cause said...

I am looking forward to your intrepretation to come....


Literally. Only when human civilization was given the choice of Uncle Joe, did the regimes finally agree to fix themselves.

In another timeline, we could have all been living under Communism had FDR failed to reform the US.

You've read my arguments before; more importantly they have total basis in the period we live in, while the "Non-violent" era has created the failed states of India and Pakistan, Russia, South Africa, Egypt.

No more "serious people" stuff. Any kind of political knowledge that was based after Woodstock is long useless.

You want to know what this game turns to...

Rand already figured out in 1953.

For instance, was the Red Scare also the period of high levels of Trade Unionism?

Because the GI generation knew that Trade Unionism was the ultimate anti-communist measure.

Don't believe me, read this declassified document. You'll be glad to just grab the bull by the horn on this one.

Unknown said...

I just read coincidentally an article, unfortunately in German, which states that The oligarchs took over in Russia, paying no taxes or wages during the Yeltsin years, living off the fat built up by the society in soviet times. This resulted in a collapse as the state had no income and in 1998 Russia defaulted. "Mr. Nobody", Putin was put in place as a compromise candidate who promised to assert "dictatorship of law" to stop the fight between billionaires who had taken all the money in privatization. Putin enforced taxes, payment of wages, arrested or forced out criminals. This stopped a new revolution. In the Ukraine the country kept going down the same old path and has now had a revolution but the Oligarchs have financed one side which one the revolution (and purged moderate forces from Maidan- socialist types) and are imposing IMF rule and taking over all the governorships and getting into presidency and getting fascist military to control the people.

(Google Translate perhaps fro article if you cannot read German)

My conclusions from article and Pikety are this:

This is the old Banana republic latin american/African concept leading to extreme poverty and several super rich with foreign bank accounts. America is going in the direction of Ukraine. Russia and hopefully EU and Japan will not go this way. The terms of the bailout of Greece and other southern EU countries leaves doubt on this however. The Eastern Ukrainians don't want fascist murderers and oligarchs ruling them and are revolting. Putin promises rule of law regarding wage payment, taxation of rich and ethnicity(no pogroms- multiethnic and multireligion state).

PJ Cats said...

Dear Mr Kaiser,

thank you very much for this thorough and critical review of such an important book. I'm lucky to live in Europe, where I can make a living working three days a week and enjoying all kinds of social benefits, such as universal health care, unemployment benefits, holidays, fine infrastructure, hospitals, education, public transportation, housing and on and on. Life is good here. Still, it will get relatively worse, as we are all under the spell of economics a la Friedman. What an impact that man had! Germany is already quite bad, having abandoned the minimum wage, people working two or three jobs to get by. These same people let themselves be distracted into voting for stupid one-issue or populist parties that claim to have the magic wand that will make their lives perfect in a single stroke. Too bad. I look very much forward to your upcoming posts, as I said, I see no solutions, only trouble ahead. Your remarks about entitlements reminded me once again of the situation in France before the French Revolution. I really wouldn't want to go that way. Anyhow, I'm off for a 700 km ride to my girlfriend in Germany. What a life! Thank you again.

David Kaiser said...

Thank you all. Mr. Young, I opened the Rand report and it does look very interesting. But you are anticipating my comments: it is horrifying that it took two world wars to create a relatively just society. The example of Rome may be quite relevant here--their major achievements collapsed pretty quickly but they did have a long-term legacy.

Bozon said...


Wonderful summary of this part.

My library has not yet gotten a copy.

Re this part of his thesis:
"Capital is accumulated more rapidly when economic growth is slow, and thus, it is in the interests of capitalists to keep it slow...",

I have my doubts, and see also my comment on my site. I think that if other parameters were chosen than a more or less globalized one, a very different conclusion might be reached.

While one can see, for example, that the mortgage backed security debacle inured, relatively, to the benefit of banks, they also lost capital in the endeavor as well.

The world Wars may be the best example, but this profoundly shifted relative political and economic power, almost over night, to the United States, almost by accident.

Many thanks for this series of efforts.

all the best,

JEFF said...

A small point....

US per capita income is closer to $28,300 (2012) than $52,000. You're confusing average compensation with per capita. Non workers are, obviously, included in the per capita.

Mourned_Cause said...

Professor Kaiser,

One of the reasons why you are my authority figures is because you have access to knowledge which contains insight to the future because its rhyems from the past. passion; I'm the one whose going to have to swim in this crap.

I have some extremely useful observations to share, if you wish further.

1. Remember Vandalia, and how they held off Islam? Or how the Gothland spurned Christianity? Or how the Huns controlled Europe for the past thousand years.

Nope. All of the Ethnic groups that brought down the Roman Empire went extinct too, due to general ineptness once the pillaging stopped.

If you follow the emergence of the French, Spanish, and Italian cultures, you will find that they are neatly based on bastardized Latin translations of the Bible.

Ideology seems to make Ethnicity, rather then the other way around. (Come on, haven't you read Harry Turtledove)

How that turns out in the information age, I am clueless, to be honest.

But to be really frank, a place like Detroit, LA, or the Deep South won't survive against an outside ideological force dedicated to "Convert or Die."

2. How did this happen? Honestly. Not for any profound reason.

Successive generations of extremely high extrinsic values are inept at politics, which leads to societal breakdown, followed by their genocide.

*Warning. Prepare for whiplash*

So how does it happen that you have a group of highly similar people breakdown to Anarchy at an Anarchist convention...pardon the pun.

I am a Communication scholar, and a person's capacity to deal with uncertainty is related to their level of intrinsic values; for instance, when your intrinsic values drop to an extreme, you start to develop PTSD or standard "Freud stuff."

However, if they are very high, you become a Narcissist, and a different kind of Sociopath.

As a result, everything you hate about your generation, is actually at a much greater proportion in my generation...

...its a run away death spiral, where it goes up to where Civilization breaks down, and then only a small fraction of Authoritarian people manage to survive, by "culling" the herd. (Remember, the Qin Dynasty was originally a small military family.)

How do you get a confidence death trap? Decadence.

You and I know this, (especially since you were the one who taught me.) However, we didn't have any philosophers explain this phenomenon, and Calhoun wasn't very bright in abstract thinking, so we were "caught off guard" when the things hit the fan.

Again. This is horrible. But again.

1. The rats developed Narcissism
2. The rats stopped reproducing
3. The rats stopped taking care of their young.
4. The male rats feminized, and then became a "second feminine gender." (Collectively, this men have had more sex then probably the "prime" Kennedys.)

Again. The theory is very abstract, but data can be produced with validity when it is tested by doing alternate maze compositions.

Mourned_Cause said...

3. The reason why we haven't created an alternative to Capitalism is because, to be frank, without an Authority, even if we knew of a solution, would it really matter to begin with? 4. Expect Liberty and Freedom to die in the same way we had forgotten Virtue and Roman Freedom. I may be one of the few people on the planet who could tell you Roman Ideology, but only because I threw myself at it by studying Roman Politics and by the sheer chance someone queued me to Tacitus and Cato. (Deep understanding of Cato was essential.)

Goes like: "We must suffer, to make ourselves stronger (virtue), and let go of things we never survive, so that we can be Free from them. (freedom)."

With a philosophy like that, no wonder they conquered nearly the whole known world

But...good luck getting poli sci Grade student to even show INTEREST in such a thing, let alone understand that. He has the mind to, but the maturity of a child, so he won't.

Nevertheless, I think the work of the Enlightenment will be reconstructed in something similar in function, but different in content.

5. Climate Change will "reshuffle" the geopolitical deck...but not in ways we may understand. Furthermore, the two countries in the best position, Canada and Russia, are significantly too inept to defend themselves when the sh-t hits the fan. Canada and Australia I particularly worry about, because their total lack of adversity in life has literally made them conquest bait.

6. To be honest, this is a normal cycle in history; nuclear war wasn't though. I keep that in mind when I dwell on this.

Whatever that is worth, thank you for writing your blog. It brought piece to my mind; along with

Slavoj Zizek

The Last Psychiatrist.

Mourned_Cause said...


On point 2, I think I botched the explanation.

High Intrinsic values allow you to function politically (hence, the lamentations for Authority in your blog) while High Extrinsic values destroy your capacity for politics (hence, the emergjavascript:void(0)ence of the 60's consensus.)

Intrinsic and Extrinsic values operate on a scale; like PH balance. (So when I said, when Intrinsic values "drop," I meant it as PH level dropping.)

Finally. Extremely low Intrinsic values create highly alturistic people, but also allow for extreme levels of violence.

Extremely high Extrinsic values creates extreme selfishness, and in ability to function in day to day life.

Generally, the sweet spot is like 5-10 on the NPI scale, where as anything above 20 ruins the person's ability to function.

Finally, one of the things that the Economics discipline "hid" from the world was that Coercion is essential to trigger altruism in humans.

If you had an economic "game" and a dictator who oversaw the game, altruism increased to around 90%.

Remove the dictator, altruism drops to 20%.

Make what you will of that too....

wmmbb said...

"Australasia" - very erudite professor, but do your readers know which two countries are referenced?
Perhaps, I under estimate them.