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Friday, May 30, 2014

The Emerging New World

In the 1990s, an historian turned political scientist named Marc Trachtenberg remarked that we were going to miss the Cold War.  He could not have foreseen the events of the last 25 years in any detail, but boadly speaking, he was right.

The Cold War from 1947 to 1989 was, I would suggest, the climax of the development of western civilization since at least the 18th century.  Spurred by population growth, economic growth, technological progress and the Enlightenment, states had developed unprecedented power.  They clashed during the two world wars, and two offshoots of the Enlightenment emerged victorious.  One was the liberal capitalist vision of Franklin Roosevelt and the New Deal, the other the totalitarian Communism of Stalin's Russia.  During the years after 1947 most (but not all) of the world adopted some form of one or the other of the two philosophies, one of which, it was believed on both sides, would eventually triumph.  The competition between the two sides was political as well as economic and military, and the US, in particular, gave critical help to the nations of western Europe and the Far East to allow them to progress along lines similar to the United States.

The Cold War included many frightening moments, including 1950,. when the West saw the Korean War as the prelude to an attack upon Western Europe; the Taiwan Straits crises of 1954 and 1958, when the US was prepared to use nuclear weapons to stop a Chinese invasion of Taiwan; the prolonged Berlin crisis of 1958-61; the Cuban missile crisis of 1962; and even, we now know, the Abel-Archer NATO exercise early in the Reagan years, which the Russians interpreted as preparation for war.  But because both Washington and Moscow disposed of enormous resources, and because they both worked to strengthen the states within their spheres of influence, the world was relatively stable, both internationally and within individual states.  The civil wars that took place during the Cold War era were proxy wars in which the two sides drew support from the two superpowers.

When Communism collapsed in 1989, many American policy makers and some intellectuals interpreted this to mean the triumph of liberal capitalist values and expected the world to make steady progress along the lines of American values.  Among the neoconservatives who essentially ran foreign policy during the second Bush Administration, this meant that the the United States could safely dispose of regimes that stood in its way, confident that friendly, liberal allies would replace them. One dissenting view came from Samuel Huntington, whose book, The Clash of Civilizations, predicted a series of conflicts between regions based on different political and cultural values.  He was half right--that is one feature of the world situation that is now emerging, but only one.

Today, as I write, Russia has fomented an uprising in eastern Ukraine which the Ukrainian government does not seem strong enough to put down.  (In an interesting development, a mining magnate has called out his workers against the separatists in one major Ukrainian city, and the separatists have had to back down.)  Vladimir Putin has specifically rejected the American model of "unipolarity" and is trying to expand Russian influence the former USSR, and use his oil and gas resources to build a new Asian bloc, including China, which will reject western attitudes towards intervention in other states.  Europe will have to draw a new boundary between itself and the Russian sphere of influence, giving up the dream that its own sphere would naturally keep extending eastward.  (It is not clear to me whether Eastern Europe, which lags far behind western Europe economically, will live comfortably within the EU.  I hope so.)  In the Far East, China and Vietnam are close to another armed clash (they last fought only 35 years ago) over Chinese pretensions in the South China Sea.  Japanese-Chinese tensions are rising  The Middle East is the scene of a prolonged religious war.  (I intend to comment at greater length some time on this excellent New Yorker article by Dexter Filkins, which shows that we have replaced Saddam Hussein with a pro-Iranian Shi'ite dictatorship, led by former terrorists, which, like Saddam, arrests, detains, tortures and rapes suspicious citizens.)  Nigeria, the largest nation in Africa, is torn by terrorism and religious conflict.  Even the United States itself is really two nations with very different values.  Red and blue states continue to deepen, not moderate, their colors.

And over all this hangs the ever-growing power of capital, of powerful economic institutions led by banks and energy companies, who everywhere now tend to hold sway over their governments.  For the last month I have been discussing the economic effects of this situation, drawing on Thomas Piketty's new book.  And while the western nations, such as the United States, have state organizations that dispose of more money than ever, most of that money now goes towards education, health care, and pensions.  Those are worthy causes, but in a world in which third world populations continue to grow relative to the rest, they do not leave sufficient resources to intervene effectively in any of the conflicts taking place around the world.  The American adventures in Iraq and Afghanistan have shown, in my opinion, that even the strongest modern state lacks the manpower and political resources to impose order upon a conflict-ridden third world nation of tens of millions of people.   One reason the American political order is in so much trouble is that we have wasted trillions of dollars on essentially futile enterprises, enterprises which did not increase confidence in the government.

John Kerry spoke at his Yale commencement in 1966 about an excess of interventionism.  The other day he spoke of an excess of isolationism.   It is true that the younger generations (which now means anyone under 53) are not showing their elders' appetite for American world power.  But more important, I think, is our inability to affect the course of events around the world, either militarily, or by offering a compelling political example at home and a vision of international affairs to which everyone can subscribe.  Franklin Roosevelt's genius, as both I in my book and my friend Nigel Hamilton in his complementary volume, The Mantle of Command, was to combine military power with moral purpose.  This we no longer seem to be able to do--largely, in my opinion, because we have lost our broader moral purpose in politics at home.

Tuesday, May 20, 2014

Piketty and the twentieth century crisis

Thomas Piketty knows where he stands in the sweep of economic and intellectual history.  In the 19th century, he shows, society accepted inequality and certain economists rationalized it in various ways.  Then came the era of the two world wars, which profoundly changed the distribution of wealth and income in all the advanced nations.  By the mid-1950s the economist Simon Kuznets was writing that capitalism had entered a new phase characterized by more equality, rather than less.  Piketty reached consciousness just as that era was coming to an end, and he has evidently spent a good deal of his adult life documenting the resurgence of inequality.  His book is an excellent example of why history has to be rewritten in every generation.  First of all, as Michael Beschloss generously recognized in his review of my new book in The New York Times, new data always remains to be discovered even on the most written-about topics.  Secondly, changes in the present change our perspective on the past.  The greatness of Roosevelt's Missionary generation becomes clear when they are compared to the current generation of Prophets, the Boom generation.

Piketty makes an overwhelming case that the period 1914-80 was very different both from what came before and from what has come after.  Because, however, he is an economist--albeit a relatively sophisticated one about history--he has a lot of trouble explaining why.  It might be better to say that he makes little real attempt to do so.  The data he presents about the period are striking.  Thus, for example (pl 196), the worldwide capital-income ratio--the ratio of accumulated assets to world economic product in a given year--fell by almost exactly half, from 500% to about 250%, from 1910 to 1950, rose quite slowly for the next twenty years, and then began accelerating much more rapidly and now once again exceeds 400%. In terms of annual income, the share of the top 1% in the US fell from 18% in 1910 to 8% in 1960, where it stayed, roughly, until 1920, after which a swift rise has taken it back to 18%.  In Britain the top 1% dropped from an even higher peak of 22% in 1910 to a lower one of 6% in 1980.  Capital suffered even more heavily from the two world wars on the continent, where inflation virtually wiped out savings, and income became more equal there before the 1980s.  It is still more equal.

The question is, why?  Piketty simply refers, again and again, to "the shocks" of the two world wars.  There's a good deal of truth to that as far as it goes, but where did those shocks come from?  Like many Europeans of his age, I suspect, Piketty regards great war as an anachronism of a bygone age, a product of obsolete values.   There is, we can hope, some truth in this, but in my opinion, both the wars and the economic policies pursued in their aftermath have to be understood in political and intellectual terms.  We can only do this with the help of some lengthy background.

When one applies Piketty to the 18th and 19th centuries, what emerges is a powerful refutation of one aspect of Marxism: Marx's idea that intellectual change always reflected economic change.  Piketty shows that the western world experienced relatively little economic change in the 18th century, and no change in the pattern of inequality--although it did experience significant population growth.  The nineteenth century experienced the industrial revolution but without any significant change in income distribution.  Yet these were centuries of intellectual and political revolution.  Traditional authority gave way to authority based on reason--whether in a new democracy like the United States, or the bureaucratic states of Europe in the first half of the 19th century.  The idea of democracy took root in the eighteenth century, and that of socialism took root in the late nineteenth.  I was very struck, reading Piketty, at how little socialists had managed to accomplish before 1914 with respect to income distribution, but they had become a  significant political force at the ballot box in many European countries, including Germany, where the Social Democrats became the largest party in the Reichstag in 1912. Many thinking people, as well as much of the lower three quarters of the population, understood that inequality was much too vast.  In the United States Theodore Roosevelt and Woodrow Wilson took a similar line, although their initial steps were also extremely tentative and not effective.

Meanwhile, nationalism had redrawn the map of western and southern Europe during the 19th century.  Because of German expansionism, a crisis in the Balkans between Austria-Hungary and Serbia turned into a global struggle for world domination.  That forced every major government to mobilize its people and resources to fight on a scale not seen since the Napoleonic Wars, if then.  Because France and Germany both borrowed to pay for the war and counted on indemnities from defeated states to make their debts good, the war drastically cut the value of their currencies, and thus, their capital.  Meanwhile, both Britain and the United States imposed serious progressive income taxes.  With European soldiers dying by the hundreds of thousands and millions, the idea that sacrifices must be broadly shared was inescapable.  In addition, labor exploited its position within the war effort to make significant gains, especially in Germany.

Another huge political shock hit Europe late in 1917: the Bolshevik Revolution.  The Russian state had collapsed under the weight of the war, and revolutionary socialists seized power and won a protracted civil war. As Piketty notes, they repudiated the enormous debts of the imperial government, dealing a heavy blow to British and French rentiers.  But they also frightened many people in the west about the consequences of laissez-faire capitalism.

After a modest recovery in the 1920s, an excess of unregulated speculation in the United States, combined with structural problems growing out of the war, triggered the Great Depression.  The United States government and the German government reacted strongly to it, perhaps because they were the hardest hit.  In 1932 Herbert Hoover signed a new tax bill raising the top marginal tax rate to 65%.  (Piketty mistakenly attributes this increase to FDR, who did raise the rate still further in 1936 and again during the war, when it topped 90%.)  In Germany the depression created a complete political collapse and led to the advent of Adolf Hitler.  It is easy to forget not only that Hitler put an end to unemployment in Germany with a combination of public works projects and rearmament, but that he also began to implement a vision of a good life for every German, complete with paid holidays and Volkswagens.  But partly because he was destined to lose the war, his legacy did not endure.  Roosevelt's did.

As I show at length in my new book, Roosevelt based the New Deal on a new set of values.  As he said in his first inaugural, a relentless pursuit of private wealth had landed the United States in a catastrophic economic situation, and only new values could get us back on the right track.  Equally importantly, he and his advisers specifically believed it necessary to transfer incomes from the wealthy, who would simply accumulate them, to farmers and workers who would spend money and promote recovery.  He did so partly by undertaking a series of gigantic public works projects.  He also took steps to create what Piketty calls the modern social state, signing Social Security in 1935 and also guaranteeing the rights of labor to organize.  (Germany and Britain, to be fair, had instituted forms of social security in the 1880s and early 1910s, respectively.)  And when the world crisis became critical beginning in 1937, Roosevelt defined a new contest of values between the U.S. and other democracies, standing for the rule of international law, and dictator powers who were plunging the world into international anarchy.  In 1940-1 he took steps to insure that the US would throw its full industrial weight into the scales.  By then the world war had engulfed nearly every major nation.

Two sweeping historical changes, I would argue, transformed both economics and politics in the advanced nations.  On the one hand, the world wars forced them into an unprecedented mobilization of their resources which was bound to have a greater effect upon those who had resources--the rich--than those who did not.  At the same time, especially in the victorious nations of Britain and the US, the working classes took advantage of the mobilization to make large gains and strengthen their unions.  On the other hand, the ideas of socialism (in Britain) and regulated capitalism (in the US) became mainstream ideas.  Lastly, the threat of totalitarian revolution never left the consciousness of the generation born in the first quarter of the twentieth century, which in the United States held power into the 1980s and even later.  Piketty believes that economic growth increased in the postwar period simply to make up for the losses during the war.  There is certainly a good deal of truth in this in Europe--but not in the United States.  I believe it increased partly because of the huge increase in the birth rate--the demographic baby boom--and partly because, to put it bluntly, economic growth was the principal focus of domestic public policy.

That was not all.  European Communist parties were strengthened by the war, and the United States became involved in a worldwide cold war with the Soviet Union.  Those developments convinced both center-left and even conservative parties that they had to make real improvements in the lives of ordinary citizens to win national and political competitions, and they did so.  German workers became full partners in their industrial enterprises.  The British, French, and West German governments all nationalized large sectors of their economies, meaning that these sectors would now accumulate public, not private, capital.  The social state grew all over the western world.

One particular example suggests that Piketty is indeed exaggerating the impact of the world wars, relative to independent political and intellectual change.   The relatively small nation of Sweden, Piketty shows, has gone through the same stages in the last 120 years as all the major western European countries.  It was very bit as unequal in income and wealth around 1900, became the most egalitarian nation in Europe in the mid-century decades, and in the last thirty years has been moving steadily in the other direction (although it is still far more equal than the United States or Britain.)  But Sweden took absolutely no part in either world war.  I do not know exactly how or why all this was accomplished there, and Piketty doesn't seem to either, but it certainly suggests that the war was not necessarily critical to the creation of the relatively egalitarian era in which I grew up.

What I am suggesting is that we do, in fact, know how to moderate or reverse the trends that Piketty is so concerned about.  We can do so, as we once did, by mobilizing our societies on behalf of a large and expensive public goal.  I am not suggesting that we need to unleash a new series of world or large-scale regional wars--far from it.  The crises in Ukraine and the South China Sea do suggest that we are heading for a more conflict-rich environment, even among major nations, but I do not expect them to become full-blown wars--and that will be a good thing.  There is, however, no lack of expensive projects to undertake.  The infrastructure of the United States is in many ways second-rate and desperately needs repair.  Lots of evidence suggests that the use of the automobile has peaked and that we need other forms of transportation.  Last, but hardly least, a real commitment to cleaner energy and a reduction of fossil fuels could be a huge project, and a good one as well.

Another interesting problem concerns birth rates.  Piketty says again and again that higher birth rates fuel economic growth, as they did in the US, especially, from the 1940s through the 1970s.  (Oddly, Piketty at one point talks as if the baby boom of the late 1940s included Europe as well. It did not--European birth rates, including French ones, remained low until the late 1950s.)  He also says that continuing US population growth, mainly through immigration, is the only reason that US GDP is growing faster than European GDP. But he does not dare call for policies to encourage more children in the west.  The trend is obviously in the other direction, especially among the upper half of the population, and I think it would be beneficial for it to increase.  The social and cultural changes of the last few decades, however, all tell in the opposite direction.

To undertake such projects, we need to recover the idea of common national enterprise and of the government as the steward of the economy and society.  We also need another rebirth of new values.  It may take a long time for these things to happen, and the men and women who might implement such changes may not yet be born.  Yet history shows that it could be done.  With the proper political will, nations can overcome capitalism's natural trend towards inequality--a trend which thanks to Piketty has become impossible to deny, but which, history shows, can also be reversed, given the proper inspiration and the proper political will.

Friday, May 16, 2014

Dr. Piketty's Prescriptions

This is the third of what I think will turn out to be four posts on Capital in the Twenty-First Century, and it will deal with Piketty's specific policy prescriptions.  The fourth one will appear late next week, when I'll be on vacation, and it is probably the most important one I will have to contribute to the general discussion of the book.  It will deal in some detail with the period 1914-1980 (and more especially 1933-1980) when,. as Piketty agrees, things were different--and it will ask why.

I cannot begin, by the way, without making a generational point.  When Generations and The Fourth Turning came out, I took the lead in applying their insights to Europe.  Strauss and Howe had simply assumed that Europe was on virtually the same identical cycle as the United States.  I thought that was broadly true, but that the last crisis, in particular, had begun later in Britain and France than in the US, and that it had lasted longer.  Britain had remade itself economically and socially in 1945-51, not 1933-41 as in the US.  France's political crisis, it seemed to me, had not reached its climax until 1958-62, when de Gaulle returned to power, left Algeria, and had to face down a series of military coups and create a new constitutional framework that has lasted until this day.  At one time I thought the French crisis might in fact have lasted until 1968, but I had decided, until I read Piketty, that I might have gone too far with that date.  Now, thanks to him, I think I might have been right the first time: 1968, it turns out, was a lot more than a student revolt, it was a key year in French economic and social history as well, after which wages began to rise.

But I am more convinced that I was right for another reason: Thomas Piketty himself.  He was born in France in 1971, meaning that his American contemporaries would be Gen Xers, of the Nomad archetype, but he very clearly is not.  He is a Prophet, like a Baby Boomer.  He is fascinated by the long-term movement of history, and by general principles.  He has spent years putting together an amazingly complete picture of worldwide economic growth, and he has a strong sense of what is wrong and what should be done about it.  I am glad that French academic life--unlike American academic life--can still produce, and reward, such a thinker.  Now, on to how he hopes to change the world.

Piketty's specific proposals have to be understood in terms of his view of the world.  Although he is deeply concerned with the rise of inequality over the last 35 years or so, he credits the twentieth century with two remarkable achievements. The first is the creation of what he calls the "patrimonial middle class," that is, the 90th to the 50th percentiles of income and wealth in most advanced countries.  In the United States that group now owns 30% of the wealth, compared to 70% for the top 10% and essentially nothing for the bottom 50%.  The second is what he calls the "social state," an advance over states in the 18th and 19th centuries, because it provides basic services for free, including health care and education, as well as pensions for all.  To be sure, the social state is considerably larger in Europe than in the United States, since it generally includes health care for all and, except in Britain, almost free higher education.  (Piketty never mentions this, but because higher education in the U.S. is increasingly financed by loans, it is yet another factor increasing the rapid accumulation of capital at the expense of economic growth.)  Piketty clearly wants to preserve, if not extend, the social state, and he is also concerned, as I am, that the emerging nations of the Third World have much smaller states that do not provide such services.  His policy proposals are designed to preserve the social state as well as to attack inequality directly.

His first proposal is to return top marginal income tax rates to 80%, which he would apply to incomes of either half a million or a million dollars a year in the U.S., and corresponding incomes in Europe and Japan.  This is not in the least unprecedented. Both the United States and Britain imposed higher rates in the mid-century decades, and US occupation authorities also imposed such rates in Germany and Japan after the war.  What is rather fascinating, however, is why Piketty wants to do this.  He does not claim that an 80% rate would bring in a great deal of revenue--far from it.  In the United States, he thinks marginal rates would also have to be raised on those making $200-500,000 or so as well to pay for a more generous social state.  But he thinks, and I agree, that the 80% top rate would transform our salary structure, for the simple reason that it would make it absurd to pay salaries of millions or tens of millions a year annually to anyone, since 80% of them would go straight into the coffers of the federal government.  Executive salaries are high, he claims, because executives themselves set them and their directors and shareholders rarely protest. That would immediately change if most of them were going to taxes.

I think that Piketty is right about this, but I think the consequences could easily be far more beneficial than even he imagines.  The American and world economies have been transformed over the last thirty years--and especially since the 1990s--by hedge fund managers and private equity firms, who pay very high compensation.  If such compensation were no longer available, it seems to me that that sector of the economy would rapidly shrink, which would be a very good thing.  As it is, our current economic system and our elite institutions of higher learning seem designed to funnel a high percentage of our smartest young men and women into businesses that specialize in the pure accumulation of capital.  That simply has to be connected to the rapid growth in the capital-income ratio which is at the heart of Piketty's whole analysis.  Indeed,. if salaries were capped in that way, well educated people might rediscover some of the real joys of life, including being more useful to their fellow citizens, since they would be more or less forced to make the pursuit of unlimited wealth the focus of all their attention.  That, as I shall show next week, is what Franklin Roosevelt called upon  Americans to do in March 1933, and he persuaded many of them to do so.

Piketty's second proposal is the one that has gotten even more attention, largely, I would suggest, because the right wing sees it as easier to attack. He wants a progressive tax on all capital assets.  Ideally, he argues--speaking as  Prophet--the tax should be global, but he recognizes that to be a utopian project, and he would be more than happy to begin in the European Union, the United States, and Japan.  He has in mind a rate of 0% for fortunes below 1 million euros (about $1.4 million), 1% on fortunes between one and five million euros, and 2% for fortunes over five million euros.  He suggests that it might be better to have an even higher rate of 5-10% on fortunes of over one billion euros, and an even lower rate--perhaps half a per cent--on more modest fortunes of 200,000-1,000,000 euros.

Piketty wants to levy these taxes annually, which sounds confiscatory, until one remembers that capital is still returning 4-5% a year in the long run, and, crucially, that the largest fortunes tend to grow considerably more rapidly than that.  (It is not clear, and I think this is a legitimate question to raise, what plans he might have for existing American capital gains taxes.  These are much lower than they used to be, but they are still higher than any corresponding taxes in Europe.)  He makes very clear, however, that an additional step is needed before any of this can be done.  The world, including the small nations of Switzerland, Austria, and certain third world nations who serve as tax havens, must be forced to accept new reporting requirements on bank deposits, capital income, and other forms of assets.  Under current conditions, he makes clear, this tax could not possibly be implemented effectively because so much income is hidden.  The scale of the problem is staggering.  To cite just one of his examples (p. 466), the rich countries of Europe, the Americas, and Japan show in their balance sheets foreign debts totaling about 5% of annual world output--but the best estimates say that about 8% of annual world output is hidden in assets overseas. That is why, Piketty argues, the sum of the world's nations balance of payments is strongly negative.  A great deal of the accumulating capital in the world is now invisible, and it cannot be taxed until its owners are forced to disclose it. just as Americans have to do for their domestic assets.

Although Piketty may not know this, his proposals reflect the thinking of a 19th-century American economic theorist, now forgotten, named Henry George.  Having seen a land boom in the San Francisco area first hand, George argued that when the value of a property increased fivefold in a few years, the owner had not created this extra wealth--the growth of the economy had created it.  He therefore proposed a high tax on land values, especially unused land.  Piketty, it seems to me, is saying essentially the same thing: that too few people are monopolizing the extra wealth which everyone has helped to create.

A capital tax, Piketty argues, is by far the best way to deal with the sovereign debt crises in Europe and the lesser debt problem in the United States.  (The extent of our debt problem, as I have mentioned repeatedly here, is much exaggerated; the debt we have to worry about is only about half of the reported figure, which is about 100% of GDP.)  Trying to solve the problem through austerity will hurt the social state and further enrich holders of capital, making the inequality problem even worse.  That is almost surely why austerity is so popular in the financial community, even though everyone knows that it hurts economic growth.

It is much too soon to know how much traction Piketty's ideas will get within the political systems of advanced countries.  Piketty knows politics are important, but he devotes relatively little attention to them.  The question of whether such ideas can be implemented raises the most interesting historical question of why they were implemented, in various ways, in the decades around the middle of the twentieth century, and whether that experience could be repeated.  That is one question, if I may say so, where I think I am better informed that Piketty, and that will be the subject of next week's post.

Thursday, May 15, 2014

Review of No End Save Victory

   The New York Times review of No End Save Victory, by Michael Beschloss, is now on line at:
Michael Beschloss reviews No End Save Victory for Sunday's NY Times:


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.


Friday, May 02, 2014

Capitalism and its discontents

The intellectual world is buzzing over Thomas Piketty's book, Capital in the Twenty-First Century,, and I participated in this on-air discussion of it the other night.   To date I have read about a quarter of it systematically, as well as some key passages later in the book.  Since it is relatively fresh in my mind, I shall share some of my first impressions now, while promising to delve a good deal more deeply into it in subsequent posts.

Piketty certainly deserves congratulations for undertaking and completing this book, and French academia deserves credit for producing and rewarding him in the first place.  Capital  in the Twenty-First Century involves a very thorough survey of the economic development of the world's leading nations over the last three centuries.  Britain and France receive the most attention, partly because they left behind the most historical data on the eighteenth and nineteenth century, but the US, Germany, and other countries get a good long look as well.  Being one of the few historians who has attempted anything of comparable scope, I know how rare such people are, and they are even more rare among economists.  In a rather striking passage in his introduction, Piketty explains that after earning his doctorate at a very early age, he worked for three years in an American economics department near Boston.  (He is too discreet to identify it as MIT.)  He abandoned that career track because his American colleagues were too obsessed with mathematics to the exclusion of all else--and not, in most cases, with numbers drawn from history either.   Beginning at the beginning and going on to the end, he has managed to write an absorbing study of the rise and fall of capital and economic growth over the last three centuries, and in some respects for even longer, although it's a basic point of his that that there was extraordinarily little economic growth, or growth in per capita income at any rate, before the industrial revolution.  He also repeatedly points out that about 2/3 of what we normally call economic growth is really just population growth--not growth in per capita income, which has averaged 1-2% in advanced countries for a long time.  Unlike most economics, Piketty understands that history and politics matter--although as I hope to show in a later post, I personally think that they matter even more than he does.

Piketty's basic point, of course, is that inequality has been increasing rapidly in all advanced countries for the last 35 years or so.  But the mechanism he focuses on is a fascinating one.  The return on capital, he stresses from the start, has been growing more rapidly than the economy as a whole in all advanced nations.  I have to confess that I was stunned the first time I read that, because I did not see how it could be true over the long run.  But then, with the help of my wife, whose more traditional left wing views came in handy on this occasion, I realized that this was only another way of saying something we've all known for some time: that the richest few percent of our society has been soaking up all the economic gains that society as a whole has been making.  Wages are essentially stagnant; the return on capital is not.  And that, Piketty argues, is making our societies more and more like those of 19th century Britain and France, where a rentier class, repeatedly portrayed by Jane Austen and Honore de Balzac, dominated society and the economy, and when economic growth was very slow.

Pikety lays a great deal of stress on the concept of national wealth, the total of assets held by a given country.  I well remember my section man in Economics 1 in 1965-6 telling us that national wealth "used to be thought of as very important," but that was the only mention it got. In those days macroeconomics focused relentlessly on GNP, now more commonly termed GNP, and its growth.  That, I can see now, was because we were living at the end of the most egalitarian decades of the modern era, from the 1930s through the early 1960s.  That, Piketty shows, is when the share of capital, relative to GDP, fell to its lowest level in modern recorded history, thanks in part to the losses suffered in the depression and the two world wars.  Yet there was another reason, one that he has not yet treated at any length in the sections I have read.  In that expansionist era--and particularly from the time of the Second World War onward--capital flowed relentlessly into industry, where it was transformed into economic growth.  A good deal of it flowed into industry through governments, which financed arms, roads, bridges, dams, and much more.  A growing population, especially in the United States, also insured a robust level of economic growth.  Piketty makes clear that a decline in the role of capital within the economy went with it.

I shall save Piketty's policy prescriptions, which include both a tax on capital and 80% marginal tax rates, for later.  Right now I shall simply pose another critical question.  Do the holders of capital--megabanks, energy concerns, hedge fund managers, and all the rest--understand that higher levels of economic growth would work to their disadvantage?  Is that why conservative economic interests want economic austerity, not expansion, despite our low-wage economy and high unemployment?  In the radio discussion that I linked above,. Mark Blyth suggested that today's rich live in a privatized society featuring their own gated communities, private schools, and top-level colleges and universities, and therefore take no interest in how the rest of the population lives.  It would be even more damaging if they used their economic power to ensure macroeconomic policies that favored them at the expense of the rest of us.  I hope that this becomes part of the debate that Piketty has inspired.

Stay tuned for more analysis of an extremely important, although sometimes erratic, book.