This Economist article points out some of the many small academic works that quibble over details with Piketty and Saez. But that's not anything new. The major points of their work, and especially of Piketty's monumental _Capital for the 21st century_ still stand: that capital is a positive feedback loop in a way that labor is not; that mid-20th-century laws that put brakes on this feedback loop have been removed; that a variety of data sources are confirming growing inequality and market capture particularly in the UK and US; and that the only reasonable solution for this is a tax on owned capital (not on income or cap gains) and the political chances of this happening are slim, etc.
And in the end this article is another one in their house style: not particularly informative in the details, they're not arguing openly or forcefully against Piketty, but instead bring up enough different nitpicky papers that it starts sowing doubt in the mind of a reader who hasn't actually read the book.
But then again The Economist has had it out for Piketty (and Saez) for a long time now, they very clearly hate Piketty's Capital and keep sniping at it, but can't stop themselves from bringing it up all the time. :)
At least they are very open about their biases: they promote a view that the solution to all ills is lower taxes and less regulation. However, Piketty's analysis and proposed solution directly contradicts that.
>that mid-20th-century laws that put brakes on this feedback loop have been removed;
I don't believe that the purpose of mid-20th-century laws was to promote equality. Things were more equal then because: a) World Wars I & II destroyed huge amounts of capital, and b) fighting wars requires lots of money which requires raising taxes on people who can pay, since borrowing cannot fully fund general wars.
Economics are cyclical in the sense that in normal times people with power and wealth accumulate more power and wealth. Then a general period of war/revolution/epidemic/famine breaks out which disrupts power relationships and consumes wealth. This is the pattern in Europe since the 1300s and it also applies to dynastic changes in other societies, such as China.
The two positions are not mutually exclusive: massive economic disruption allows laws intended to promote equality to suddenly succeed. Likely WWI & II made politically impossible things suddenly possible. For example, FDR's attempts at Keynesian intervention were either timid or blocked (like the National Recovery Act). During the war taxes could be used to massively raise employment (albeit making weapons) and prime the pumps for the post war era.
And it is difficult to identify the motivation behind every piece of legislation but the Roosevelt administration, Beveridge, LBJ and others often acted with the clear intent of creating greater equality. And, as I think you point out, did things that would have been impossible before the wars.
The huge reduction in the XXth century was due to many factors.
You start in the XIXth century with the development of Anarchism, which, to oversimplify, spawned various movements such as democratic socialism or communism on the political side, but also syndicalism (anarcho-syndicalism). The appearance of these forces started to change/influence things even before WWI with a few laws regulating working conditions (ex: 6 days week in 1906 in France voted after the Courrières mine disaster, or in Germany with a basic form of social security put in place in the 1880ies).
The two World Wars, and specially the various states (France, UK, Germany Russia) defaulting on their debts (either through inflation or complete un-acknowledgment of the debt) basically killed the rentiers (previously it was really nice for them, 5%, with an economic growth of 1 to 2% and practically not inflation).
The rise of the legitimacy of the State also helped a lot. This is due to the rise of Nationalism, the efforts of various states to build a common identity, and also the technological developments which permitted for a state to reach every corner of its population (transport and communication). This lead to the legitimacy of states to raise taxes which would have caused revolts previously.
WWI and specially WWII also shifted mentalities hugely, it's quite interesting that countries either monetarily or literally in ruins created Social Security systems.
Lastly the degree of technological development and its progressive deployment between 1820 and 1980 (in Europe and North America) hugely improved material condition for most people. The equation is a bit different when you are past 80% of the economy being subsistence farming.
Yes, some past events did change wealth distribution (the Plague for example), but a change on that scale is not something ever seen before in History, the XXth was pretty exceptional in that regard.
Between the Plague and WW I&II there was the Reformation and following religious wars until the Peace of Augsburg, The Thirty Years War, and the French Revolution/Napoleonic Wars. These were periods of major conflict that leveled European societies. Other wars were limited in geographic scope and/or in their objectives and means used.
That’s definitely not the case in Europe. Socialist movements were on the verge of power in many countries before WWII, and actually ruled or heavily conditioned the political life all over the continent until the end of the Cold War. The war effort had been dealt with by the early ‘50s at the latest; the following 40 years were dominated by the fight for social and economic equality.
The war “helped” only in the sense that it often acted as a selection for the political classes in the following 20 years or so, in some cases literally (Italy and France).
Socialism gained only after World War I disrupted incumbent powers and wealth. World Wars I and II really need to be considered as a unit. War continued into the '20s in Eastern Europe and then resumes in 1936 in Spain. See "War of the World" by Niall Ferguson.
Socialism was not that strong before WW I destroyed the power structures of the German, Russian, Austro-Hungarian, and Ottoman Empires. The resumption of war in World War II destroyed the Japanese and Chinese Empires and enervated the British and French sufficiently that the British and French Empires dissolved after the war.
> I don't believe that the purpose of mid-20th-century laws was to promote equality.
They were rather explicitly a response to the conditions of the lower classes in a capitalist (in the relatively pure sense that was dominant before the rise of the modern mixed economy through the policies under discussion) economy.
it seems odd to dismiss papers that challenges Piketty's and Saez's conclusions as nitpicky. in complex systems the devil is most often in the details. and not only that, but the sort of project that Piketty took on has many potential methodological pitfalls. so, small details could actually mean a given premise or conclusion is invalid. how would you suggest someone go about assessing whether a paper is nitpicky vs something that should be taken seriously?
note that i'm not taking a position on the conclusions of Piketty and Saez, just pointing out that re-stating their claims does not say anything about the papers that argue against them and calling such papers nitpicky seems like a particularly weak critique in this instance.
> note that i'm not taking a position on the conclusions of Piketty and Saez, just pointing out that re-stating their claims does not say anything about the papers that argue against them and calling such papers nitpicky seems like a particularly weak critique in this instance.
There's another angle: in a general-interest publication like the Economist, over-emphasizing nit-picky flaws that fail to effect the core arguments of a work can have the effect of giving general-interest readers the impression the work has more serious flaws than it actually has.
I'm fairly well acquainted with the literature on this topic, and I think the opposite; the fact that most people don't understand why these "nitpicks" actually seriously undermine the premise and totally butcher the prescriptive suggestions makes it easy for readers to dismiss the criticism, especially in a general-interest publication. While there's a contrary effect for the skimming reader who just accepts that P&S' work is flawed without understanding it, I think that tends to be a much lower risk with the Economist audience.
> I'm fairly well acquainted with the literature on this topic
How so, exactly?
> and I think the opposite; the fact that most people don't understand why these "nitpicks" actually seriously undermine the premise and totally butcher the prescriptive suggestions
Personally, I'm inclined to withhold judgement until the dust settles, yay or nay. The topic is technically difficult, and there are a lot of actors with political interests in the outcome of the discussion that muddy the waters.
My biggest problem with Piketty & Saez's work is that it made pretty major economic policy prescriptions based on a model that was so simplistic that the result was borderline click-bait. And the end-result is that assertions have entered the political discourse ("the middle class's standard of living has been stagnant since the 1970s") that just aren't true.
Let's unpack that. If you want to quantify the middle class's standard of living, you have to look at:
1) Post-tax income.
2) Prices/product quality/
3) Benefits/services.
4) The characteristics of the middle class (age, race, immigration status, household size, etc).
Piketty & Saez look at pre-tax income, apparently only because it's easy to assess via tax receipts. That overlooks data that's highly relevant to addressing deep and substantial policy questions. For example, consider what would happen if the U.S. and Mexico merged. Immediately afterward, median income in the U.S. would drop significantly. But nobody's standard of living would change. I.e. looking at the "median" fails to account for changes in who comprises the median. In the U.S. the immigrant share of the population has almost tripled from 1970 to 2017. Even if you've got a great economy that's good at integrating people and equalizing their incomes over time, it's probably not realistic to expect first generation immigrants as a group to have the same income as native born people. Looking at just pre-tax incomes completely masks that effect.
Similarly, marriage rates and household sizes are down significantly since 1970. Married couples make significantly more money than non-married individuals. The median marired couple in Michigan has an income of $80,000, which is 45% higher than the combined income of the median single woman and median single man: https://www.mlive.com/news/2017/09/michigans_median_income_i.... Looking at pre-tax household income overlooks that effect entirely.
There's a story in here somewhere. But Piketty and Saez's analysis doesn't actually tell us anything.
Okay, but it’s not quite true that ‘nobody’s standard of living would change.’
Cartels would be free to cross the border and operate in the U.S. (no way the U.S. could handle a sudden spike in 100,000+ Member sophisticated criminal operations), so their quality of life would increase.
The lower class in the U.S. would have even more wage competition, so theirs might decrease, etc.
Over the time period, married couples often had a single income.
Now working class married couples are just as likely to have a total of two to six jobs between them, but their real median income is still lower than it was when only one person was working.
There are no "nit picks" to debate. Refusing to acknowledge the destruction of financial stability for the working class and lower middle class in the US and certain other Western countries is simple denialism.
> Now working class married couples are just as likely to have a total of two to six jobs between them, but their real median income is still lower than it was when only one person was working
This is very much false. Look at the data. Real median income of all households had risen by a relatively small amount, because there are many more households today with one adult than in the past. However, real median income of households with two adults had rose very substantially. Similarly, real median household income of households with one adult also rose substantially. The relative stagnation of real median household income is mostly an artifact of changes in the composition of the index.
> because there are many more households today with one adult than in the past
Not only that, but we should remember that there are simply more _people_ globally. Using the U.S. as an example - when my dad was born in 1954, the U.S. population was HALF of what it is now. Should we assume that all markets and wage/labor share increase linearly AND directly (in time) with population? Certainly not.
Somewhat tangential, this population factor also plays a major role (though not the only one) for the reason city or near-city housing prices have skyrocketed - building construction just didn't keep up with the sheer population growth in many advanced economies, even more so in cities of advanced economies. This is why my buddy in Palo Alto is, for all intents and purposes, forced to live with two retirees and 4 other Millenial devs to afford rent.
The relationship is causal. Married couples are a household. Married couples consist of two people. Two people is more than one person. Two incomes is more than one income, etc. Even though all married households are not dual income, those that are shift up the mean for the rest. This is an artifact of measurement via 'household'.
You've missed rayiner's argument, which is that the household income is more than the sum of the median man and the median woman. That is: two married people make more than two single people.
There are a number of arguments you could make as to why (for example: married people tend older and so are farther in their careers), but it's not just "married households have two incomes and single households have one".
> There are a number of arguments you could make as to why (for example: married people tend older and so are farther in their careers), but it's not just "married households have two incomes and single households have one".
Sure I didn't say it was the only explanation. But it is a sufficient one to prove the relationship is causal.
Notice how your response is even less than a restatement of Piketty's thesis, just the observation that theoretically, it is possible that some papers have valid criticisms. Well yes, but which ones?
The article cites Smith, Zidar and Zwick who have tweaked Saez and Zucman's equations regarding top income growth. Assuming different weights and biases results in--surprise, slightly different outputs. But it's a matter of degree, not a reversal of direction. After a couple paragraphs of quibbling, the Economist admits as much with the conclusion: "Few dispute that wealth shares at the top have risen in America, nor that the increase is driven by fortunes at the very top, among people who really can be considered an elite. The question, instead, is by just how much."
Do you have any actual arguments or are you just trying to sow FUD? Cause you sound exactly like a concern troll. Not providing any substantial arguments against Piketty, just vaguely suggesting that there are problems with his argument, then changing the subject to what’s nitpicky or not..
Give us a concrete argument, and we can discuss if it’s nitpicky or not. What you are doing is leading people into the weeds, which only helps the people making a profit of the positive feedback loop you do not seem to want to discuss. I don’t think that’s your intention, but it is the result..
Aren’t we discussing an article which actually lays out these arguments, and references the papers with more detail? At least, I thought that’s what we were doing. Under those circumstances it seems odd to complain about a lack of such arguments having been presented.
in complex systems the devil is most often in the details
The devil is sometimes in the details, but it's not in all the details. The sun is an incredibly complex system. But you could tweak an incredibly number of small variables and yield very little noticable change. An oncoming tsunami is an incredibly complex system, but the devil is in the overall brunt of the phenomenon.
It's a valid criticism to say an argument doesn't get at the meat but merely picks at the scraps. It's easy to frame such nitpicking in a misleading way -- by pointing out so many details that are not quite right you can sow doubt in the overall conclusion. And that's the accusation that's being made about this Economist article.
> This Economist article points out some of the many small academic works that quibble over details with Piketty and Saez [...] that capital is a positive feedback loop in a way that labor is not
Well the article mentions that:
> Matthew Rognlie, now of Northwestern University, argued that the rise in America’s capital share was accounted for by growing returns to housing, not by the shares and bonds which are held disproportionately by the top 1% of American households.
So it seems that housing is really the positive feedback circuit.
Yeah the most succinct criticism of Piketty is simple: The gains in r > g are almost exclusively down to housing, not other sources, and you can fix the housing problem without touching (and potentially cocking up) the rest of the economy if you wanted to.
Instead, people want to take Piketty's conclusion, not look at where the r > g comes from, and then go on to fuss about with other things (like forms of wealth distribution, taxes, etc), instead of directly addressing the one thing that causes most of the r > g, which is housing, which does not need massive economic intervention to solve, but something entirely different (relaxing of building laws, etc).
> which does not need massive economic intervention to solve, but something entirely different (relaxing of building laws, etc).
Nitpick: you're probably thinking of directly intervening with the economy through regulations and subsidies, but isn't disrupting the housing market technically going to be a massive economic intervention in practice? As in, kind of by definition?
Also, I'm not sure if it's actually that easy to change the laws surrounding housing in such a way that pushes back against wealth accumulation.
Well, I agree on both points, but "We should tax X [and maybe redistribute Y]" is very different from "We should de-regulate or fundamentally change Z", is all.
It's hard to actually address Piketty's inequality at all if people think it spawns from something fundamentally different from land/real estate appreciation.
> I'm not sure if it's actually that easy to change the laws surrounding housing
Totally agree, but I don't mean to make any claims about how hard it would be, only that it would actually address the thing in question, whereas other interventions would not.
Couldn't we address the real estate problem by having (more) property taxes? I wonder how much impact prop 13 alone had on the problem (I also wonder how the US analysis would look with California subtracted)
Of course such taxes wouldn't automatically create housing, but it definitely disincentivizes hoarding it, and allows the state to capture more of the accrued wealth to redistribute it. It makes real estate look like a less enticing holding and would make people less entrenched in defending its value, etc.
Property taxes are higher on more developed property. In general, when you tax something more you get less of it. There might be exceptions, but wouldn't a more credible plan be to relax some of the zoning and regulation that are widely acknowledged to deter housing construction?
I suspect the answer is that there is no "the" positive feedback circuit as not only can things get messed up in many ways interactions between components can make the issue that none involved intended. A simpler comical example is medical marijuana in California.
* Federal legislature dogmatically denies a medical usage.
* State approves it for medicinal use.
* Federal regulators threatens to arrest any doctor perscribing it.
* Intended medical gatekeeping loses power
Neither party wanted that laxer level of enforcement (regardless of outcome) but together they did so.
Besides zoning laws and building codes, dodd-frank and similar financial regulation has made speculative building of single family homes nearly impossible, if you are not 100% self-financing.
Which itself is a capital feedback loop which requires a not insignificant minimum outlay to enter the market.
Basically, the government said loans are too risky to give to builders, except to build the things the government wants.
Longer version: Many people were abusing interest-only loans and similar financing. It was blamed somewhat deservingly for the 2008 crash, as banks had incentives to sell as much financing as possible and then sell-off the loans in packages to others, offloading the risk. Repackage, resell, repeat. Eventually crash.
Without getting any deeper into the politics of that, Dodd-Frank was the regulation heavy government response, part of which redefines risk levels of loans, making financing, in general, a lot harder and more expensive to get. Simultaneously, it enacted government guaranteed loan programs for lenders and builders that meet certain criteria.
Keep in mind, there was a large army of homebuilders that besides facing a recession, suddenly couldn't sufficiently finance their main product via banks, and needed to find a way to stay in a business that's high-risk, high-capital, slow-cashflow, and low margin.
The only government loan programs that allowed similar sized financing to these builders all basically require some sort of public housing participation, the most profitable and easiest of which to qualify for is mid to large scale apartment complexes that would be contractually obligated to accept tenants receiving public assistance from HUD sponsored / affiliated programs. Some programs are available for mixed use or similar developments, usually with the involvement of local government controlled block grants.
But this has left a sizable gap between small business residential builders and the larger scale required to take on government sponsored projects.
The exceptions to this are generally contractors that have their own sources of capital, or builders that were already big enough to have existing appropriately sized collateral. But it's very applicable, in the context of barriers to business growth, especially capital.
When you pass an apartment construction site, start paying attention to how many of them have signs that include a HUD logo. It's a substantial percentage.
Property taxes are not wealth taxes, they are consumption taxes.
You can easily tell this because a person who owns a home outright pays the same tax as someone who owns a similar home but has a large mortgage. These two people have different levels of wealth but pay the same tax. This is because their consumption is the same.
A property tax takes effect without sales occurring, without the property being used, etc. There is no act of consumption to tax, other than simply existing. And before anyone argues that the use of the land is the consumption, that would only make sense if the value of the house wasn't taken into account as part of the property tax.
If property taxes were only levied at the time of sale (e.g. stamp duty in Australia), then it would be fair to call it a consumption tax.
It's not exactly the same as a sales tax that is paid all at once, but it's basically the same as the size of the tax scales with the size of the consumption rather than the size of one's wealth.
No. And if you buy an apple pie, you pay the sales tax on it, even if you give it to your kids to eat. And the sales tax is based on the price of the apple pie, not how many apples it contains.
It is still a consumption tax. If you rent the house out to others, presumably you'll pass on the consumption tax (or not, it doesn't matter).
Say you and I each buy a house. Yours is new construction and cost $1mm, mine was built in 1970, never remodeled, and is perhaps located somewhere more expensive and also cost $1mm. Common scenario in the SFBA.
Is one year of your consumption equivalent to one year of my consumption? Like a car, the longer you use it the higher the likelihood that something expensive goes wrong. But unlike a car, our homes are probably appreciating at close to the same rate.
That's a circular explanation, but maybe I'm reading it that way because we aren't aligned on what 'consumption' means. For a durable good like a house or a couch I think it would be something like expected service life / interval * over-or-underuse multiplier.
The interval technique makes sense to me on goods that are used over time or taxed over time. You can pay for a house all at once, and if you were only paying property tax once I think I would agree with you that the tax is consumption tax. Yet property taxes are annual, so in order for property tax to be a consumption tax we would have to enumerate how much consumption is occurring during that year.
Consider something simpler, like a sofa. We both buy the same sofa with a service life of 10 years. Did we consume the sofa when we bought it? Or do we consume it over its useful life? If I jump on the sofa daily and it lasts for 1 year, I've consumed it in a year. If you barely sit on it and it lasts you 20 years, you've consumed it over 20 years.
Does that make sense? How are you defining consumption?
I believe that in most jurisdictions, the "guts" of property tax millage formulas is based on a 10-year interval (or maybe more accurately, 1/10 of the assessed value). However, that's always seemed arbitrary to me, as: 1) it's never "paid-off" and 2) millage rates are set in conjunction with this known value.
So while it may not be a satisfying answer, in my experience, self-circular is just sort of the way it is.
Also, the consumed / depreciated value comparison doesn't sit right with me, since for business expenses (tax write-off purposes), it's based on zero value at end of life. Any previously depreciated value recovered at sale has to be (re)taxed; you only get to ultimately deduct true depreciated value, albeit (re-)payment is delayed to year of sale.
Regardless, real property (non-movable) is rarely disposed of for zero value, so "depreciated" value isn't a good estimate for "consumed " value.
Property taxes are neither wealth or consumption taxes. Those are not the only two options.
You could just as easily charge the mortgage holder the property tax, and that mortgage holder will then charge the that amount as an extra fee on the mortgage. What does that do to your argument?
Seem to me Property tax is basically a toll. Just like you pay a toll to use a road, you pay a toll to use a house.
The wealth difference is not as great as it seems, it's just the interest on the mortgage minus tax incentives and the opportunity cost of paying it off.
What if you're into houses, you don't have a car, don't have a computer, you spend all your money on a nice house. Why should you pay more local taxes than people who pay one-time taxes on stuff (computers, music, clothing#?
If we believe rich people should pay more taxes (higher percentage), then we have already established a system for this. Why not making local taxes a fraction of income taxes?
Why are lower class people who's only capital is their house taxed on their capital, while rich people who own bonds and stock not get taxed on THEIR capital?
True. But housing is also tax-privileged in other ways. Most notable is the mortgage interest on federal income tax.
More subtle is the fact that the value of the imputed rent from owning your own home is not taxed. I.e. if you rent your home to someone else, you pay income tax on the rent you collect. But if you "rent to yourself" by owning your own home, you don't pay tax on this implicit form of income.
If I own my own house, I do so because I already paid for it. That cost me more at that time than the person who's renting pays in rent. So why should my owning my house be considered "implicit income" because I don't have to pay rent? It should be considered money I've prepaid.
And then there are similar situations. If I've paid off my car, is it implicit income because I don't have a car payment? If I don't own a cell phone, do I have implicit income on the amount of a cell plan?
For that matter, the homeless have lots of implicit income. That's not a useful way of analyzing their circumstances, though.
I feel like the "implicit income" idea has an unstated assumption: The "normal" situation is for you to be paying out every dime you receive, and if you don't, that part you don't spend is "income". I absolutely reject that view. The world is not entitled to my spending.
I don't think that's the assumption that it's based on. It's more like, when you own an asset, you get to benefit from the consumption of that asset.
You did not "prepay" for the consumption of that asset. You paid to own the asset, which entitles you to consume it while you own it, but the value you get from consuming it is not deducted from the resale value of the asset. Example: you buy a house in 2010 for $500,000 that would cost you $4,000 a month to rent. In 2012 you sell it for $500,000. During those two years you received $96,000 of value from owning the house. You are now $96,000 richer than if you had rented the house instead of buying it (minus expenses associated with the house, and opportunity costs of having your money tied up in the house).
It's true that the same reasoning applies to other assets. I would assume, but don't know, that the reason people don't talk about imputed income for other assets is that the amounts are just much smaller in most cases.
Well, dcolkitt was talking about imputed income in the context of tax advantages. I assumed (perhaps wrongly) that the subtext was that people who own houses should be taxed on the "imputed income" as if it were real income. That raised my hackles - perhaps wrongly.
Still... there's something funny in the "imputed income" accounting. Let's say I buy a house for $500,000. I live in it. I don't pay rent, though the house would rent for $4000/month.
Or, let's say I buy the same house, but don't live in it. I live somewhere else instead, paying $4000/month in rent. But I also rent out the house I own, receiving $4000/month in rent for that house. My net is $0... except that I probably pay taxes on the $4000/month I receive. But if dcolkitt's point is not that should have to pay taxes on the "imputed income" of owning my house, then the "imputed income" is exactly offset by the "imputed foregone income" - I could have rented out the house, but I didn't.
I think your example actually helps make the case for imputed income, because whether you happen to live in the same house you own has huge tax consequences, which doesn't seem optimal. Without imputed income you are incentivized to live in the house that you own, even if it is worth less to you than what you could rent it for, because that way you don't have to pay taxes on that consumption value.
If you had to pay taxes on the imputed $4k a month then you would prefer to rent it out to someone who actually values it at $4k a month, and move yourself to a house that is better suited to you.
Right. But then you've changed the default from "not having to pay tax" to "having to pay tax". That is, far more people live in the house they own than rent out the one house they own and live somewhere else. Right now the 5% (say) who rent out the house they own get taxed, the 95% who live in the house they own don't. The change you propose would result in the 95% now also being taxed. That's fair, I suppose, but it's also the most drastic change you could make to create fairness. You could, for example, offer the 5% that the rent they pay could offset their rental income for tax purposes.
So why change it in the direction you propose? We're back at my initial complaint: This turns into "Saving money rather than spending it deprives us of the tax we would have received, so we'll tax your saving as if you had spent it. Don't own a cell phone? Pay us the taxes that would have been on your monthly bill anyway. Don't own a car? Pay us the registration fee anyway. Walk to work? Pay us the gasoline tax anyway. Don't drink alcohol? Pay us the taxes as if you did. Don't smoke? Pay us the taxes on the cigarettes that you could have smoked. Don't visit national parks? Pay us the entry fees anyway."
Do you see that that's insane? But if it's insane, why isn't "imputed rent" as something taxable insane?
It's insane, but we're basically already there, on some levels.
Politicians have been using that method of accounting for years, when describing taxpayer savings.
And it's not quite the same, but the method of tabulating the number of deaths in Puerto Rico after Maria also comes to mind. No "receipts", just statistics of what the numbers should be.
You also don’t get to claim 3.6% deduction of basis of the improvements (everything but the land) plus other rental related expenses if you live in it which you would if you rented it out. This has the effect of significantly reducing the tax owed on rented property throughout the course of ownership.
Similarly, rented property has an unlimited deduction on mortgage interest rather than the capped deduction available for owner-occupied housing.
Except in California we had proposition 13, so that property taxes are severely hamstrung; I wonder how much impact that alone has on the overall analysis given the size of California as part of the US economy.
I really think we should bring them back but it's anathema. The usual argument has something to do with a little grandma living on a fixed income who suddenly can't afford taxes on the home she's owned for 40 years. (And not, say, a landlord who owns dozens of buildings, though it benefits him far more)
I'd have to do the math but to me it seems like ridiculous housing prices make up for prop 13, while also pushing the tax burden to those best equipped to handle it (people in the position to afford to buy expensive houses)
So while grandma's only paying taxes on a tax-appraised value of $200k for a home worth $1mm on the open market, people who buy today are paying tax on $1mm+ for homes that "should be" (or would be in other states) worth $200k.
Not really. See some of the charts here [1]. Key quotes to show the effect:
"The year before Proposition 13 passed, property taxes comprised over 90 percent of cities’ and counties’ local tax revenue. Today, that share is less than two–thirds."
"Cities’ and counties’ tax revenue per person has declined since Proposition 13. However, looking across all California local governments’ per–person revenue—excluding state and federal funds—revenues increased 36 percent since Proposition 13. In comparison, similar per–person revenues for local governments across the country increased by almost 70 percent over the same period."
Basically the state had to struggle to make up the tax revenue difference via other fees and assessments, and it never caught up to where it was before or to where it is in other states without such a measure.
And yet many region have taxe based on the value of the house, so a tax on capital, a tax on wealth. Often the only capital middle and lower class have access to.
A key thing about the mid-century is that the actual manufacturing capabilities of most of the world (with the sole exception of the US basically) were completed destroyed by WWII. Britain and Germany were devastated. This means that in the 1950's the US was essentially acting as the sole industrial power at full strength serving the rest of the world. We were playing worldwide economics on easy mode: as if we were the only ones that had modern technology and fully functioning infrastructure, while all other countries wanted our goods. This is why it is bizarre to draw any conclusions about taxes or any other economic principles from this very unique period of time: you could probably put in place just about any law and still have the United States be ridiculously successful. We are now actually competing with other parts of the world.
>We were playing worldwide economics on easy mode: as if we were the only ones that had modern technology and fully functioning infrastructure, while all other countries wanted our goods. This is why it is bizarre to draw any conclusions about taxes or any other economic principles from this very unique period of time: you could probably put in place just about any law and still have the United States be ridiculously successful.
IIRC Pickety made this exact point in his book Capital in the 21st Century. Looking back at that time period as something to emulate or get policy ideas from is misguided for this reason. Instead of thinking of it as "a time of enlightenment when the people fought the billionaires and achieved utopia" it would probably be better to think of it as "a historical aberration which will probably never happen again".
Agricultural efficiency, and food handling and storage are big cornerstones in this past century too. We were a world of frequent famine and hunger and now one of abject abundance.
If the capital returns 4% and is taxed at a 30% rate, you will have the same effect as if the capital is taxed at a rate of 1.15%.
I think the biggest injustice is that return of capital isn't taxed at the same rate as income from labor.
Someone who earns $100'000 from labor and $50'000 from return on capital should be taxed at the same rate as someone who earns 150'000 from labor.
> I think the biggest injustice is that return of capital isn't taxed at the same rate as income from labor.
Almost there. One step further and you’ll realize the root injustice is that rent is taxed less than either returns to capital or labor.
Compensation for labor and returns to productive risk bearing or entrepreneurship should not be taxed. Rent seeking, where profit is guaranteed disproportionate to investment of labor or capital should be taxed out of existence.
Before income tax, nobody had any idea about who was making what. Fast forward 100 years and we still have no idea about who holds how much capital. Even if you disagree on a universal wealth tax (just like we have for income) there is an argument to be made that it is important information to policymakers.
Other than that Piketty argues that larger wealth means larger returns (per unit capital) and that is a very strong argument against a flat capital gains tax.
Moreover I think wealth can be used in ways which don't necessarily produce an income: for influence, as collateral...
>>Before income tax, nobody had any idea about who was making what.
That's precisely why the income tax is socially harmful. It forces people to divulge intimate personal information to the state, under pain of imprisonment. It's nothing less than warrantless mass surveillance.
The government having this much information on people creates an information asymmetry in society that makes the state incomparably powerful relative to private citizens. This manifests as trends like the suburbs of Washington, DC being the wealthiest in the US, and seeing the most income growth in the US over the last 40 years.
> The government having this much information on people creates an information asymmetry in society that makes the state incomparably powerful relative to private citizens.
Government, in a democratic society, is simply the citizens wielding their power collectively. It cannot possibly be more powerful than the citizens it serves.
A democratic system of rules doesn't mean a democratic distribution of power. Rules rarely have their intended effect 100%.
In all democracies, elites form, which wield far more political power, and derive far more benefit from government, than voters.
Even in a perfectly democratic society, giving the majority, acting collectively through their government, so much power over individuals would be dangerous, because it would create enormous rent-seeking opportunities for those who wield the most influence over public opinion and because it would endanger persecuted minorities.
> Other than that Piketty argues that larger wealth means larger returns (per unit capital) and that is a very strong argument against a flat capital gains tax.
But someone who earns more will also have a higher marginal tax rate.
There is probably better risk tolerance once you have a net worth above e few months of expenses. But someone with $10M will be able to get the same risk adjusted return as someone who has a net worth of $100k.
> But someone who earns more will also have a higher marginal tax rate.
Not currently on capital
> But someone with $10M will be able to get the same risk adjusted return as someone who has a net worth of $100k.
That's exactly what Piketty has shown to be false. If you look at stuff like endowments and sovereign funds you'll see gains that are nowhere near what's possible even for funds that have $100M in capital.
There are economies of scale involved here, both in diversification and in management. Moreover some markets are not even available to investors who are not larger than a certain threshold.
I said in my comment that return on capital should be taxed the same as labor income.
> That's exactly what Piketty has shown to be false. If you look at stuff like endowments and sovereign funds you'll see gains that are nowhere near what's possible even for funds that have $100M in capital.
Do they really outperform a basic index fund strategy? Any data on this?
There isn't a market that offers better risk adjusted returns than than what is available with affordable index funds.
The only exception are probably the index funds of Dimensional Fund Advisors. They are only available to investors that have an approved financial advisor.
> Do they really outperform a basic index fund strategy? Any data on this?
Yeah, Piketty's book. But of course the Norwegian government and Harvard administrators are just a bunch of idiots, they have billions of dollars to invest and didn't think of a basic index fund! Now they can save a lot of money firing whoever was managing it for them!
Most fund managers are very intelligent people, yet most of them fail to outperform a basic index fund.
The Harvard endowement underperformed the sp500 by more than 3% annually for the last 10 years. So instead of a plus of 220% it produced a plus of about 130% over the same period.
There is lots of data that shows that passive strategies outperform hedge fund and these university funds.
It might be sound strategy for an endowment to give up upside in the most raging of bull markets that we’ve ever seen in exchange for lower drawdown in down markets. A low beta portfolio underperformed (by definition) in 2009-2019.
I’m a staunch proponent of passive index investing so I suspect we largely agree on philosophy, but the mere fact that someone underperformed in the somewhat historically anomalous market we’ve enjoyed for the last decade is not conclusive that they clowned it, IMO. If they outperformed 2005-2008 or outperform in the next bear market, that would be evidence again full clown performance.
That article states they outperformed when measured over a 10, 15, 20, and 25 year period and underperformed over a 5 year period. (See the table. The longer periods include the more recent periods meaning they had strong outperformance early that more than made up for the recent under.)
Is that evidence that they’re dramatically underperforming? It seems the story is mixed and you could argue either way depending on whether you think the last 5 years are more important than the prior 20 or not. (It might be, if you argue that something fundamental changed. That would fall into the “this time it’s different” which is generally falsified eventually.)
The endowements averaged the market over the last 25 years. There will always be some funds that will outperform the market. In the majority of the cases this will be luck. (Except for exposure to known risk factors like size or value)
Harvard is optimizing for a different objective than retail investors or even smaller endowments. It can afford to take less risk and get less return.
Lots of small colleges with 100MM endowments using a passive strategy will fail to survive the next deep recession. They need those returns to survive, so they have no choice but to accept the associated risk. But one deep down market without an associated counter cyclical uptick in enrollment numbers and they are dead. Ask any small private college CFO and they'll agree.
On the other hand, the public markets could lose all their value and Harvard would still be able to cover its operating expenses.
Harvard's goal is to survive for centuries. The goal of a college with a 100MM endowment is to make payroll during the next few school years.
Taxing capital incentivizes putting it to work. If you only tax gains then people can endlessly horde wealth. Taxing the wealth itself makes hording unappealing... I think.
> But hoarding wealth isn't a problem for inequality.
It absolutely can be, especially for wealth that is finite. (Like land for housing)
> Inflation is the process that incentivizes capital to be put to work.
Does it though? Inflation mostly just punishes labor alone, labor feels the effects of inflation far more severely than anyone else.
With enough capital (the amount anyone 'hoarding wealth' already has), the capital automatically buys itself out of any problem of inflation, because the returns to sit on that cash are routinely higher than inflation itself is.
Inflation can't currently incentivize capital to be put to work, because capital just sitting doing nothing already far out-earns any loss from inflation. And for inflation to be strong enough to actually incentivize capital to be used, you'd have to bump it to astronomical heights (like say, 15-25%), at which point you've completely obliterated all wage-earning people's lives.
This is why many well-respected people advocate for a wealth tax. In a perfect world, inflation would be exactly 0, and a strong punitive wealth tax would discourage greedy people from hoarding wealth.
The market already has a mechanism for incentivizing putting capital to work, though. If something is held off the market ("hoarded", in your terminology), it reduces supply, and the returns in that area go up, making it more attractive to do something with it.
For money-wealth, the outlook is even better. If Scrooge McDuck, puts all his money into his basement so he can swim in them, he has removed those from the supply and increases the value of everyone else's money while he holds it off the market.
I'm not an expert, but what you describe as "capital sitting doing nothing" is, presumably, capital invested in some kind of market index? In which case it's by definition not "sitting doing nothing", right?
Unless you were referring to capital in the sense of owned non-market property that appreciates with time? Land/property values are a major topic of discussion throughout this thread for sure.
Just trying to make sure I'm following the thread of the argument here.
> With enough capital (the amount anyone 'hoarding wealth' already has), the capital automatically buys itself out of any problem of inflation, because the returns to sit on that cash are routinely higher than inflation itself is.
I remember the late 1970s, when inflation was 14%, and sitting on cash paid 5%. There have been times when your "just sit on cash" approach meant losing your shirt.
But taxing capital is not possible and probably a bad idea. This will require you to list everything you own to the government who will then evaluate the worth of it. I really can't think of much else that's a worse violation of privacy. It will also make owning something expensive a bad idea, because you'll have to pay to own it. In fact, can you even say that you own it at that point? Aren't you basically renting it from the government instead? Thinking more about it, I'm surprised that totalitarian systems didn't have a wealth tax.
Come off it, it’s not like this isn’t a staple of political economy since the 1800s or so.
A very charitable description of Piketty’s big ted talk of a book is that it suffers from the same flaws of classics like “A monetary history of the United States” by Friedman and Schwartz: it uses empirics as gargoyles, not as structural beams. It seems to be a great argument that’s backed by numbers — but whatever you make of it, the numbers are a distraction.
The cringe of it is that Piketty’s numbers are also fraudulent, as extensively documented by dozens upon dozens of important scholars.
> ... as extensively documented by dozens upon dozens of important scholars.
Do tell. In particular, give some references to those who you are talking about rather than leaving us to do our own searches (and then guessing which results are those you are talking about).
And also tell who we should believe the criticisms of these "important scholars" and not the criticisms of the criticisms.
> they promote a view that the solution to all ills is lower taxes and less regulation.
I’ve read the Economist for a long time and have never gotten that impression. That’s more the Republican Party platform, who they really don’t support. In the articles, they explicitly argue for more regulation in the form of enhanced anti-trust laws and enforcement.
> the only reasonable solution for this is a tax on owned capital (not on income or cap gains) and the political chances of this happening are slim
Seems to be a cornerstone policy of multiple presidential candidates in the US at the moment. We have it in the Netherlands. I don't think it's that unlikely.
Not sure how much it helps with inequality in the Netherlands though. If anything I think it stimulates people and businesses to invest, which either means the wealthy people make more money, or they lose it. At the most it creates jobs. People on low salaries aren't really benefited.
In the Netherlands (where I currently reside as well) I think this tax can easily be avoided by placing your assets in some sort of shell company. When the startup I used to work for IPO'd I was not surprised to find that most of the important stockholders were using such companies (presumably) to avoid being taxed on their hundreds of millions/billions of euros.
I know that the Belastingdienst is going after people pretty hard for tax avoidance/evasion at the moment. Things are changing quite quickly in this area in the EU, and NL is no exception. What worked well for people 5 years ago could well result in a pretty full on audit now leading to nasty bills to pay back owed taxes.
The only problem is companies like Amazon, Google etc. are still getting away with paying 0 taxes everywhere... easier for the Belastingdienst to take on SME's first I guess. :/
As soon as you get it out of there either as income (at least some part is required) or as dividend and you start paying taxes. Not before so this is allowed and legal (and smart). They are about 25-30% in total well below the top tier of about 52% in case of income tax.
Note that the Dutch wealth tax replaces their capital gains tax. It’s a tax on the assumed returns on capital assets. (Of course unlike a capital gains tax the wealth tax reaches unrealized gains. But the rate is also lower than a capital gains tax would be. It’s possible to come out ahead compared to a capital gains tax depending on your situation.)
Yeah. IIRC the "assumed returns" is finally going to be changed now so it's more in line with actual returns outside of more risky single stock investments (or other risky ventures)
Not to mention that Piketty has a relatively soft list of proposals and research compared to the 'old guard' of critics of capital. The Economist's arguments against Piketty are only there because he's the most radical economist on capital's horizon. By presenting Piketty as radical on the issue of inequality, the arguments from modern, radical economists on every other aspect of capital are shut out. For example, beyond Piketty we have John Roemer, beyond Roemer we have Veneziani & Yoshihara, beyond them we have Fred Moseley, Andrew Kliman, Sekine, Itoh...
In other words, Piketty gets so much criticism because he's the least radical of a bunch of radical economists, and because of that, he hasn't left capital's horizon.
Would you happen to have some suggestions on where to start further reading of radical economics? I'm halfway through "Doughnut Economics" right now, but it's a bit simple -- I was looking for something more challenging.
J.E. Roemer's classic 1982 book[0] on exploitation from a game-theoretic standpoint is generally the beginning of the post-Marxian era of radical economics. However, his is not the only approach, now there are theories which attempt to reformulate the Marxist concept into a theory of unequal exchange of labour. Roberto Veneziani[1] has a great many papers on this theory of exploitation, expressed mathematically, in particular, two principles: profit-exploitation correspondance principle, and the class-exploitation correspondance principle. Andrew Kliman[2] and Fred Moseley[3] are two economists with very contrasting approaches to Marx's labour theory of value and its application today, as well as other "problems" in Marx (such as the transformation problem). Moseley also criticizes some of Piketty's methods[4]. Kliman and Patrick Murray agree that, providing the labour theory of value is true, then we can deduce Marxian exploitation - however their approach is less economic and more philosophical. This is because Murray objects to the use of neoclassical models and methods, with good reason[5]. Vrousalis[6] takes a non-Marxian approach to dominatiton and exploitation under capitalism.
For the latest stuff in the field, check out the main journals[7][8] and Brill's Historical Materialism book series, and this one[9] in particular.
I had a very different takeaway from Piketty's book. Namely, that inflation (primarily hyper inflation) has been the only force to reduce income inequality. For example, Jeff Bezos is much more affected than I am if the government decides to give everyone a $1B. Thus, governments looking to end income inequality shouldn't be afraid of high inflation.
Bezos is basically entirely invested in stocks (Amazon). His exposure to monetary inflation is roughly 0. If the government hands out 1bn to everyone that'll happen at the expense of cash / bond holders. Prices from Amazon services will just adjust accordingly to the inflation spike along with their profit margins.
In the US at least they're still still taxed for capital gains, but the capital gains tax doesn't account for inflation. So if there's 2% inflation that causes the value of your stocks to rise by 2%, that is taxed as a capital gain, so in real teams you have less money afterwards. Non-inflation-adjusted capital gains tax is essentially a wealth tax.
Fair point. But assumes Bezos doesn't loophole capital gains taxes to 0, which I could be wrong about but i feel like he does. That effect will also be maxed out to cap gains rates.
If my wealth is in anything beyond cash -- say I own a huge hotel chain, or the largest retail company in the country -- how is inflation a tax on my wealth? My businesses will still be generating the same proportion of the economy as they were before.
If inflation causes the nominal value of your hotel chain to increase 2%, you have to pay capital gains tax on this nominal gain (at least in countries where capital gains tax is not adjusted for inflation), leaving you with less real value afterwards.
Only if you sell. And if you're invested in a company that is only growing at the rate of inflation then I'd imagine they are paying a decent dividend which is very possibly a qualified dividend that has no tax associated with it. Reinvesting that into the company creates a compound effect far greater than the inflation rate and will be taxed at the LTCG rate one day when divested from.
That only matters if you realize the gains. If you own a business like a hotel, car wash, etc. and intend to keep it, you are not affected by value increases of the business itself. In fact, for many privately held businesses, it is not even known what the value of the business is because there is no reason to calculate it.
I'm not even sure how accurately some small businesses can be valued. A local cupcake lady or artist might run a business that makes decent money, but all the income and value is derived from their unique style. Remove them and the business is almost worthless.
If a tax on capital is instituted are there mechanisms to value such cases?
With the current wealth-tax proposals by Warren and Sanders. the owner first of all would probably owe zero wealth tax unless she was worth more than $32 million, or $50 million for Warren. I doubt any local cupcake businesses are worth anywhere close to that much.
Second, an actual business of that size would probably be owned by some other corporate entity created for that purpose, not an individual, and that entity would be paying its own taxes.
Finally, Warren and Sanders both plan on beefing up the IRS to answer these kinds of questions, which will certainly be thorny for some kinds of assets.
Only for wealth stored as currency. For debts, inflation effectively transfers money from lenders to borrowers by reducing the value of debts. Other things, for example stocks and real estate, are only nominally affected by inflation.
Inflation comes in different flavors. If all you do is print and hand out 1bn to each citizen, they'll just be able to outspend other dollar holders in the world. Prices will adjust, but the amount of real goods in the world per capita is unchanged. You're just reallocating who gets what amongst monetary savers. If your wealth is in the actual stuff people end up buying, this is very much a side concern for you. Bezos is in that camp.
Is there any aggregate data on how the money printed by the U.S. government has been distributed historically? Inflation only helps the average person if they get a slice of the money printed, and I have a feeling the vast majority of it hasn't been going directly to John and Jane Doe.
> This Economist article points out some of the many small academic works that quibble over details with Piketty and Saez. But that's not anything new
These are not nitpicks. What you measure drastically changes the results. Piketty and Saez presented their own revision to their data in 2018 that shows starkly different results than the 2013 data everyone cites: http://gabriel-zucman.eu/files/PSZ2018QJE.pdf
For example figure 3 shows that when you account for tax transfers, the bottom 50%’s share of income is only a few points lower than in 1960, though significantly lower than the peak of about 25% in 1970. It also shows that, contrary to common assertions, the bottom 50% income has grown consistently since 1960 adjusted for inflation. Figure 1 shows that the labor share of income has been flat since 1940 when you account for benefits. (Put another way, capital’s share of income is flat.)
The data about returns to capital are particularly important. Supporters of wealth taxes and capital taxes tend to point to rising inequality as the justification for such approaches. But if the returns to capital aren’t increasing as a fraction of the economy, that argument gets harder. Of course there may be other arguments in favor of such taxes, but those seem less well developed.
The point the Economist article makes well is that inequality is hard to measure, and the simple definition used by Piketty and Saez’s initial analysis is inadequate. For example, there is a whole school of libertarian thought that, even if you believe the government should be in the business of redistribution, the best approach is to maximize growth through a free, deregulated economy and then tax individual incomes to provide generous welfare benefits. Most of the developed world has moved in that direction over the last 30 years. Under Piketty and Saez’s 2013 model, which excludes tax transfers, you can’t accurately describe inequality in a country that uses such a model.
Moreover, there are additional analyses showing that, when you look at consumption rather than income (which accounts for both tax transfers and falling prices from globalization) inequality is basically unchanged since the 1970s: https://voxeu.org/article/consumption-and-income-inequality-.... That is to say, the bottom 10% get to consume about the same fraction of total production as they did half a century ago. Of course there are downsides to consumption measures too, insofar as the data is sparser for incomes at the top. (The measure above includes money spent on mortgages for mansions, but not private yachts, for example.)
But just because something is easy to measure (pre-tax income) doesn’t mean it’s the right thing to measure!
While I don't have the time to read the PSZ paper right now, I'll just point out that their introduction contradicts your post, that the results are starkly different. I'll just quote verbatim from p 557:
> Even after taxes and transfers, there has been close to zero growth for working-age adults in the bottom 50% of the distribution since 1980. The aggregate flow of individualized government transfers has increased,but these transfers are largely targeted to the elderly and the middle-class (individuals above the median and below the 90th percentile). Transfers that go to the bottom 50% of earners havenot been large enough to lift their incomes significantly."
> "... our data show a sharp divergence in the growth experienced by the bottom 50% versus the rest of the economy. The average pretax income of the bottom 50% of adults has stagnated at about $16,000 per adult (in constant 2014 dollars ...) . As a result, the bottom 50% income share has collapsed from about 20% in 1980 to 12% in 2014. In the meantime, the average pretax income of top 1% adults rose from $420,000 to about $1.3 million, and their income share increased from about 12% in the early 1980s to 20% in 2014. The two groups have essentially switched their income shares, with eight points of national income transferred from the bottom 50% to the top 1%. The top 1% income share is now almost twice as large as the bottom 50% share, a group that is by definition 50 times more numerous. In 1980, top 1% adults earned on average 27 times more than bottom 50% adults before tax, while they earn 81 times more today. Second, government redistribution has offset only a smallfraction of the increase in pretax inequality."
INHO we should be looking much more at consumption and a lot less at income or (worst of all) assets.
In what way does it matter that Warren Buffet has X times my income and Y times my assets, if he drives the same kind of car and lives in about the same kind of house? It means he has more power than me in a capitalistic system, sure. But is that really so wrong or unfair? I think it’s actually kind of a good thing: most people would just consume like crazy and ruin the planet if they came into that kind of money...
> INHO we should be looking much more at consumption and a lot less at income or (worst of all) assets.
At what age can you retire?
Can you afford education for yourself and your children? Can you afford the home in the district with the good schools? How much debt will you and your children be in after finishing college?
What are the odds you go bankrupt from a medical incident, even with "insurance"?
"Consumption" of cars, electronics, restaurant meals, etc. are not the really significant economic expenditures in a persons life. It's those big items that create debt slaves and crippling economic anxiety.
> Can you afford the home in the district with the good schools?
Let me pick on that one in particular. Let's suppose that we redistributed all the assets in the country evenly (never mind how). Doing so did not increase the number of homes in districts with good schools. So not everyone can have them, no matter how much money everyone has. Who's going to get those houses? Not everyone who has school-aged kids.
Or take college. Redistribute all the money, and it won't change the number of college classrooms. Who's going to get to go? Not everyone.
Same with beach houses. There are more people who want beach houses than there are beach houses. Redistribute all assets evenly, and it may change who has the beach houses, but it won't change the fact that more people want them than have them.
If everyone had the same amount of money, these things would still be allocated on the basis of who's willing to pay the most for them - that is, who's willing to give up the most other things in order to get that thing.
Remove money entirely, and these things will still be allocated somehow - by who gets luckiest in the lottery, or who has the best political connections, for example. There is no system that magically makes there be as many beach houses as there are people who want them. So there will always be the problem of how scarce resources are allocated.
> If everyone had the same amount of money, these things would still be allocated on the basis of who's willing to pay the most for them - that is, who's willing to give up the most other things in order to get that thing.
Though that's arguably a better situation from the equality perspective. Right now we have people who are allocated everything they want and others who are allocated none of what they need. Taking redistribution to a monomaniacal extreme is probably a bad idea for well understood reasons, but that doesn't mean that redistribution doesn't have its place.
> I think it’s actually kind of a good thing: most people would just consume like crazy and ruin the planet if they came into that kind of money...
Crazy to think we might consume ourselves into fundamentally altering our ecosystem and causing mass migrations and death if we didn't have all of those rich guys around.
> It means [a billionaire] has more power than me in a capitalistic system, sure. But is that really so wrong or unfair?
Where does that leave democracy?
> I think it’s actually kind of a good thing: most people would just consume like crazy and ruin the planet if they came into that kind of money...
That bears a striking resemblance to some anti-democratic rhetoric I've seen. For instance, one of the rationales the CCP gives for the lack of multi-party democracy in China is that the Chinese people would use their political power irresponsibly, so it's better for everyone that the [insert positive adjectives here] party have a monopoly on political power.
I don’t believe that economic power is the same as coercive power. The former let’s you dangle a carrot in front of people. The latter let’s you threaten to kill them. There’s a difference, and democracy (with constitutional restrictions) should IMHO primarily be a way to distribute coercive power.
Economic power can do much more than dangle a carrot. It can buy coercive power. It can also buy propaganda machines to fool people into believing what economic power needs them to believe. Economic power also gets to decide which projects are worth pursuing in our society.
> if he drives the same kind of car and lives in about the same kind of house?
Most wealthy people don't behave like Warren Buffet.
> It means he has more power than me in a capitalistic system
Which allows him to shape the system however he chooses, and as is the case this is usually in favor of the power holder.
> But is that really so wrong or unfair? I think it’s actually kind of a good thing: most people would just consume like crazy and ruin the planet if they came into that kind of money...
In other words, poor people can't be trusted with money so they should remain poor and deprived?
If you honestly believe that people can't be trusted with their money then why not have a system where people aren't as reliant on money? (e.g. free health care, free basic housing, free public transportation) In such a system you don't have to worry about people abusing wealth they can't control.
> At least they are very open about their biases: they promote a view that the solution to all ills is lower taxes and less regulation.
That's a (common) caricature of The Economist's views. Their actual policy proposals are quite a bit more nuanced than that, and often call for taxes and regulation.
You are asserting that there is broad academic agreement that Piketty's major points still stand, but that is far from true -- in fact they never stood under serious scrutiny at all. Outside of simply describing tautalogies, his major point is that inequality is rising because the rate of return on capital is exceeding the economy's growth rate, from which he makes a logical leap that inequality will increase inexorably without intervention. This point fails to consider that people spend some (and sometimes a lot) of their earnings from capital, which dissipates their wealth back into the economy. Historical data show that wealth does not end up growing faster than income because of the effect of spending the wealth (you have to spend basically none of it to maintain a growth rate that is greater than GDP). A good number of serious academics have raised this and other points. His book is best understood as a popular argument for specific political ends, and since it gives a veneer of academic seriousness to those ends it has been popular.
> and that the only reasonable solution for this is a tax on owned capital (not on income or cap gains) and the political chances of this happening are slim, etc.
I think another reasonable solution, and one which actually has a chance of happening, is a land value tax
In all seriousness, that is precisely what government is intended to do: take a portion of the private surplus and apply it to the public interest, thus increasing total productivity.
This requires a lot of the investment environment that isn't a given. Capital loses its feedback loop if inflation outpaces economic growth or if the quality of investment opportunities declines significantly.
There is no given that just having $10 million dollars means it will be easy to outpace inflation and not end up with less.
Professional labor can have a positive feedback loop, like engineering, law, medicine, even bureaucrats. you can get more efficient with more experience and usually can make more money. Less risky then capital investment. Also small business is a mix of labor and capital.
I don’t really understand why people say a tax on owned capital is so far fetched when we are all okay with property taxes which is literally a wealth tax on a subset of owned capital. The only difference is that property taxes are regressive and not progressive
> This Economist article points out some of the many small academic works that quibble over details with Piketty and Saez. But that's not anything new. The major points of their work, and especially of Piketty's monumental _Capital for the 21st century_ still stand: that capital is a positive feedback loop in a way that labor is not; that mid-20th-century laws that put brakes on this feedback loop have been removed; that a variety of data sources are confirming growing inequality and market capture particularly in the UK and US; and that the only reasonable solution for this is a tax on owned capital (not on income or cap gains) and the political chances of this happening are slim, etc. [emphasis added]
I'm a bit surprised that you included ad hominem accusations of bias and haterism given the adjectives in the first paragraph. :)
But, in seriousness, Piketty's work is pretty poor. The empirical data is now discounted [0], the `r > g` claim was debunked shortly after publication [1]. The fate of the latter claim seems fatal to Piketty's attempts to accurately model the world and prescribe solutions. For instance, capital depreciates as it ages, and can do so dramatically due to obsolescence or damage. Redeploying capital toward new uses is generally quite costly, due to the high inelasticities of capital. Labor is much more elastic to different tasks of production. (I should note that the inelasticity of "human capital" in the modern service-based economy, which is indeed a problem. "Learn to code" is a meme deployed by trolls, but it reflects a real economic reality. The increasing prevalence of human capital and its inelasticities also undercuts Picketty.)
Further, Piketty himself defines capital in such a way (he uses it essentially synonymously with wealth) that his argument is almost tautological, and also fails to account for wealth stored in e.g. real estate (or the works of Picasso, for that matter). Increases in real estate prices (driven almost entirely by well-understood microeconomic structural issues and not by some abstract macro mathematical inequality) account for the amount r exceeds g.
Any usual definition of capital emphasizes that it is a factor of production, not merely wealth. Capital is the fixed "stuff" we use to produce other stuff. It might be a dump truck or an assembly line process or even knowledge of C++. Housing stock almost certainly fails the factor of production test, and thus shouldn't be counted as capital (the status of a Picasso as a factor of production is an exercise left to the reader). (By analogy, labor is also defined as a factor of production, and doesn't include the value of leisure hours or time spent sleeping.) Piketty's book sales might not have been so high had he simply argued that fixed supplies of highly-demanded scarce resources tend to increase over time, and that land in a reurbanizing and NIMBY-ish period is by far the strongest such asset. Henry George said more insightful things about the same subject over a century before Piketty had an economics professorship. (I'm not arguing that George's solutions were great. I'm more enthusiastic about ideas like nuisance-based zoning as opposed to use-based: they seem to achieve the desired effects of stability and low inequality without a ton of extraction. I somehow doubt that Piketty would share this enthusiasm. [2][3])
Ultimately, if these small attacks of death by 1000 cuts on Piketty's work don't convince you (and I would characterize some of the attacks as quite substantial) that it was very flawed and probably just nonsense, then maybe ask yourself if any evidence whatsoever would convince you that Piketty is (broadly speaking) wrong.
Have not read his latest "People, Power, and Profits: Progressive Capitalism for an Age of Discontent", but I think Stiglitz has basically been saying the same as the gist of this article: equality is essential to sustainable capitalism.
Afaik his finding are disputed. And even if not, why should it even be desirable to encourage labor? If capital is so great, people should seek owning capital, not seek to work more. As they say, savings plans start at 50$/month.
It seems rather great that this opportunity exists (assuming it is true). The alternative is that you have to work and work until you die.
Because a good chunk of people suck at delayed gratification so are incapable of saving money. Even on an average income it's not unfeasible to retire a millionaire if saving a significant percent (and indeed there are people who do this, small businesspeople and tradespeople, the "millionaires next door").
That's silly - compared to cavemen, even workers in third world countries are "rich", being able to trade things for goods and services and not being required to hunt and gather. Inequality solved?
yes, exactly; to have equality, you'll have to reduce everyone to the lower common denominator, which will be rather low
Also, I don't see why exactly inequality is inherently bad. I'm poorer than Bezos, _and that is a good thing_. Pretty much like Steph Curry is better than me at basketball and so he should have a lot more ball possesion should we be playing on the same team, Bezos is much better than me in allocating resources, so he should have a lot more resources to play with.
to have equality, you'll have to reduce everyone to the lower common denominator, which will be rather low
Why must everyone go down to the lower common denominator? Wouldn't moving everyone to the average also be equality? For most middle-class Westerners that would be a reduction, but for most people on Earth that would very likely be a small improvement, and in some cases a significant improvement.
The real problem is that it's logistically impossible. Someone living in the middle of a desert just can't have access to the sort of food wealth and stable energy supply we have because the technologies to get those things to where they are don't really exist yet. That doesn't mean we shouldn't try to move everyone towards the average a bit though.
California has ports and airports and... roads. People stay in the same places for a long time. Try delivering fresh produce to nomadic Bedouin tribes in the Eastern Sahara and you might find it a little trickier.
A huge number of people work very hard for much less than middle class Westerners have. They would all get more than they have now. I suspect that would lead to better global productivity even with the loss of your input.
It's a bit of a strawman to take arguments of the general form "we should enact policies to reduce inequality" and implicitly restate them as "we should enact policies that force perfect equality," then argue against that restatement, don't you think?
I think the concept of "inequality" itself is a type of straw man. It's basically a problem that will perputually exist. Arguments (straw man or not) pointing out the lack of a concrete, absolute (non-relative), morally justified goal is appropriate as long as "inequality" itself is the stated "problem."
If we were talking about a fixed, concrete goal, then I'd agree with you. Reducing poverty, reducing world hunger, increasing standards of living, etc are things that can be accomplished by setting some absolute, concrete moral goals, which moving towards by any measure might be considered morally good. But "inequality" on its own is, prima facia, a term that requires comparison to the point of "perfect equality".
Doing good things might result in less inequality, but reducing inequality for the sake of itself is just justification of envy. There's nothing inherently "evil" or even negative about it.
On a side note: "Reducing inequality" is an activists dream. They can sell political solutions forever for a problem that will always exist, by some form of the definition.
(Unless we were to oversimplify it and set some standard deviation type hard-target for income distribution, but I've not heard anyone suggest this, let alone an appropriate "fair" target distribution. I'm not for it, but it's at least a measurable goal.)
> Bezos is much better than me in allocating resources, so he should have a lot more resources to play with.
How do you know that, though? Have you had the opportunity to be in the exact same place he was for the exact same time? Do you sincerely believe there aren't, in the billions of people on earth, someone with better resource allocation skills than Bezos? Having more money is not proof of ability.
Bezos also had parents that gave him a several 100 thousand dollar loan that they never expected to be paid back. He's a product of Montessori and Ivy League education. Definitely not a rags to riches story
From 100 thousands to Billions is kind of rags to riches. And even so - you are saying he doesn't deserve his success? It doesn't count because he went to Montessori school?
The problem I think is that people attribute all of success to the sheer iron will and willingness to suffer of the individual, when that just isn't the case. Are you attributing all of Amazon's success to Bezos solely? If he left do you assume Amazon would immediately start to fail? Was it Bill Gates alone who kept Microsoft afloat?
You have to consider luck, there's a ton of people in the world who put in the work and didn't get anything, and it's not just because they didn't work hard enough.
I don't see how luck invalidates my point; yes, you probably need luck to make big bucks, but that is just a part of the game. If you make so that no one can get seriously rich, "to prevent exploitation", congratulations, this is how you get Soviet Union, with Gulag and Golodomor and other stuff, but with oh so nice intentions, workers owning means of production, blah blah blah
Not everybody becomes a Billionaire, but most people with intelligence and skill amount to at least something. The luck factor is mitigated by people trying several things until they succeed. You throw out the hypothetical example of the talented people who didn't amount to anything, but how common is it really?
Would you also say Steve Jobs was merely lucky, and everybody else could have founded Apple? Perhaps people just don't know enough about what those CEOs do?
And of course at a basic level, it is always luck, because even being born, being healthy, the place where you are born, intelligence, and so on, are luck.
I think to assume people don't deserve stuff because they were lucky is rather backwards.
Imagine you had a brain tumor, and you need brain surgery. There is a surgeon who was very lucky - he was born white, male, to a wealthy family, so that he could afford to go to the best schools to become a really good brain surgeon.
Would you then say that guy doesn't deserve your money, because he was just lucky?`
I'd say that's just bullshit. It doesn't matter why or how he got his qualifications by luck, magic, whatever. What matters right now, what makes you willing to give him money, is that he can provide you with the best odds of a successful brain surgery.
You are welcome to pick a random poor person from the street to perform that surgery, for the sake of fairness. After all, it isn't their fault that they weren't able to afford the education to become a brain surgeon, right?
And if you say that brain surgeon should have to operate on you for free, that is exploitation, plain and simple. You dispose of his body. In the end he would be punished for becoming a brain surgeon, because people would feel entitled to his services and would make him work 20 hours a day, with no compensation.
Why exactly is inequality a problem? Because people suffer from their envy?
People starving, having no health care, low life expectancy, that sort of thing, are problems. Their neighbor having more money in the bank is not really a problem.
There are also actually differences in skills, performance, diligence, and so on. It would be very unfair if some people weren't allowed to earn more money than others.
Whether it should be possible to be arbitrarily rich is another question.
> People starving, having no health care, low life expectancy, that sort of thing, are problems. Their neighbor having more money in the bank is not really a problem.
Most people, when they critique wealth inequality, aren't critiquing their neighbors because most people in the same zip code are going to be at similar levels. When people critique wealth inequality, they're talking about the Koch brothers, or other parties who leverage capital to gain unfair advantage and political powers and then work against the first half of your statement.
> Whether it should be possible to be arbitrarily rich is another question.
I, too, am in favor of a 100% wealth tax upon death. No more freeloading failsons.
Well, again, start accumulating capital, if it is such an unfair advantage.
"I, too, am in favor of a 100% wealth tax upon death. No more freeloading failsons."
I am absolute against such a thing, in fact I consider it an insane proposal.
It seems one of the fundamental human rights should be people being allowed to provide for their children.
People work to have successful children. It is absolutely incorrect that all children should have the same starting positions for a fair world. If a couple works hard to earn money, and others don't work and instead pop out 10 children, why on earth would it be fair to take money from the hard working parents to distribute it to all? I know many people who would like to have more children, but feel they can't afford them. Why should they be punished for being responsible.
It even starts before people have children. They work hard to be attractive and find a good mate, to improve the odds for their children. That is basic human nature.
The acts of their parents are not the children's fault, of course, and everybody should be given a fair chance to make it in life. But there are limits. Both strategies can be valid (have few children and try to give them a good head start in live vs having as many children as possible and leaving them to their own devices), but it would be unfair to politically punish one strategy over the other. At the very least, if you take away money from the responsible parents, you should have to limit the behavior of the irresponsible parents.
The only way to make things completely equal for everyone is to disallow people to have children, and instead rise future children in clone factories. Why should that be considered desirable?
And even more basic than that: people should be allowed to do with their money as they please. Including giving it to their children.
> I am absolute against such a thing, in fact I consider it an insane proposal.
44 minutes ago
> Whether it should be possible to be arbitrarily rich is another question.
You were so close to getting it, what happened to you?
> Well, again, start accumulating capital, if it is such an unfair advantage.
Hey, person who can barely make it to get by and spends all of their income on subsistence-level living, why don't you just get more capital?
> The acts of their parents are not the children's fault, of course, and everybody should be given a fair chance to make it in life. But there are limits.
You continually try and straddle the line with these declarations, but just draw completely arbitrary distinctions: everyone should be given a fair chance to make it--but what is fair, how is this decided, who enforces it? What are these limits and why are they decided? There's no rhyme or reason to what you're saying, just whatever sounds the best to you.
> And even more basic than that: people should be allowed to do with their money as they please.
So it's perfectly acceptable when Coca Cola sends death squads to kill labor organizers. The ancap fever dream is terrifying.
"> Whether it should be possible to be arbitrarily rich is another question.
You were so close to getting it, what happened to you?"
There is a difference between limiting how rich anybody can get, and taking everything away from families if the head of family dies.
"Hey, person who can barely make it to get by and spends all of their income on subsistence-level living, why don't you just get more capital?"
How many such people even exist? If you barely make it, you should aim to improve your situation. Try to find a better job, try to learn skills that enable you to get a better job, and so on. Few people are really doomed to such a situation forever. And those who are, usually because of illness, need charitable help or insurance. It's a separate problem.
"everyone should be given a fair chance to make it--but what is fair, how is this decided, who enforces it?"
Well who do you want to decide what is fair?
I think markets are the best mechanism to establish fair prices. Other than that, you can establish some baseline - access to housing, food and education, so that people can try to make something out of their lives. It can be discussed. But certainly it doesn't mean fair has to be everybody has to have the exact same starting positions. It is not even possible, because not all parents are the same. If your parent is Paul Graham and he teaches you programming, you already have an advantage against other kids, even without economic resources.
"So it's perfectly acceptable when Coca Cola sends death squads to kill labor organizers."
Obviously not. I think you are being silly here. Basic laws still apply.
> I, too, am in favor of a 100% wealth tax upon death. No more freeloading failsons.
I am very far from an economic leftist, but the elimination of inheritance seems to me the fastest, fairest, path to equality of opportunity (the disposition of the confiscated assets is a separate argument). Tax the dead guy.
That's one of the top defining characteristics of "economic leftist" type systems.
Either you don't fully grasp the implications of such a policy, or you may want to re-evaluate your economic self-identity.
I'll add- it's not just the rich that this hits. This means taking a family's home when parents die, unless they pay for it again.
Which means it's basically an incentive for people to rent everything and own nothing. A Subscription based economy for everything. And companies will love it, since they'll provide the subscriptions and corporations never die, so it won't affect corporate wealth.
This is just the tip of the iceberg, but it's not difficult to see a floodgate of unintended consequences. And only the rich will be able to afford the accountants and lawyers to double-Irish/ Dutch-sandwich loopholes.
1. The government must be funded, taxes are inescapable
2. Financial/material inheritance is inherently cosmically unfair (Paris Hilton and orphan street dweller have equal merit claim to the Hilton fortune)
3. Your children's "inheritance" is their genetic endowment, the benefits of being raised by you, and whatever material help you can provide during your lifetime
4. The details (and loopholes) of the implementation are an exercise for the student (I'm not super concerned whether a "family farm" must be liquidated, or how every last penny of Warren Buffett's fortune is confiscated)
> Which means it's basically an incentive for people to rent everything and own nothing.
This may be true toward the end of one's life, and I'm not sure this is a bad thing. Your children's inheritance is a distant concern for most your time on earth; your savings is almost entirely a prudent hedge against a lean harvest.
FWIW, I am strongly against (national) Government expansion, and would be fine with just setting all the confiscated funds on fire.
Then the dead guy will give all his money to his kids before dying.
At the very least the dead guy will pay for them to go to Harvard, arrange the appropriate internships, etc.
It’s very possible to preserve a class system without actually transferring wealth to your children upon death.
Just use your wealth and money to make sure they’re set before you die.
Easy-peasy.
Just look at the many children of still-Alice billionaires. They’re not hurting.
For example, Warren Buffet announced he was giving away all his wealth, created a foundation that possesses most of his wealth, and named his son as director.
Not rocket science.
And that doesn’t include the affects of private tutors, nanny’s, quality education, etc.
> Then the dead guy will give all his money to his kids before dying.
Don't let the perfect be the enemy of good enough. Inequality is a fundamental part of human existence, but I'd prefer that inequality to be as much as possible an expression of individual merit rather than a financial windfall as a result of parental success.
As I mention in another reply, your "inheritance" is what you get while your parents are alive.
It’s not so much the perfect being the enemy of the good, as the fundamental point being missed.
The goal is to prevent persistent, cross-generational inequality. High inheritance taxes simply won’t accomplish this. Or even come close.
The only policy that had ever achieved the sort of field-evening you want is a very strong public sector.
Providing quality education, job, opportunities to everyone (or at least lots of people).
A good example is Sweden. Sweden had massive asset-inequality. A handful of families are massively wealthy, and the successfully pass that wealth down generations.
Yet Sweden had little income inequality, because of their strong public services.
My complaint with inheritance is not that perpetuates income inequality (though it may do that). I don't care about income inequality in the abstract, it bothers me not a whit that multi-billionaires prosper while the poorest in the US live merely pretty OK lives.
I simply hate the unfairness of this particular form of wealth transfer: the winners hit the jackpot without even buying a ticket.
You're just incentivizing rich people to put all their assets in holdings companies and then giving their children ownership before they die. I wouldn't be surprised if this is how its done today.
Presumably there are people who are being exploited in the world. But to claim in general poverty is a result of exploitation seems very questionable.
Start with basics. People live in the woods, with nothing. Some start building a hut from sticks, others don't. The ones living in huts suddenly are richer than the ones who don't, even though they haven't taken anything away from the ones who don't have huts.
And of the ones who don't have huts demand some of the huts from the people who built them, who is doing the exploiting?
People in huts eventually band together into villages, villages start to trade goods with one another. Eventually the largest village is able to coerce (either using the threat of force via superior military or through infiltration, bribery subversion etc) the smaller villages into giving it the best deals.
The largest village gets very rich while extracting all the resources and goods from the smaller villages around it. The largest village is able to ram through treaties, trade pacts etc that favor it's interests, it is able to interfere in politics of surrounding villages and sometimes provides backing to despots or outright overthrow leadership of smaller villages that might be doing something the largest village does not agree with.
What you say is true, but when people usually talk about inequality, they're talking about inequality in a specific country. In your example that would be inequality inside a single village rather than between the villages.
Also, with similarly bad faith you could say that when the first group was building their huts, the second group was sharpening their sticks. Once the huts were completed they used their sharpened sticks to coerce the richer people (those with huts) to give them huts too.
We'll, I guess all notions can seem silly from some perspective. Children climbing up chimneys or adults wearing diapers to meet chicken plucking quotas can seen silly from a certain perspective, but usually not a first person one.
A lot of this article reminded me of the techniques used by climate change deniers to sow doubt.
Take for example the following:
> Another correction concerns the tax reforms passed under Ronald Reagan in 1986. Apparent changes in top incomes around this reform account for about two-fifths of the total increase between 1962 and 2015 in the pre-tax incomes of the top 1% in Messrs Piketty and Saez’s estimates. Messrs Auten and Splinter say this is an illusion. Reagan’s tax reform created strong incentives for firms to operate as “pass-through” entities, where owners register profits as income on their tax returns, rather than sheltering this income inside corporations. Since these incentives did not exist before then, top-income shares before 1987 are liable to be understated.
In essence this just says that it's possible the rich used to be overwhelmingly rich even before the Reagan era reforms, hence inequality might not have increased that much over the past decades. This is hardly comforting for the average person.
Or take a look at the conclusive paragraph:
> While that long and bloody academic battle takes place it would be wise for policymakers to proceed cautiously. Proposals for much heavier taxes on high earners, or a tax on net wealth, or the far more radical plans outlined in Mr Piketty’s latest book, are responses to a problem that is only partially understood.
Doesn't it smack of "the science is not in yet" argument used by climate change deniers?
Looking at your methodology critically is crucial to all fields of science though, as is changing your conclusions and interpretations as more findings come forward. Dismissing someone outright for challenging something that has become dogma is anti-scientific even if that dogma is based on facts. If it's actually true, then it will stand up to scrutiny.
I absolutely agree. However I'm not at all sure Piketty's ideas are dogma. If anything he's the challenger to the neoliberal dogma.
Secondly, the fact that there are diverging sides to an issue doesn't mean those sides have the same likelihood of being true. To take a trivial example, flat-earthers are challenging the dogma that the Earth is round (spherical to be more precise) - should this mean that their position should be taken seriously?
Yes, Piketty and co are the challengers. Therefore the burden of proof is on them to convince people their ideas are true, and presenting their ideas without pointing out how the rest of the field thinks of them would be the analogue of your climate deniers in your comment above.
> A lot of this article reminded me of the techniques used by climate change deniers to sow doubt.
And a lot of climate change advocates' technique reminds me of the religious zealots of the past. Even down to the ad hominems like "Christ denier"/"climate change denier".
Firstly, I don't believe climate change is a matter of "belief". No such thing as a "climate change denier". Climate change is an intrinsic part of nature. It always exists.
> Doesn't it smack of "the science is not in yet" argument used by climate change deniers?
But the "science is not yet in". That's why there is so much debate, even within the "climate change" advocacy group.
If climate change was a developed science and we understood climate change adequately, we wouldn't have so many climate change models. We would have ONE.
On the one hand, climate change advocates claim that the climate is too complex that we can't have a predictive model yet. And yet, climate change advocates also claim that their own personal view is gospel and everyone else who doesn't agree are heretics.
>If climate change was a developed science and we understood climate change adequately, we wouldn't have so many climate change models. We would have ONE.
In physics we have a dozen different models of gravity, yet we're still pretty sure that if you jump out of a building you're going to fall downward.
> In physics we have a dozen different models of gravity
We have general relativity. Newtonian gravity is kept around for legacy's sakes and ease of calculation. Also, there is a difference between "different" models of gravity that gives the same results/predictions given the same input and different climate models that give different results/predictions given the same input.
> yet we're still pretty sure that if you jump out of a building you're going to fall downward.
If I drop a ball from the window, every valid model of gravity gives the same time for when the ball will hit the ground. If the models of gravity were like the climate models, we'd have dozen different times for when the ball hits the ground. We'd have 1s, 5s, 3s... Hell one result would claim the ball will float up and never hit the ground.
If the gravity models were like climate models, we would not be able to fly planes.
This is why climate change advocates are so disappointing. The complete lack of understanding of science and yet that ignorance makes them pretend they are an authority on science.
> This is why climate change advocates are so disappointing. The complete lack of understanding of science and yet that ignorance makes them pretend they are an authority on science.
And are you an authority? I'll concur that I'm not, my field is cosmology. However, all my contemporaries in climate science seem to support the consensus, and here's a source that 97% of publishing climate scientists do [0]. They are an authority, and I think I'll believe them over an armchair intellectual trying to sow doubt on the internet.
>In essence this just says that it's possible the rich used to be overwhelmingly rich even before the Reagan era reforms, hence inequality might not have increased that much over the past decades. This is hardly comforting for the average person.
While that may not be comforting, it does cast doubt on the idea that inequality is the cause of all our ills.
Yes, it does smack of the science is not in yet argument - except that this is not climate change. Climate change's academic battle is essentially over. This one is not.
Only in the sense that predictive global economic theories are equally as un-testable as predictive global climate theories, at least in the traditional sense of comparing experimental results against a control group.
And demanding relatively drastic policy changes based on said theories, in comparison to policies influenced by other areas of science.
Measuring income inequality in the US without looking at outsized wage gains abroad feels remarkably inaccurate.
I'll copy-paste my reply to another thread from earlier this year:
> But, wages haven't improved in the last 40 years for the average person
...in the US.
Growing inequality in the US is driven by the fact that capital gains domestically have improved dramatically alongside wage gains abroad, while wage has been essentially stagnant within the US due to globalization / offshoring / outsourcing
The solution, in my humble immigrant opinion, is to train Americans to take on service jobs that cannot be easily automated / performed by cheap labor overseas. But that requires taking an honest look at the country's education system and neither side of the aisle seems to be able to do that without resorting to anger and vitriol
Neither have they improved in Australia. They have been largely stagnant for the past 5-10 years. Jobs have been evaporating in all sectors except for service sectors that, you guessed it, can't be automated. But most locals see those jobs as things you do in high-school/uni, or if you can't do anything else. Hence they are performed by very young people, or immigrants / those that have no choice. And so the vast majority of the workforce competes for the higher paying "white collar" jobs. This isn't so bad in IT right now, since there is still high demand. But I expect that to change soon as the barrier to entry is made increasingly lower.
Education just isn't a priority for Americans, it's not about partisan anger and vitriol --both sides don't prioritize educations. Polls of both parties' voters show that education is not a top issue, but rather social concerns, the economy, guns, immigration, trade, climate change, these are all given as much if not more political oxygen than education.
The problem with education in America is not government and policy, but individuals, families and culture. Many school districts across the country have horrid graduation rates and median test scores. The amount of money you pour into these districts has very little impact on student outcomes.
How different would wage growth and average wages look like if the people in these districts took school seriously? The numbers would probably be much better.
Yep, I’ve seen it. Families scraping up money from all kinds of places and driving old beaters just to make sure they can send their kids to after school cram school. A lot of it is culture.
I mean, some parents are well off but many are just really eking it out, never the less any extra money goes into education rather than new scooters or vacations or clothes, etc.
And at the end of the day, the amount of money you have or the time you have outside of work as a parent matters much less than the amount of time the student puts into their work. Many Asian students know they have to (because they are expected to) put in the time.
R&D in general (but, in particular, engineering, innovative software development and other highly-trained CS-based roles, life sciences research), highly-trained managerial roles in finance, accounting, operations management
Those are not service jobs. I think you might be confusing the definition of the service industry and information industry. Additionally, I would argue those jobs you listed could potentially be off-shored, while service industry roles (which typically pay far less) could not.
The parent poster is referring to the three-sector model of the economy: primary (resource extraction, agriculture), secondary (manufacturing, processing), tertiary (services). Education, R&D, knowledge workers, secretaries all fall under this.
It seems to me that income is in effect an abstraction of a person's social class. Therefore, I wonder if it might be more effective to look at the factors that actually separate different social classes.
For example:
What percentage of a population is self employed and/or employed in a role with significant autonomy?
What percentage of a population owns their own house? Of those who own a house, how much control over their house do they have (e.g. you cannot add an extension to a multi-unit house even if you own it and you likely cannot put in a workshop due to noise)? How do these measures change based on how desirable the location is (e.g. top tier cities, suburbs, etc.)?
How easy is it for a given population to acquire the means of production? E.g. if someone doesn't like the products that the corporations are making, how difficult would it be for them to try to make an alternative?
What level of political office could a member of a given population realistically run for?
> It seems to me that income is in effect an abstraction of a person's social class.
That's not how class works. There are multimillionaires running their own blue-collar businesses and farms whom a bankrupt real estate developer would look down on.
I think that actually supports my core point: income doesn't always map directly to a person's role in society.
Even if the 99% has roughly the same portion of the income that they did in the past they still might have less of the things that actually determine lifestyle such as autonomy.
It's sad that we live in a world where reducing poverty is somehow a hot take on society. I do not understand why some people believe it is impossible to rise out of poverty without seizing someone else's property. Capitalism is not a zero sum game
One the whole capitalism is not zero-sum, as we can observe by continued GDP growth. I think a lot of the frustration comes from the feeling that within certain classes, it is zero-sum.
Imagine an economy that grows by $1 trillion. Suppose all that wealth goes to a select group (Top 5%). Everyone in the other 95% is essentially in a zero-sum game. If the paths to that Top 5% diminish (low capital gains tax, increasing education/housing costs), it becomes worse.
At the same time, the rich are running for political office and supporting things like Citizens United that re-enforce their power.
Unfortunately, you can't have a real democracy with too high income inequality, and it is hard to reduce absolute poverty if the poor don't have a political voice.
This is an often used argument, but can you elaborate how exactly that's the case?
In most western democracies (the US included), the only way to elect a politician is for a human being to go to the polls and check the box next to the candidate's name.
This opportunity is present regardless of whether one is a billionaire, a millionaire, a member of the upper-middle class, or a blue collar worker.
A real world example of this is Sweden, which has the highest per capita population of billionaires. The country doesn't seem to care because the minimum standard of living is high enough. It's not even paid for by taxing the billionaires, it's paid for by high taxes on the middle class and a VAT.
Well, in the US, as possibly in other places, elections are usually won by the candidate who receives the most corporate support. On top of this, a bipartite political system can quite easily keep out candidates with views that are unpalatable to the rich and powerful (e.g. see how Bernie Sanders was treated by the Democratic establishment in 2016).
Individuals mostly rubber-stamp one of the two mainstream candidates.
> Well, in the US, as possibly in other places, elections are usually won by the candidate who receives the most corporate support
Again, this is orthogonal to the point about inequality. Insofar as corporations or money are involved in politics in America, it's for campaigning — buying TV ads, flyers, etc. While it's true that this makes it easier for richer people to get their message out there, the fact of the matter is that the message still needs to resonate with a broad enough polity capturing working class, college educated, non-college educated, urban, rural voters etc (see: the Electoral College).
Just to give you some numbers, in the 2016 election, Hillary Clinton outspent Donald Trump $132M vs $92M.
In the ongoing Democratic Primary for the upcoming 2020 election, the TV ad spending through 12/3/2019 is as follows. The candidate's polling percentage at the same time is included in parenthesis.
Steyer: $63.4 million (1%)
Bloomberg: $37 million (<1%)
Sanders: $6.7 million (15%)
Buttigieg: $5.1 million (13%)
Yang: $2.9 million (4%)
Biden: $1.7 million (25%)
Klobuchar: $1.3 million (3%)
Bennet: $1 million (<1%)
Gabbard: $1 million (1%)
Warren: $926k (18%)
Delaney: $662k (<1%)
> On top of this, a bipartite political system can quite easily keep out candidates with views that are unpalatable to the rich and powerful (e.g. see how Bernie Sanders was treated by the Democratic establishment in 2016)
You're right about this, but the Democratic Primaries are not a good example of a democratic institution (ironically) — it's a private club and they can make their own rules, for better or for worse. During the general election, the opposite happened; the rich and powerful overwhelmingly supported Hillary Clinton, and yet she still lost.
> Individuals mostly rubber-stamp one of the two mainstream candidates.
This is true, but has nothing to do with economic inequality. The two-party system is an artifact of the first-past-the-post voting system. Since ~1860, there have only been two mainstream candidates, and inequality has varied wildly in that time period: i.e. no correlation.
In a society there are may levers (official or not, transparent or not) that the powerful can pull to get politics to lean their preferred way. This is true of all places and all times. The more power is concentrated, the easier it is for a very small group of individuals to have a very large impact on decision making.
All the billions poured in campaign funding, lobbying etc. do actually buy a lot of influence albeit not in a direct, transparent way.
The same billions can also sway public opinion through deliberate and persistent propaganda in support of certain view points and against others.
Nowadays (and probably throughout most of modern history) you have to be highly committed and quite fanatical if you want to develop well grounded opinions that are not very much affected by propaganda. Most people don't have the time and resources for this -> most people are easily swayed by corporate propaganda.
>The more power is concentrated, the easier it is for a very small group of individuals to have a very large impact on decision making.
So if we remove the federal government's broad involvement in all aspects of life, we can reduce the power of corporations by reducing their vehicle of control. I agree.
Unless you provide data or empirical evidence, it's just a vague intuition. There's more than enough evidence to the contrary (as I've provided).
At the end of the day, people act as individuals, and they have their beliefs and biases. For example, a small group of wealthy individuals can pour as much money as they want into pro-abortion propaganda, but it's unlikely that it will sway pro-lifers' opinions (especially evangelical Christians).
Money doesn't influence opinions directly, it just affords you a platform to try and change someone's mind. The only way to change one's mind is if the message is compelling, and because the US requires broad buy-in for any democratic action, the message needs to be compelling to a broad audience, not just a small group of wealthy people.
How do you explain presidential campaigns costing billions of dollars[0] in the first place? (And that's just one slice of the pie, when we take into account not only all the other election campaigns, but other sources of propaganda, lobbying, and so on.)
If that's what it costs to buy 'a platform to try and change someone's mind', then almost nobody can afford to to so without big money backing.
As for the donors' motivations, maybe you'll argue that they are merely supporting the candidates with favourable policies, rather than buying influence with them. But even if that were true, the donations would still be a means of converting $ into desired political outcomes.
I'm familiar with Ferguson's work. As with most economic work based on theoretical models, the empirical facts are more than enough to disprove them.
The famous IMF rebuttal of Piketty was an exercise in exactly the same. "rich in data, [but] the book provides no formal empirical testing for its theoretical causal chain". The same applies to the Investment Theory of Party Alignment. You can make an argument that poor people will follow rich people ideologically, but you can't 1) draw a causal line between the wealth and the influence, and 2) most importantly, you can't prove that poor people would ideologically follow rich people against their own self-assessed interests.
There were some good arguments from another user on this topic, but I wanted to also raise another direction.
To have a true democracy, free elections are not the only necessity. You also need wide representation of popular ideas among the candidates of the election; and you need the winning candidate to at least take steps towards enacting the policies that they were elected for.
Income inequality works very strongly at these two steps - gating access to candidates which hold certain political opinions to the election itself; and ensuring that certain campaign promises never get delivered on, regardless of election results.
For an example of the former, compare Gallup poll results on public healthcare to the positions of candidates in any election so far - tough at least 48% if the population has been in favor of a public option for a decade, there has been no candidate for presidential elections that had even offered that.
For the latter, again Healthcare can prove a useful example, comparing Obama's campaign promises of drug price negotiation to the final resulting law proposal, which essentially had no change that could affect the insurance companies' bottom lines.
> To have a true democracy, free elections are not the only necessity. You also need wide representation of popular ideas among the candidates of the election; and you need the winning candidate to at least take steps towards enacting the policies that they were elected for.
Not sure that this is ever a prerequisite of a "true democracy". Campaign promises can only be successfully delivered if the legislature allows it, and the members of the legislature are also democratically elected. We do have a wide representation of popular ideas in Congress (see: members in Congress ranging all the way from AOC to Rand Paul), it's just that some ideas have not quite found broad bipartisan support across the large heterogenous polity that is the United States. The bar to pass law at the Federal level is extremely high: it needs to pass 2 houses + signed by the President, all separately, yet (in varying forms) democratically elected.
> For an example of the former, compare Gallup poll results on public healthcare to the positions of candidates in any election so far - tough at least 48% if the population has been in favor of a public option for a decade, there has been no candidate for presidential elections that had even offered that.
Support plunges when the polled respondents are asked if they would support the funding strategy (higher taxes) [1]
> For the latter, again Healthcare can prove a useful example, comparing Obama's campaign promises of drug price negotiation to the final resulting law proposal, which essentially had no change that could affect the insurance companies' bottom lines.
You'd have to reconcile why the same voters are voting for members of the House of Representatives and Senate that have opposed Obama's agenda. Both political branches of government (Executive and Legislative) are democratically elected.
All this being said, there is a public option that has passed in the state of Washington. [2] San Francisco also has a public option [3], and the state of California is currently reckoning with lukewarm popularity for a statewide single payer system [4].
This seems disingenuous to me. If your concern is the influence of money in politics, address that issue directly. Get rid of PACs, or give a total annual cap in per-person political donations, or move to publicly funded elections, or quadruple the number of House seats so that canvasing for votes is a legitimate strategy for poor candidates.
Redistributing wealth to enhance the relative political voice of the poor is an absurdly tangential 'solution' to the stated issue.
This is kind of a touchy subject. I feel like a lot of people would balk at the idea of the top 1% not doing better and better, not because they have any extra insight into the topic but because to say this seems like you're defending the ultra-rich (and by extension attacking everyone else). In reality, even if the rich aren't getting even richer at quite the rate we thought, it doesn't mean you really need to have any more sympathy for them, it just means you tweak a few lines of your rhetoric.
Conflating the top 1% with the ultra-rich is another big problem.
If we assume that most people achieve peak earning years between 45-50 years old, then about 30% of people end up in the top 1% at some point in their lives.
As I replied to someone else in this thread branch, the threshold for entering the 1%, at least in terms of income, is nearly $330K a year annually. The plain reading of your last sentence is that about 30% of people make that at some point in your life, which... doesn't strike me as very plausible.
Are you talking about net worth instead? That's still an argument that 30% of people have over $10M in assets (in 2019 dollars) at some point in their lives, and that... also strikes me as a stretch, honestly.
In US terms. What if we look at the same numbers in global terms? Suddenly many of the people complaining about the 1% are the 1% themselves. According to the global rich list website if you earn above $33k a year you're in the top 1% globally by income.
this is a huge problem because if you're in the top 1% then you're probably also living in the top 1% most costly cities and towns (at least in terms of housing cost). take into account the much higher taxes and you'd only be doing a tiny bit better than the average person nationwide.
I think "a tiny bit better" underestimates how big the gap is between "median income" and "1% income." The median individual income for the US in 2019, from data I can find (on "Don't Quit Your Day Job," which uses census data rather than Social Security data), is $40,100; the average income is $48,380. The threshold to enter the top 1% is $328,551.
I live in one of the most expensive cities in the country (San Jose, CA) in terms of both cost of living and taxes, and I'm making well under that $328K level. And I assure you I am doing more than "a tiny bit better" than someone making under $50K in a metro area closer to the national median.
tl;dr: I really don't think anyone who's in "the 1%" is having a huge problem with their finances, unless they're staggeringly bad at money management.
GP is overstating a bit but not by too much. I have friends in non-coastal states and $50k is a kingly amount of money out there. As in, renting a nice family-sized house for $500/month.
At san jose's going rate of roughly $4k/month for the same thing, that would be the equivalent of a $400k/yr salary.
> At san jose's going rate of roughly $4k/month for the same thing, that would be the equivalent of a $400k/yr salary.
No, it wouldn't -- conflating absolute dollars with percentages is a mistake in this kind of comparison, even though it's a very common one. You need to look at the amount of money you actually have left over after expenses. Let's throw in federal taxes based on 2019 rates for a better comparison.
Person A: $50,000 a year - $8200 in taxes - ($500/mo * 12) = $35.8K after housing
Person B: $400,000 - $127,000 in taxes - ($4000/mo * 12) = $225K after housing
Even if we assume everything else costs eight times as much for Person B as it does for Person A, they'll still have several times left over after paying those expenses than Person A had before expenses.
I think you did follow! I was talking about housing costs, not the rest of living costs, because in general housing is (a) your biggest expense and (b) most tied to the region you're in.
Sure: gasoline, utilities, and groceries are certainly more expensive here in Santa Clara than they would be if I was still living in Tampa, Florida. But the difference is much smaller in magnitude than the difference in housing costs, and the absolute amount of money that I'm spending on those things is also less. (e.g., I pay around $3.60 a gallon in gas right now; in Tampa it's around $2.40/gal, which is a pretty astounding difference objectively, but it's not eight times less. if I drove 15,000 miles a year in a car that got just 30 mpg, I'd pay about $50 a month more here.
In general, everything else follows similarly. If the $30K number you produced is "stuff Person A spends on non-housing costs," in practice Person B, even in the most expensive area, isn't spending anywhere close to $240K on the same things. It's extremely unlikely they're spending anywhere close to $60K on the same things.
Whenever I play monopoly I imagine I feel like Jeff Bezos when the other players land on my properties and pay me rent. There’s something seductive about that income stream. You don’t even have to be prudent about what you buy so long as you buy early enough.
Isn't this one of the thesis of Marx's Capital? That there's a loop in the flow of commodities, money, and labor that generally results in capital extracting more capital from the economy. (Typically from wage labor.)
It seems to me that without someone applying the brakes to that loop and changing the way distribution or production is done, we're just going to keep riding this positive feedback loop.
Failure to distinguish land from capital is an enormous possible pitfall for those trying to fight poverty.
Land titles, and all other types of access rights to natural opportunities, are means by which "rent-seeking" occurs. Rent=seeking is any type of of zero-sum extractive activity that adds nothing to the economy, and simply serves to make the rich richer.
Examples include: holding a prime piece of real estate idle, while waiting for others to add value to that land. Or acquiring a patent just to sue anyone who unknowingly violates it. Or manipulating the rules to your favor through lobbying.
Productive activity, however, must be rewarded since that is the engine of wealth. We can't have a high standard of living if production isn't rewarded. Solving inequality by making everyone poor is not going to get you very far.
For sure. I'm a big advocate for removing the benefits of holding land in this way. Especially in cities, where the land could productively house people rather than be empty or have a surface lot on it.
> Solving inequality by making everyone poor is not going to get you very far.
For sure. I'd like to see more wealth equality, and I'd like to see it done by raising the amount of wealth of the working class.
But that's an oversimplification. The system has its own brakes in the form of corporate bankruptcies and liquidations. The market landscapes are constantly changing and companies get destroyed regularly.
... and this returns that stored capital back into the liquidity system.
There's little evidence of a persistent imbalance.
Fundamentally, capital is seeking to take money, temporarily convert it to commodities, and convert those commodities back into money + some additional value. (Compare this to a more traditional/historical market where you brought commodities, exchanged them for currency, which you turned into an equivalent value of different commodities.)
That additional value has to come from somewhere. It could come from buying low and selling dear, from usury, or from buying wage labor at a price less than its value to you.
> There's little evidence of a persistent imbalance.
From 1989 to 2018 the top 1 percent increased its total net worth by $21 trillion. The bottom 50 percent saw its net worth decrease by $900 billion over the same period. In 2018 dollars. [1]
Why when we talk about inequality we never talk about the tide of economic progress that capitalism produces.
If the rich get richer but the middle class has a better quality of life than what the rich had 200 years ago, is strict inequality still the only thing that matters?
How do you measure quality of life though? People say this kind of thing all the time "the poor are better off now than rich of the past". My guess is that most poor of today would switch places with the rich of the past in a heartbeat.
My point is just that "quality of life" is more complex than just longer expected lifetime, or has access to faster internet, as nice as those things are.
Check out [1] and scroll down to Table A-7 (it's an Excel file). It's the real earnings data (in 2018 dollars), by gender, from 1960 to 2018 (though it's kind of spotty before 1967). What sticks out:
* For men (looking at Total Workers), real earnings are currently around 10% higher than they were in the 70s (moving from low-$40K's to recently just past mid-$40K's, with some peaks and valleys along the way). Doesn't sound like much, but...
* For women, earnings have roughly doubled in that timespan
* The number of men in the workforce has increased by almost 50%
* The number of women in the workforce has increased by almost 100%
From a certain perspective, it's kind of amazing that real earnings haven't gone down significantly.
In the last 20 years, median earnings, in real terms (adjusted for inflation), are up. Unemployment is at its lowest, and that's at the broadest definition of "unemployment" (U6) [2].
As for poverty, check out [3] from the US Census Bureau and scroll down to Table 6 (it’s an Excel file). It’s the percentage of people in America that are below 125% of the poverty line (I.e. near poor to absolutely poor) between 1959 and 2018. That percentage has gone down from 31% to 16%.
The median number of years to recoup the cost of a Bachelors degree in America, adjusted for inflation, has gone down since the 1980’s, from about 22 years to about 10 years. [4]
> If the rich get richer but the middle class has a better quality of life than what the rich had 200 years ago
So no changes are called for until quality of life is literally as bad as it was 200 years ago?
In more recent times, quality of life and economic metrics are flat or down in the USA, at least. Life expectancy has gone down multiple years in a row now, for example.
Obesity must have a clear link with free personal time, which is essential for cultivating physical fitness. If you work two full-time jobs, there's no time for proper meal preparation, hitting the gym or going for a swim. Add poor quality meals to sedentarism, and obesity is an expected result.
Actually, it correlates with the opposite; low income and high dependence on others. Go stand outside wherever Americans collect welfare to take a look.
Hence my usage of the phrase “billionaires, broadly”.
Nobody is denying that the Sacklers are culpable for opioids, but what about Buffett, Bezos, Brin, Jay-Z, and Jerry Seinfeld? They’re all “billionaires” too, and it would be foolish to blame them m for obesity and opioids, and in turn, the falling average life expectancy.
>There is nothing worth celebrating about a world where inequality is so extreme that 58% of people are in poverty, while a few dozen billionaires have more than all of their wealth combined
I also think the point about changing goalposts to focusing on proportions (the absolute number of people in poverty is increasing) is interesting
1) The amount of wealth held by ultra-billionaires isn't nearly enough to solve our poverty problems. If you seized literally all of the wealth of the the entire Forbes 400, it would fund the US federal government for 8 months.
2) Wealth is illiquid, and if one were to seize it, you can only seize it once. It isn't an ongoing stream unlike, say, income. So to amend the last statement, if you seized literally all of the wealth of the entire Forbes 400, it would fund the US government for 8 months, one time.
3) Wealth is not zero-sum, it is created. The global inflation-adjusted GDP has gone up from ~$2T in the mid 20th century to ~$110T today. The ultra-wealthy have enjoyed most of that growth, but one can argue that it's because they created that wealth. I.e. Bill Gates' net worth is only as much as it is because he created Microsoft, which has added ~$1T (its market cap) to the US GDP.
> None of these points are being contested or purported in the "line of thinking" you mention (the letter I linked I assume?)
These points are being purported/contested here:
"There is nothing worth celebrating about a world where inequality is so extreme that 58% of people are in poverty, while a few dozen billionaires have more than all of their wealth combined"
They're not, but its fine to read between the lines. The letter makes no allusions to seizing wealth or stating that immense wealth hasn't been created.
A one-time seizement assumes the money is just sitting there in a high-interest savings account or something. This is why we need proper education, but as soon as you mention basket weaving class should probably be replaced with something more relevant, you're a right-winger trying to dumb down the population.
Capitalism has its perks, great advancements have been made in technology, quality of life and the development of cities that would otherwise have never existed.
The real issue lies when you look at the system in a more holistic, long term view, lets say another 200 years. In that time-frame the self propelling cycle of capital will make the accumulation of all wealth lie in a very small group.
In itself it is not a bad thing as long as advancements are still being made and the average quality of life is improved, however it leaves the system with a very centralized point of control.
This point of control could quickly deviate the system for purposes not entirely in the best interest of the species, put it as "Power tends to corrupt, and absolute power corrupts absolutely." It may be a possibility but not the great peril. The real issue lies in the central group having accumulated all resources, and then not being able to maintain said resources and leaving the whole system open to a single point of failure by a revolt of some sorts. (starting from scratch can take more energy that the energy required to topple the system, and sometimes there may not enough energy to build over...)
Do we really want to have a society were the integrity of it depends on a single point? Maybe we do, but it just might not end up being the most resilient system.
Just don't mention the elephant in the room: the Cantillon effect which is primary reason for the wealth flowing from working classes and savers to the bankers and the managerial class. Entirely courtesy of artificially low interest rates created by central banks and lax controls on monetary emission (i.e. fractional reserve shenanigans) by private banks.
The Cantillion effect describes a phenomena of relative inflation due to the uneven distribution of new money and access to credit.
This doesn't really translate to "a flow of wealth from working classes and savers to the bankers and the managerial class". Rather, the impact on inequality is that it reduces the purchasing power of those not benefiting from the increased supply of money and credit. As these tend to be the poorest individuals in society, inequality is made worse.
Interest rates are driven by the supply and demand of credit. Supply outstrips demand now.
There are two sides to every transaction; low rates are good for borrowers and bad for lenders. What makes you think the lenders are entitled to a greater return on their savings? Do you think we should force people to borrow at higher rates for this purpose?
>wealth flowing from working classes and savers to the bankers and the managerial class.
The working class in America are debtors and have no savings. Outside of low rates contributing to driving housing prices higher in some communities, how are the working class harmed by lower payments on their debt?
> Interest rates are driven by the supply and demand of credit. Supply outstrips demand now.
While that's somewhat true, its also largely dictated / controlled / heavily influenced by government. This means the overnight lending rate, U.S. bond rate, etc.
You're both right. The Fed is a lender (to banks only) and carries out what they call "open-market operations" with the goal of enacting policy and not making money. They throw around enough money to skew the market.
>This means the overnight lending rate, U.S. bond rate, etc.
The overnight lending rate is set by the Fed, yes.
Treasuries are sold in the market. Although an initial auction price is set, the rates will fluctuate based on demand for the bonds.
I don't deny the Fed are a major influence on rates, as it's a major component of their mandate now. However, the market can "agree" or "disagree" with those rates and set corresponding rates however they choose.
But your missing the key part. Sometimes if the Fed sets rates too low and there's not enough demand for the bonds the Fed buys the bonds thus keeping the interest rates artificially low.
>Sometimes if the Fed sets rates too low and there's not enough demand for the bonds the Fed buys the bonds thus keeping the interest rates artificially low.
Yes, it's how the Fed conducts monetary policy. Can you name the last time that US treasuries were under-subscribed? Greek bonds have lower rates to US treasuries; which would you rather own? On a relative basis, how can one claim that US interest rates are "too low"?
> The working class in America are debtors and have no savings.
There are plenty of working class people that avoid debt and save money. Why should those people, who are acting responsibly, lose out on savings interest? We should be encouraging people to save, not make it cheaper to go into more debt.
Interest rates are set by FED, who can print arbitrary amount of money out of thin air, there is no supply/demand mechanism involved in setting them. Basically every rate change is an experiment testing whatever monetary theory is currently popular among FED board members.
>Interest rates are set by FED, who can print arbitrary amount of money out of thin air
One interest rate is set by the Fed, which serves as a benchmark for other market rates.
But it's a simple question: if I can borrow money at 3%, why would I borrow your money at 7% so you can earn a return? And if someone wants to lend me money at 3%, why is that "artificial"?
>who can print arbitrary amount of money out of thin air
How else should money be created? Should we do pretend mining, like Bitcoin?
> One interest rate is set by the Fed, which serves as a benchmark for other market rates.
This used to be true, but lately CBs are also buying bonds. That affects their supply/demand balance, which affects their price, which is another way of expressing the interest rate.
Monetary policy, and the setting of rates, is accomplished by the buying and selling of bonds in the open market by the Fed. They buy bonds and create money, or sell them to destroy it. This affects the amount of money "available" in the system, which affects interest rates.
Of course, this transmission mechanism isn't perfect.
Real mining seemed to work okay in past. American GDP grew faster in the 1800s under the gold standard (avg. 4%+) than any time after the creation of the federal reserve.
> American GDP grew faster in the 1800s under the gold standard (avg. 4%+) than any time after the creation of the federal reserve.
Yes... during industrialization. Basically all countries experience rapid GDP growth during their industrialization. Even developing countries today get 4%+ GDP growth. Look at China's GDP growth in the last 50 years for a recent example.
You would still have to prove to me that the rate of gold mining is the perfect tool to prevent inflation/grow the economy. Who knows if it may have grown faster or slower during that period without the gold standard.
My current best solution to the problem of capitalism is this: once a year the richest n people must divest themselves of all assets minus the median annual salary and start over.
For any arbitrary n, those clustered at the top will arrange their affairs to maintain the n-1 wealthiest person in society to avoid the reset. Giving away 100s of millions to keep billions makes rational sense - especially if you can arrange it to flow to your spouse/children/trust/charity you control.
In fact, you could game such a system by spiking a competitors net-worth right before the reset i.e. by suddenly buying a small, but significant chunk of their shares to move the market value on their shares.
Those are games within with the current system as well. The difference is that once you begin to approach the top your incentive becomes altruistic, because you are thinking about increasing the wealth of other people more than yourself.
That's the key. Capitalism only rewards greed. There is no altruistic component. What I suggest rewards altruism after the game is won. There is currently no end to the increasing gap, except violent revolt, which has always been the solution.
Violent revolt is not a good solution to the wealth gap.
Did not downvote.
But this solution would make the rich try to hide their true wealth, so basically it becomes picking randomly from the first 0.x percent.
Also do you agree your solution has zero chances of ever being implemented?
I didn't downvote, but while I see the value in a moderate wealth tax, I think cutting the rich down to median salary would destroy a lot of value. Our capitalist system is undergirded by pecuniary incentives to innovate, improve, and produce. If you take those incentives away, the most productive members of society will not produce as much.
Some people are saying that billionaires shouldn't exist. I'm not so sure. If we create a high marginal wealth tax at each 5 or 10 billion dollar bracket, and someone still manages to retain tens of billions of dollars, then they're producing a massive amount of value that should only be celebrated.
Can you imagine that Bill Gates would get wealthy again or Warren Buffett? They would be lauded as heroes! They already are for suggesting something similar, just at death. They give away so much already and are loved for that.
What if they were that person twice our three times! The most productive people will have a new incentive to create tremendous value again!
Very soon I will get a warning from hn that I'm posting too fast. I Don't know when that will be but I will respond when I can. I love the constructive dialog.
And in the end this article is another one in their house style: not particularly informative in the details, they're not arguing openly or forcefully against Piketty, but instead bring up enough different nitpicky papers that it starts sowing doubt in the mind of a reader who hasn't actually read the book.
But then again The Economist has had it out for Piketty (and Saez) for a long time now, they very clearly hate Piketty's Capital and keep sniping at it, but can't stop themselves from bringing it up all the time. :)
At least they are very open about their biases: they promote a view that the solution to all ills is lower taxes and less regulation. However, Piketty's analysis and proposed solution directly contradicts that.