Monday, May 5, 2014

Making sense of the Piketty craze

It is hard to understand how a difficult 700-page book, written for an audience of professional economists using their specialized language, can become a best-seller.  It is probably a safe assumption that the VAST majority of these books will never be read.  Of course, almost nobody actually read Marx's Capital or Keynes' General Theory and they became incredibly important so the question really should be, is this one of those economic treatises of substance?

I don't happen to think it is.  But my opinion isn't so very important here.  What is important is that guys like Paul Krugman think it is big deal.  And as nearly as I can tell, Krugman is a booster because this is a book about a subject (economic inequality) that zoomed to the front of everyone's concerns in part because of the 'Occupy' movements.  It is a subject mainstream economists have systematically ignored for over a generation yet here is Piketty using the language and methods of the profession making a bid to put inequality back into the mainstream debate.  Krugman should be excited.

Once the subject of inequality gets back onto the list of appropriate economic topics, folks will soon discover that there is over 3000 years of thinking about this intersection of envy and greed—much of it a lot better than Piketty's analysis.  So it is not surprising that others who have written on inequality are beginning to fill in those serious analytic holes in Capital in the 21st Century.  First up is Michael Hudson reminding us that Piketty leaves out financialization of the economy and the fraud that went with it as a primary cause of the massive current inequality.  Then we have James Howard Kunstler reminding us that the mega-fortunes of the last 100 years are a function of cheap oil—a commodity that only exists anymore in the fading memories of the aging boomers.  Piketty left a LOT of gaps.

Which is fine IF he put the study of inequality back into the economics profession.  We will soon see if he has.

JESSICA DESVARIEUX, TRNN PRODUCER: Welcome to The Real News Network. I'm Jessica Desvarieux in Baltimore. And welcome to this edition of The Hudson Report.

Now joining us is Michael Hudson. Michael is a distinguished research professor of economics at the University of Missouri-Kansas City. His two newest books are The Bubble and Beyond and Finance Capitalism and Its Discontents.

Thanks for joining us, Michael.


DESVARIEUX: So, Michael, this week we're going to be talking about the very popular book by French economist Thomas Piketty. It's a 700-page book that takes on the topic of income inequality. Why do you think so many people are talking about this book? What's in it that has people buzzing?

HUDSON: Statistics. It shows that wealth inequality is actually much wider than income inequality, because if you earn income, you have to pay taxes on it, and rich people, the 1 percent, don't like to pay taxes, so they basically expense most of their income. They expense it as interest, they expense it as depreciation. There are all sorts of expenses. But he shows statistically in almost every country not only that income and wealth are getting wider and wider apart, the 1 percent versus the rest of the economy--but it's not just the 10 percent of the population that's richer than the bottom half or the bottom 20 percent; it's the 1 percent that has the vast majority of the wealth and controls the world's stock markets of the bond markets. And since 1980 there's been quite a turnaround. And the 1 percent have bought government as if government were sort of like a factory that you can make profits on. And you can get much more profits by buying a government than you can ever get by buying a property or real estate. And so what we've been turning into is an oligarchy.

Well, a lot of people saw this, but what Piketty did was show that in every country since 1980, since Reagan and Margaret Thatcher had the whole neoliberal revolution, the revolution that's now being supported by the U.S. government, by the eurozone, by the international monetary fund and the World Bank, that all of this neoliberalism and so-called free markets is really just a property grab by the rich. And he shows that given this grab, you're not going to be able to get more equality as long as all of this wealth that's accumulating at the very top among the 1 percent is inherited and passed down and grows and grows. And so, basically, he's described the symptoms of what's wrong. And people are very glad that at least he's described the symptoms that everybody knew but nobody had spent the three or four years that it took to make all of the charts charts that he's made.

DESVARIEUX: So it also sounds like he's focused on the 1 percent specifically. What about the 99 percent? What do you think is missing in Piketty's argument?

HUDSON: Well, the one percent have got rich by holding the 99 percent in debt. Basically, you have an economy where governments and businesses, homeowners, credit card users, and people getting an education all have to run into student debt, mortgage debt, credit card debt, government debt, corporate debt, all to the 1 percent. So the 1 percent wouldn't be making all of this income and concentrating all this wealth if they didn't hold the bottom 99 percent in debt to itself. So you have a polarity. You wouldn't have the 1 percent getting rich if they weren't--if it wasn't in an exploitative way, making the 99 percent more dependent on them.

Now, if the 1 percent made their money--you know, they call themselves job creators as if they're creating the prosperity, but they're not creating the prosperity, because what they're getting is interest and economic rent much more than profits. They're getting rich in an exploitative way, not in a productive way that helps the economy grow and raises living standards.

DESVARIEUX: What are some of the solutions that Piketty proposes?

HUDSON: Well, the first solution he proposes is that the people are--all this wealth at the top is being inherited. And since the Reagan and Thatcher revolution, they've got rid of inheritance tax. The 1 percent says, think of the small families that want to give a little bit of property to their children; let's not tax them. And by the way, let's make us completely tax-free for all of our billions of dollars, just so the middle-class families can maybe end up with their house or so. So they've hidden behind the middle-class to, really, abolish the effective inheritance tax. And so this wealth is being inherited to grow and grow. So the first thing he wants is an inheritance tax.

The second thing he wants is more problematic. He said, well, maybe there can be a world tax on wealth, because after all, the rich families in America hold their money offshore or in Swiss banks or in the Caribbean. So he wants a general wealth tax. And that's what he's been criticized for, because he hasn't really gone to the root of what is creating this polarization.

DESVARIEUX: And, also, how would you even implement something like that, Michael?

HUDSON: Well, that's why the neoliberal's love Piketty. It's why Krugman loves Picketty and others. You can't implement it. So he's produced a book without any solution, and the free enterprise boys like that. The 1 percent don't mind being criticized as long as there's no solution to their problem. And that's what the critics have come out saying: wait a minute, there are a lot of solutions. For one thing, some kind of wealth is better than others. You don't want to tax people building factories and improving living standards like the one percent pretend that they do, but what you do want to tax is unearned income, economic rent, capital gains. Right now, the capital gains tax, most people, rich people, make their money not buy earning income; the naked on capital gains, on stock markets going up, on bond prices going up, on all of the asset prices that the Federal Reserve's qualitative easing has been just flooding the market with. So the first thing to do is to raise the capital gains rates much higher, closer to 100 percent, because that's unearned. These are inflationary gains. Right now, the economy's all about capital gains, so if you make $1 million like--as Warren Buffett said, he makes hundreds of millions of dollars. He pays a lower tax rate than his secretary. So the tax system is all wrong.

What Piketty does not suggest is getting rid of regressive taxes like the FICA wage withholding that everybody has to pay that's now more than 15 percent of their paycheck. This is a regressive tax. That should be gotten rid of.

But most of all, he doesn't talk about the whole restructuring that's part and parcel of this neoliberal revolution to privatization. He doesn't criticize privatization. And most of this increased wealth by the 1 percent since 1980 is all taken--a result of privatizing the public domain--public utilities, things that--100 years ago everybody expected banking to be a public utility, roads, railroads, public transport, telephone systems, broadcasting systems. Now that these are being monopolized, the rich are getting their money by monopoly rents.

And the solution isn't simply to let the rich exploit the 99 percent by raising the prices you pay for your cable, for fridges, for transportation; it's to take--to deprivatize these assets, to put them back in the public domain, so that you can provide basic services to people at a very low price instead of at an extortionate price that's all meant to pay the 1 percent that basically has been foreclosing on governments and grabbing the public domain. And Piketty quotes the French novelists, in English, of the 19th century and points out why is it that novelists understand the problem that's happening in the economy more than economists. Economists all talked about the economy becoming more equal. But if you read Balzac, he said that the origin of almost every great family fortune is a great theft, often undiscovered, and people think it's just a part of nature. And it's thievery and theft, as Bill Black, who's often on your show, also points out every week: you have essentially the decriminalization of fraud. And what really pays is crime. And it's the criminals that have risen most rapidly into the 1 percent. It's the Wall Street bankers who've been doing the junk mortgages and engaging in the kind of fraud that we've been hearing about on Wall Street. This is not what Piketty discusses. He doesn't say, throw the clerks in jail; he doesn't say, have government regulatory agencies to prevent this kind of exploitation; he doesn't say, reimpose anti-monopoly regulations to prevent monopoly profits from enriching the one percent; he doesn't say, take all of these public utilities that Margaret Thatcher privatized in England and Ronald Reagan did in America and put them back in the public domain so that they can provide basic services to people at cost. All of this is a different topic from his book. more

Piketty Dikitty Rikitty

James Howard Kunstler  April 28, 2014

The debate over Thomas Piketty’s new book Capital in the Twenty-First Century is as dumb as every other issue-set in the public arena these days — a product of failed mental models, historical blindness, hubris, and wishful thinking. Piketty’s central idea is that wealth will continue to accumulate and concentrate among individual rich families at ever-greater rates and therefore that nation-states should take a number of steps to prevent that from happening or at least attempt to correct it.

The first mistake of Piketty fans such as New York Times op-ed ass Paul Krugman is the assumption that the dynamic labeled “capitalism” is an ism, a belief system that you can subscribe to or drop out of, depending on your political correctitude. That’s just not true. So-called capitalism is more like gravity, a set of laws that apply to and describe the behavior of surplus wealth, in particular wealth generated by industrial societies, which is to say unprecedented massive wealth. The human race never saw anything quite like it before. It became both a moral embarrassment and a political inconvenience. So among the intellectual grandiosities of modern times is the idea that this massive wealth can be politically managed to produce an ideal equitable society — with no side effects.

Hence, the bold but hapless 20th century experiment with statist communism, which pretended to abolish wealth but succeeded mainly in converting wealth into industrial waste and pollution, while directing the remainder to a lawless gangster government elite that ruled an expendable mass peasantry with maximum cruelty and injustice.

In the other industrial nations, loosely called “the west,” the pretense to abolish wealth altogether never completely took, but a great deal of wealth was “socialized” for the purpose of delivering public goods. That seemed to work fairly well in post-war Europe and a bit less-well in the USA after the anomalous Eisenhower decade when industrial labor enjoyed a power moment of wage arbitrage. Now that system is unraveling, and for the reason that Piketty & Company largely miss: industrial economies are winding down with the decline of cheap fossil fuels.

Piketty and his fans assume that the industrial orgy will continue one way or another, in other words that some mysterious “they” will “come up with innovative new technologies” to obviate the need for fossil fuels and that the volume of wealth generated will more or less continue to increase. This notion is childish, idiotic, and wrong. Energy and technology are not substitutable with each other. If you run out of the former, you can’t replace it with the latter (and by “run out” I mean get it at a return of energy investment that makes sense). The techno-narcissist Jeremy Rifkins and Ray Kurzweils among us propound magical something-for-nothing workarounds for our predicament, but they are just blowing smoke up the collective fundament of a credulous ruling plutocracy. In fact, we’re faced with an unprecedented contraction of wealth, and a shocking loss of ability to produce new wealth. That‘s the real “game-changer,” not the delusions about shale oil and the robotic “industrial renaissance” and all the related fantasies circulating among a leadership that checked its brains at the Microsoft window.

Of course, even in a general contraction wealth will still exist, and Piketty is certainly right that it will tend to remain concentrated (where it isn’t washed away in the deluge of broken promises to pay this and that obligation). But he is quite incorrect that the general conditions we enjoy at this moment in history will continue a whole lot longer — for instance the organization of giant nation-states and their ability to control populations. I suppose it’s counter-intuitive in this moment of the “Deep State” with all its Orwellian overtones of electronic surveillance and omnipotence, but I’d take the less popular view that the Deep State will choke to death on the diminishing returns of technology and that nation-states in general will first degenerate into impotence and then break up into smaller units. What’s more, I’d propose that the whole world is apt to be going medieval, so to speak, as we contend with our energy predicament and its effects on wealth generation, banking, and all the other operations of modern capital. That is, they’ll become a lot less modern.

As all this occurs, some families and individuals will hang onto wealth, and that wealth is apt to increase, though not at the scales and volumes afforded by industrial activities. Political theorizing a la Marx or Thomas Piketty is not liable to deprive them of it, but other forces will. The most plausible framework for understanding that is the circulation of elites. This refers to the tendency in history for one ruling elite to be overturned and replaced by another group, often by violence, and then become the new ruling elite. It always happens one way or another, and even the case of the Bolsheviks in Russia during the industrial 20th century can be seen this way.

In any case, just because human affairs follow certain patterns these days, don’t assume that all these patterns will persist. I doubt that the Warren Buffets and Jamie Dimons of the world will see their wealth confiscated via some new policy of the Internal Revenue Service — e.g. the proposed “tax on wealth.” Rather, its more likely that they’ll be strung up on lampposts or dragged over three miles of pavement behind their own limousines. After all, the second leading delusion in our culture these days, after the wish for a something-for-nothing magic energy rescue remedy, is the idea that we can politically organize our way out of the epochal predicament of civilization that we face. Piketty just feeds that secondary delusion. more


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  2. And Piketty wins again because again people are talking about wealth inequality and they have the charts now to make their case.

    No one's making anyone use Piketty's suggested solution. The importance of Piketty is in getting the conversation reactivated, something lefty economists have failed to do. The opportunity is NOW if you are willing to seize it. NOW is the time for blogs like this to spam local media with links to their best columns. NOW is the time for national economics blogs to use Piketty to widen the debate.

    Saying Piketty's solution won't work is missing the point, just as generations of backroom Marxists have failed to advance the revolution while playing chess and talking politics. What's wrong with putting up yard signs this fall say CANDIDATE'S NAME is in favor of Wealth Inequality!

    Wealth inequality hasn't gotten this much attention since Twain wrote The Gilded Age. Use this to educate average Americans instead of pissing on about the wrong people getting all the credit.