Whatâs
Wrong Today:
History is
not inevitable: decisions are made by people, and that changes the outcome. In February, Larry Summers wrote
in the Financial Times: (emphasis by
the Wrongologist)
has increased sharply. A rising share of output is going to profits. Real wages
are stagnant. Family incomes have not risen as fast as productivity. The cumulative effect of all these
developments is that the US may well be on the way to becoming a Downton Abbey
economy. It is very likely that these issues will be with us long after the
cyclical conditions have normalized and budget deficits have at last been
addressed.
Does it mean that âworking for the manâ will become
âworking for the Earl?â That we are on a track to return to a society with very
limited upward mobility?
A generation ago, we thought that the overall
growth rate of the economy was the main influence on the growth in middle-class
incomes. And that GDP growth would help reduce poverty. Today, middle class
incomes are stagnant. Corporate profits are at an all-time high, and GDP is
growing. Summers makes the point that relying on GDP growth to grow the middle
class is no longer a plausible thought.
Still, politicians continue to quote their tired mantras about
job creators, lower taxes and socialist redistribution whenever inequality is
discussed. But maybe, not for much longer.
The economist Thomas Piketty, who (along
with Emmanuel Saez) has done useful work on income concentration, has written a
magnum opus: Capital
in the Twenty First Century. The title is an obvious reference to Karl Marxâs
Kapital, and the book is a survey of 200 years of economic history,
specifically relating to what Piketty defines as âCapitalâ. James
Galbraith reviewed
Pikettyâs book, and helpfully outlines Marxâs definition compared to our
current view of capital: (brackets by the Wrongologist)
was a social, political, and legal categoryâthe means of control of the means
of production by the dominant class. Capital could be money, it could be
machines; it could be fixed and it could be variable. But the essence of
capital was neither physical nor financial. It was the power that capital gave
to capitalists, namely the authority to make decisions and to extract surplus
from the worker.
[in the 20th
century] neoclassical economics dumped this social and political analysis for a
mechanical one. Capital was reframed as a physical item, which paired with labor
to produce output. This notion of capital permitted mathematical expression of
the âproduction function,â so that wages and profits could be linked to the
respective âmarginal productsâ of each factor.
The new vision thus
raised the uses of machinery over the social role of its owners and legitimated
profit as the just return to an indispensable contribution
Pikettyâs “Capital in the Twenty-First Century”
analyzes the long term distribution of income and wealth. The book draws on
reams of data from the United States and many other countries. The sheer
quantity of data that underlies Piketty’s conclusions is unprecedented, and as
a result, brings a great deal of credibility to his analysis.
The major
conclusion Piketty finds is that, over the long run, the return on capital has been higher than the growth rate of the
overall economy. He shows that the long term growth rate for wages over
the last 200 years has been between 2-2.5%. The long term growth rate for
capital (money/wealth), has been 4-5%.
In other
words, accumulated and inherited wealth has become a larger fraction of the
economic pie over time. This has happened more or less automatically, and there
is no reason to believe this trend will change or reverse course.
Piketty also
found that the more capital you have, the faster it grows: so if you have $100,000,
you get a greater return than someone with $10,000. This contradicts orthodox economics, which claims there will
be diminishing returns, but it is a common sense observation about how the
world actually works.
Piketty
argues that the reduction in inequality in developed countries after World War
II was a “one-off”, driven entirely by political choices and
policies. It did not happen automatically. Those policies have now been largely
reversed, especially in the US.
As
a result, the drive toward increased inequality has become relentless.
Piketty’s solution is a global wealth tax. While this seems politically
unfeasible, he argues that it is the only thing likely to work. He is dismissive
of the idea that more education and training for the masses will solve the
problem by itself. We need a mix: Jobs are primary way to eliminate inequality,
but more revenue is necessary to rebuild our failing infrastructure and fund a
robust safety net.
Policy matters: Low inflation is
bad for ordinary people. They tend to have one major asset, the family home and
inflation will make its value rise. Their wages are tied as much to inflation
as to merit. Inflation helps make their debt cheaper to repay over the long run,
because the amount is fixed. Low inflation is good for the wealthy. It holds
labor costs down, keeps stock markets robust, and provides opportunity to invest
for the long term. Policies since
1979 have favored very low inflation. This has increased the power
of the rich. High marginal taxation would be good for ordinary people (they
donât pay the taxes, the state gets the benefit of increased funding, and the
rich are relatively weak).
Political
decisions are important: In 1929, Hoover, the Fed, and later, FDR, did not bail
out the rich. They were allowed to lose their money, and thus much of
their power.
That was a
policy decision. Another decision could have been made, and in 2008 it was made:
The rich were bailed out. A different decision was made in 2008 because
the rich had spent the last 80 or so years obsessing over what went wrong in
1929 that facilitated FDR and the New Deal. They did everything they could to
reverse it.
The cost
of bailing out the banks and the rich in 2008 was the catastrophic drop in the
income and wealth of average Americans, the austerity in Europe, the failed
Arab Spring, the Ukrainian Maidan revolution, and so on.
A Great
Depression was avoided, but instead, a long austerity for the 99% was created.
Why do so many Americans believe
that the rich create jobs? They do not. Jobs are created when a buyer buys something
that whoever is selling the product cannot produce enough of by themselves, forcing
the seller to create more jobs to make more of the product.
The
consequences are easy to figure out: The 99% are the vast majority of buyers. If
they fall behind, they will buy less. That leads to fewer jobs, which leads to
less buying, and so on.
It
was America’s relative equality
(in terms of capital distribution and income) that allowed it to create the economic
and political institutions that led to our current global dominance. Economic
growth, we argued back then, was a product of companies and institutions
reflecting broad political participation, where the interests of those who are
just starting out were just as important as those who had already climbed way up
the economic ladder.
These institutions
are impossible to find in unequal societies, like the society we are busy creating
today.
Everybody
knows that the dice are loaded
Everybody rolls with their fingers
crossed
Everybody knows that the war is
over
Everybody knows the good guys
lost
Everybody knows the fight was
fixed
The poor stay poor, the rich get
rich
That’s how it goes
Everybody knows
(Leonard Cohen)
