Thursday, June 19, 2014

Whereas Our Hero Falls a Bit Flat

"Capital in the 21st Century,” by Thomas Piketty, 2013 - Second Review - Part of Chapter III and Chapter IV

Piketty certainly needs an editor.  After all, repetition must be the god of his understanding.  It is more common in the latter part of his book. Lord!  In this part, he turns his attention to inheritance, the reason for the decrease in inequality from the turn of the century’s astronomical levels, and its prospects for rising further.  The last section is where he advocates solutions that are mostly left social-democratic. What is interesting about his ‘tax on wealth’ solution is that he himself calls it ‘utopian’ – much as actual socialism is also called ‘utopian.’  While various American reformists like Dean Johnson issued laundry lists of legal restraints on capital to criticize Piketty, Piketty in a sense dismisses them all as not getting to the heart of the issue. And that involves an international solution and a more complete solution.  A wealth tax has aspects of a transitional demand.  Which shows that he is actually more perceptive than the left/liberals in the U.S. who peddle a version of ‘humane’ capitalism, tinkered with by purely nationalist means.  His wealth tax would actually have to be applied across regions, then globally, to work.  And that leaves the door open for a Marxist, internationalist approach, as capital cannot cooperate on that level. 

Piketty’s analysis is heavily grounded in history and resonates with our common, though anecdotal, knowledge. For instance, his statistics bear out the fact that the newly-settled U.S. was for a long time more egalitarian than Europe.  He also comments that the South was the most in-egalitarian place in the U.S. during slavery.  This heritage still resonates in the south and accounts for the servility of so many southern whites.   It is also refreshing to read something that is primarily based on non-U.S. statistics – France, England, Germany, Japan and Sweden figuring prominently - with the U.S. only one among many.   


The question of modern overseas earnings from corporations is not addressed.  Determining the amount of international business and profit that a ‘domestic’ company earns from its overseas retail, factory and land holdings, labor force wages and contracts with others would take significant research into each major capitalist firm to establish a pattern.  Piketty says that most profits now accrue from financial and overseas sources because domestic industrial capital is not that profitable, but he does not flesh out this view. Piketty can easily see in 1910 tax records holdings in sovereign debt bonds – Russia was one – and stock shares in clearly colonial companies like the East India Company, the Hudson’s Bay Company, the Panama or Suez Canals, or land holdings in a tobacco plantation in Jamaica.  Imperialist earnings for the 1% and the 10% are now hidden under the rubric of ‘domestic’ value in firms like GE, Wal-Mart or Archer Daniels Midland.  Shares in India’s Tata corporation will not show the 80 countries they invest in.  Invisibly, capital reaches around the world. So this book does not give us the wealth earned through imperialism, nor is that its intent.  Yet as such, it can delude the reader as to global sources of U.S. and European wealth.

Due to perhaps a lack of good statistics, he – unlike others – thinks the U.S. is more unequal than India or China or other ‘developing’ nations.  However, others have come to the opposite conclusion. He estimates that the upper centiles in poor countries – India, South Africa, Argentina, Columbia, China, Indonesia - control as much as in rich countries.  He doesn’t join the Bloomberg chorus of trying to describe the Chinese rich like the American rich, as China has more capital controls on incoming and outgoing assets, as well as a non-convertible currency.  As such, the Chinese rich are under more controls.

Piketty primarily accounts for the decrease in absolute inequality from the past, 1910 and earlier, due to the institution of progressive taxes – on estates, income, capital gains, interest, dividends, real estate, etc. and even capital in general.  This has resulted in less wealth by the dominant class as a percentage, and more by his oddly-named ‘patrimonial’ middle class – patrimonial meaning ‘inherited from a father.'  When you hear the common refrain of the ‘hollowing out’ of the middle class, the ‘destruction’ of the middle class, this is the modern reflection of this intermediate strata between big capital and the working class that became larger in the 20th century.   

In the 20th century, Piketty’s charts show 1910 to be a high point of wealth, with 1950 as the year wealth began to climb again.  The 1970s are the beginning of the true counter-offensive to return wealth to its normal position, when it starts rising more quickly.  In these sections, his special focus is on inheritance.  Inheritance is a somewhat forbidden topic, as it concerns death and deep family issues.  Americans don’t like to talk about it.  Yet Piketty isn’t hiding the green laundry. At present, pre-death ‘gifts’ to children are almost half of all inheritance.  Due to parents living longer, most inheritance occurs for children in their 50s, not their 30s - which accounts for more focus on ‘careers,’ even for middle-strata children.  One of the signs of growing inequality is that old people die far wealthier than the living, which is the effect of asset compounding.  Or, more pithily, the ‘dead are worth more than the living.’  Piketty here punctures another economics’ class fallacy – the “Modigliani triangle,’ which asserted that all old people save for retirement and die with almost no money.  Many do, of course, but the upper classes certainly do not.  His charts show that inheritance is a chief transmitter of inequality between the classes, and it is rising. 

Piketty’s charts show that inheritance was 25% of national income at the height of inequality in 1910, and that if present trends continue, it will reach that level again.  Using mostly French figures, Piketty estimates that inherited wealth in the 19th and early 20th century was 80-90% of wealth.  Right now it is back up to around 72%.  This, again, is based on returns on capital outstripping actual economic growth.  The latter helps young people, the former older people. 

I am going to list certain points I find interesting, though there is of course much more.  I’m going to quote from the ‘left’ Piketty the most. 

  1. He continues to dwell on literary descriptions of inequality in the 18th and 19th centuries and especially focuses on Balzac’s “Pere Goriot” which has a key scene in which one of the nastier characters, Vautrin, advocating marrying rich instead of working because it is far more profitable.  Of course this reflected the time perfectly.  Even now there is still the ‘gold digger’ as a type, though it should not be limited to women.  “Sense and Sensibility’ and ‘Washington Square,’ by Henry James also figure prominently.
  2. The richest 10% in the U.S. accumulated 75% of the growth from 1977-2007 through both income and holdings. 
  3. Artists, actors, athletes make up less than 5% of the top earning group. ‘Super-managers’ as Piketty calls them, make up the rest. 
  4. “The relative power of different social groups often plays a central role in determining what each worker is paid.” Piketty then echoes the Democratic Party line that ‘education and technology are the decisive determinants of wage levels.’ These statements contradict each other.
  5.  “Inequalities at the bottom of the wage distribution have closely followed the evolution of the minimum wage.”  This highlights the importance of the minimum wage. He thinks firms unilaterally setting wages is inefficient and arbitrary. 
  6. While Piketty feels that ‘education’ is key to solving inequality, he cannot track any present relation between growing educations and growing incomes.  He discusses how top schools filter out students from the lower classes; how ‘super-managers’ are compensated, not by productivity, which is hard to measure, or profits, but by a ‘buddy system’ of cronies. He mentions the role of ‘luck’ and the role national differences play in compensation - even though technology and education are similar across many countries.  He concludes that the top levels in society are not earning what they earn due to meritocratic skills in technology or education.  He says it is more ‘hand in the till’ than ‘the invisible hand.’
  7. Wealth is hidden by bad or inadequate tax statistics by national governments.  Obviously in league with capital.  This is especially a problem in countries like India or China. 
  8. Household surveys used by the World Bank etc. to estimate wealth are misleading, as they are based on self-evaluations.
  9. His ‘essential’ point is that the progressive tax policies instituted in the face of World War I and the Bolshevik Revolution are why inequality is not as great as the sky-high levels of 1910 Europe.  He especially uses very detailed French records to prove this point – themselves products of the 1789 French Revolution.  (A Revolution which also ended the older son inheriting estates, and instead mandated distributions equally to all heirs.)  The U.S. was a leader in instituting very high, progressive tax rates, especially under Franklin Roosevelt.  This also benefitted the rise of a larger middle class.
  10. “…conditions are ideal for an ‘inheritance society’…”  His estimates are based on the supposition that a revolution will not alter the wealth of the capitalist class.  In 1910, 25% of capital flow was from inheritances, a massive amount.  In France in 1910 the inheritance component of wealth was near 90%.  Now it is 72% and he predicts it will return to over 90%. 
  11. Galbraith wonders where Piketty gets his ‘return on capital’ figure averages of 4-5%.  Well, Piketty has charts of them from his tax studies.
  12. “Clearly, equality of rights and opportunities is not enough to ensure an egalitarian distribution of wealth.”   Equality before the law, of course, is the only ‘equality’ permitted by Democrats.
  13. “Super-managers’ also become ‘petit rentiers’ with their earnings, i.e. accumulating more and more wealth that just earns income.  “The entrepreneur always tends to turn into a rentier.’ 
  14. The wealthy in the 18 & 19th centuries had servants and ‘staff.’  From what I can see, today’s middle class apes them by hiring contractors to do almost everything, eats out to gain a cook, dishwashter and servant, and shuns ‘menial’ labor or repairs. 
  15. He points out that a ‘meritocratic’ society’s philosophy is harder on those who do not do well than a patrimonial society, because the ‘losers’ have themselves to blame. 
  16. “…one-sixth of each age cohort will receive an inheritance larger than the bottom half of the population earns in a lifetime.”
  17. “Rent (of land or housing) is not an imperfection in the market; it is rather the consequence of a ‘pure and perfect’ market for capital…”
  18. “…real democracy and social justice require specific institutions of their own, not just those of the market, and not just parliaments and other formal democratic institutions.” This goes far beyond Democratic Party 'liberalism' or even left-liberalism.
  19. Wealthy people earn more with their money than those with less wealth, due to ‘economies of scale’ for those investors.  I.E. they can take more risk, can hire better experts, can purchase more profitable investments.  As a result, their earnings, as reflected in tax records, university foundation earnings, the Forbes billionaire list, sovereign wealth fund earnings and the global wealth reports on ‘high net-worth individuals’ can be up to 8-10% per year.  Compound these earnings and you will get an idea of what is going on.  Due to this process, Piketty estimates that the top 1000th of the world wealthy could end up owning 60% of global wealth.  “…which is hard to imagine in the framework of existing political institutions unless there is a particularly effective system of repression or an extremely powerful apparatus of persuasion, or perhaps both.”  Welcome to the new world order!
  20. “…the entrepreneurial argument cannot justify all inequalities of wealth…”  See Bill Gates.
  21. “Property sometimes begins with theft.”  Piketty moderately echoing Prodhon's “Property ... is Theft.” Which shows what a moderate fellow Piketty is.
  22. “…the main effect of inflation is not to reduce the average return on capital but to redistribute it.”  Piketty points out that inflation hurts the less wealthy and benefits the more wealthy, redistributing money upwards.
  23. Saudi Arabia buys low-earning U.S. government bonds in exchange for (military) protection.
  24. “… petroleum rents might well enable the oil states to buy the rest of the planet…and to live on the rents of their accumulated capital.”
  25. Figures on the global balance of payments is negative, when it should be perfectly equal.  Piketty thinks the best answer as to what happened was that the hidden assets are in tax havens.  (Duh!) This ‘dark wealth’ amounts to nearly 10% of global GDP.
  26. “…the upper classes instinctively abandoned idleness and invented meritocracy lest universal suffrage deprived them of everything they owned.”

Piketty marshals his arguments for a ‘global wealth tax’ by first calling for economic and financial transparency as absolutely necessary to understand what is going on.  Which is also the first demand in the Transitional Program of the 4th International – simplified as “Open the Books!”  Hiding income in tax havens or fake entities, bad or incomplete statistics, fake prospectuses or accounting reviews, non-cooperation across nations - all help the capitalists hide their wealth.  He also recommends increased spending on colleges, to allow other classes than the rich get good educations.  In his disquisition he discusses the increased role of the state in the financial system.  To him the three pillars of the ‘social’ capitalist state that developed in the 20th century were based on health, education and social security/pensions.  The older role of the state – called ‘regalian’ in his terminology, which I think is incorrect – was limited to police, courts, army, foreign affairs and some administration.  This is the conservative doctrine of the state.  He does not think this ‘leap’ towards a greater ‘social’ capitalist state will be repeated – unlike the sentiments of many left-liberals, who are nostaligic for the Rosevelts. 

Piketty sees this ‘global wealth tax’ as the only way to really undermine inequality, as the issue is now international, not national.  A tax on oil proceeds would especially affect the autocratic rulers of the petro-states.  Piketty feels that regulations of capital flows can impede the process, but do not actually address the fundamental problem.  He insists that it is fairer than the present ‘real estate,’ income and consumption taxes because it gets at the hidden assets of the wealthy.  As it is, 'wealth' per se is not taxed in hardly any countries.  Piketty also thinks that labor migration can even out inequalities.  Yet this dovetails with capital’s need for fluid labor that can easily cross borders.  This does not change the rulers of either the country arrived at or the country left.  In fact it probably just makes them both wealthier.  Public debt can be reduced through austerity, inflation or a capital tax, and the latter to him is the best for the working classes.

Piketty acknowledges that a ‘global wealth tax’ still recognizes the capitalist system and the market, and he thinks this ‘compromise’ makes it desirable.  That was his explanation for the success of progressive income taxes initially.  Even the right-wing agreed with them at that time!  Prior to 1910 taxes were almost nil on any wealth.  Of course, these taxes were initiated under the shadow of labor rebellions, revolutions and strikes around the world.  Paying for WW I was also a necessity.  In essence Piketty claims this is the only way to save capitalism, as his book is peppered with warnings about its possible overturn because of inequality.  Marxists solved the problem of inequality in a ‘logically consistent’ way, in his phrase, but he doesn’t want to go that way.  So he’s picking the more ‘illogical’ method.  He calls for a ‘democratic control of capital’ which is a contradiction in terms, but says there is no other solution.  Capital, after all, is based on the exploitation of the majority of people.  The ‘democratic control of capital’ would actually mean its abolition. 

Red Frog
June 19, 2014

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