On April 15, 2014, Scott Baker writes on OpEd News:
What are the grand dynamics that drive the accumulation and distribution of capital? Questions about the long-term evolution of inequality, the concentration of wealth, and the prospects for economic growth lie at the heart of political economy. But satisfactory answers have been hard to find for lack of adequate data and clear guiding theories. In Capital in the Twenty-First Century, Thomas Piketty analyzes a unique collection of data from twenty countries, ranging as far back as the eighteenth century, to uncover key economic and social patterns. His findings will transform debate and set the agenda for the next generation of thought about wealth and inequality.
Piketty shows that modern economic growth and the diffusion of knowledge have allowed us to avoid inequalities on the apocalyptic scale predicted by Karl Marx. But we have not modified the deep structures of capital and inequality as much as we thought in the optimistic decades following World War II. The main driver of inequality–the tendency of returns on capital to exceed the rate of economic growth–today threatens to generate extreme inequalities that stir discontent and undermine democratic values. But economic trends are not acts of God. Political action has curbed dangerous inequalities in the past, Piketty says, and may do so again.
A work of extraordinary ambition, originality, and rigor, Capital in the Twenty-First Century reorients our understanding of economic history and confronts us with sobering lessons for today.
The book draws on reams of data from the United States and numerous other countries. Most of the data comes from income tax records and estate tax/inheritance records. The sheer quantity of data that underlies Piketty’s conclusions is unprecedented, and as a result his work deserves a great deal of credibility.
While the book is quite long, the major conclusion can be summarized very briefly: Piketty has found that, over the long run, the return on capital is higher than the growth rate of the overall economy. In other words, accumulated and inherited wealth becomes a larger fraction of the economic pie over time. This happens more or less automatically, and there is no reason to believe this trend will change or reverse course.
Piketty argues that the reduction in inequality in developed countries after World War II was a “one-off” that was driven entirely by political choices and policies. It did not happen automatically. Those policies have now been largely reversed, especially in the United States. As a result the drive toward increased inequality is likely to be 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.
[From the New Yorker] – At first, Piketty concentrated on getting the facts down, rather than interpreting them. Using tax records and other data, he studied how income inequality in France had evolved during the twentieth century, and published his findings in a 2001 book. A 2003 paper that he wrote with Emmanuel Saez, a French-born economist at Berkeley, examined income inequality in the United States between 1913 and 1998. It detailed how the share of U.S. national income taken by households at the top of the income distribution had risen sharply during the early decades of the twentieth century, then fallen back during and after the Second World War, only to soar again in the nineteen-eighties and nineties.
With the help of other researchers, including Saez and the British economist Anthony Atkinson, Piketty expanded his work on inequality to other countries, including Britain, China, India, and Japan. The researchers established the World Top Incomes Database, which now covers some thirty countries, among them Malaysia, South Africa, and Uruguay. Piketty and Saez also updated their U.S. figures, showing how the income share of the richest households continued to climb during and after the Great Recession, and how, in 2012, the top one per cent of households took 22.5 per cent of total income, the highest figure since 1928.
The question is what’s driving the upward trend. Piketty didn’t think that economists’ standard explanations were convincing, largely because they didn’t pay enough attention to capital accumulation—the process of saving, investing, and building wealth which classical economists, such as David Ricardo, Karl Marx, and John Stuart Mill, had emphasized. Piketty defines capital as any asset that generates a monetary return. It encompasses physical capital, such as real estate and factories; intangible capital, such as brands and patents; and financial assets, such as stocks and bonds. In modern economics, the term “capital” has been purged of its ideological fire and is treated as just another “factor of production,” which, like labor and land, earns a competitive rate of return based upon its productivity. A popular model of economic growth developed by Robert Solow, one of Piketty’s former colleagues at M.I.T., purports to show how the economy progresses along a “balanced growth path,” with the shares of national income received by the owners of capital and labor remaining constant over time. This doesn’t jibe with modern reality. In the United States, for example, the share of income going to wages and other forms of labor compensation dropped from sixty-eight per cent in 1970 to sixty-two per cent in 2010—a decline of close to a trillion dollars.
Some people claim that the takeoff at the very top reflects the emergence of a new class of “superstars”—entrepreneurs, entertainers, sports stars, authors, and the like—who have exploited new technologies, such as the Internet, to enlarge their earnings at the expense of others in their field. If this is true, high rates of inequality may reflect a harsh and unalterable reality: outsized spoils are going to go to Roger Federer, James Patterson, and the WhatsApp guys. Piketty rejects this account. The main factor, he insists, is that major companies are giving their top executives outlandish pay packages. His research shows that “supermanagers,” rather than “superstars,” account for up to seventy per cent of the top 0.1 per cent of the income distribution. (In 2010, you needed to earn at least $1.5 million to qualify for this élite group.) Rising income inequality is largely a corporate phenomenon.
Many C.E.O.s receive a lot of stock and stock options. Over time, they and other rich people earn a lot of money from the capital they have accumulated: it comes in the form of dividends, capital gains, interest payments, profits from private businesses, and rents. Income from capital has always played a key role in capitalism. Piketty claims that its role is growing even larger, and that this helps explain why inequality is rising so fast. Indeed, he argues that modern capitalism has an internal law of motion that leads, not inexorably but generally, toward less equal outcomes. The law is simple. When the rate of return on capital—the annual income it generates divided by its market value—is higher than the economy’s growth rate, capital income will tend to rise faster than wages and salaries, which rarely grow faster than G.D.P.
If ownership of capital were distributed equally, this wouldn’t matter much. We’d all share in the rise in profits and dividends and rents. But in the United States in 2010, for example, the richest ten per cent of households owned seventy per cent of all the country’s wealth (a good surrogate for “capital”), and the top one per cent of households owned thirty-five per cent of the wealth. By contrast, the bottom half of households owned just five per cent. When income generated by capital grows rapidly, the richest families benefit disproportionately.
80% tax on imcome over 1 million dollars a year and net worth tax
Given that inequality is a worldwide phenomenon, Piketty aptly has a worldwide solution for it: a global tax on wealth combined with higher rates of tax on the largest incomes. How much higher? Referring to work that he has done with Saez and Stefanie Stantcheva, of M.I.T., Piketty reports, “According to our estimates, the optimal top tax rate in the developed countries is probably above eighty per cent.” Such a rate applied to incomes greater than five hundred thousand or a million dollars a year “not only would not reduce the growth of the US economy but would in fact distribute the fruits of growth more widely while imposing reasonable limits on economically useless (or even harmful) behavior.”
Piketty is referring here to the occasionally destructive activities of Wall Street traders and investment bankers. His new wealth tax would be like an annual property tax, but it would apply to all forms of wealth. Households would be obliged to declare their net worth to the tax authorities, and they would be taxed upon it. Piketty tentatively suggests a levy of one per cent for households with a net worth of between one million and five million dollars; and two per cent for those worth more than five million. “Or one might prefer a much more steeply progressive tax on large fortunes (for example a rate of 5 to 10 percent on assets above one billion euros),” he adds. A wealth tax would force individuals who often manage to avoid other taxes to pay their fair share; and it would generate information about the distribution of wealth, which is currently opaque. “Some people think that the world’s billionaires have so much money that it would be enough to tax them at a low rate to solve all the world’s problems,” Piketty notes. “Others believe that there are so few billionaires that nothing much would come of taxing them more heavily. . . . In any case, truly democratic debate cannot proceed without reliable statistics.”
Reality of attempts to implement wealth taxes
The nations of the world can’t agree on taxing harmful carbon emissions, let alone taxing the capital of their richest and most powerful citizens. Piketty concedes as much. Still, he says, his proposal provides a standard against which to judge other proposals; it points to the need for other useful reforms, such as improving international banking transparency; and it could be introduced in stages. A good place to begin, he thinks, would be a European wealth tax that would replace the property tax, which “in most countries is tantamount to a wealth tax on the propertied middle class.” But that may be utopian, too. If the European Union moved ahead with Piketty’s proposal, it would produce a rush to tax havens like Switzerland and Luxembourg. Previous efforts to introduce wealth taxes at the national level have run into problems. Spain, for example, adopted a wealth tax in 2012 and abolished it at the start of this year. In Italy, a wealth tax proposed in 2011 never went through. Such difficulties explain why governments still rely on other, admittedly imperfect, tools to tax capital, such as taxes on property, estates, and capital gains.
In the United States, the very idea of a new wealth tax looks like a nonstarter politically, as would the notion of raising the top rate of income tax to eighty per cent.
SOURCES – Amazon, Guardian UK, New Yorker, youtube
Is Thomas Picketty Right About The Causes of Inequality?
Well, that’s why the neoliberal’s love Piketty. It’s why Krugman loves baby 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% don’t mind being criticized as long as there’s no solution to their problem.Economist Michael Hudson discusses the popularity of French economist Thomas Picketty’s recent book and says his work fails to link the financialization of the economy to the ascent of the 1% – April 29, 14“…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.”
Transcript
JESSICA DESVARIEUX, TRNN PRODUCER: Welcome to The Real News Network. I’m Jessica Desvarieux in Baltimore. And welcome to this edition ofThe 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. MICHAEL HUDSON, PROF. ECONOMICS, UNIV. OF MISSOURI, KANSAS CITY: Thank you, Jessica. 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 baby 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. DESVARIEUX: Alright. Michael Hudson, thank you so much for joining us on The Real News.HUDSON: Okay. DESVARIEUX: And thank you for joining us on The Real News Network.
End
Thomas Picketty’s new book on inequality of wealth does a respectable job of identifying the problem but offers no viable solutions for reversing the systemic causes of poverty and wealth inequality.
My colleague Norman Kurland, President of the Center for Economic and Social Justice (CESJ.org) put forth an analysis that proposes viable solutions:
I happen to agree with Professor Michael Hudson’s critique of Thomas Picketty’s new book on inequality of wealth. But like Picketty, Hudson offers the wrong and incomplete solution for reversing the systemic causes of poverty and wealth inequality.
Hudson casually mentions but seems indifferent to two of Picketty’s means for addressing wealth inequality in the world: (1) imposing a significant inheritance tax and (2) adding a world tax on wealth.
It was only near the end of his interview with Jessica Desvarieux, the Producer of The Real News Network (TRNN), headquartered in Baltimore, did Hudson reveal his presumably superior “solution” to what we can all agree is a problem created by an unjust and power-concentrating economic system:
“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.”
“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.
What both Hudson and Picketty miss is a comprehensive systems solution based on four key pillars of what Louis O. Kelso, Mortimer J. Adler, and those of us in the Center for Economic and Social Justice, the Coalition for Capital Homesteading and the newly formed Unite America Party would call “The Just Third Way”. These are:
(1) as a fundamental human right, the lifting of all legal, monetary, tax, inheritance and other institutional barriers to universal and equal access for every person to the institutional means to acquire and possess personally or share with other persons “private property” rights and powers associated with ownership of all “non-human means of production”;
(2) limited economic powers of government by making the state economically subservient to and dependent on the economic power of all citizens;
(3) restoration of “private property” rights, powers, privileges, limitations and profits that may have been violated by flawed and unjust government laws and regulations promoting monopolies and other concentrations of ownership power; and
(4) restoration of the competitive, open and free market system for democratically determining just prices, just wages and just profits and the elimination of laws that foster or tolerate monopolistic, coercive or other concentrated or bureaucratic powers over prices, wages and profits.
More details for the systemic changes needed to address the problem of wealth inequality and move America and the world toward general prosperity, economic democracy and justice are described in the Summary of the Capital Homestead Act at http://www.cesj.org/learn/
capital-homesteading/capital- homestead-act-summary/. No economist has ever been able to offer to refute these ideas or explain rationally what’s wrong with any of our proposals or the logic of the Kelso binary theory of economics. See: “A New Look at Prices and Money: The Kelsonian Binary Economic Model for Achieving Rapid Economic Growth Without Inflation” at http://www.cesj.org/wp-
content/uploads/2013/11/ pricesandmoney.pdf
and other papers and free downloadble books at http://www.cesj.org.If you agree that Hudson and Picketty merely describe what’s wrong with the currently unjust global economic system but fail to offer a positive solution for redesigning the system or a rational critique of our solution, you may want to contact Jessica Desvarieux, the Producer of The Real News Network (TRNN) to open her mind to our solution. You can add a comment by clicking on http://therealnews.com/t2/
index.php?option=com_content& task=view&id=31&Itemid=74& jumival=11788
http://nextbigfuture.com/2014/04/capitalism-is-not-working-analysis-of.html
http://www.nationofchange.org/now-we-know-economic-inequality-malady-and-not-cure-1398519838
http://www.vox.com/2014/4/24/5643780/who-is-thomas-piketty#interview
