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A Frenchman Admonishes Americans to Equality
by Martin Killian and Markus Diem Meier
Email: marc1seed (nospam) yahoo.com
12 Aug 2014
With his book and the data, Thomas Piketty has shaken the self-understanding of the US. In 2010, the richest one percent had 20 percent of the total income. In the 1970s the share was under 10 percent.
A FRENCHMAN ADMONISHES AMERICANS TO EQUALITY
By Martin Killian
[This article published on Never Mind the Markets 4/24/2014 is translated from the German on the Internet, http://bazonline.ch.]
The chasm between poor and rich opens up more and more.
Inequality has become an American trademark. Therefore the celebrated book of the French economist struck more powerfully in the US than elsewhere.
In his book “On Democracy in America,” Alexis de Tocqueville, Thomas Piketty’s compatriot, described a relatively egalitarian society nearly 180 years ago. Last week de Tocqueville’s compatriot raced from one US television studio to the next and proclaimed the exact opposite. The United States has increasingly developed to an unequal society. A “patrimonial capitalism” of inherited money looms on the horizon as in the 17th and 18th century in Europe.
The bearer of the bad news is Thomas Piketty, professor at the Paris School of Economics and author of the path-breaking 700-page good read about the economic causes of growing inequality in many western nations. The title of his work – “Capital in the 21st Century” – may recall Karl Marx’ “Capital.” Piketty understands himself as a social democrat. His book struck in the United States like a bomb. It explains why inequality grows in crisis times and the rich become ever richer. Supported by enormous volumes of historical income- and tax data, Piketty predicts a further intensification of social inequality if counter-measures are not taken.
CELEBRATED AS “EPOCHAL”
The Nobel Prize winner Paul Krugman praised the book as “truly excellent.” Elsewhere Piketty’s thick tome is celebrated as epochal. “Whoever has read it cannot see the world as before,” said the American MSNBC TV moderator Krystal Ball when Piketty was a guest. The Frenchman explained Anglo-American capitalism leads to growing inequality particularly in crisis times because capital incomes grow more quickly than economies. Whoever has receives more. That is Piketty’s thesis supported by massive data.
Nowhere in the developed world can this be documented better than in the US. Those at the top skimmed off while wages and salaries of most Americans stagnated or only rose moderately since the 1970s. The income of the richest one percent grew 165 percent; the income of the richest tenth of one percent soared 362 percent. While Piketty’s book led the bestseller list of online trader Amazon, the US middle class is no longer the richest on earth as in the past. Middle class persons in Sweden, Canada and elsewhere live better than the former front-runners.
ON THE WAY TO AN OLIGARCHY
Piketty is hardly alone with his warning that even greater and politically dangerous inequality threatens the United States. However his prescriptions are often disregarded as the country is already well on the way to an oligarchy. Increasing capital- or inheritance taxes together with higher top tax rates as the Frenchman urges can hardly be carried out in the United States on account of Republican resistance. Capital has been at the controls since the 1980 election of the Republican Ronald Reagan. Plutocratic characteristics increasingly cling to the US. Taxation of capital incomes and inheritances like the top tax rate was forced down.
Republicans used ideological cushioning of their gifts for the rich and the super-rich. In 1960 the Democratic president John F. Kennedy declared “a rising tide lifts all boats.” Republican Congressional minorities and presidents after 1980 started a machinery clearly favoring the richest Americans with supply-oriented economic policy, “trickle-down theory” and untiring propaganda.
With Ronald Reagan, a campaign began against the unions and for an almost religious transfiguration of the markets. “No hypocrisy is too great when economic and financial elites are forced to defend their interests,” Piketty writes about the French Belle Epoque and means the distortions and lies with whose help the political class in the United States supports top earners and profiteers. Unlike the European rich, the American rich have a lever with which they can gain advantages again and again. They finance American parties and election campaigns and lubricate a political system of legal bribery.
Therefore Piketty’s proposals on reducing inequality and rescuing liberal democracy can hardly be carried out in the US. Alongside the reform of election campaign financing, courts are needed that stop the trend to an American oligarchy by ending legitimating the dreadful state of financing as freedom of speech. Ridiculous top salaries and the accumulation of inherited capital guarantee the constant undermining of American democracy. The way to the banana republic is opened up. (baz.ch/ Newsnet)
THE PIKETTY SHOCK FOR THE US
The book of the French economist Thomas Piketty is the dominant theme in America
By Markus Diem Meier
[This article published on May 7, 2014 is translated from the German on the Internet, http://blog.baszonline.ch/nevermindthemarkets/.]
Thomas Piketty put optimistic assessments in question with the following observations and reflections:
• The share of the top earners in the total income has dramatically increased in the US since the 1980s… In the 2000s, the top 10 percent raked in almost 50 percent of the total income. In Europe the share of the top 10 percent has also climbed but not to the same extent.
• In 2010 the richest one percent had around 20 percent of the total income with 20 times the average income. In the 1970s the share was under 10 percent. Capital gains and losses are included in this income…
• According to economic theory, work in functioning markets should be paid corresponding to its marginal productivity, the additional value created. As Piketty explains, the very strong increase of the share of the top income refers back to the salaries for top managers in the US. However nothing indicates that the efficiency of these managers has increased in the last thirty years to the same extent as these salaries. Otherwise they would be reflected in a higher output of the US economy or in a parallel development in other countries since the same possibilities must exist there. Piketty’s explanation for the higher income is simple and understandable. Top managers are paid higher salaries because they have power.
Assets not incomes are the main theme of Piketty’s book. The share of assets in the hands of the richest is greater in the US than in Europe. The richest 10 percent of Americans possess 70 percent of all assets; the richest one percent has 35 percent of all assets. In Europe the richest 10 percent corner 60 percent of all assets and the richest one percent 25 percent. Assets cement the economic and indirectly political hierarchies of power since they are bound to the efficiency of persons much less than incomes and are handed down.
The importance of assets appears in the US in that the highest incomes mainly result from assets and not from labor.
• As Piketty writes, the much higher income share of top earners is reflected in an even greater assets concentration. Today’s top incomes are not completely spent and serve as savings.
• The social mobility in US society is trifling as the analysis of economists shows. This means there will not be others with excessively high incomes and high assets.
• Access to higher education could at least be a way to such mobility for incomes. In this connection, Piketty refers to the study of economists Claudia Goldin and Lawrence Katz who showed the importance of higher education for income and simultaneously that descendants with medium and lower income cannot afford the top universities. Piketty documents that higher education is important for the rise in the top-earning 10 percent but not for the rise in the very highest.
• As already described, that the returns on assets (as in the 19th century and before) will be even higher than economic growth in the future is most important for economists. The concentration of assets will intensify. That is the result. As Piketty shows, higher yields can be realized with very high assets than with smaller. This intensifies the assets concentration.
With his book and the data, Thomas Piketty has shaken the self-understanding of American society. The compiled and evaluated tax data in the so-called World Top Income Database is unparalleled. With all inequality in results, the basic conditions make possible everyone’s assent and no class can and may be completely and permanently distanced economically (and politically) from the rest of the population. That is the assumption.
The terrible example of such a society for the US was old continental Europe before the First World War. As Piketty describes impressively, that was the reason why the US introduced exorbitantly high income taxes with top tax rates of more than 90 percent – hardly imaginable any more today…
Greater tax revenues were not gained with such higher rates. The goal was prevention of exorbitantly great differences. The worry was becoming like Europe. The irony of history is that the US today is already more like old Europe in this relation than the Europeans themselves. No wonder Piketty’s book struck like a bomb in the US.
Afterthoughts on Piketty’s Capital
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13 Aug 2014
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May 17, 2014
Thomas Piketty has written a book called Capital that has caused quite a stir. He advocates progressive taxation and a global wealth tax as the only way to counter the trend towards the creation of a “patrimonial” form of capitalism marked by what he dubs “terrifying” inequalities of wealth and income. He also documents in excruciating and hard to rebut detail how social inequality of both wealth and income has evolved over the last two centuries, with particular emphasis on the role of wealth. He demolishes the widely-held view that free market capitalism spreads the wealth around and that it is the great bulwark for the defense of individual liberties and freedoms. Free-market capitalism, in the absence of any major redistributive interventions on the part of the state, Piketty shows, produces anti-democratic oligarchies. This demonstration has given sustenance to liberal outrage as it drives the Wall Street Journal apoplectic.
The book has often been presented as a twenty-first century substitute for Karl Marx’s nineteenth century work of the same title. Piketty actually denies this was his intention, which is just as well since his is not a book about capital at all. It does not tell us why the crash of 2008 occurred and why it is taking so long for so many people to get out from under the dual burdens of prolonged unemployment and millions of houses lost to foreclosure. It does not help us understand why growth is currently so sluggish in the US as opposed to China and why Europe is locked down in a politics of austerity and an economy of stagnation. What Piketty does show statistically (and we should be indebted to him and his colleagues for this) is that capital has tended throughout its history to produce ever-greater levels of inequality. This is, for many of us, hardly news. It was, moreover, exactly Marx’s theoretical conclusion in Volume One of his version of Capital. Piketty fails to note this, which is not surprising since he has since claimed, in the face of accusations in the right wing press that he is a Marxist in disguise, not to have read Marx’s Capital.
Piketty assembles a lot of data to support his arguments. His account of the differences between income and wealth is persuasive and helpful. And he gives a thoughtful defense of inheritance taxes, progressive taxation and a global wealth tax as possible (though almost certainly not politically viable) antidotes to the further concentration of wealth and power.
But why does this trend towards greater inequality over time occur? From his data (spiced up with some neat literary allusions to Jane Austen and Balzac) he derives a mathematical law to explain what happens: the ever-increasing accumulation of wealth on the part of the famous one percent (a term popularized thanks of course to the “Occupy” movement) is due to the simple fact that the rate of return on capital (r) always exceeds the rate of growth of income (g). This, says Piketty, is and always has been “the central contradiction” of capital.
But a statistical regularity of this sort hardly constitutes an adequate explanation let alone a law. So what forces produce and sustain such a contradiction? Piketty does not say. The law is the law and that is that. Marx would obviously have attributed the existence of such a law to the imbalance of power between capital and labor. And that explanation still holds water. The steady decline in labor’s share of national income since the 1970s derived from the declining political and economic power of labor as capital mobilized technologies, unemployment, off-shoring and anti-labor politics (such as those of Margaret Thatcher and Ronald Reagan) to crush all opposition. As Alan Budd, an economic advisor to Margaret Thatcher confessed in an unguarded moment, anti-inflation policies of the 1980s turned out to be “a very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes…what was engineered there in Marxist terms was a crisis of capitalism which recreated a reserve army of labour and has allowed capitalists to make high profits ever since.” The disparity in remuneration between average workers and CEO’s stood at around thirty to one in 1970. It now is well above three hundred to one and in the case of MacDonalds about 1200 to one.
But in Volume 2 of Marx’s Capital (which Piketty also has not read even as he cheerfully dismisses it) Marx pointed out that capital’s penchant for driving wages down would at some point restrict the capacity of the market to absorb capital’s product. Henry Ford recognized this dilemma long ago when he mandated the $5 eight-hour day for his workers in order, he said, to boost consumer demand. Many thought that lack of effective demand underpinned the Great Depression of the 1930s. This inspired Keynesian expansionary policies after World War Two and resulted in some reductions in inequalities of incomes (though not so much of wealth) in the midst of strong demand led growth. But this solution rested on the relative empowerment of labor and the construction of the “social state” (Piketty’s term) funded by progressive taxation. “All told,” he writes, “over the period 1932-1980, nearly half a century, the top federal income tax in the United States averaged 81 percent.” And this did not in any way dampen growth (another piece of Piketty’s evidence that rebuts right wing beliefs).
By the end of the 1960s it became clear to many capitalists that they needed to do something about the excessive power of labor. Hence the demotion of Keynes from the pantheon of respectable economists, the switch to the supply side thinking of Milton Friedman, the crusade to stabilize if not reduce taxation, to deconstruct the social state and to discipline the forces of labor. After 1980 top tax rates came down and capital gains – a major source of income for the ultra-wealthy – were taxed at a much lower rate in the US, hugely boosting the flow of wealth to the top one percent. But the impact on growth, Piketty shows, was negligible. So “trickle down” of benefits from the rich to the rest (another right wing favorite belief) does not work. None of this was dictated by any mathematical law. It was all about politics.
But then the wheel turned full circle and the more pressing question became: where is the demand? Piketty systematically ignores this question. The 1990s fudged the answer by a vast expansion of credit, including the extension of mortgage finance into sub-prime markets. But the resultant asset bubble was bound to go pop as it did in 2007-8 bringing down Lehman Brothers and the credit system with it. However, profit rates and the further concentration of private wealth recovered very quickly after 2009 while everything and everyone else did badly. Profit rates of businesses are now as high as they have ever been in the US. Businesses are sitting on oodles of cash and refuse to spend it because market conditions are not robust.
Piketty’s formulation of the mathematical law disguises more than it reveals about the class politics involved. As Warren Buffett has noted, “sure there is class war, and it is my class, the rich, who are making it and we are winning.” One key measure of their victory is the growing disparities in wealth and income of the top one percent relative to everyone else.
There is, however, a central difficulty with Piketty’s argument. It rests on a mistaken definition of capital. Capital is a process not a thing. It is a process of circulation in which money is used to make more money often, but not exclusively through the exploitation of labor power. Piketty defines capital as the stock of all assets held by private individuals, corporations and governments that can be traded in the market no matter whether these assets are being used or not. This includes land, real estate and intellectual property rights as well as my art and jewelry collection. How to determine the value of all of these things is a difficult technical problem that has no agreed upon solution. In order to calculate a meaningful rate of return, r, we have to have some way of valuing the initial capital. Unfortunately there is no way to value it independently of the value of the goods and services it is used to produce or how much it can be sold for in the market. The whole of neo-classical economic thought (which is the basis of Piketty’s thinking) is founded on a tautology. The rate of return on capital depends crucially on the rate of growth because capital is valued by way of that which it produces and not by what went into its production. Its value is heavily influenced by speculative conditions and can be seriously warped by the famous “irrational exuberance” that Greenspan spotted as characteristic of stock and housing markets. If we subtract housing and real estate – to say nothing of the value of the art collections of the hedge funders – from the definition of capital (and the rationale for their inclusion is rather weak) then Piketty’s explanation for increasing disparities in wealth and income would fall flat on its face, though his descriptions of the state of past and present inequalities would still stand.
Money, land, real estate and plant and equipment that are not being used productively are not capital. If the rate of return on the capital that is being used is high then this is because a part of capital is withdrawn from circulation and in effect goes on strike. Restricting the supply of capital to new investment (a phenomena we are now witnessing) ensures a high rate of return on that capital which is in circulation. The creation of such artificial scarcity is not only what the oil companies do to ensure their high rate of return: it is what all capital does when given the chance. This is what underpins the tendency for the rate of return on capital (no matter how it is defined and measured) to always exceed the rate of growth of income. This is how capital ensures its own reproduction, no matter how uncomfortable the consequences are for the rest of us. And this is how the capitalist class lives.
There is much that is valuable in Piketty’s data sets. But his explanation as to why the inequalities and oligarchic tendencies arise is seriously flawed. His proposals as to the remedies for the inequalities are naïve if not utopian. And he has certainly not produced a working model for capital of the twenty-first century. For that we still need Marx or his modern-day equivalent.
David Harvey is a Distinguished Professor at the Graduate Center of the City University of New York. His most recent book is Seventeen Contradictions and the End of Capitalism, published by Profile Press in London and Oxford University Press in New York.