Thomas Piketty And The Economics Of Jealousy
/It seems like only yesterday the big crisis in the U.S. economy was our very low rate of personal savings. In a complex economy requiring more and more capital to produce a dollar of GDP, how can we expect to stay successful if nobody saves? The rate of personal savings in the U.S. hit a low of only 1.5% in 2005, and since has recovered some, to 3.9% by 2012 and then to just over 5% today. But still that compares to rates of over 10% in many European countries and much higher in Asia. A study from the People's Bank of China in 2013 put the personal savings rate in China close to 50%, at least in some months.
As recently as 2013 you could still find articles talking about this personal savings crisis. Here is one from Leslie Kramer of CNBC in May 2013.
Many economists and fund industry experts say that unless Americans change their spending habits and learn how to save, we will soon be facing a full blown retirement crisis and it may be turn out to be a deeper and more harrowing experience than many have already envisioned.
Back then (barely more than a year ago) people analyzing why our savings rate was so low often pointed to the very poor incentives to save, starting with the Fed's near-zero interest rate policy, followed by high taxes on interest, dividends, and capital gains. With interest rates on bank savings and money market funds well less than 1%, and even that 1% taxed as ordinary income, and with at least some inflation, however minimal, it is clear that cash and near cash investments have been earning negative returns for years. Longer term fixed income investments may earn barely positive returns after taxes and inflation, but those could well get wiped out by principal declines when interest rates start to rise. You can buy higher interest "junk" bonds, but at your peril -- they can default and wipe out your investment at any time. Equities have earned strong returns over long periods, but subject to periodic sharp and sickening declines, such as the decline of over 50% that occurred in 2008 - 09. And if you do have long-held equity investments that have appreciated substantially, then when you sell them you must pay capital gains tax on all the appreciation, most of which will be inflation rather than real gain. In short, if you save and invest in the U.S., between Fed policy, taxes, and wide market swings, you could as easily lose as gain. No wonder the savings rate is low.
Then earlier this year came out the translation of Thomas Piketty's book "Capital in the Twenty-First Century." I haven't seen anything about the crisis of low personal savings since. Is it coincidence?
I will not claim to have read Piketty's book from end to end (I'm not sure that's even possible). However, I have bought it and looked through it for highlights. On the kindle, where after you buy a book they can track of how much of it you have read, this has been declared the least-read book of the year -- less read than even Hillary Clinton's "Hard Choices," if you can imagine that. Still, if you are left-wing economist you are seemingly required to declare this one of the greatest economics books of all time. Gushingly favorable notices have come from the likes of Nobel Prize winners Robert Solow, Joseph Stiglitz and, of course, Official Manhattan Contrarian Worst Economics Writer Paul Krugman. In the New York Review of Books Krugman calls "Capital" a "magnificent, sweeping meditation on inequality."
Piketty asserts that inequality is high and increasing and that he has identified the key to understanding why. It is that r > g. r is the rate of return on capital; g is the rate of growth of the economy. If the rate of return on existing capital exceeds the rate of economic growth, then, asserts Piketty, the owners of existing wealth get richer faster than anyone else can catch up with them. In other words, the rich get richer and the poor get poorer. From page 377:
We have also learned that the relative movements of the return on capital and the rate of growth of the economy, and therefore of the difference between them, r - g, can explain many of the observed changes, including the logic of accumulation that accounts for the very high concentration of wealth that we see throughout much of human history.
Aha! Now you tell us that all you have to do is save some and you are on the ineluctable path to becoming a plutocrat! The former crisis of low personal savings does not fit with this and is no longer part of the narrative.
But wait: is r really greater than g when the government has been running for years a zero interest rate policy specifically to make it so that nobody can earn any positive return on savings? I can't seem to find the answer to that here. I do find this on the same page 377:
In all likelihood, inheritance will again play a significant role in the twenty-first century, comparable to its role in the past. . . . Whenever the rate of return on capital is significantly and durably higher than the growth rate of the economy, it is all but inevitable that inheritance (of fortunes accumulated in the past) predominates over saving (wealth accumulated in the present). . . . The inequality r > g in one sense implies that the past tends to devour the future: wealth originating in the past automatically grows more rapidly, even without labor, than wealth stemming from work, which can be saved. Almost inevitably, this tends to give lasting disproportionate importance to inequalities created in the past, and therefore to inheritance.
That sounds a lot more like a prediction for the future than an explanation of why we supposedly have too much inequality today. And what basis does Piketty have to predict that inherited wealth will come to dominate in the future? Got me. Even if you grant that r is greater than g, or has been for some substantial periods in the past, if that meant that inherited wealth would dominate, shouldn't we now be dominated by the heirs of the Vanderbilts, the Fords, the Carnegies, the Morgans, and so forth. Instead, as Jonah Goldberg points out in Commentary, most large fortunes in the United States seem to dissipate or get eclipsed quickly, while almost all the largest fortunes today have been made in the current generation:
Fewer than 1 in 10 of the 400 wealthiest Americans on the Forbes list in 1982 were still there in 2012. (Lawrence Summers notes that if Piketty was right about the stable return on capital, they should have all stayed on the list.) Of the 20 biggest fortunes on the Forbes list in 2013, 17 (85 percent) were self-made. Of the three remaining entries, only one—the Mars candy family—goes back three generations.
Oh well. Maybe it doesn't really matter if any of this is true or not. You need to get way toward the back of the book (past page 500) before you get to the really important point: we must take the wealth away from those who have gotten too rich! And thus we find proposals for much higher marginal income tax rates and for a global wealth tax to prevent anyone from getting too rich. And how rich is too rich?
A[n income tax] rate of 80 percent applied to incomes above $500,000 or $1 million a year would not bring the government much in the way of revenue, because it would quickly fulfill its objective: to drastically reduce remuneration at this level but without reducing the productivity of the US economy, so that pay would rise at lower levels.
Up to this point in the book I thought that the problem was the accumulation of wealth in the hands of a few and the passing of that wealth by inheritance; now all of a sudden the problem is current income above a certain level. Piketty is explicit that his desire for this tax is not to raise revenue (to his credit he admits that it won't raise much) but rather to punish anyone who dares to be too successful. And is it just my cynicism, or is that level of "$500,000 or $1 million a year" picked to be just above the level that an academic economist with a modestly successful book can expect to earn? Somehow, all the proposals for punitive action against the evil "one percent" always seem to come from people in percents 2 and 3. Those people are themselves very affluent, but somehow consumed by jealousy. That's not much of a basis for economic policy.