The policy proposals Thomas Piketty forgot to mention

by on April 22, 2014 at 6:42 am in Books, Economics, Political Science | Permalink

Suresh Naidu writes:

…let me suggest that if we’re aiming for politically hopeless ideas, open migration is as least as good as the global wealth tax in the short run, and perhaps complementary.One weakness of the book is its focus on the large core economies (the data obviously is better and the wealth is obviously larger). But liberalizing immigration, while not solving the ultimate problem the book diagnoses, can go some of the way by raising growth of both income and population.

Maybe, that will likely improve welfare but in an Alvin Hansen model it can make Piketty-like phenomena (I won’t call them problems) more extreme.  In any case there are more straightforward remedies.  Social Security privatization is another option, if r > g is truly such a likelihood.  Yet Piketty and his boosters won’t mention this.  By the way, I am opposed to social security privatization — scroll down in that link — but I probably would favor it if it my views were closer to Piketty’s.

Here is a somewhat biting paragraph on Piketty and policy from my Foreign Affairs review (use “open private window” in Firefox, if need be):

Piketty also ignores other problems that would surely stem from so much wealth redistribution and political control of the economy, and the book suffers from Piketty’s disconnection from practical politics — a condition that might not hinder his standing in the left-wing intellectual circles of Paris but that seems naive when confronted with broader global economic and political realities. In perhaps the most revealing line of the book, the 42-year-old Piketty writes that since the age of 25, he has not left Paris, “except for a few brief trips.” Maybe it is that lack of exposure to conditions and politics elsewhere that allows Piketty to write the following words with a straight face: “Before we can learn to efficiently organize public financing equivalent to two-thirds to three-quarters of national income” — which would be the practical effect of his tax plan — “it would be good to improve the organization and operation of the existing public sector.” It would indeed. But Piketty makes such a massive reform project sound like a mere engineering problem, comparable to setting up a public register of vaccinated children or expanding the dog catcher’s office.

Here is another:

Worse, Piketty fails to grapple with the actual history of the kind of wealth tax he supports, a subject that has been studied in great detail by the economist Barry Eichengreen, among others. Historically, such taxes have been implemented slowly, with a high level of political opposition, and with only modestly successful results in terms of generating revenue, since potentially taxable resources are often stashed in offshore havens or disguised in shell companies and trusts. And when governments have imposed significant wealth taxes quickly — as opposed to, say, the slow evolution of local, consent-based property taxes — those policies have been accompanied by crumbling economies and political instability.

The simple fact is that large wealth taxes do not mesh well with the norms and practices required by a successful and prosperous capitalist democracy. It is hard to find well-functioning societies based on anything other than strong legal, political, and institutional respect and support for their most successful citizens. Therein lies the most fundamental problem with Piketty’s policy proposals: the best parts of his book argue that, left unchecked, capital and capitalists inevitably accrue too much power — and yet Piketty seems to believe that governments and politicians are somehow exempt from the same dynamic.

And finally the review closes with this:

A more sensible and practicable policy agenda for reducing inequality would include calls for establishing more sovereign wealth funds, which Piketty discusses but does not embrace; for limiting the tax deductions that noncharitable nonprofits can claim; for deregulating urban development and loosening zoning laws, which would encourage more housing construction and make it easier and cheaper to live in cities such as San Francisco and, yes, Paris; for offering more opportunity grants for young people; and for improving education. Creating more value in an economy would do more than wealth redistribution to combat the harmful effects of inequality.

The original pointer to the first link was from Henry Farrell.  And my previous criticisms of Piketty on the analytics are here.  Barry Eichengreen on wealth taxes is here.

Zach April 22, 2014 at 7:09 am

“potentially taxable resources are often stashed in offshore havens or disguised in shell companies and trusts”

How is this different for wealth than for income?

dan1111 April 22, 2014 at 7:24 am

Because income is ongoing, it’s harder to duck future obligations when a new tax is instituted. I can’t decide to receive all of my income for the next 20 years now, because taxes are going up next year. But if a wealth tax were instituted next year, I could move all my wealth accumulated over the previous 20 years to avoid it.

Also, income taxes are tied to the country in which the income is made. This severely limits most people’s ability to dodge income taxes by avoiding jurisdiction. Wealth, however, can easily be moved between countries.

Zach April 22, 2014 at 8:11 am

I don’t follow the 1st point… I think it’s easier to rearrange when income is realized than to time-shift wealth accumulation?

Territorial taxation is a bigger issue, but there are similar issues when it comes to income taxes. Maybe countries would be more likely to have residential wealth taxes even though most of territorial income taxes… probably working identically to America’s residential income tax where you deduct foreign territorial tax paid.

Basically, I don’t think the practical difficulties are insurmountable… similar issues arise for income tax evasion — especially for wealthy/high-income people. Whether it’s more fair, efficient, or aligned with prosperity to tax wealth over income is a more interesting question.

For what little it’s worth, I’d prefer taxing income for the purpose of income redistribution (e.g. social insurance, health care) and taxing wealth for the purpose of, as Cowen puts it, providing “strong legal, political, and institutional respect and support for [the] most successful citizens” (e.g. courts/legislature/executive, military, land management, scientific research, industrial subsidies).

Steve Sailer April 22, 2014 at 8:14 am

I totally don’t understand Piketty’s demand for a _global_ wealth tax. What could be nuttier than that?

Is it really all that likely that all that many rich Americans will flee to Singapore like Brazilian Eduaro Saverin so the IRS can’t possibly collect more income tax from them? Heck, it seems like celebrities have been moving en masse to New York City in recent years, despite the city’s 3.6% municipal income tax rate. New York has provided good government for the last 20 years, and the rich have flocked to the place. Sure, a lot of rich folks moved out of NYC in 1965-1995 when it was crime-ridden and filthy, but since it became safe and shiny they’re pouring back in despite the nearly unique city income tax.

ChrisA April 22, 2014 at 9:43 am

“Only the little people pay taxes” wasn’t it someone from New York who said that? In fact any already rich person moving to New York probably already has structured their affairs to minimize their tax burden, those who are making their money in New York probably see it as a cost of business.

Timothy April 22, 2014 at 10:48 am

Don’t worry, Bill deBlasio is getting rid of that “good government” bit as far as the executive goes.

Just another MR Commentor April 22, 2014 at 4:04 pm

This is why I think my idea of having a global market for politicians seems like a good idea in order to push out wild populists like Bill DeBlasio. For example why shouldn’t Boris Johnson be allowed to stand for Mayor of NYC as he’s proven himself quite able in London.

Steve Sailer April 22, 2014 at 8:36 pm

Right. Or why shouldn’t Stanley Fischer get to run the Bank of Israel and be Yellen’s minder on the Fed? And the GOP should run Netanyahu for President in 2016 — he seems more popular with the base than any potential candidates who happen to be Americans.

So Much for Subtlety April 22, 2014 at 7:33 am

But liberalizing immigration, while not solving the ultimate problem the book diagnoses, can go some of the way by raising growth of both income and population.

Right up to the moment all those nice new immigrants vote to stone homosexuals to death and ban the charging of interest rates. Western capitalism has not traveled well. No one else can really do it. When people who share that culture become a minority, functioning, even thriving, cities become Detroit.

Neither a wealth tax or unconstrained immigration will do anything other than impoverish the world. The best thing we can do is encourage development, progress and innovation among the small number of countries that have shown they are capable of doing it. They will pull the rest of the world along with them.

Millian April 22, 2014 at 9:07 am

Observe that in the modern West which you undoubtedly regard as both decadent and Muslim-bordering-on-African-American, nobody has voted to re-ban homosexuality or usury. Indeed, gay rights are on the march. Indeed, the criminalisation of homosexuality was widespread in those Judeo-Christian pillars of Liberty, God’s own country the United States and its distant father Britain, just two generations ago, with no brown-skinned menace required.

So Much for Subtlety April 22, 2014 at 6:26 pm

I am impressed that you managed to miss the point so well. Although perhaps Gay rights was not the right choice. After all, when it was illegal, the West worked a hell of a lot better. Maybe Uganda is on to something.

Only the Third World executes people for being Gay. When the West, still not Muslim-bordering-on-African-American, becomes a majority Third World region, it may too.

The Third World has been exposed to sensible economic policies. They know what they are. They have, by and large, chosen something else. Even India seems to have decided that 10% growth a year is not to their taste and they would prefer something slower. In free and fair elections. Economists think of economics as an objective science, like Communism, but it is not. It is rooted in specific cultures in specific places and at specific times. Freedom does not travel well.

Willitts April 22, 2014 at 1:01 pm

Western democracy and capitalism travel very well on bombers, tanks, and aircraft carriers.

We need to conquer these illiberal and evil cultures, not liberate them.

msgkings April 22, 2014 at 1:59 pm

Yes, finally someone sane! We must be rational. We must conquer many nations!

So Much for Subtlety April 22, 2014 at 6:32 pm

I am sorry but did the entire point miss your higher brain cells entirely? Because this looks like a knee jerk response born from a complete indifference to anything that might challenge your prejudices.

No, Western democracy and capitalism do not travel well on tanks. We have tried this. It does not work. American tanks, well navy ships and the Marines, have taken democracy and capitalism to all of South America. Haiti is not all that free now, it is certainly not rich – although it did grow much richer under American control, and it is democratic only by a very generous definition of the term. The same with the Philippines. The incompetent and corrupt Spanish-origin oligarchy is still there. Only made worse, if that is possible, by exposure to the US. South Korea did eventually become democratic, but it had very little to do with the US. Both South Korea and Japan have not adopted the American model of capitalism or democracy.

We can conquer all we like. You cannot make a Haitian into an American. At least not a WASP. The West has tried. It has failed. Even the British, who were in India for 450 years more or less, managed to gift them a few institutions that look like British ones. But they do not work like British ones at all. Culture is virtually impossible to change.

Immigration is slow suicide.

Steve Sailer April 22, 2014 at 7:49 am

The most obvious example that Piketty is right about the rich being able to impose their desires on the political process is how guys like Carlos Slim and Mark Zuckerberg have largely succeeded in shutting down open debate over immigration policy. Billionaires want more immigration so they can pay lower salaries, but anybody who mentions that is an evil person, unlike the Mexican oligarch (and second largest owner of the New York Times) who profits exorbitantly on calls placed between illegal immigrants and their loved ones in Mexico.

Just Another MR Commentor April 22, 2014 at 8:39 am

Nonsense of course. Entrepenuers like Mark Zuckerberg realize American needs more high skilled immigrants to expand the ecosystem of Innovation and keep the US as the number one society for idea and hence wealth generation.

Millian April 22, 2014 at 9:08 am

Steve is annoyed because his ancestors were out-competed by European immigrants in the 1600s who stole their land and hunted his herds of bison. At least, I assume this is what happened, or else he would be a hopeless hypocrite.

Rahul April 22, 2014 at 9:11 am

Bah! Who cares about ideological consistency? When has Sailer ever let facts dilute his arguments?

The Anti-Gnostic April 22, 2014 at 12:16 pm

It’s not about ideology; it’s about blood and soil, and keeping a superior culture.

How do I know it’s superior? Because you’re here instead of there.

Turkey Vulture April 22, 2014 at 9:42 am

I am generally for more open borders, but I don’t get this type of criticism. The North American natives clearly would have been better off if they could have mostly or entirely closed their borders. Instead most of them died, their land was taken, and their cultures were smashed, because of mass immigration.

Just Another MR Commentor April 22, 2014 at 9:47 am

But in the long run this was beneficially. Property values are surging sky high in places like the Valley and that’s benefitting everyone. The economy continues to grow by leaps and bounds, a short period of pain followed by the triumph of the US economy making everyone richer.

ChrisA April 22, 2014 at 9:49 am

@turkey Vulture, is it really true that native Americans are worse off now than before the Europeans arrived? They were living in a Stone Age culture with little material possessions and exceedingly high death rates and very variable food supply. Plus the culture was exceedingly brutal. Surely even living on welfare in a reservation that has no casino revenues is better than that? I think many people are too hung up on what ethic group is top rather than material quality of life.

Brian Donohue April 22, 2014 at 12:05 pm

@JaMRc,

Crazy talk. In this rich country, millions of people are starving. Shameful.

OK, not starving, but hungry.

OK, not hungry, but ‘food insecure’, which means they might become hungry. Shameful.

josh April 23, 2014 at 5:55 am

This was pretty funny, IMO.

https://www.youtube.com/watch?v=Xo5RScEhqtY

A Definite Beta Guy April 22, 2014 at 10:35 am

Poe’s Law

QWERTY April 22, 2014 at 11:06 am

Yeah, cause immigration in 1700 and immigration in 2014 is the same thing.

Unless your are native american, opposing open borders is hypocrite. Could you make a more nonsense argument?

josh April 23, 2014 at 5:51 am

Remind me how mass immigration worked out for the indians. Did it help them become the number one society for innovation?

JosieB April 22, 2014 at 9:40 pm

I’m fine with high-skilled immigrants, but let’s be honest: Once they have US sponsors, they are abused by their employers.

The larger problem is the immigration of low-skilled workers who are hungry. They work harder than low-skilled American workers, and they bid down the price of basic labor. They work under the table and they raise our children, clean our houses and maintain our lawns. It’s not Zuckerberg and his class who enable this; it’s middle-class Americans.

I don’t like the Zuckerbergs and I don’t like the tax-evading Americans. I do respect the immigrants, and I would be one myself if I were in their situation.

The whole business stinks, and I wish I could think of a solution that was good for all.

Curt F. April 22, 2014 at 9:27 am

Zuckerberg’s group, FWD.us, backed a comprehensive immigration reform bill which stalled in the House. How exactly does that add up to shutting down open debate on the topic? Essentially, FWD.us thought that supporting a comprehensive bill would let Republicans feel good about beefing up border security, while Democrats would enjoy provision of pathways to citizenship for some illegal US residents (“amnesty”). And while all that was happening they would be able to sneak in H1B visa reform.

It didn’t happen precisely because the Republican-controlled House does not want amnesty in any form and really doesn’t value border security budgets per se very much.

So it doesn’t make very much sense to say that Zuckerberg has shut down the debate on immigration when in fact debate was shut down by Republicans in the House.

Jay April 22, 2014 at 11:41 am

Disagree with them if you want, but you can at least understand the R’s skepticism right? The last time they agreed to pass amnesty and border security separately (in the 80’s), they got the former but nothing of the latter.

Did FWD.us-backed comprehensive bill pass in the Senate or are we only picking on the House here?

Curt F. April 22, 2014 at 12:08 pm

Oh I don’t necessarily disagree with the Republicans on the issue of whether immigration reform needs to be omnibus or piece-by-piece. I’m just trying to point out what Mark Zuckerburg’s money has actually been doing.

And an omnibus bill supported by FWD.us did pass the Senate.

The Original D April 22, 2014 at 3:39 pm

Because Facebook cost-cut it’s way to profitability.

Alexei Sadeski April 22, 2014 at 7:10 pm

Given that US immigration is extremely restricted, it would seem that the influence of billionaires is in fact quite weak.

jerseycityjoan April 23, 2014 at 2:23 am

If you are a relative of a green card holder or citizen or work in a field where a (usually) cheap labor employer is willing to hire you for less than the cost of an American, your chances of ending up here can be good to excellent, in many cases. The ones who came here illegally have been very fortunate too.

Certainly we are no longer the country we were in 1970. Back then we had 8,920,940 Hispanics; by 2010 there were 50,477,594. In 1970 we had 230,064 Asians; by 2010, there were 19,107,368.

Now of course many people with hopes didn’t make it. Many Americans with hopes of a job that would pay them a living wage didn’t get one either.

The rich are richer than ever, Wall St is in clover.

Are you really going to suggest that the hundreds of millions of Americans who are not part of the elite should cut off another piece of thier slice of the American pie and hand it over to tens of millions more newcomers, on top of the over 1.5 million we are now getting each year?

http://en.wikipedia.org/wiki/Historical_racial_and_ethnic_demographics_of_the_United_States

The Anti-Gnostic April 24, 2014 at 7:01 am

One million people per year isn’t enough?

Should it be two million? Five million? The entire population of Haiti, to your neighborhood?

I’m beginning to warm to Steve Sailer’s idea: just declare the whole world the US, then this debate is over.

Steve Sailer April 22, 2014 at 7:57 am

Suresh Naidu writes:

“…But liberalizing immigration, while not solving the ultimate problem the book diagnoses, can go some of the way by raising growth of both income and population.”

Sure, let’s show the the billionaires who is boss by doing exactly what they demand. Granted, this doesn’t make any sense, but any kind of excuse for letting my relatives back in the Old Country come here will do.

Just Another MR Commentor April 22, 2014 at 8:35 am

The future belongs to whichever society leads in the innovation race. Right now America’s innovation engine, Silicon valley, is running out of fuel (good ideas). We have now in the world legions of highly trained people who want to come to the US and contribute the skills and talents American woefully lacks. Indeed more immigration is the cure that will lead to greater growth and greater incomes for all who matter.

jerseycityjoan April 23, 2014 at 3:48 am

Who does not matter?

josh April 23, 2014 at 5:59 am

Yeah, screw my kids! Who wants (legitimate) grandchildren anyway? What really matters is that a there is big number next to the the letters U.S. on wikipedia’s GDP page. Bring on the downward social mobility.

Hackity Hack April 22, 2014 at 8:55 am

Why would you need to privatize social security when you can just make a Sovereign Wealth Fund?

Mesa April 22, 2014 at 10:59 am

The government usually has the option to withdraw funds from the sovereign wealth fund if it needs it. These are usually used in resource rich countries running surpluses to avoid over-consumption while the resources are extracted. I don’t see the application here.

The inequality argument mostly hinges on disparity of opportunity due to differences in economic quality of upbringing, education, etc. Therefore what is needed is a jolt of wealth early in the life-cycle via a wealth grant, not trying to enhance the retirement system when it’s too late. The wealth grants probably get mostly used to enhance poor public education, but could be used for health care, counseling, other job training, etc. They are human capital development grants. If not used they become ordinary retirement savings.

Willitts April 22, 2014 at 1:05 pm

The government has the option of using social security revenues when it needs it, and it always needs it.

Complete privatization is the only hope for pension reform, but that defeats the true purpose of SS: redistribution.

rayward April 22, 2014 at 9:16 am

Piketty has done (at least) three things: he has quantified inequality, he has provided an explanation for rising inequality, and has offered a way to mitigate inequality. What he doesn’t do is devote much attention to the detrimental effects of high levels of inequality; he essentially assumes that it’s socially disruptive and must be mitigated for that reason. What he mostly ignores is the economic instability that correlates with high levels of inequality. He does so because he assumes that governments and central banks will always intervene in future financial crises and adopt counter-measures to prevent the crisis from resulting in another great depression, as they did in 2008-09. In other words, he assumes that the market mechanism for correcting excessive inequality (i.e., a precipitous decline in the value of capital as a result of the financial crisis) will never take place. Economists can disagree about the cause of rising inequality (I don’t find Piketty’s explanation (r > g) all that persuasive), they can disagree about its negative economic effects (such as lower economic growth), and they can disagree about the negative social effects (such as political instability), but they cannot disagree about the financial and economic instability that correlates so strongly with excessive inequality. I disagree with Piketty’s assumption that governments and central banks will always intervene; indeed, the tea party arose over objections to the intervention by government and the Fed in the financial crisis of 2008-09. With each recurring financial crisis, I would expect growing opposition to intervention. After all, intervention also has the effect of preserving the inequality that causes the crises!

Willitts April 22, 2014 at 1:09 pm

“he has quantified inequality, he has provided an explanation for rising inequality, and has offered a way to mitigate inequality.”

Sounds exactly like what Scientology has done.

Andrew M April 22, 2014 at 9:34 am

“potentially taxable resources are often stashed in offshore havens or disguised in shell companies and trusts”

That’s why the only way to tax wealth is to tax land. Everything else can be hidden; but you can’t hide Maine or Manhattan.

Becky Hargrove April 22, 2014 at 9:50 am

Piketty is just worried that production in general would struggle to support knowledge use, if and when growth slows. Sure, he’s right. But he’s not accomplishing a thing, by insisting that knowledge use and skills use time are not capital in their own right. He is not willing to go the route of knowledge use supporting itself and growing the economy in the process.

derek April 22, 2014 at 9:58 am

Anyone who suggests that the best solution to anything is to have government consume 2/3 to 3/4 of national income is an idiot. Thanks for the review.

The Other Jim April 22, 2014 at 7:16 pm

Well, now you see what happens when you don’t leave Paris for 17 years.

govco April 22, 2014 at 10:24 am

for limiting the tax deductions that noncharitable nonprofits…

I’m not sure what that means, but I assume it will be “governments and politicians” in charge of that particular dynamic?

Mesa April 22, 2014 at 10:44 am

Either there is a problem or there is not. If there is not, let’s not do anything about it. If there is, a suite of modest reforms like TC recommends won’t do anything much about it and he knows that. A more sensible proposal would be a block wealth grant at birth or majority age, funded in whatever is your favorite manner.

Pierre April 22, 2014 at 10:44 am

“the book suffers from Piketty’s disconnection from practical politics — a condition that might not hinder his standing in the left-wing intellectual circles of Paris”
Always that little anti-french rhetoric. Quite tiring, really.
And for the umpteenth time, almost nobody in France talked about Piketty’s book as a major book in the history of economics. Only American pundits did.

prior_approval April 22, 2014 at 11:27 am

Shhh – a narrative is being constructed. Don’t bring up facts – it’s gauche (or guache, in terms of obscuring with broad strokes).

Jay April 22, 2014 at 11:45 am

We do remember that Piketty lives in Paris though right? If it was London, TC would say “left-leaing intellectual circles of London”. How is this any jab at Paris specifically?

Pierre April 22, 2014 at 3:35 pm

I guess Paris left-wing intellectuals is a cliché from the 60’s and 70’s. Sartre, Bourdieu and so on.

Alexei Sadeski April 22, 2014 at 7:17 pm

You’re embarrassed of Sartre?

He’s far more insightful than many of his non-French counterparts. Not to mention Camus, perhaps one of the 20th century’s finest political philosophers.

Rather remarkable that neither Camus nor Sartre – both of whom lived under the Nazis – were able to fully appreciate the sheer terror of collectivized politics. It took Orwell’s experience under Stalinism – brief though it was – to allow us to see what was to come.

The 21st century may still be one of abject terror.

Pierre April 23, 2014 at 2:30 am

Sartre ripped off most of his philosophy from Heidegger. But what is more important is that he was a blind stalinist, whose main goal was his own glory and to destroy anybody he could see as a competitor.
That’s why he did everything he could to attack Camus.
It is hard to admire both Camus and Sartre, they are sheer opposites.
Sartre says all his life that Stalinism was wonderful. I guess the cliché of the French intellectual who doesn’t let facts influence his idealogy comes from that time. And that Tyler’s jab at Paris left-leaning intellectuals comes probably from this image created by Sartre.

Alexei Sadeski April 23, 2014 at 5:40 am

I like Sartre for the human insights and Camus for the politics.

Alexei Sadeski April 23, 2014 at 5:42 am

If one is to ignore everyone who approves of Stalinism, there will be precious few left over…

Willitts April 22, 2014 at 11:02 am

Because nothing cures income inequality quite like allowing hordes of unskilled labourers into your country with their fathers and mothers, sisters and brothers, cats and dogs, chickens and frogs, kids and squids, and wives with overactive uteri.

o. nate April 22, 2014 at 11:06 am

I’m sorry but I can’t take seriously any proposals for social security privatization or sovereign wealth funds as a solution. It’s not conceivable that these could significantly offset private concentrations of wealth at any practical funding level, unless you’re talking about new taxes at or above the levels proposed by Piketty. If you want to talk practical first steps, I’d suggest greatly expanding the estate tax and clamping down on tax avoidance schemes, and phasing out preferential treatment of capital gains and dividends above certain income levels, as a start.

Mesa April 22, 2014 at 11:11 am

Good points. One problem is that right now any politically feasible tax increases merely go to paying down the deficit/debt. This means you can only feasibly decrease inequality by reducing the wealth of high end to pay down debt. That does nothing about the substance of increasing opportunity at the bottom end. Again, either there is a problem or there is not. If there is, it requires a really big rethinking of the tax structure and top rates.

Willitts April 22, 2014 at 1:13 pm

I cant take seriously any proposal that the objective of social security should be to resolve concentrations of wealth. It is purportedly a means to finance retirement. The fact that the government collects revenues through taxes and distributes benefits as spending is an artifact of SS being unconstitutional to begin with.

QWERTY April 22, 2014 at 11:15 am

“liberalizing immigration, while not solving the ultimate problem the book diagnoses ”

I must have missed something in Piketty’s book. What “ultimate problem” can be solved by liberalizing immigration?

It is a weird thought that every problem on earth can be solved by open borders. Moving people across the us border is apparently the most obvious solution to problems in the rest of the world.

Maybe we should read it more like the political agenda of an ethnonationalist or something like that

Willitts April 22, 2014 at 1:20 pm

Merger is one method of internalizing externalities.

Geopolitical boundaries are also indeed boundaries to free trade. These boundaries create incomplete markets.

The problem is that geopolitical areas also mitigate the market failure of public goods. Preferences for public goods differ across these boundaries.

There is also the public choice aspect of rent seeking. That flood of immigrants changes the political landscape.

Invasion works just as well as immigration in internalizing externalities and free rider behavior without the public choice problems, unless the invasion is by uterus.

Dan Cole April 22, 2014 at 11:21 am

How dare a Frenchman, who prefers to stay in Paris rather than travel the world (on other people’s budgets) like most prominent American economists, write a clear, lucid (thanks to an exceptionally good translator), and strongly argued (if not necessarily compelling) economics book that becomes, unlike anything written by good-old American neoclassical economists, a runaway bestseller in the US? Tyler and the other attack dogs have picked up the scent and they are out to tear him and his corrupting book apart.

Surely there’s no reason to be concerned that wealth might become more concentrated and sticky as a result of policy changes such as the elimination of nearly all inheritance taxes, the rapid demise in many states of the common-law Rule Against Perpetuities, and other institutional “reforms” that have led to the resurrection of “Dynastic Trusts,” among other previously moribund devices of the Gilded Age. Let’s pay no attention to studies showing that social mobility in the US is now lower than in most EU (“Nanny”) states (especially since those studies are likely to be contestable).

And even if we do conclude that rising levels of inequality and declining rates of social mobility are socially problematic, by all means let us have no discussion of possible policy solutions (anyone remember James Buchanan’s proposal for a 100% inheritance tax?) because, as most prominent US economists know, government policies to fix social problems cannot possibly work, and can only make matters worse.

Jay April 22, 2014 at 11:49 am

Inheritance taxes have been eliminated? When?

dan cole April 22, 2014 at 12:55 pm

Estates up to $5.25 million pay no federal estate tax (see Hines, Jr., “Income and Substitution Effects of Estate Taxation,” Amer. Econ. Rev.: Papers & Proc. 103(3):484-488 (2013). And even estates worth more than that have a number of legally created mechanisms by which to avoid the estate tax altogether.

Jay April 22, 2014 at 3:34 pm

A $5.25 million estate is relatively modest by estate standards. Please name the mechanisms by which a billionaire can avoid the estate tax altogether because that is ridiculous. Most estate planning by the rich isn’t to avoid paying any taxes (yes there is some minimization), it is to provide liquidity to the beneficiaries so that they’re able to pay the taxes once they come which is important when leaving non-monetary assets like businesses.

Dan Cole April 22, 2014 at 4:59 pm

Kopczuk and Slemrod, “The Impact of Estate Tax on Wealth Accumulation and Avoidance Behavior,” in Rethinking Estate and Gift Taxation (Brookings 2001), quoting U.S. Joint Economic Committee report: “Virtually any individual who invests sufficient time, energy, and money in tax avoidance strategies is capable of avoiding the estate tax altogether.” As for specifics, as I mentioned in my original post, many states that have abolished the Rule Against Perpetuities now allow for the creation of “Dynastic Trusts” which, because they are perpetual, never are taxable as part of an estate.

A $5 million estate may not be large by your standards, but your standards may not be well-calibrated to asset distributions below the top percentiles.

jpe April 22, 2014 at 9:20 pm

Estate lawyer here. It is near impossible to avoid estate tax altogether at larger amounts of wealth.

Jay April 24, 2014 at 11:52 am

Dan Cole,

Please read about what you’re actually talking about before throwing around hate-the-rich style words like “dynastic trust”. Yes these trusts allow the children to avoid the estate/gift taxes but those taxes are still payed by the parents when transferring money to the trust.

Nick April 23, 2014 at 7:35 pm

As a attorney, I would love to know what those “mechanisms” are. But keep citing economics article for what is fundamentally a legal question. One that you are wrong about.

Charlie April 22, 2014 at 12:29 pm

People have focused on the wealth tax proposal, but Piketty also makes (directly or indirectly) a number of crazy or at least highly questionable descriptive claims that could be mentioned. A short and incomplete least would include:

1. An implicit working hypothesis that growth in advanced economies is essential exogenous to policy
2. The claim that foreign direct investment is bad for development because it means that foreigners “own you”
3. Scattered assertions that certain k/y ratios cause social unrest
4. rent control policies can significantly influence society-wide levels of inequality
5. German/Continental public companies are undervalued relative to British/US ones because workers have a bigger role in corporate governance

Jeff April 22, 2014 at 12:53 pm

I haven’t read the book yet, so pardon my ignorance, but we really can’t say that Piketty would be against each of the suggested policies listed above. The main problem, however, with the policies is addressed generally in the book: economic determinism is a greater force than economic equilibrium.

I think Tyler ultimately misses that point in his FA review. Sure, we have logical reasons for thinking, for example, that r will not, for all t, be greater than g. The problem is that historically, it has as a global phenomenon and despite the various rules across the past two centuries, those factors ultimately never played out. What should they start to now? What’s so different about this decade, or the next?

wiggly April 25, 2014 at 9:10 am

I think Tyler misses a lot of points in his FA review. I haven’t read the book either, but it’s rare that Tyler comes across as such an insistent right-winger. Disappointing: I usually get a lot out of his thoughts….

Current April 22, 2014 at 1:37 pm

I don’t understand how the use of “Capital” in such an old-fashioned sense is justified. Most workers in the developed world earn their wages from human capital. They have skills that are valuable and the use of them is what their employer pays for. The wages for non-skilled work are indeed very low. That means that practically all of us live on capital income. Despite being a somewhat tricky analogy “Human Capital” is quite like equity and physical capital. It can be acquired and invested in, even if it can’t be traded. So, what Piketty is really saying is that in the future owners of physical capital and equity will do better than owners of human capital. I’m sceptical about that.

Hopewell April 22, 2014 at 2:48 pm

(guy who posts on MR but somehow has missed all of the Tyler Cowen posts about how human capital is becoming less valuable as average comes closer to being over)

Current April 22, 2014 at 8:30 pm

What Tyler has generally been saying is that some types of human capital are becoming less valuable and some more so. For example, knowledge of technology is becoming more valuable. The skills and knowledge that are becoming less valuable are those that which can be automated by machines. This doesn’t tell us if physical capital becomes more valuable overall.

Even if automation becomes much more important that doesn’t tell us that it will earn high returns for those who own it. The returns are likely to go to those who design it and to the consumer.

twobeef April 22, 2014 at 3:01 pm

Here’s an interview where Piketty addresses some of the political side of this: http://qz.com/200213/ten-questions-for-thomas-piketty-the-economist-who-exposed-capitalisms-fatal-flaw/

“Q: There have been some American reviewers who have found your book to be very deterministic in assessing the inevitability of inequality and the challenges of constructing an effective response. Is there an undiscussed assumption about political economy behind the book?”

“PIKETTY: But there is a whole continuum of possible policy response! I don’t recognize myself at all in these reviews… I am not fatalistic at all, I certainly don’t believe that it’s all or nothing response. What’s probably inevitable is [investment returns being] bigger than [economic growth], that’s economics. In terms of politics, everything is possible, nothing is inevitable. [The United States] has a property tax which is a pretty big wealth tax. I would prefer it to be a progressive tax that was proportional and I would prefer it to be on net wealth rather than the gross value of real estate—if you take someone whose house is $500,000 and they have a mortgage liability of $490,000, his net wealth is $10,000, I would propose he would pay no property tax, no wealth tax. Right now he is paying as much property tax as someone with no mortgage who inherited his apartment 20 years ago. My premise is not to tax to destroy the wealth of the wealthy, it’s to increase the wealth of the bottom and the middle class.”

Craig Loehle April 22, 2014 at 3:08 pm

Venture capital, especially for new firms, is almost exclusively from the wealthy. Stocks can’t be issued until a firm is clearly profitable and large. Likewise, most small businesses are largely self-capitalized. Heavy taxation of the “rich” leads to their inability or unwillingness to start up or invest in new businesses. This leads to stagnation and low job creation. The idea that the rich are exploiting society and that they just burn up their wealth is not valid. Most of the wealth of the wealthy is invested in trying to make more money. Those wealthy who simply buy mansions do not stay wealthy.

Just another MR Commentor April 22, 2014 at 4:00 pm

Which is EXACTLY why increased immigration is so important. There is money out there that needs good ideas here in the United States and we have millions of smart, hardworking potential immigrants who could come here and make a huge difference.

jerseycityjoan April 23, 2014 at 2:34 am

We already have a lot of high tech immigrants.

How many more saviors do you think we’ll need to do the job?

jerseycityjoan April 23, 2014 at 2:42 am

What are your plans for the tens of millions of American citizen descendants of these people.

The later generations will not have the magic immigration dust. They will just add to the store of hundreds of millions of useless Amreicans we already have.

Do you not think we need to change our immigraition laws so that we don’t have to keep the later generations? They will just more deadwood, after all, taking up places that finnovative and truly worthy immigrants of the future could hold.

Actually maybe we should start limiting American citizenship to just one generation. If we get rid of all the descendants, we could really become a country that’s ALL IMMIGRANTS, ALL THE TIME!

Wouldn’t that be wonderful? A dream come true, right?

jerseycityjoan April 23, 2014 at 2:55 am

I do not mean to be nasty.

But look: We have a lot of talented Americans who are unemployed, underemployed, etc.

I am not anti-immigrant. I am most certainly pro-American worker, and I am also for American-style wage for American jobs. Prices are going up; wages are not.

I would like the US to refocus on US needs, interests and make the needs of its people paramount.

Simon April 22, 2014 at 4:27 pm

I find your review a little bit opportunistic. You fall back on a basic 101 argument in political science – what matters to people – their relative or absolute wealth. Of course absolute wealth is basically important, but this does not mean that highly inequitable distributions of wealth are socially desirable or even productively efficient. The relative important of absolute vs relative factors can only be examined empirically and on a case-by-case basis. Otherwise it is just a dog chasing a tail.

History has taught very serious lessons that for political reasons inequality should be an area of concern – in addition to absolute levels of income. Also I doubt that Piketty argues that inequality hampered technological development before the time of the industrial revolution. Before that time you also had a one-percent, it was called an aristocracy. There was very little class mobility.The nineteenth century saw the rise of the middle class. This liberation of labour was important for development. In relation to forecasts what I think he is saying is that in the foreseeable future (barring other unknowns such as the spread of weapons of mass destruction, climate change etc which could change everything) it is difficult to see a trend that would work against growing inequality.

And this

“It is hard to find well-functioning societies based on anything other than strong legal, political, and institutional respect and support for their most successful citizens.”

Perhaps you should also say the same for respect for people at the bottom. I would say a big reason for Japan’s success was the notion of “being in the same boat” and a policy of egalitarianism. Also what do you define as the most successful citizens – Russian oligarchs? People who inherited massive wealth?

Piketty’s book is not without flaws. But its scope, depth and insights were impressive. Books like this, especially in economics, do not come along often. They should not be dismissed to lightly.

Thomas April 23, 2014 at 12:33 am

It’s worth mentioning that the aristocracy were government and it was the merchants’ capitalism that created the middle class, not any government act. The aristocracy maintained power while the mechant class grew wealth. The situation isn’t too different today and Picketty can only propose taking wealth from the mechants and delivering it to the modern aristocracy to benevolently distribute it. All socialists are myopic if they rest on the benevolence if government officials.

byomtov April 22, 2014 at 6:35 pm

It is hard to find well-functioning societies based on anything other than strong legal, political, and institutional respect and support for their most successful citizens.

Based on? Really?

It sounds an awful lot like you are arguing in favor of a privileged plutocracy. Are you? And are you conflating “most successful” and “wealthiest?”

observer April 22, 2014 at 9:12 pm

Good quote:
“Therein lies the most fundamental problem with Piketty’s policy proposals: the best parts of his book argue that, left unchecked, capital and capitalists inevitably accrue too much power — and yet Piketty seems to believe that governments and politicians are somehow exempt from the same dynamic.”

observer April 22, 2014 at 9:54 pm

Also . . . compared to what? Modern plumbing? Electricity and all that’s meant to music? Planes, trains, and automobiles? Modern plumbing? Access to the World’s resources at local stores?

observer April 22, 2014 at 10:01 pm

chamber pots, cold water flats, or porridge, or buffalo again?

Simon April 23, 2014 at 3:42 am

Tyler, have you read any of Theodor Adorno’s work – (a very good counterweight to our Victorian era based modern Economics -i.e limited resources, unlimited wants)? I would really recommend it. It is big in scope, but very dense in content. He even manages to connect trends in music with economics. I think Piketty is also very much in the Frankfurt School vein.

byomtov April 23, 2014 at 9:10 am

“Piketty’s disconnection from practical politics — a condition that might not hinder his standing in the left-wing intellectual circles of Paris but that seems naive when confronted with broader global economic and political realities.”

Odd. I would argue that Tyler is disconnected from practical politics, a condition which does not hinder his standing in the self-congratulatory libertarian circle of GMU economics, but that seems naive when confronted with broader global economic and political realities.

Joe April 23, 2014 at 3:02 pm

I recall the recent publication of a Harvard study that supports the first part of the below quotation, that is, the lack of upward mobility in the US. However, I am unaware of any research that has indicated the latter part of the statement, that there are certain immigrant groups more successful than others. Is there empirical data on this point somewhere?

“To be sure, outside the realm of the ultra-elites, the United States suffers from unfairness in terms of who gets ahead in life, and a lack of upward mobility profoundly affects the prospects of lower-income Americans. Still, the success of certain immigrant groups suggests that cultural factors play a more significant role in mobility than does the capital-to-income ratio, since the children and grandchildren of immigrants from those groups tend to advance socioeconomically even if their forebears arrived without much in the way of accumulated fortunes.”

Rakesh April 23, 2014 at 9:26 pm

Piketty paints r as high relative to g, but what if it is too low?

If the r not on capital in general but on (non-financial) industrial investments domestically is not enough to motivate capital accumulation–and this seems to be the case in the US–we get not patrimonial capitalism but an economic crisis that can only be resolved if capital can restructure industrial and labor relations to raise again not r in general but r on domestic industrial investments.

There is simply no industrial class conflict in Piketty’s model, but there is in fact little to assure us that the relevant r will be high enough to prevent crisis.

A second big problem is Piketty’s non-engagement with Branko Milanovic. Milanovic shows that the rise of inequality within nations has been dwarfed by the rise in inequality between nations since 1850 and that therefore the most important form of capital that someone can inherit is not property but citizenship in a wealthy country. Piketty has little to say about global inequality.

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