Wednesday, March 11, 2020

Rajan on Piketty

People often ask what I think of Piketty. I have to admit: I haven't read his books (or pretended to). Life is short, and it's 1,000 pages.

But Raghu Rajan has, and writes a splendid and well written review at the FT.  Bottom line, the choir is singing:
as a call for nations to enact massive redistribution programmes to reduce inequality, this latest work will persuade few outside his devoted following.
What's wrong?
Piketty describes social systems through the ages — such as slavery, feudalism, colonialism and caste — collectively as “inequality regimes”. No surprises, then, about what he thinks is their key attribute. In each case, he uses historical sources to map the distribution of incomes and wealth and show how the situation today parallels those earlier abhorrent episodes. The obvious implication: if we are not disturbed by what is going on around us, we should be.
 If our level of inequality is the same as slavery, feudalism, colonialism, and caste, then we are no better or different. That's an astonishing statement, though common on the left.

Unlike Marx, Piketty does not seem to believe the structure of society — the ownership of property, and the economic shares of different groups — is strongly influenced by the technology of production. Marx argued the plough gave us the feudal manor and the steam engine gave us the capitalist mill. Piketty claims instead that the nature of property rights and their distribution is largely driven by the prevailing ideology, a vague term that seems to imply a kind of public brainwashing.
Raghu has also read Marx. As economists even the choice of ideas can be analyzed by its utility:
the reason for the emphasis here is clear. If inequality stems primarily from ideology, all the reformer has to do is to change the prevailing ideology.
Piketty's program:
Piketty wants steeply progressive taxes on income, wealth, carbon emissions and, if anyone has somehow managed to hold on to any wealth after all that, on bequests.
(I love that little clause in the middle. Great sentence Raghu!) The economic vision is interesting. Piketty does not have the government run the whole economy:
Small and medium-sized businesses have an important role to play, he argues. He prefers “temporary ownership” by which successful businesspeople will not accumulate wealth but will see it taxed away, giving others the chance to succeed.
This strikes me very much as a French academic's view of running a business. It takes no skill, risk taking, hard work or entrepreneurial spirit. One does it as one becomes a middle manager in the French Railway system.

The central conceit of Piketty's earlier work, that all wealth is first stolen and then passed on through generations at r>g has already been well analyzed and destroyed. No, Julius Cesar's descendants do not own all today's wealth. Ragu says it well.
Piketty’s assumption in this and his previous book is that today’s rich are largely the idle rich....most top earners in the US today are the self-made “working rich”, such as lawyers, doctors and car dealers, deriving their income from their skills rather than their physical or financial capital. 
This matters, as
If today’s rich work, the sky-high taxes Piketty wants could have serious adverse effects on effort, gross domestic product and tax revenues. 
I might have chosen a more forceful verb than "serious adverse effects. " And the real issue is tomorrow's rich. Who will found and start great companies in the future just to suffer confiscatory wealth taxation?
Also, one virtue of the entrepreneurial rich retaining control over their wealth is that they have already shown an ability to put resources to good use — which is why they are wealthy. How costly would it be to hand over their wealth to a bevy of untried entrepreneurs? Temporary ownership may be very detrimental to society’s productivity. 
Another superb logical inconsistency:
in the “glorious” high-tax years (1950-1979) that Piketty favours, the personal income tax collected in the US averaged 7.6 per cent of GDP, while in the supposedly lower-tax 1980-2018 period he disfavours, it averaged a higher 7.9 per cent.
Piketty believes tax loopholes can be eliminated today through international agreement and better information. Yet, if loopholes were rampant then, it undermines his argument that high progressive taxes are consistent with strong growth. If nobody actually paid those taxes in the glorious years between 1950 and 1979, we never actually ran the high-tax experiment.
Piketty's vision is as much political and ideological as economic. Raghu points out interesting contradictions here too:
while he claims he wants greater democratic participation, he pushes grand elite-devised centralised schemes that suggest a tin ear to the protest movements that have roiled the world
it is unclear what would offer a countervailing balance to an overpowerful state when so many are dependent on it for endowments or minimum support, and there are few independent private players of any size. 
there is a fundamental contradiction in Piketty’s alluring vision of participatory socialism — the pretence that a dose of democracy and a dollop of egalitarianism can be picked off a menu. He admits that more coercion will be needed to achieve this in Europe — a European superstate, where no country will have veto power, and common fiscal rules will be imposed on all countries (all the better to tax the rich). Yes, it ostensibly will be democratic but also centralised, with the tyranny of the majority deemed a virtue. Most people will have little sense of control over their futures. It was this very view of Europe that many in Britain rejected with the Brexit vote.
Raghu closes
Inequality is a real problem today, but it is the inequality of opportunity, of access to capabilities, of place, not just of incomes and wealth. Higher spending and thus taxes may be necessary, not to punish the rich but to help the left-behind find new opportunity. This requires fresh policies not discredited old ones. .
I think Raghu is as usual trying to be too nice and admit something to find common ground. Is higher spending actually beneficial to helping the left-out find new opportunity? How are subsidies working out in, say India?  Might we not mention getting out of the way first -- the barriers imposed by teachers unions, the battle against charter schools, the criminal justice system, zoning and similar barriers to housing near jobs, social program disincentives, and the effect of various programs on chaotic family lives?
Read and learn from the vast amount of scholarship on display in this book. But look sceptically at its solutions
What is the point of reading and learning from "vast scholarship" if it is wrong, and visibly assembled with an elephant's thumb on the scale? I measure scholarship by quality not by weight.  Or is Raghu just once again being polite?  In any case Raghu persuaded me of many things, but not to follow his last piece of advice and read 1,000 pages. But go read the whole review and see for yourself.  Or maybe the book. We may all have time on our hands in the next month or so.


Update. This excursion clarified things a lot for me. It's not really about wealth, it's about property rights. Are they the foundation of prosperity and growth, the central vital incentive for people to work, accumulate, invent, maintain and improve land, buildings and business? Or are they the evil engine of inequality? You can tell which side I'm on. Even my dog understands property rights. Try to take away that bone.


  1. Steven Kaplan debated Emanuel Saez on the topics of wealth inequality and taxes. Kaplan did an amazing job, but they never got around to the central topic of why billionaires' existence is a problem?

    Maybe Dr. Cochrane can drive across the San Mateo bridge and debate Dr. Saez on this very point. I would certainly be very curious to see it and there's not much if any traffic on the bay area highways these days!

  2. The link to FT is paywalled. Is there an open link?

  3. After reading this evisceration, Piketty seems to be arguing something similar what Plato did in The Republic: The philosophers should run the city state. But, The Republic was also a lamentation, because it really was the end of idealism in Plato's mind. Piketty appears to have created this utopia in a version of Plato's transcendent realm, where all is perfect. Ha.

    The line I enjoyed the most:

    "Also, one virtue of the entrepreneurial rich retaining control over their wealth is that they have already shown an ability to put resources to good use — which is why they are wealthy. How costly would it be to hand over their wealth to a bevy of untried entrepreneurs? Temporary ownership may be very detrimental to society’s productivity."

    Entrepreneurship to a large extent is being able to learn from failures and adapt. No one has all the answers when starting up a business. It can be, and often times is, a walk into the unknown, for the promise of generating wealth, and generating something useful at the same time.

  4. The recent contests held during the primary elections have decisively demonstrated that Piketty's and Saez's proposals lack popular support in the USA. Sen. Warren and Sen. Sanders both advocated taxing accumulated wealth at punitive rates. Sen. Warren has abandoned her quest for the nomination; Sen. Sanders is failing in his. This will not be the last time we'll hear of those proposals, but it might be last time any serious contender for the position of president of USA puts those proposals forward as policy.

  5. "Piketty claims instead that the nature of property rights and their distribution is largely driven by the prevailing ideology... ."

    This is nothing more than the claim that a new man will be produced, someone without self-interest, to be guided by his or her superiors' wishes. That, of course, was naked Stalinism.

    Piketty is merely another post-modernist. Charlie Marx himself would be turning over in his grave.

  6. We may all have time on our hands in the next month or so.

    Making the Best of Enforced Solitude: Quillette’s Quarantine Book Club written by Jonathan Kay and Published on March 9, 2020

  7. Envy is as much a cardinal sin as greed.

  8. Envy is as much a Deadly Sin as is greed.

  9. Crony east European oligarchs (e.g.Czech PM is one of many) definitely do not deserve to prosper in free markets...

  10. Cochrane writes, "I measure scholarship by quality not by weight."

    On its face this statement can hardly be quarreled with. But isn't this just another way of stating, "I favor rationalist arguments over empirical ones"?

    I've always felt that Cochrane favors theory over experiment, elegant mathematics over laborious evidence-gathering. He is a rationalist by temperament.

    That's not a criticism per se; a science needs both theorists and empiricists. But this type of scholarship bias in economics does merit more scrutiny than Cochrane himself provides us.

    1. While I agree with the thought that John tends toward the theoretical, I think that the statement you cite is more aimed at saying quality over quantity. It is better to publish a few well done studies over many poor ones, be they empirical or theoretical.

  11. Many in the West express genuine and artificial amazement at the India Economic Story, which is steered by the RBI, id.,est,the Robbers and Barons Of India.dindooohindoo

    How does the RBI protect the Robbers and Barons.The Indian Banking system does not do any commercial banking.It is a VC enterprise,which lends to ultra-high risk activities,id.est FRAUD.

    Let us say Mr A starts a business B and then takes a bank loan from a Private Bank Say HDFC bank - and then steals the money.Then what ? Then The RBI gives him the key to the door of a lower tier Private Bank,like Axis Bank - say,for working capital funding (after sinking the term loan - by diversion and over- invoicing).This money is also eaten up by A.

    Then A goes to a 2nd tier state owned bank - but by now his name is flashed ONLY In the banking system.So he floats a new trading cum manufacturing company called D,and starts the entire process again.Within 1 year,he digests this money also. Then he targets the STCIL,MMMTC and MSTC and PEC to get merchant financing for transactions, as a trader or an associate and he rips them off also.

    Now,the beauty is that all these Banks and other agencies,have more than Rs 900000 crores of such OUTRIGHT FRAUDS and Mr A has positioned him at a scale and a type of fraud which is far less than the rest and so,Mr A is NOT a Priority for the bank or the legal system.Now Mr A has to be creative.So he taps his trusted suppliers and other participants in the supply and value chain of Business B and D, to raise working capital loans from new banks, based on bogus financial statements - and now Mr A has a cartel - of partners in crime.So Mr A is a seed VC, who has tried and tested the banking system,and placed his confidants in a position to loot money on his behalf – who will follow the same pattern as that of Mr A

    Then Mr A moves to the last tier of the Indian Banks,which is the Cooperative banks and Societies - a perpetual black hole.Here he has to just share the loot with the bank board and the local neta.The bank will be bailed out by the state - else,there will be civil war.

    The genius of the RBI is that the Indian Public does not know the names of the companies, shareholders and directors of these FRAUDULENT BORROWERS.The RBI says that it is a State Secret.The purpose is to ensure that these Robbers and Barons,can keep the Ponzi scheme working,y ripping off as many institutions,suppliers and public as possible.

    Now Mr A has invested the stolen 1 Billion USD, in land or gold or stocks and in 10 years, it is worth say USD 3-5 billion, and he now wants to "get back in the gane".So what does he do ? He dials the banker and asks for a CDR/OTS,and the banker thinks that an angel has descended from the pole star.The entire bank staff stands in line with garlands and does bharatnatyam when Mt A descends in his Chariot.

    Mr A has the interest halved or waived,has the principal loan converted into equity and then uses his OWN 3 Billion USD to route it through some FII or entrepreneur (say USD 100 million) to be a partner in the CDR.He also secures some tax concessions for the old plant.

    People say ,Y did he wait for 10 years ? Simple - in 10 years, the demand of the products outstripped supply and the Indian economy and banking was busted and vulnerable.

    Next day,it is the top wired news across the world and a case study, for the WB and IMF and Harvard.

    But what of Company D ? Mr A says that he has redeemed his sins.So he lets the company be taken over by ARCIL, and uses his links with Netas to force some PSU to PURCHASE THE ASSETS OF CONPANY D, at the WDV and pay off the loans ! WONDERBAR ! Now Mr A will get a Bharat Ratna and be the talk of the Robber Community for decades.

    But Mr A has to get back his 100 million USD in the CDR - and so,within a year he does an IPO,and his so called partner, exists his 100 Million at 150 Million,and pays 145 million in cash back to A,and Mr A sells of 5% of the entire equity of his company B,and then,he is off to a Greek Island with the female beaus of Adnan Orkut


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