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.

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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.