Mish's Global Economic Trend Analysis

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Income Inequality Author Turns Down Prestigious Award; Can you Solve a Problem When You Don't Know the Cause? Posted: 02 Jan 2015 11:52 AM PST French economist Thomas Piketty, author of the surprise best-selling Capital in the 21st Century turned down France's top award, the Legion D'Honneur. "I do not think it is the government's role to decide who is honourable", said Piketty. Nobel Prize-winning economist Paul Krugman called it "the most important economics book of the year - and maybe of the decade". Krugman likely says that because he believes in Piketty's socialist solutions to income inequality. Thomas Piketty's Capital Review Piketty's book is a massive 696-page slog. Fortunately, Harvard Business Review offers this synopsis: Piketty's "Capital," in a Lot Less than 696 Pages. The argument. Capital (which by Piketty's definition is pretty much the same thing as wealth) has tended over time to grow faster than the overall economy. Income from capital is invariably much less evenly distributed than labor income. Together these amount to a powerful force for increasing inequality. The method. Piketty does not offer his own theory of what drives economic growth, or what the optimal ratio of capital to labor income might be. In fact, a recurring theme of his book is that the theory-first approach of modern economics is a dead-end. The evidence. The richest source of data for the book is France, thanks to the country's long tradition of excellent record-keeping and an estate tax that was enacted a couple of years after the 1789 Revolution. What the French numbers show is that the ratio of capital to income remained steady at about seven-to-one for centuries, plummeted around the start of World War I, and began recovering after World War II. Piketty argues that the U.S. should consider a return to a "confiscatory" (his word) 80% top marginal tax rate even though it wouldn't bring in much money (he basically agrees with Arthur Laffer on that), well, that provokes some thoughts, doesn't it? Everything You Need to Know The Guardian offers an Everything You Need to Know synopsis of the surprise bestseller. I piece together some paragraphs out of order below to make rebuttals easier. That capitalism is unfair has been said before. But it is the way Thomas Piketty says it – subtly but with relentless logic – that has sent rightwing economics into a frenzy, both here and in the US. Piketty's argument is that, in an economy where the rate of return on capital outstrips the rate of growth, inherited wealth will always grow faster than earned wealth. So the fact that rich kids can swan aimlessly from gap year to internship to a job at father's bank/ministry/TV network – while the poor kids sweat into their barista uniforms – is not an accident: it is the system working normally. If you get slow growth alongside better financial returns, then inherited wealth will, on average, "dominate wealth amassed from a lifetime's labour by a wide margin", says Piketty. Wealth will concentrate to levels incompatible with democracy, let alone social justice. Capitalism, in short, automatically creates levels of inequality that are unsustainable. The rising wealth of the 1% is neither a blip, nor rhetoric. If he is right, the implications for capitalism are utterly negative: we face a low-growth capitalism, combined with high levels of inequality and low levels of social mobility. If you are not born into wealth to start with, life, for even for the best educated, will be like Jane Eyre without Mr Rochester. Mish Comment: Already his thesis is suspect. One need only look at the developers of Google, Microsoft, and countless other extremely successful individuals who became the world's wealthiest by their actions, not their inheritance. Piketty attempts to explain this away later, but for now let's continue with the Guardian. To understand why the mainstream finds this proposition so annoying, you have to understand that "distribution" – the polite name for inequality – was thought to be a closed subject. Simon Kuznets, the Belarussian émigré who became a major figure in American economics, used the available data to show that, while societies become more unequal in the first stages of industrialisation, inequality subsides as they achieve maturity. This "Kuznets Curve" had been accepted by most parts of the economics profession until Piketty and his collaborators produced the evidence that it is false. In fact, the curve goes in exactly the opposite direction: capitalism started out unequal, flattened inequality for much of the 20th century, but is now headed back towards Dickensian levels of inequality worldwide. One of the most compelling chapters is Piketty's discussion of the near-universal rise of what he calls the "social state". The relentless growth in the proportion of national income consumed by the state, spent on universal services, pensions and benefits, he argues, is an irreversible feature of modern capitalism. He notes that redistribution has become a question of "rights to" things – healthcare and pensions – rather than simply a problem of taxation rates. His solution is a specific, progressive tax on private wealth: an exceptional tax on capital, possibly combined with the overt use of inflation. Piketty's Solution Global Wealth Tax 15% tax on capital 80% tax on incomes above $500,000 Piketty in Three Minutes Here is a very interesting video that offers still more perspectives. link if video does not play: Piketty in Three Minutes Can you Solve a Problem When You Don't Know the Cause? France is in a horrific state because of excessive taxation and government interference in the free markets, yet Piketty asks for more of the above. Ironically, Piketty wants an 80% confiscatory tax rate even though he agrees with Laffer it would not bring in much money. How stupid is that? Confusing Symptoms of Problems with Problems Piketty proposes solutions to economic problems even though he does not know what drives economic growth. He also confuses symptoms of problems with the problem. Rising income inequality is a symptom of government interference in the free markets, of increasing government percentage of GDP growth, and of inane central bank inflation policies. It's no wonder that Krugman, also a socialist, calls Piketty's work the best of the decade. I have a simple question: If confiscatory taxes, big government, and "save the local bookstore mentality" solved problems, why isn't France the economic shining light of the world? Law of Bad Ideas My question is simple isn't it? Yet economists would rather deal with mathematical nonsense than answer simple questions. And in another irony, Pikkety says "theory-first approach of modern economics is a dead-end" while proposing his own inane theories about how to fix problems! For further discussion, please see ... August 26, 2013: Income Inequality Explained: Why Wages Don't, Won't, and Can't Keep Up With Productivity March 13, 2014: Democrat Sponsored "Income Inequality"; Law of Bad Ideas, Yet Again October 17, 2014: Irony of the Day: Yellen Moans About Income Inequality; Seven Things That Cause Inequality Will Piketty or Krugman address my rebuttal? Of course not. It does not meet their socialist agenda. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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