From Stephen Moore at Investor’s Business Daily, The Left’s Advice Would Bring A Second Great Depression:
One oddity of the current economic debate is that the more Barack Obama’s incompetent income-redistribution policies have failed, the more the left calls for more government-intervention policies to correct for the deficiencies of the earlier rounds. American middle-income families have lost nearly $3,000 in purchasing power since 2007, and the left’s only solution to get us out of the rut is more debt, more social-welfare spending, more income redistribution and higher taxes on the rich and big business.
That’s the conclusion of French economist Thomas Piketty, whose new book called “Capitalism in the 21st Century” is suddenly the new rallying cry of the redistributionists. One reason the book is garnering so much attention is that the slow economy of late has meant that everyone is fighting over a smaller share of a smaller pie. The New York Times piled on this week, moaning that the middle class in the U.S. has fallen behind the middle class in Canada. The Times never mentions that Canada has cut tax rates, balanced its budget, and tamed government spending.
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From Legal Insurrection, Piketty on income inequality:
As all this was going on, expectations and demands have risen, and so income inequality has been the new buzzword. Stamp it out, because it somehow “offends democracy.” The fact that the remedy Piketty and many others propose offends liberty, and the strong possibility that it could end up killing the goose that laid the golden egg, are both ignored and/or minimized in the rush to social and economic “justice”—that is, equality of outcome rather than opportunity.
From National review Online Michael Tanner writes Piketty Gets It Wrong:
Capital in the Twenty-First Century is well researched and contains much useful information and some important insights. But it is not unflawed. Some of the problems are technical — Piketty tends to underestimate the elasticity of returns on capital — but more are deeply philosophical. Piketty takes the evilness of inequality as a given, ignoring the broader question of whether the same conditions that lead to growing wealth at the top of the pyramid also improve material well-being for those at the bottom. In other words, does it matter if some people become super-rich as long as we reduce poverty along the way? Which matters more, equality or prosperity?
To cite just one example, Piketty devotes considerable effort to criticizing the rise of inequality in China over the past three decades as it has adopted market-oriented policies. But he largely glosses over the way those policies have lifted millions and millions of people out of poverty.
Still, Piketty makes some important points. In particular, he notes correctly that returns on capital nearly always exceed the return on labor. With capital held by a relatively narrow group, therefore, rising inequality is inevitable. Moreover, with the wealthy able to pass capital on to their heirs, that inequality will be perpetuated and even extended over generations.
One wonders why, then, Piketty’s fans ignore the obvious answer to this problem. Instead of attacking capital and capitalism, why not expand the number of people who participate in the benefits of having capital? In other words, let’s make more capitalists.
Yet, the Left is unremittingly hostile to exactly those policies that would give workers more access to capital.
Take, for example, 401(k) plans, which allow some 52 million American workers to own stocks and bonds as part of their retirement portfolios. Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School in New York, has argued before Congress that 401(k) plans should be abolished, and replaced by an expanded social-insurance system.
Megan McArdle writes in Bloomberg Piketty’s Tax Hikes Won’t Help the Middle Class:
The government can spend a lot more money on social programs, and that might or might not make people somewhat happier. But when you look at places where a large percentage of the people arecompletely dependent on government benefits, you don’t really see a great explosion of human flourishing. Nor do I think we would see it if only the checks were larger. Checks do not fix the psychological pain of unemployment or the emotional deprivation of single parenthood. They do not increase social cohesion. They don’t even necessarily cut down on crime; while you’d think there would be an obvious connection between economic conditions and crime, apparently there isn’t.
Writing checks certainly won’t offer a more hopeful future to the middle class. Middle-class parents aren’t worried that their kids will starve or freeze to death. They’re terrified that their children will not enjoy the security that their parents had. I’m not making light here: That’s a real terror. You used to be able to feel that when you had gotten your kid through high school or college without a major substance-abuse problem, you’d done much of what was needed to launch a successful adult. Now that seems like barely a start.
But how much better would parents feel if a technocrat came along and said, “Your child will never have a real job that conveys status and belonging and some feeling of contributing to society. He will, however, have an annual check for $20,000 a year and government-sponsored health insurance”? Your kid would have to be a very deep screwup indeed for that to be much consolation. A check fixes deep deprivation that middle-class parents aren’t really worried about. It doesn’t do a thing to make sure that your kid has a respectable job and a solid community to raise her kids in.
Tyler Cowen writes in Foreign Affairs, Capital Punishment:
Yet there are flaws in this tale. Although r > g is an elegant and compelling explanation for the persistence and growth of inequality, Piketty is not completely clear on what he means by the rate of return on capital. As Piketty readily admits, there is no single rate of return that everyone enjoys. Sitting on short-term U.S. Treasury bills does not yield much: a bit over one percent historically in inflation-adjusted terms and, at the moment, negative real returns. Equity investments such as stocks, on the other hand, have a historical rate of return of about seven percent. In other words, it is risk taking — a concept mostly missing from this book — that pays off.
That fact complicates Piketty’s argument. Piketty estimates that the general annual rate of return on capital has averaged between four and five percent (pretax) and is unlikely to deviate too far from this range. But in too many parts of his argument, he seems to assume that investors can reap such returns automatically, with the mere passage of time, rather than as the result of strategic risk taking. A more accurate picture of the rate of return would incorporate risk and take into account the fact that although the stock of capital typically grows each year, sudden reversals and retrenchments are inevitable. Piketty repeatedly serves up the appropriate qualifications and caveats about his model, but his analysis and policy recommendations nevertheless reflect a notion of capital as a growing, homogeneous blob which, at least under peaceful conditions, ends up overshadowing other economic variables.
Furthermore, even if one overlooks Piketty’s hazy definition of the rate of return, it is difficult to share his confidence that the rate, however one defines it, is likely to be higher than the growth rate of the economy. Normally, economists think of the rate of return on capital as diminishing as investors accumulate more capital, since the most profitable investment opportunities are taken first. But in Piketty’s model, lucrative overseas investments and the growing financial sophistication of the superwealthy keep capital returns permanently high. The more prosaic reality is that most capital stays in its home country and also has a hard time beating randomly selected stocks. For those reasons, the future of capital income looks far less glamorous than Piketty argues.
Another problem with the high taxes on wealth of the very rich is defining that wealth? Does real estate, jewelry, artwork, expensive cars, leisure time count as wealth. If it doesn’t guess where assets will be transferred to. Like estate taxes such pending confiscation ENCOURAGES conspicuous consumption. Why save just to have it taken away. Blow it on private jets, expensive cars, gluttonous meals, first class entertainment, etc. Does anybody think this is preferable to investments in mortgage loans and job creating capital equipment?
Like Krugman, Piketty’s problem is not just economic analysis but a philosophical construct that is destructive to the creation of wealth that will harm just about everybody.