Russ Roberts

Afterthoughts on Piketty

EconTalk Extra
by Russ Roberts
Thomas Piketty on Inequality a... Continuing Conversation... Tho...

Here are my thoughts on the Piketty episode.

This was a lot of fun and very challenging. It's a dense book and it isn't easy to talk about data-rich work when you only have audio. We obviously could have gone a lot longer than an hour.

One of the issues that came up was the rate of growth of income of the top 1%. My point was that as technology and globalization increase, the amount of money the most talented entrepreneurs and athletes will capture increases. So Messi makes more than Pele, LeBron makes more than Magic. And Sergey Brin makes more than--I don't know--pick a technologically creative person from 1970. This effect will taper as globalization maxes out. But technology may more than make up for it. So it is theoretically possible that the share going to the top 1% keeps growing asymptotically toward 100% but that the value enjoyed by the 99% continues to grow even while their share falls. The 99% are getting a smaller share of a fast-growing pie.

I don't think that will happen but it's possible. Is it worrisome? It highlights what I think is important--that we ought to focus on whether the wealth at the top comes from making more and more of us increasingly better off, or whether it is the result of say, cronyism.

There is an in-between case--Liliane Bettencourt, the heiress to the Oreal fortune. (By the way, it is not so surprising that her fortune has grown at the same rate as Bill Gates's. Gates is just an investor as she is.) I guess it doesn't bother me that she has more and more money to spend, presumably the result of investing wisely and not consuming an inordinate amount of her principal. I presume that her investments often help others beside herself and on this question, Piketty is virtually silent in the book. He focuses on the return to capital that accrues to investors and ignores the gains to the rest of us from those who consume less and invest more.

Of course in a world of crony capitalism, some investments have perverse effects--adding to the housing stock say, rather than curing cancer. I'd like to spend more energy getting rid of the perverse incentives that encourage over-investment in housing and encourage instead, the effective use of scarce capital in other, more productive places.

The most surprising moment of our conversation came here, as Patrick R. Sullivan noted in the comments:

Russ: How do average people get wealthy or better off by rich people doing badly? What happened there? What's the mechanism? Guest: Oh, the simplest mechanism is that if you have a destruction of wealth, the rate of return to wealth is going to increase, and you know, this creates space for accumulation from people who start from less wealth or zero wealth and that work for labor incomes they can invest.

Piketty is implicitly assuming that there is no benefit from investments and capital created by the rich. So if their wealth is destroyed, the rate on the investments the rest of us can make will go up. The poor and middle class will have better lives when there is less investment. My thought is that yes, they might earn more on their savings accounts. They will earn a lot less from their labor though, if capital is destroyed or scarcer.

Finally, there is something strange about worrying about the growth at the top because it leads to the rich having too much political power and presuming we can raise the tax on wealth in order to redistribute it to the poor. I wouldn't presume that the political class would be so thoughtful if indeed, the rich are as politically powerful as Piketty worries. Seems to me, the effect goes in the opposite direction. As the rich pay a bigger share of the tax burden, politicians are more likely to take care of them. In recent years, the top 1% of taxpaying units pay 35-40% of the federal income tax burden. If they do poorly, the politicians have less money to spend. This gives them an incentive to coddle them. Which they have been doing. My solution is to reduce the power of the federal government to play favorites.

Don't miss the Extras for this episode. Coming Monday, Martha Nussbaum talking about creating capabilities and the role she argues the government should have in expanding capabilities and opportunities. It includes a very lively discussion of just how accountable government is.

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COMMENTS (22 to date)
amren miller writes:

Well, it's complicated, isn't it? I do have a problem with unearned income in general, but perhaps more of a problem with the entire banking industry than the rich. This includes the massive waste generated by getting people into debt and clogging the legal system with court cases, and not to mention ruining lives for years at a time. I always look at mobility on the micro side. Sideways mobility is just as important as upwards, they go hand in hand. I would prefer a libertarian world instead of this, where transactions are euvoluntary and the state cannot assist in ruining your life with records and fines. You haven't really touched on debt so much, Russ, why don't you hit on that?

Michael Byrnes writes:

Russ Roberts wrote:

"Seems to me, the effect goes in the opposite direction. As the rich pay a bigger share of the tax burden, politicians are more likely to take care of them. In recent years, the top 1% of taxpaying units pay 35-40% of the federal income tax burden. If they do poorly, the politicians have less money to spend. This gives them an incentive to coddle them."

To the extent that this is a problem, isn't it going to increase with the total share of income to the top 1%? Doesn't your argument here validate Piketty's concerns, at least to some extent?

I think you are correct that it matters a great deal what is causing the increase in wealth at the top. I was somewhat surprised that Piketty explicitly said that it did not matter.

DougT writes:

It seems to me that you missed the point of his "destruction" comment. In Europe WW1 and WW2 reduced inequality because so many were reduced to zero wealth. There was huge wealth destruction. This "helped" those on the bottom because their labor rebuilt the businesses and institutions on the Continent, and much of the economic surplus of that labor was captured by labor, rather than by the capitalists. At least, that's how I understood his comment.

Kevin L writes:

@Doug T, yes, people with nothing but their own labor to sell/invest captured a larger portion of fixing the world's largest broken window. The question is, would those same people have been absolutely better off without the destruction of capital in the first place? Would most German workers in 1950 have been better off if there had been no war at all?

MTIPTON writes:

The one thing that kept coming to my mind when listening to the concern with ‘r’ > ‘g’, was if we are concerned that more and more of the extra wealth produced every year relative to the previous year is going to rich people, why wouldn’t we concern ourselves with increasing ‘g’? It seems we can change that relationship not just by reducing ‘r’ via taxes, but by increasing ‘g’ with creating a better environment for growth. If ‘g’ > ‘r’ because we make ‘g’ greater instead of ‘r’ smaller than EVERYONE is doing better every year, not only in absolute but also relative terms, so it deals with the ‘fairness’ aspect. Focusing on making ‘g’ larger is the best thing that can be done for both eliminating poverty and reducing inequality.

Arash84slp writes:

I usually listen to econtalk and i really like the most of the episodes. But this one got me so disepointed. One of the talkers was talking bout data, the other one about ideology. It was like Piketty was a sinner who need to be turned to the light and see rich people is our salvation. I have read almost all of his book and he is making some great Points. Its not about how u see "(...)what I think is important--that we ought to focus on whether the wealth at the top comes from making more and more of us increasingly better off, or whether it is the result of say, cronyism. "
This is just a fantasy, an ideology fantasi just like god is a fantasy for religous people. I have a great Life small debt own my own house good paying job and 2,5 degres going for the third soon. ITS A BOUT REAL DATA, everytime Inequility is this high it comes with pain. A correction, selffulfild or forced like a war, revolution and so on. What worry me is how so many so called academics Think they can use ideology as an argument. People are upset and angry, when your housing bubble burst you bailed out the banks, the super rich finance guys keept all their Money and many poor and middle class loost their home. U seriously dont Think that will change the social Construction, the psychology of the people, Moral Hazard just apply to banks or what?
And one thing that really anoys me with market loving people. They say that they love free market, but as soon as the market react in a way they dont like, its no longer the market its something else. GOVERMENT IS A REACTION TO MARKETS. Everything is a market, moving in a timeless evolution just morphing in diffrent ways. This got Little longer than i wanted it to. But please dont just look at data when it fits your view and scrap data when it doesnt fit your ideologi. It makes u look like a hypocrite.

Gary Mullennix writes:

Does Pickety's book and philosophy call for any radical steps to achieve less inequality of wealth? Lord Acton's view informed by the French Revolution noted "...complete equality is the ruin of liberty, and very prejudicial to the most valued interest of society, civilization, and religion."

I don't think Pickety's work calls for diminishing liberty to achieve greater equality. However, there are many people who are happy to call for such efforts.

Those who rail against the 1%, particularly politicians, appeal to the existence of Envy in most people's minds. Envy doesn't guide people to do what is needed to get more but rather, it seeks the reduction of those with more to fall to where those who envy exist.

There are 7 of the 10 Commandments which prohibit the
application of envy in life which is a testimony to its pervasiveness in human calculus.

Mark Crankshaw writes:


I find both you and Piketty are also ideologues. That is crystal clear to me since I do not share your ideological predisposition. I see Piketty's reasoning as the common display of a left-wing ideologue who started with a series of conclusion: (1) let's increase the power of the State to tax (2) this will lead to higher wages/benefits to academics like me and (3) that suits me financially very nicely. He then proceeds to analyze and manipulate data in whatever way will justify his original conclusion.

Sure, I like ("love" would be an overstatement) what unhampered markets have done for mankind over the centuries.

A serious analysis of the governments most of mankind have been subject to over those same centuries indicates that government, in my view, is simply a social tool of the political elite to control, manipulate and exploit the rest of society. Many hold that government "serves the people", whatever that vague phrase is meant to mean, but this is merely "false consciousness" inculcated into political subjects through the education system that is directed by the political master class. This process of "false" programming occurs in every country from A-Z: Afghanistan, to North Korea, the US, and to Zimbabwe.

My ideological predisposition (and we all have one) follows from my assessment of unhampered ("free") market and from my assessment of the governments who are liable to hamper the market. A "free" market is not defined as a system without rules or customs, as on the contrary, the culture within which the market operates will provide them. A bad or dishonest culture leads to bad or dishonest markets, relatively honest and good culture leads to relatively honest and good markets. When a market is "free" what is meant is that the market is "free" from political manipulation. I emphatically do not trust the class of political manipulators who will do the manipulating whether they go by the name democratic politician, central committee or "central planner". Historically, Governments have NEVER been a reaction to markets; rather governments have always and everywhere been used by the ruling elite to manipulate the market in favor of the ruling class to further empower and enrich the ruling elite. This is so for all governments past and present: Ancient Rome, the USSR, China, the US, the UK, France--under Louis XIV, Napoleon or today, you name it.

To hold the ideology held by Piketty and yourself, given the assumptions about the world I hold, would necessitate believing that I was part of the ruling class and thus the government, serving the interests of the ruling class, would serve my interest as well. However, it is apparent to me that nothing could be further from the truth--I am a mere subject to government authority and not a member of the ruling class, consequently, the government can not be trusted to serve my interests as a given. My interest and the interests of the ruling elite (as well as many democratic yet elite serving "pressure groups") are very often at odds, therefore, I hold no hope that government, democratic or otherwise, will serve my interest when the ruling elite holds interests at odds with my own. Reducing the relative wealth and power of the ruling class is, it appears obvious to me, not currently in the interest of the ruling class, therefore increasing the power of the State under present conditions is not going to accomplish this. As Russ intimated, giving the State increased redistributive power will only result in increased taxes for Middle Class "Peter" to pay for government benefits and subsidies to ruling elite "Paul".

jw writes:

I actually read the book. A summary would have helped before the interview for the listeners who did not:

Piketty's conclusions:
- The world needs a 10% wealth tax on all assets over $13M
- BTW, that includes 1% on all assets over $250K and 5% on assets over $1.3M
- Plus an 80% income tax on income over $1.3M
- Includes a 60% tax on income over $250K
- In order to control evasion, every government worldwide must have access to every bank account and every transaction of every person on the planet so assets can’t be hidden.
- He calls this “democracy taking back control of capital”.

Now here’s the kicker. He admits that confiscatory rates on income and capital will quickly stifle innovation and incentive and NOT return any additional money to government coffers to be used for social services. (For those following at home, yes, he did just validate the Laffer curve.)

Also, he has NO theory to support any additional productivity gains or other device to increase the lot of the bottom 90%.

So he wants to confiscate assets SIMPLY BECAUSE HE DOESN’T LIKE MILLIONAIRES!!!! There is no economic theory. There is no justification. His (erroneous) inequality metric is reason enough to confiscate your hard earned money. All inequality measures use pre-tax income for the top 1% and pre-redistribution income for the lower groups, significantly distorting the problem.

Also, R>G assumes that the same people are in the top group over time to take advantage of R>G. They are not. The composition within the top 1% changes considerably over time, so it cannot hold (again BTW, R is taxed, G is not).

Why he’s a Communist:
- On Marx: “The solution to the problem of capital suggested by Marx…was far more radical and, if nothing else, more logically consistent”.
- He says that Marx solved his R>G problem.
- With Marx, “the rate of exploitation fell to zero” and “man finally threw off his chains along with the yoke of accumulated wealth”.
- He grudgingly admits that a market economy “plays a useful role in coordinating the actions of millions of individuals, and it is not so easy to do without them”. And blames Soviet totalitarianism on just the failed market signaling, which is crazy.

This was the stunner:
- “It is not right for individuals to grow wealthy from free trade and economic integration only to rake off profits at the expense of their neighbors. That is outright theft.”

That’s right, profit is theft.

The bottom line is that this guy has no understanding of free markets, innovation, incentives, or freedom in general.

The really evil part is that the world would be much, much poorer under his recommendations. The fact that he doesn’t see that is mind blowing. He spends a lot of time comparing Gates’ $50B to Jobs’ “only” $8B and trying to justify if Gates is six times more innovative that Jobs. Angels dancing on pinheads. What matters is that there WOULDN'T BE ANY PC’s, Windows, Apples, Iphones, Ipods, Office, or any of the thousands of products that everyone takes for granted every day if Gates and Jobs were limited to $250K/yr and $13M in incentives (not per year, but TOTAL – LIFETIME).

Absolute nonsense. Plus there are many historical inaccuracies and economic mistakes that I caught, plus the reported invented data and numerous calculation errors. But hey, it stokes the fires of leftist class envy and takes the focus away from the VA and Benghazi scandals, failing Obamacare and any other misdirection that the lapdogs want to take the public’s attention, so it has served its purpose.

jw writes:

A parable:

A Millionaire is walking down the street and meets a Homeless man.

H: You are oppressing me by being rich, give me a dollar.

M: You know, you may be right, I feel terrible. Here is $900,000. I have given you almost all of my money, that must make you happy!

H: No! According to GINI, you will still make a million dollars and I will make nothing, so you will still be oppressing me. See you next year!

jim canavan writes:

Question for the forum. I didn't read the book so Im just going off of Russ' interview and a few other articles written on the book. Did he cover why only rich folks can enjoy a higher rate of return on capital versus the middle class? Cant middle class folks buy real estate and rental properties and companies and stock portfolios? It seemed he was arguing that the middle class can only enjoy the returns on growth and are shut out from investing in capital markets and investments. Did I hear this correctly?

Mike Riddiford writes:

@jim canavan

Piketty argues that rich folks can access more sophisticated financial investments than ordinary folks, and thus can expect higher returns on average

From the transcript: "it looks as if the bigger your endowment, the more you are able to access to sophisticated financial product or financial derivatives, etc. that give you some time a much bigger return than the typical middle class families sometimes getting pretty lousy returns."

He asserted this without proof in the talk, but it sounds plausible. I'd like to see some evidence either way on this

PS I just heard the original talk - congrats to Russ on (1) exposing us to an economist whose views are quite different to Russ's alma mater UChicago, and (2) being a patient interviewer with a somewhat long-winded guest!

Mike Riddiford writes:

Russ said: "As the rich pay a bigger share of the tax burden, politicians are more likely to take care of them."

This is plausible. However, the changes in corporate tax share may belie this idea. IIRC, the share of the total US tax paid by US corporations has declined from 30% plus in the 1960s to less than 10% now. Yet I am not sure that US policy makers are notably less sympathetic to corporations than they were 40 or 50 years.

I suspect that politicians would be more sensitive to their donors, rather than large taxpayers as such, so this may be the data to look at to track influence trends.

Tom writes:

Russ, what's so surprising about this?

"Oh, the simplest mechanism is that if you have a destruction of wealth ..."

Roberts always likes the example of Keuffel & Esser, the manufacturer of slide rules that famously failed to forsee its own destruction in a self-made study about future technologies.

Keuffel & Esser's value and business was destroyed by the pocket calculator five years after conducting the study.

Getting rid of old technologies and business models, like the slide rule, always destroys the value of assets and allows other companies to move into markets.

"Roberts: How do average people get wealthy or better off by rich people doing badly? What happened there? What's the mechanism? Guest: Oh, the simplest mechanism is that if you have a destruction of wealth, the rate of return to wealth is going to increase, and you know, this creates space for accumulation from people who start from less wealth or zero wealth and that work for labor incomes they can invest."

Why is everybody here against a very entrepreneurial way of thinking?

Jay writes:

@Mike Riddiford

Why are we conflating rich with corporations? I suspect the drop in rate has more to do with globalization since the 60's then inequality.

Don Crawford writes:

The fundamental question Piketty fails to address and Russ failed to point out is whether voters have a right to take as much wealth as they want from those who have more. When our country was founded only people of property were allowed to vote, presumably because people without property would vote to give the government the power to redistribute wealth in their general direction. Is there a limit on the power to take wealth from those who own it? How much is enough? If the top 1% already pays 35-40% of the taxes, how much more do they need to pay? Will we keep going until they go on strike, as in Atlas Shrugged? Apologists for socialism never answer that question but blandly assert the right to other people's assets--for the general good, of course.

Mike Riddiford writes:


The reference to corporations was merely to illustrate that paying a declining share of the total tax take (as corporations now do) does not necessarily translate into less political influence. So Russ's claim that the rich (individuals) paying a greater share of tax would automatically translate into greater political influence may not come to pass, i.e. there may not be a direct line between tax contributions and political influence, and that there may be other, more immediate, vehicles of influence e.g. political donations etc

As to whether globalization has increased possibilities for tax avoidance by US corporations, I would say it probably has, through transfer pricing, use of tax shelters etc. Not really sure what the answer is, FWIW

PS what view you take about the most effective way to influence politicians tends to revolve around what you view as their primary interest. I would argue politicians are most interested in getting (re) elected, not governing, so political donations are likely to be more effective in influencing their views rather than paying tax per se.

Russ Roberts writes:

Tom argues that creative destruction--the power of innovation to create new opportunities while reducing the power of older technologies is the mechanism that Piketty has in mind for why destruction can help the masses. But Piketty is not talking about the creative destruction of entrepreneurship. He is talking about actual destruction. War is his example of how the economic landscape gets leveled. And his argument is the one I've quoted above. After war, there is less capital so the return to capital is higher. That lets ordinary people, not just the rich, accumulate wealth.

The problem with that argument is the rate of return on my portfolio is not the only thing I care about. In post-war Japan, where there was real and utter destruction, investors earned a high return--there was low-hanging fruit everywhere. Same with West Germany. Same with England. But people were also very poor for a while because their skills were not augmented with capital. They were less productive.

Seth writes:
In recent years, the top 1% of taxpaying units pay 35-40% of the federal income tax burden. If they do poorly, the politicians have less money to spend. This gives them an incentive to coddle them.

The incentive to coddle the rich comes from their campaign donations, not tax payments.

Russ Roberts writes:


It's both. The more you coddle them, the more money they have. The more money they have, the more they can donate. The more money they have, the greater the tax revenue.

Bob Siegel writes:


I just finished the Piketty podcast, second time through. Maybe I missed this, but it seems to me that if capital provides a greater return than growth that means that the demand for capital is sufficiently high to drive those returns. Thus, the issue is a global shortage of capital which means that to encourage growth we need more capital through the economy which means less taxes.

Please bear in mind that I am the listener that wrote to you about a year ago regarding Bastiat so I have that framework as my bias.

Kyle writes:

Piketty's book is pseudoscience, nothing more. He confuses relative wealth inequality with being the same as absolute wealth inequality. He writes that the United States has the greatest level of wealth inequality of any society in the world and in human history today. Now that is just patently absurd. If you go by standard-of-living, which depends on various goods and services, which are the real wealth of society, the standard of living for the average person is today much better than say a person living in 1700s France or 1st Century Rome.

This is because a high standard-of-living means that everyone is rich, but unequally rich. The average person has all the same basic creature comforts as Bill Gates. He may have a bigger, more luxurious home, and better healthcare, but otherwise, there isn't a whole lot of difference in basic standard of living. The average person uses the same type of basic shower and bath tub, has access to the same entertainment, air conditioning, heating, indoor plumbing, radio, television, Internet, quality furniture, enormous variety of foods so that they can eat like a king, etc... the healthcare the average person has today is eons beyond what even the richest people in the world had access to hundreds and thousands of years ago. And 100 years from now, the average person will have access to better healthcare than the richest people today have access to.

What is amazing is how many people do not recognize any of this and actually fall for Piketty's analysis, such as Paul Krugman for example. The political Left will never acknowledge the above points however because it puts refutes what is a central core belief of theirs, which is that wealth inequality is growing, and we are going to end up having a repeat of the Russian or French revolution soon if we do not do something drastic to stop it, namely HIGH taxes, which fits into the other aspect of Leftwing belief, which is that high taxes and wealth redistribution create a better society.

More proof of what nonsense the work is can be observed simply through countries and states. France is not exactly a bastion of economic prosperity. And when it tried recently a 75% top tax rate, it was disastrous, and was ultimately declared unconstitutional by the French supreme court. The countries with the healthiest economies are the most right-leaning ones, such as Germany, Switzerland, Netherlands, the United States, Canada, etc...within the United States, we have the economic basket case that is California, once the Golden State, now destroyed through high taxes, high regulations, and excessive spending by the political Left, only hanging on because of its established industries that were built up in prior more economically-friendly times and the nice weather.

Then we have Texas, one of the healthiest states economically in the country, and also an adherent to right-leaning policies of low taxes and light regulation and fiscal responsibility. Democrats lust to turn it blue, which will mean it will then begin becoming another version of California, i.e. another economic basket case. We have the high-tax, high-regulation, high-spending Northeast losing a tremendous amount of people as they flee to more economically-friendly pastures (many of whom will probably then begin turning their new states into versions of the states they just left).

According to Piketty, it should be France that is the healthiest economically, and California that is the healthiest.

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