Afterthoughts on Piketty
By Russ Roberts
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.