Sunday, April 27, 2014

Piketty Thoughts

By Robert H.

The book is Capital in the 21st Century, a french guy wrote it, and you can find dozens of summaries and reviews from both sides of the political spectrum if you don't know what I'm talking about.  These are my general thoughts on it.


Let's disaggregate possible problems with economic inequality.  Note that I think some of these are dumb and not real or likely problems, I'm just trying to be complete:

1. Negative political effects -- the elite will use their increased share of the pie to dominate the government and use it for rent seeking (er, more so).
2. Less meritocratic society -- Elites will create social and economic barriers to make it harder for people born out of the upper class to get ahead.  This will lead to wasted human capital.
3. Psychic effects -- inequality makes the bottom 99 percent jealous and unhappy.
4. Dis-utilitarian distribution -- Because of diminishing marginal utility, a more equal distribution should be preferred to a less equal one, ceteris paribus.
5. Poverty -- the real problems with historical inequality is the poverty at the bottom. It is sad when lots of people are poor.
6. Art -- The best art comes in periods of high economic mobility into and out of the upper class, during which times the Venn diagram of those who have been highly educated, have suffered poverty or repression, and who have the leisure to write has the most overlap.
7. Inherent badness -- Inequality is just bad because it is.

From what I've read, Piketty's supporters seem to want to focus mostly on four and one (inequality will have negative political effects, whereas a more equal distribution will increase total utility). His detractors are most interested in five (the living standards of the poor is what matters and taxing capital will slow growth and lower those living standards).  I think the anti-Piketty folks are mostly right.  Wages and living standards for the bottom quintiles are likely to rapidly grow if returns on capital remain high over the next century, even if inequality also increases.  This is a success story.  Piketty gets it wrong to focus on the living standards of the poor relative to the rich rather than focusing primarily on the living standards of the poor, full stop.  We shouldn't target inequality or capital accumulation or high rates of growth on capital, we should just work on making the lives of the less well off better and should do so with the most efficient taxes available.

That said, I think the problems associated with point one (negative political effects) are real, and I'm disappointed so few of Pikety's critics have latched onto them.  Relatively simple democratic reforms could make good (er, relatively good) governance much more likely in a period of high inequality -- mandatory voting, campaign finance reform, proportional representation, cash rewards for voters who pass civics tests, etc etc.  The idea is to make sure that more cash doesn't equal more ability to rent seek for rich people, and there are all kinds of ways to do that short of "have a global wealth tax."  But Pikety's detractors, while acknowledging that higher inequality is possible or likely in the future, don't seem to want to embrace any of the relatively trivial reforms that could help democracy weather inequality better.  I wish they would!

Standard Disclaimer: Obviously the books is brilliant and worth reading and Piketty's historical research is amazing.

1 comment:

  1. This is tangential to your post, but I do wonder about the argument that:

    "Piketty gets it wrong to focus on the living standards of the poor relative to the rich rather than focusing primarily on the living standards of the poor, full stop"

    To play devils advocate, suppose that we model welfare as being two-part, a 'living standards, full-stop' (or absolute) part and a relative living-standards part. I think that many supporters would believe that (for the majority of the population in OECD countries at least) there are diminishing marginal returns to the absolute portion as average wealth increases, but NOT (or at least less so) to the relative portion. Or to put it another way when we're both homeless I'd gladly let you live in a nice house if it let me live in a hut, but when we both already live in nice houses I would resent living in a mansion if it meant you got to live in Versailles. My need to keep up with the Jones' doesn't change, but my need for increasing living standards does (I'd note that this is turning down what looks like a Pareto improvement on the surface out of sheer spite, but 'people are spiteful dicks' is an assumption in this model).

    In that case the question of whether it's better to focus on increasing absolute wealth at the expense of inequality depends entirely on how high wealth is to start with.

    That said, I think it's a somewhat dubious proposition that we've reached a point where spite is the driving force of our enjoyment in life. By contrast your point 1 would have much the same effect (the size of the effect doesn't depend on current wealth levels, only on relative wealth) on much firmer grounds. I just talked myself out of the devil's advocate position I was taking in the first place. Well enough then.