Piketty Pushes Back

June 1st, 2014

First a shout out to our friends in the southern hemisphere where the winter is beginning in earnest.  Hey, you had the sun for six months.  Now it’s our turn.  We all have to share.  I think that because there are more people in the northern hemisphere, the sun should stay up here for longer than six months.  It’s not fair.

Piketty Controversy

Talking about fair…..Last week I touched on some of the highlights in Thomas Piketty’s book, Capital in the 21st Century.  At the time of that writing, Chris Giles in the Financial Times had just reported that he found some data errors while using Piketty’s source material.  Giles’ criticisms were rather precise and included charts of the revised data which Giles claimed contradicted Piketty’s conclusions that wealth inequality had risen during the past thirty years.  This past Friday, the financial site Bloomberg reported that Piketty had rebutted criticisms of his methodology.  En garde!!! For those of you who are not interested in the minutiae of the disagreements, I will quote from Piketty’s response:

What is troubling about the FT methodological choices is that they use the estimates based upon estate tax statistics for the older decades (until the 1980s), and then they shift to the survey based estimates for the more recent period. This is problematic because we know that in every country wealth surveys tend to underestimate top wealth shares as compared to estimates based upon administrative fiscal data. Therefore such a methodological choice is bound to bias the results in the direction of declining inequality.

Piketty’s rebuttal is sound but the debate over data and methodology does underscore a problem. There were times when I have questioned Piketty’s data only to find that he addressed those concerns in either the footnotes to the book or in notes contained in his tables.   Fearing that I might put readers to sleep, I edited out of last week’s blog a concern I had with Piketty’s rate of inflation shown on page 448 when he presented a table – Table 12.2 – of historical returns by university endowments.  Piketty states a 2.4% inflation rate from 1980-2010, which struck me as too low (BLS figures are 3.3%).  In a note at the bottom of the Excel file TS12.2, he revealed that he used the GDP deflator, not the CPI, in order to keep data consistent with the GDP series.  He could have stated this simply at the bottom of the table in the book.  It’s not like the publishers were trying to save space in a 700 page book.

So, Open Letter to Professor Piketty and other Economists:  Please put your caveats and clarifications up front and center and repeat often. Last week, I gave several examples of Piketty’s clarifications which could be found in a referenced paper or on one of the spreadsheets that his team compiled.  James Joyce famously said of his book Finnegan’s Wake that he expected the reader to put as much time and effort in reading the book as Joyce did in writing the book.  Relatively few people have read Finnegan’s Wake.  Help us understand your point!!

For those of you who want more of the controversy, a reader sent me this, including  Simon Wren-Lewis’s comments on the matter at Mainly Macro, which I link to every week on the side of this blog. Economist Tyler Cowen comments echo my concerns with valuations of capital that vary widely because of asset pricing.  When an asset is difficult to price or varies widely in price, should one use the SNA international convention (System of National Accounts) and estimate a present value based on projected future flows?  The founder of Vanguard, John Bogle, recommends this common sense approach for our personal portfolios; that we should stop looking at our statements and look at the money flows that our portfolio mix will probably generate them when we need them.  That is the true worth of our portfolios, according to Bogle – not some temporary valuation based on the market prices on the last day of the month.

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What is Income?

This week, as I listened to and read discussions of income in the U.S., it became apparent that there are understandable misconceptions of what is being counted when economists tally up the income of a household and the income of a nation.  Update:  Corrected. A 2011 report from the Census Bureau states that household income does include cash benefits before taxes.  EITC payments are not included because they are a reverse tax (Source).  Non-cash benefits like Medicaid, Food Stamps and housing assistance are not included.  These non-cash benefits can easily surpass $1000 per month.

Money income includes earnings, unemployment compensation, workers’ compensation, Social Security, Supplemental Security Income, public assistance, veterans’ payments, survivor benefits, pension or retirement income, interest, dividends, rents, royalties, income from estates and trusts, educational assistance, alimony, child support, cash assistance from outside the household, and other miscellaneous sources.

The national income figures that Thomas Piketty uses in his book do include government transfers.  The 2005 NIPA Guide summarizes what is included in personal income.   IVA and CCAdj are inventory and depreciation adjustments.

Personal income is the sum of compensation of em­ployees, received; 
proprietors’ income with IVA and CCAdj; 
rental income of persons with CCAdj; 
personal income receipts on assets; 
and personal current trans­fer receipts; 
less contributions for government social insurance

Measuring income to determine an aggregate level of well-being within the population is challenging and gives each side ample ammunition in the political debate.  The inclusion and exclusion of various types of benefit, cash and otherwise, leads one side to dismiss the conclusions of the other side and hinders a constructive dialog.

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GDP Growth

Each month the BEA (Bureau of Economic Analysis) releases a new estimate of the previous quarter’s GDP.  This past week the BEA released the 2nd estimate of 1st Quarter GDP growth, showing an annualized 1% decline.  This was pretty much in line with consensus estimates and the market’s response was rather neutral on the day of the release.  Much of the downturn was ascribed to the particularly harsh winter weather and many economists are projecting a 4% annualized increase in this quarter, a rebound to offset the past quarter’s decline.

Peering under the hood of the GDP report:  under the category of Private Domestic Investment, residential housing dropped almost 8% (annual rate) in the fourth quarter and another 5% in the first quarter of 2014.  What is more surprising is the almost 2% drop in business investment.  Let me go back to a paper by Ed Leamer that I first wrote about in February.  Mr. Leamer’s thesis is that the sales of new homes first decreases, followed by a decrease in business investment. He found that this 1-2 punch precedes most recessions by about 3 – 4 quarters.  In two cases, it was a false positive.  Perhaps this latest 1-2 punch  is a false positive.  Perhaps it was just the winter weather.  This economy does not feel like a recession is at all imminent. Industrial activity, the labor market and auto sales are strong or expanding. More perplexing to a casual investor might be a summer lurch downward in the market if the economy does not show signs of a correcting rebound.

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Fixed Capital Consumption

Since 2000, there has been a notable change in economic growth.  It is not often that we see growth above 3% as we did in the 20th century.

Helping that meager growth rate look – well, less meager – is an item that the BEA adds to GDP called Fixed Capital Consumption.  To the ordinary Joe, this is simply depreciation, but this is not the depreciation that your accountant might have mentioned if you own a small business or rent out part of your home. The depreciation that the BEA calculates is based on the current market price of a piece of equipment, for example, not the actual cost of the item.  As an example, let’s say that Billy and Betty Jones bought a new $20,000 truck for their business and their accountant depreciates it over a 5-year cycle.  To keep it simple, assume that the truck’s depreciation each year is 20%.  That depreciation is based on the cost of the vehicle.  Let’s do it the way the BEA does it (if only!  The IRS does not allow this!).  In year 3, the current market price of a similar vehicle is $24,000.  20% of $24,000 is $4800, higher than the $4000 depreciation based on the cost of the vehicle. In a given year, the amount of depreciation actually reported by companies might be $2 trillion.  The BEA figure will be higher and this is included in Gross Domestic Product.  As a percentage of GDP, depreciation has risen considerably since the early 2000s, driving up reported GDP growth just a smidge.  Below is a chart of the increasing percentage of GDP that is Fixed Capital Consumption.  Almost one of every six dollars of GDP is being allocated to depreciation, a third higher than 1960 rates.

In a low inflation environment, the change in the market prices of equipment and land is muted.  Are capital expenditures becoming obsolete at a faster pace?  Over the past two decades, software and systems development has become an increasing share of non-residential investment.  Rapid changes in technology may be one driver of the acceleration in depreciation.  Wikipedia has a good article on the concept as it is reported in the national accounts.

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Education

As I mentioned last week, I’ll look at a paper I read recently which had some rather startling conclusions. In a paper published in the World Economic Review earlier this year, economists James Galbraith and J. Travis Hale reviewed paycheck and IRS income data to identify state and national trends in income inequality during the past 40+ years.  It comes as no surprise that there is inequality between sectors in the economy, a fact which Galbraith and Hale acknowledge.  Their particular focus was the changes in inequality within and between sectors at the state and national levels.

There are two components to income inequality: 1) wage growth or the lack of it; and 2) employment growth or the lack of it within each sector.  If a particular sector experiences a period of high growth in earnings but jobs decline in that sector, then the gains become more concentrated and inequality between sectors grows.

What Galbraith and Hale found was that the changes in the 1990s and 2000s had one common characteristic: booming sectors of the economy vs. non-booming sectors accounted for most of the growth in income inequality.  Where each decade differed was the change in the sectors that experienced high growth.  The 1990s was marked by a growth spike in information technology, giving rise to out-sized gains to workers in the professional, scientific, and technical fields.   The 2000s was the decade of outsized growth in construction, defense and extractive technologies. Here is a troubling finding of their study: common to both periods is that the number of jobs declined in those sectors that experienced high wage growth.  Higher pay = less job growth. Also common to both decades, until the financial crisis in 2008, was the high growth in the finance and insurance industries.  Problem:  Rising  inequality.  Remedy: More education. The authors acknowledge this common response:

When public discourse admits inequality to be a problem, education is often given as the cure.  According to Treasury Secretary Henry Paulson (2006), for instance, the correct response to rising inequality is to “focus on helping people of all ages pursue first-rate education and retraining opportunities, so they can acquire the skills needed to advance in a competitive worldwide environment.”  This is a view with powerful support among economists. 

But their evidence casts this common conception into doubt:

As we’ve shown, the last two decades have seen significantly slower job growth in the high-earnings-growth sectors than in the economy at large. So even if large numbers of young people do “acquire the skills needed to advance” there is no evidence that the economy will provide them with jobs to suit.  Many will simply end up not using their skills.  Moreover, a strategy of investment in education presupposes advance knowledge of what the education should be for. Years of education in different fields are not perfect substitutes, and it does little good to train too many people for jobs that, in the short space of four or five years, may (and do) fall out of fashion. And experience shows clearly that the population does not know, in advance, what to train for. Rather, education and training have become a kind of lottery, whose winners and losers are determined, ex post, by the behavior of the economy.

Does this mean that parents and grandparents should cash in those college funds for the kids and take a long vacation with the money?  Hardly.  Bureau of Labor Statistics reveal that those with a college education have a significantly greater lifetime income than those without. The findings of this paper imply, however, that the economy and the job market change in ways which none of us can reliably predict.  The wiser course for students might be the same advice financial advisors give to investors: diversify.  If a student is majoring in philosophy, take some business, computer or science courses. Science majors could do with some literature and writing courses as well.

At the start of the 20th Century, 40% of the population was engaged in farming-related jobs.  A century later, less than 2% of jobs are in the agricultural sector.

When I was a teenager, an aunt told me that a reliable bookkeeper could always find a job. That was before the introduction of the computer and accounting programs for small businesses.

The number of librarians has declined about 10% in less than a decade.  In 1990, who could have predicted that?

Records Management, once a clerical job, has evolved into management of many interdependent mediums, complicated by laws and regulations that few could foresee just twenty years. A science major confident in the availability of work in a certain skilled profession might find that the introduction of a qubit computer in 2025 sharply reduces jobs in that profession.

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Takeaway

As investors, we often think that we can avoid the pain so many of us experienced in 2008 if we pay more attention to economic and corporate indicators.  In hindsight, the graphed data looks so obvious. We ignore now what we didn’t ignore then because we know now what to ignore, making hindsight a marvel of clarity.  The future enables us to filter out the noise of the past.

If China’s housing sector implodes and repercussions of that undermine the U.S. economy, we’ll criticize ourselves for not reading that article on page 24 that detailed the coming crisis.  There will be a graph of some spread in interest rates or some other indicator that we glossed over at the time.  If there is a recession 9 months from now (this is just an ‘if’), we will forget the harsh winter of 2014 that blinded us to the early warning signs.  We will see the decline in 1st quarter GDP together with the decline in disposable personal income as the clearest of warning signs and slap ourselves on the head for missing it.  Some guy will get on the telly and show us how he predicted it all along and we’ll think that we should get his newsletter because this guy knows.

As to our current disputes, the grandchildren of our grandchildren may be puzzled by our concerns with income and wealth inequality.  We remember the first two paragraphs of the Declaration of Independence, which the signers largely agreed to with a few revisions.  The majority of the Declaration is concerned with a list of grievances against the British Empire, which the signers debated vigorously, making numerous amendments to the text.

When did we last have a debate on which metal, gold or silver, should serve as a backing to the currency?  This burning topic of the late 19th Century is of little more than historic interest.

Over a fifty year period in the 19th Century, bankruptcy became less a criminal act and more a civil matter, culminating in the Nelson Act in 1898 which codified our more modern notion of bankruptcy.

With relatively little debate, 19th Century Americans bequeathed their heirs a country dominated by large corporations.  Less by design and more by default, the raising of private capital by corporations seemed to be a convenient solution to the persistent misuse of public funds by corrupt politicians in that century.

We no longer argue, as they did during the Civil War, whether the Federal Government has a responsibility to bury soldiers who have died on the battlefield.

We argue about guns and the meaning of the Second Amendment, which 19th Century Americans thought was non-controversial and not a universal individual right to gun ownership.

A hot topic of debate in the early part of the 20th Century was whether Irish, Italians and other Southern European immigrants were fully evolved humans and were capable of exercising the right to vote.

19th Century Americans argued about the moral validity of slavery.  We don’t.

What is the minimum working age for children?  Is it six or eight years of age?  What should be the legal maximum hours that they can work?  These burning questions of the early 20th Century are dead embers now.

The issues changes, our perspectives change, but we can be sure of one thing: in a hundred years, we will still be arguing as much as we do today and that is oddly reassuring.

Piketty’s Capital

May 25, 2014

No graphs this week!  Awwww!

A few months ago, Thomas Piketty, a French economist, released Capital in the 21st Century, a book that I mentioned to readers back in January before its publication.  Piketty’s book has aroused much interest, praise and denunciation.  What could arouse such fire in the hearts of men, you ask?  Inequality.  We humans are a social bunch and, like our chimpanzee cousins, are especially sensitive to inequality.  “She got more chocolate milk than me!  It’s not fair!” is a familiar lament to many parents.

To understand Piketty’s thesis, let’s review some fundamental concepts of capital and income.
“Income is a flow…the quantity of goods produced and distributed in a given period…Capital is a stock…the total wealth owned at a given point in time.” (p. 50)  Piketty’s thesis is based on a ratio of the capital of a nation to the national income.  His definition of capital is so encompassing that my immediate suspicion was the accuracy of estimates of the total wealth of a nation, a flaw that Piketty acknowledges.

The main thesis of Piketty’s book is: as the capital wealth of a nation accumulates, capital’s share of annual national income increases.  For long periods, the rate of growth of accumulated capital is larger than the growth of the economic output/income of a nation.  The process is self-perpetuating, so that capital takes an ever increasing share of national income.  The higher the capital/ national income ratio the more inequality of wealth and income.  Piketty estimates that, in 2010, the capital/income ratio was 450% for the U.S., a bit above Germany and Canada’s ratios, and far below those of France and Great Britain. Piketty proposes a solution to this inexorable process:  a progressive tax on wealth.  Mount up your steeds, men!  The Marxists are coming!

Wealth = Capital

I’ll begin a review of some criticisms of Piketty’s methodology with a brief primer on some measures of capital.  Economists and accountants often analyze the flow generated by a store of capital, but it is capital that can be more easily counted. In finance, there is a metric called Working Capital Turnover Ratio which calculates the flow of sales from the working capital of a firm, and is used to assess both the value and liquidity of a firm.   Piketty rarely uses the term liquidity in his book, but I think it may be an unstated implication of his work.

ROIC, or Return On Invested Capital, is frequently used to measure how well a firm uses the capital and debt invested in the firm to generate a profit.  These measure net after tax profits as a percentage of the stock of capital and debt in a business.  Piketty also measures flow but it is sales, not profits that is his primary focus.  Profits are of course an intrinsic component of sales since they are that portion of sales income that is left over after all expenses.  The change in real GDP is the percent change in that flow.  Piketty’s concern is the accumulation of the residual of past economic flows, the stock of wealth that he claims earn a greater rate of return than the increase in the annual flow of economic activity.  Capital is a key component of economic growth but Piketty raises concerns that Capital can become too large relative to the flow of economic activity.
  
Hopefully, this brief background will enable the reader to appreciate the criticisms of Piketty’s thesis.  Charles Gave is a forty year veteran of investment management and cofounder of the international investment firm GaveKal.  Coming from the world of finance, Gave understands capital as meaning invested capital or working capital. Keep that in mind as you read Gave’s denunciation of Piketty’s thesis:

The extraordinary thing is that Piketty’s analysis is based on a massive logical error. His thesis runs as follows: if R is the rate of return on invested capital and if G is the growth rate of the economy, since R is greater than G, profits will grow faster than GDP, and the rich will get richer and the poor poorer. This is GIGO (garbage in, garbage out) at its most egregious. Piketty confuses the return on invested capital, or ROIC, with the growth rate of corporate profits, a mistake so basic it is scarcely believable. [Gave’s emphasis]

On page 46 of his book Piketty writes: “In this book, capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market.”  While this includes invested capital, it is not solely invested capital, for it includes residential real estate, government capital, land and natural resources, some of which are very difficult to value.

In short, Gave read “invested capital” when Piketty wrote just “capital.”  Gave read “corporate profits” when Piketty wrote “return on capital, including profits…” (p. 25).

The economist James Galbraith takes issue with Piketty’s all inclusive  definition of capital: “he conflates physical capital equipment with all forms of money-valued wealth, including land and housing, whether that wealth is in productive use or not.”

Piketty anticipated his critics: “some definitions of ‘capital’ hold that the term should apply only to those components of wealth directly employed in the production process…Capital in all its forms has always played a dual role, as both a store of value and a factor of production.  I therefore decided that it was simpler not to impose a rigid distinction between wealth and capital.” (p. 47) 

Let me rephrase the ” R is greater than G” formula that piqued Gave’s derision.  Picketty uses small ‘r’ and small ‘g’ so I will adhere to that: the annual income r derived from capital, as a percentage of that capital stock, will be more than the annual percentage change in real, or inflation adjusted, income/output g.  As Piketty writes: “the inequality implies that wealth accumulated in the past grows more rapidly than output and wages.”

An example:  In the teeny tiny kingdom of Miniscule, the total nonhuman capital stock at the beginning of this year is $100.  It  generated output/income of $10, or 10%. That is r, the return on capital.  This income from capital was part of Miniscule’s total output/income of $30, an increase of $2 over last year’s income/output of $28. To keep the math simple, let’s pretend there was no inflation or depreciation in that year.  The growth in total income/output is about 7%, or $2 / $28.  That is g, the growth rate of output/income.  To recap,  r = 10%, g = 7%.  “r can be significantly higher for long periods of time than the rate of growth of income and output, g.” (p. 571) Is this true?  That’s what Piketty claims to show.

Like Galbraith, I question Piketty’s inclusion of many different forms of wealth which are difficult to measure.  Piketty acknowledges the difficulties in the appendix to a paper he co-authored with Gabriel Zucman in December 2013, “Capital Is Back” and is included as one of the data sources for his book.  Piketty’s thorough explanation of the shortcomings of capital measurements led me to scratch my head and wonder why he decided to include them.

Piketty has no control over accounting conventions adopted by international bodies, yet I’m sure he and his team will be taken to task for the computation of the data that is the responsibility of the various nations included in the study.  A big shout out to Piketty and his collaborators for making the data available.

Back to our tiny kingdom of Miniscule. What if we missed some capital in our tally?  If the capital stock were closer to $120, not $100, then ‘r’, the return on capital would be 8%, not $10% and approximately the same rate of growth as the economy as a whole.

How accurate are the public, or government, capital computations?  In the U.S., the Comptroller General is responsible for auditing the financial statements of the country as part of the Federal Budget.  For ten years, from 1998 – 2008, Comptroller General David Walker refused to certify the financial statements,  listing a number of accounting problems: inadequate  monetary controls, poorly supported adjustments, outdated computer systems, unsupported cash disbursements, an inability to track internal or external fraud and a poorly documented inventory system.  These flawed financial statements are the basis for the capital computations in Piketty’s book.  In the appendix to Capital Is Back, Piketty explains the methodologies used by different nations.   Implicit in these standards is that public capital is understated in the national accounts.  This undervaluation decreases the capital/income ratio while increasing the r, or rate of return, of the capital stock.  Piketty notes the deviations in the various computations of land capital.  In the U.S. only the value of agricultural land is measured (Appendix p. 15).  A vast store of capital in 770 million acres of range land (Source) , more than half of which is private, is thus uncounted, further inflating the r, or return on capital.  70% of the land surface in the U.S. is devoted to livestock grazing (Source). A fundamental weakness in cross country valuations is the assumption that developed countries are more or less similar in most respects.  Key differences in the composition of economies are  factored out of the models.

Human Capital

Piketty separates capital into two categories: human and non-human, including only that non-human capital that can be traded on a market.  This exclusion of human capital may be an appropriate methodology in an analysis of an agrarian economy but is not so when applied to the developed economies of today which rely much more heavily on the human capital amassed through education. This point has been raised by economists Robert Solow and Robert Gordon and Piketty acknowledges this on page 586, note 35.

What are the implications of including educational capital?

Today a person may spend $40,000 to $150,000 to get a college education and expects an inflation adjusted return on that investment  that is greater than the 4% one could get investing in long term Treasury bills.  Developed economies depend greatly on the capital investment that they make in educating most of the young people in a society.  An educated mind is both a capital investment and a leaseable, if not outright tradeable, commodity.  While an employer can not buy an employee’s brain the way one can buy a machine, an employer does lease the knowledge, the output from that brain, by paying a compensation premium to that employee.  Income data from the Census Bureau, the IRS and the Bureau of Labor Statistics enables us to quantify the implied store of value of a college education.  If Piketty’s expansive definition of capital were to include educational capital, what would the resulting capital/income ratio look like?

The Bureau of Labor Statistics estimates an annual return of approximately $24,000 in 2013 for a bachelor’s degree. In 2011, the Census Bureau estimated the number of people in the U.S. with college degrees at 63 million, or 40% of the workforce.  If we guesstimate an average cost of $50K per degree, that is over $3 trillion of capital investment not counted, almost 20% of the $17 trillion in GDP (BEA News Release)  If we were to use the international standard (System of National Accounts) method of computing the present value of a college degree using an average 4.5% return (p. 572), then the capital value of a college degree over a working period of 35 years is over $400,000 per degree and the total is $26 trillion in uncounted capital, 150% of the nation’s GDP.   That inclusion would add $26 trillion to the $65 trillion capital base of the U.S. (p. 151)

If educational capital were included,  the capital/income ratio in the U.S. in 2010 would rise to 620%, far above the 450% calculated by Piketty’s team.  The higher this ratio, the greater the inequality in income and wealth.  By excluding educational capital, Piketty has understated his thesis.  Like Galbraith, I would exclude land and natural resources that are impossible to value.  Unlike Piketty and Galbraith, I would include educational capital, since it is a productive capital.

If we use the BLS figures and guesstimate that 63 million people with college degrees earn an additional $24K per year, then the share of income attributable to capital would increase by $1.5 trillion, from $4 trillion to $5.5 trillion.  As a share of national income, the income from capital would increase to 38% from 28% (p. 222)  The return on capital, r, would stay about the same at a bit over 6%, and more than twice the growth rate of national income in the U.S.

Liquidity

Piketty does not mention the liquidity of a national economy but implies it.  As the capital of a nation becomes more concentrated in a rather small group of families, individuals, and endowments, the trading of capital takes place within a small pool.  The onset of the 2008 financial crisis revealed that a small coterie of investment firms, sovereign funds and mega-banks traded financial instruments among each other.  Contagion in one class of asset – mortgage backed securities – poisoned the financial pool.  Like a gene pool, diversity is the key to survival.

As capital’s share of national income becomes greater, the buyers of capital as a percent of the population shrinks.  Fewer buyers = lack of liquidity.  A nation does have an abiding interest to reduce threats to the stability of its financial system.  The mobility of capital in the global world of finance may be hiding an underlying lack of liquidity.

Solutions

To offset the increasing accumulation and concentration of wealth, Piketty recommends (p. 517) a progressive wealth tax, ranging from .1% to .5% for most Americans, those with assets of less than 1 million euros, $1.36 million dollars at today’s exchange rate.  Piketty is not done yet.  He notes that the progressive income tax taxes only the income from inherited wealth.  In some countries in Europe, that capital income is exempt from the income tax (p. 496).  Piketty advocates a return to the confiscatory income tax rates of the early half of the 20th century (p. 512 – 513), citing an optimal top tax rate at above 80%.  Bill Gates and Warren Buffett have both pledged to give away most of the billions they have amassed.  Why bother, guys?  If Piketty’s solutions were implemented, the politicians bickering on C-Span every night will take care of that for you guys.  In the U.S. the Constitution would have to be amended if the Federal Government were to enact a wealth tax because the 16th Amendment allows only a tax on incomes.  However, that does not prevent the States from enacting such a tax.

Will a wealth tax solve the problem of growing inequality?  In principle, in a mathematical utopia – the kind of world that economists assume in their models – governments would take corrective action by taxing wealth, thereby offsetting the growing accumulation  and concentration of capital and its increasing share of national income.  Unfortunately, we don’t live in that world.  In the real world, politicians – real people that you and I know – would say “Hey, this is a great excuse to grab more money from the private sector to solve problems!  Solving problems wins votes!  Votes get me re-elected!”  Politicians love problems, and solving them.  That’s why they create so many of them with their policies.

If people think income tax reporting and accounting is a nightmare, wait until they see the wealth tax forms.  Since the rich would pay a progressively higher tax, they would be highly motivated to develop ways of sheltering assets.  The hiding of wealth will become a national pastime.  Gold miners and dealers are shouting “Huzzah!”  Accountants and lawyers will cook up complicated investment vehicles that offer rapid depreciation of assets to reduce the amount of notional wealth one has to report.  Insurance companies will lobby for the purchase of annuities that are then excluded from one’s wealth.  The lobbyists are singing in the streets.  Strike up the band and join the tax parade!

In short, I heartily endorse this proposal just as soon as I sell my house, convert any assets to gold and find a private island in the Caribbean where I can bury my assets in the sand. I do heartily recommend this book, though. The book contains far more that caught my interest than I can touch on – public and private debt and capital, a survey of income taxes in developed countries, to name a few. The author has taken great pains to lay out historical trends in the data, acknowledging and anticipating many objections.  But, like the old country doctor, Dr. Piketty has but one solution. Got a problem?  Add another tax and call me in the morning. I also salute the translator, Arthur Goldhammer, for the flow and grammatical construction of his  English translation.

Next week I’ll look at another disturbing and related topic – education.  A recent analysis suggests that the financial advantage of a college education may be eroding.