The rent is too damn high! Piketty's analysis and model don't capture rent sufficiently, so his proposed reform doesn't address the fundamental issue, which is rent-seeking and rent extraction, which need to be discouraged, versus productive contributions that need to be encouraged.
A byproduct of this value-free view of wealth is that Piketty suggests an equally value-free remedy for inequality: a global estate tax with a progressive wealth and income tax. Not only is this almost impossible to enforce politically, but a general tax on wealth or income does not discriminate between what is earned “productively” and what is squeezed out by rent extraction or obtained by capital gains.
The advantage of classical economic theory’s focus on rent extraction, financialization and debt-leveraged asset-price (“capital”) gains is that each form of “unearned” wealth and income has a different set of remedies. But to Picketty’s sources – and hence to his analysis – wealth is wealth, income is income, and that is that. He is obliged to make his solution as general as his statistics that define the problem.
Piketty vs. the Classical Economic Reformers
Michael Hudson | President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, and Distinguished Research Professor of Economics at the University of Missouri, Kansas City
Michael Hudson | President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, and Distinguished Research Professor of Economics at the University of Missouri, Kansas City
13 comments:
"A byproduct of this value-free view of wealth is that Piketty suggests an equally value-free remedy for inequality: a global estate tax with a progressive wealth and income tax. "
OK, so here is a note from the data:
"Income defined as annual gross income reported on tax returns excluding all government transfers (such as Social Security, Unemployment Benefits, Welfare Payments, etc.) and before individual income taxes and employees' payroll taxes."
http://elsa.berkeley.edu/~saez/TabFig2012prel.xls
So if we were to implement a big tax to equalize things, how would we ever know if it worked if we never look at after tax income?
Seems to me you would want to look at after tax income at t=0, then make some adjustments to the tax code, and then re-measure the effects after your tax rate adjustments... which would mean (logically) AFTER taxes....
So if we just look at pre-tax how do we ever know what the true effects are? Especially if we are proposing a tax to make an adjustment?
seems to me if you propose a tax change as an adjustment, you would eventually want to know if it worked.... which would require a look at after-tax incomes....
No, Matt, Piketty favors higher marginal taxes on the rich, and especially higher estate and wealth taxes, not increased taxes on the middle class.
And it's not about balancing the budget or anything else related to it. The goal is simply to make the rich less rich.
Piketty also casts skeptical doubt on the distinction Michael seems to want to make between "good" returns to capital based on productive activity and "bad" returns to capital that are not. Some such distinction lies behind the neoclassical and neoliberal defense of the idea that only some returns to capital constitute "economic rent", while others are an appropriate return from productive capital.
For Piketty, it's all rent. If you are deriving an income from your sheer ownership of capital assets, rather than from your labor, you are collecting rents.
Of course, if you are really doing something productive, you must be laboring in some way, and so your labor should get a return. But is there really such a thing as "productive" ownership? If you own a highly productive and useful factory, but spend all your time floating around on a yacht in the Pacific, then you are not being productive; your factory is. To say you are entitled to that return because you own that productive factory is to endorse the capitalist myth that legal ownership of an asset is a kind of extension of the self, and so when your asset is doing something productive you are doing productive.
By the way, the goal of leveling wealth and making the world more equal is not the expression a "value-free" approach to wealth. It is the expression of the idea that equality is in itself a positive value.
The attempt to draw distinctions between good billionaires and bad billionaires, and promote the existence of good billionaires - like Steve Jobs say - is how we got into all of the trouble in the neoliberal era.
Dan I completely agree that we have rampant out of control inequality... its the damned libertarians I dont even want to get into it...
I was reviewing some of the data set that I assume Piketty uses at the Excel file and read that note at the bottom and am trying to see if this is true that our current measurement of the income inequality does not take present taxes and xfers into account for all of his analysis...
My concern here is not with the goals, etc... I see what he is after and am on board ... its with the analytical process and how we take into account leading govt spending vs. resultant taxation... the "net" if you will...
It looks to me (on the surface) here that he is sampling the income before taxes only and not including present progressive tax policy and other govt xfers effects on present income...
These types of aspects should be taken into account as they imo are the "levers" that we should eventually use to make adjustments... ie taxes and xfers...
I have just ordered the book and will look there to see if he addresses this present tax and xfer issue in other parts of the analysis...
rsp,
If one reads PIketty, I don't see how one can conclude that he is other than heterodox in his approach to econ. He says for example that econ is not a science, which is blasphemy to the orthodox.
Piketty admits that he is dealing with estimates and approximations and assets that he has taken a more conservative POV, at least in many if not most cases, and the figures still show inequality at a high level. He says it is likely far higher than we can accurate estimate due to lack of transparency owing to data collection and privacy issues.
Dan has right, I think, in saying that for Pikety return on capital is rent by definition since productive contribution is the result of labor. Entrepreneurs and managers are skilled labor, not capital. Human capital is a misnomer. Everyone that works is a producer and also a consumer. The issue is distribution of the fruits of work. Should mere ownership of capital entitle one to a significant share without work?
There is also the question of high earning workers like CEOs of large firms and many Wall Street employees that are richly rewarded in comparison with other workers. Do they actually earn what they are paid through productive contribution, or is there rent extraction at the higher levels work comparable to capital ownership.
Are disproportionate gains in income and wealth really based on marginal product so that distribution is on the basis of merit and just deserts, or are their other factors operative like laws and other institutional arrangements that tilt the playing field toward the top and enable rent-seeking.
PIketty is pretty clearer on the heterodox side here even though he uses neoclassically based modeling. That is a feature and bug. It's a feature because if he didn't it's unlikely he mainstream would have noticed him. It's a bug because it tends to distort the picture, e.g., Piketty seems to dismiss the Cambridge capital debates in using a single variable for return on capital as it capital were homogenous, as Jamie Galbraith has observed.
As far as Michael Hudson's argument about rent v. productive contribution is concerned, an example is RE, where land is scarce and the name of the game is location, location, location. One earns just by owning land in the right location. Hudson thinks that this land rent should be taxed away while value added to the property by owner improvements, chiefly construction, should not be taxed as rent. That seems reasonable to me.
Warren agrees that taxing land rent is a good move and holds that most other economic rent can be eliminated by changing laws regs, and other institutional arrangements that tilt the playing field, letting competition eliminate rents as it is supposed to. The objection here is that this might be much more difficult practically than just taxing it away in one fell swoop.
PIketty also doesn't asset that there is one correct answer. He has though the matter through and offered his views. All are welcome to the debate but they had better come well prepared because he is.
I think Piketty has set the debate on a new course and it's a field that both orthodox and heterodox can meet. To the degree this happens, it promises to be a game-changer.
In the book he shows data for both before and after taxes.
I think my favorite rentiers are Carlos Slim and Warren Buffet and they both work pretty hard and smart. I wonder how much of what they take home should be considered rent/capital gains/labor. That is really what we are talking about, for the extreme rich, what portion of what they do is earned and what portion is extracted.
It is easy to talk in the abstract where no values, nothing real is at stake but substitute real peoples names, your own favorite people, maybe even yourself and your heirs, real companies, and real amounts into the variables of the equations and then decide... see if you support your own ideals on what should be taken and when. I personally like Death taxes so that each person starts more equal. And more transfer payments. And I like the idea that rentiers will have to sell their most valuable assets upon death to allow new people to buy them.
Buffet takes $1.00 in wages because economists think tax laws should favor capital over labor and give capital lower tax rates. I think taxes on labor distort labor markets which are more critical than proper allocation of capital. Capital will always find a way. Labor won't.
Tom, I have always thought that the distinction between returns to land ownership and returns to other forms of capital is spurious.
Land is productive. You can't make and distribute widgets without a widget factory, and you can't build a widget factory and distribution center without some land to build it on. It's all the same thing: the land and the factory are two essential factors of production.
The spurious distinction between land and other forms of fixed capital as "productive" and unproductive" is another artifact of 19th century rise of bourgeois capitalism and the classical and neoclassial economics that underpinned it. Those folks often imagined there was a big moral distinction between "unproductive" land and "productive" capital, and that distinction underpinned the moral distinctions they drew between the older indolent landed classes in the aristocracy and gentry, on the one hand, and the new rising, virtuous bourgeoisie composed of industrious capitalists.
But they were confused. If a person is floating around in a yacht collecting rent on the land they own, that is no different than floating around on a yacht collecting rent on the factory they own. The land and the factory are both essential parts of the production system; they are both productive capital assets. It might well be the case that the rising capitalists were often more industrious and productive than the older landlords. But that has nothing to do with a difference in the productivity of the type of capital assets owned. It has to do with the fact those capitalist owners are often entrepreneurs and executive managers at the same time, and so they are doing productive work.
If Warren Mosler is more productive than some land baron, it is not because he owns a car factory. It is because he does actual work on producing cars.
The floating around on a yacht is a normative flourish. If the person sits at their desk instead and allocates capital to exploit iron ore deposits from their land or factory, ohh wait, factories don't have iron ore deposits. Land can't move, factories can. Well anyway, it doesn't matter, factories and land are the same, and if the person does what they do to ensure production happens, they are being productive. Unless maybe they are floating on a yacht and make those decisions, then it isn't productive? Or do they actually need to be personally staffing the production line, or swinging the pick? Or is making phone calls or sending emails productive? It's easier to draw distinctions between land and factories than between productive and unproductive behavior.
Yeah, it's all too arbitrary.
About land, I think is more abount 'rent seeking'. For example if you own a bunch of real estate and rent it to others and live off those rents, is that productive? I would say no. That's what Henry George argued, you have to tax 'rent seeking' activities.
However, how do we agree on what quota of profits being absorbed is a 'rational' quota or isn't? There is no right or wrong answer, and I suspect the answer depends much on personal circumstances and ideological biases. If you are a communist you will say 0%, if you are an anarcho-capitalists you will say 100%.
There is no rational or technocratic al approach to this crap, except functional finance. But there must be a consensus then that tax levels (and different sort of taxes) are to be used as levers to influence macro outputs. OFC this goes against orthodoxy and neoliberalism and 'free market' which still is the dominant paradigm regarding economic (and political) policy.
I would approach it differently: study what sort of activities increase (specially headline) inflation and tax accordantly heavily to open up more fiscal space for poor and middle classes. So you target inflation 'selectively' to influence macro output. This can only be done through taxes and fiscal policy, not through monetary policy.
it has been demonstrated that the inequality in pollution creation (a proxy measure of headline inflation) is even bigger than financial inequality (there was an article posted by Tom in this same blog). if you are a real technocrat (ie. not the current clowns in charge) you must target these activities (McMansions, yacht economics, etc.) with awful taxes (like 95-99%) to disincentive them, reducing the false inflation numbers reported to open up for more 'money printing' that helps poor and middle classes.
Two important things to happen then are:
- Agreement that taxes must be approached in a real technocratic way (functional finance) instead of treating as as ideological battleground (this probably has the prerequisite of agreement on what state currency is understanding the concept of monetary sovereignty, we are years away from that, lot of work to do, like redefining the meaning of 'debt' etc.) .
- Dropping blatant manipulation of deflation/inflation definitions so it can be technically used. Focus more on purchasing power, costs of living, and segmentation of the consumption baskets amongst the population. The current measures are useless, when in reality we have a mix of deflation-inflation driven by disparity of consumption patterns amongst the different cohorts of the population (based on income levels).
"For example if you own a bunch of real estate and rent it to others and live off those rents, is that productive?"
Theoretical blank land, like in Sim-City doesn't really exist. You rent out buildings that contribute housing stock to the nation. You rent out crop lands, you are a steward of the top soil, aquifers and productive capacity to keep billions fed. The leasing of minerals and energy to the highest bidders that are most likely to actually produce and pay royalties is obviously an active and productive act. Choosing to lease out the airspace above your property for wind turbines provides a service to society. Leasing out transportation easements for roads is necessary. Leasing out utility easements provides safe transport of public goods. Someone has to take risks and be rewarded for providing the basic services that we all take for granted. So simple economic models like to eliminate the special properties of land or any of the various categories of capital so they can focus on the one part of the concept convenient to their model and their ideology. The they think everyone who points out the flaws simply don't "get" the simple idea they are working on. So to me, talking about "rent" is sort identifying what isn't described by the model. Rent is all that other stuff we didn't put a price on. Then we sit back and decide where we think there is value to it.
So the way to argue against the silly simplification of "capital" is to point out where capital is special, how it is productive while acknowledging that markets rarely give socially optimal prices to anything. It ruins the elegant simple ideas, and we won't win any popularity contests with the academics, but it is what we must do to keep the economists from destroying the world again. We must stubbornly refuse to let the professional economists get away with their ridiculously stupid simple ideas because it makes their models easy to conceptualize.
To me it all seems that we are lacking a lot on accounting for externalized costs to society, these costs result in inequality, poverty, instability and ultimately unhappiness and increasing misery and health issues. But it's inherently difficult to account for those because those are based on forthcoming potential realization of a subset of circumstances of all the set of possible future outcomes given our current environment AND our own aggregate actions. So we are dealing with knightian uncertainty and we can't estimate the costs externalized to society as an aggregate.
For example: if we knew for certain that tomorrow there will a meteorite colliding with the earth that will render 90% of the arable land useless, we would value the remaining land much more and we could tax any other use of the remaining land strongly to disincentive a 'malinvestment' that will hinder the future output and clash with future social needs. But because we don't know, we can't account for it, and we can't regulate or tax properly.
This is an extreme example, but in practice is even more complicate, because we are not talking about natural inputs on the system, but social inputs, that will often favour a subset of the population, but will hurt an other subset of the population. Democracy, in theory, is the political system we use to try to balance these choices so the 'lesser evil' is the future outcome.
We need a toolbox of concrete technical measures that are not misused by politicians to try to maximize positive outcomes.Because we can't guess the future, we must deal with the present checking the past, and try do our best, getting rid of useless things like GDP and GDP growth and instead focusing on income, income distribution (piketty is a good steep in this direction, but he hasn't stated anything that has not been said before tbh), average and median net worth (and private debt, which should be a rare thing instead of the exorbitant levels we have now all over the system, which are ultimately pushing us to make stupid policy choices), poverty indexes, misery indexes, inflation and more concrete measures like differential consumption baskets, ofc pollution, health and happiness indexes etc. then we could use taxes more appropriately.
But ofc this would require some real hard work, more statistician hiring, more data collecting, stronger analysis of the data, more input than other technicians other than economists, more intelligent discussion on desirable outcomes and less corporate influence into technocratical and democratical matters, stronger check & balances mechanisms.
So, take our current system and improve/rework it? And there may be an option to avoid total collapse and chaos, and more future despair and unhappiness (or misery). Some would argue that it's easier thought to rebuild a system after a collapse than to reform the current one, unfortunately there is no real evidence of that and anything could happen (a worse system is not an unlikely possibility).
We are human beings. We know what harms another human being.
There is within us a choice: 'do no harm'. That alone would get rid of most of the problems. Depends upon whether or not we value human beings above money and machines. That depends upon actually USING our intelligence and understanding, accepting what we know - ignorance (ignoring)is a vaccum into which arrogance soon rushes. The world is full of it.
We do not respect other human beings because we do not know how to respect ourselves. Therefore nothing changes on the inside, while everything changes on the outside. Meanwhile Time has everything in its grasp and carries it away. What we are looking for is certainty, and very few understand the intelligence in saying: 'what you are looking for is already, inside of you'. Maybe solving the problems is easier and closer than you think? One human being at a time - that's the only way it can be done. There is no aerial spray for consciousness.
Closer than under your pillow ....
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