July 12, 2016 – PICKING ON PIKETTY

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A few years ago we could not stop reading and hearing about the French economist Thomas Piketty. Why? Because his research claimed the middle class has made little progress over the last 100 years. The left jumped on that as proof of their Hobbesian view on contemporary American life and culture. 

They did the same with the Card & Krueger study that claimed raises in the minimum wage would not cost jobs. That’s been well debunked, but the canard is brought out every election. Krueger was responsible for the ‘cash for clunkers’ program that was part of the liberals war against the poor. Somehow it made sense to him our economy could advance by destroying wealth. So, we paid for the destruction of tens of thousands of cars. And the used cars, important to the poor, went up in price. That kind of failure has to be recognized.  What do we do with an academic who is usually wrong? Krueger became the head of the administration’s Council of Economic Advisors. 

Writing in Commentary, Tim Kane lays out some of the foolishness in Piketty’s book. His article is titled “Piketty’s Crumbs.” In the article he shows us some pictures from 1910. 

Three years ago, Thomas Piketty’s Capital in the Twenty-First Century (2013) made its author the most famous economist in the world. The book caused a sensation by highlighting rising income and wealth inequality in the United States and Europe, especially in its jarring claim that inequality is just as bad today as it was a hundred years ago. Piketty writes: “The poorer half of the population are as poor today as they were in the past, with barely 5 percent of total wealth in 2010, just as in 1910. Basically, all the middle class managed to get its hands on was a few crumbs.” …

… How much money would you demand to give up modern public goods such as highways or emergency fire and ambulance services? How much is air conditioning worth to you? What about penicillin? Entertainment of any kind that is not live? The ability to travel to Australia from Minneapolis in a day’s time for the price of five men’s suits? Recorded music, movies, and cable television? How much would you have to be paid to surrender the Internet for a month? No Facebook. No Netflix. No email. No Google searches. No Google Maps.

These are Piketty’s crumbs. Here are some others.

It is doubtful that anyone in my old Ohio neighborhood on the west side of Columbus was a one percenter. My mother worked as a “lunch lady” at the local elementary school and later as a secretary for Xerox. My father worked at a grocery store before enlisting in the military. They never complained, but, as my mother says, “We ate a lot of Hamburger Helper.”

I remember hot summer days before many people with middle incomes could afford an air conditioner. I remember how dramatically it changed our quality of life, too. AC is ubiquitous and cheap today, but is it a crumb?
My mother slept in on one Christmas in, I think, 1978, on orders from my father. She awoke to find that he had bought and installed our first dishwashing machine. As an economist, I try to think about how to measure the value of that washing machine, but I am at a loss. Surely, it was worth more than it cost. There’s a notion of consumer surplus in welfare analysis, but that fails to capture the extra-economic utility people actually experience.

I remember getting one of the nation’s first cable television systems—30 channels instead of three, including CNN (which debuted in 1980) and HBO and ESPN. A movie “costs” $15 to see at the theater, yet we have millions of hours of broadcasting piped over cable every month at no marginal cost. …

… The most compelling photo from the first decade of the 20th century comes from a street in Manhattan. A dead horse, clearly malnourished, had collapsed and was awaiting collection. This was a common occurrence in cities everywhere, as horse-drawn commerce and transportation remained predominant. Indeed, there are a half dozen other carriages—not automobiles—in the background. What compels are the eight boys at play in the sewer a few feet from the dead horse. Two older boys are standing and staring at the photographer, while the younger boys are barefoot and seated along the gutter, splashing. Nearby wooden buildings are in shambles, windows wide, shutters hanging askew. The streets and sidewalks are bricked and worn down.

The germ theory of disease was barely a half-century-old when this photo was taken. Antibiotics would be discovered decades later, and widely used only when these boys were adults, assuming they survived the Great War and the plague of 1918. …

… I asked my mother what it would take for her to give up air conditioning for a year. She lives in Florida, and she didn’t have to think long to name her price. “Nine million dollars.”
What does all this mean? It means the inequality debate is a slippery slope almost by design, cleverly limited to ensure that free-market advocates will never have the high ground except the one afforded by sheer common sense. The way to win the argument is simply to ask about those crumbs of progress that progressives ignore. Ask if critics of capitalism actually believe progress can happen (child labor laws, voting rights, electrification, hot showers) and can continue.

Second, it means that economic theory is falling short, because it cannot successfully measure progress over the long term. What economists call consumer surplus—the difference between what you are willing to pay for something and its actual price—is a fraction of the value we experience, but Piketty doesn’t even count consumer surplus. To paraphrase Oscar Wilde, progressive economists know the price of everything, but the value of nothing. Scholars who research income trends should no longer ignore positive externalities which are tiny year to year but extraordinarily large decade to decade. The political stakes are too high, and inequality debate too central, for us to pretend the foundations of microeconomics are firm. If Nordhaus is right, intangible gains are many multiples greater than median incomes.

For voters, this means we should pause in our rush to “fix” capitalism. Yes, modern economies in Europe, Asia, and the Americas are imperfect, but recognize that they have enriched everyone in intangible yet vital ways. Does this mean, as the sharp-witted economist Brad DeLong charges, that I am saying we shouldn’t care about inequality? Maybe a better way to frame it is that the inequality you’ve been told about is almost certainly an illusion. If poorly measured inequality is the price of progress—mothers and babies alive, blood transfusions, civil rights, ice cubes in summertime, and, yes, Facebook—it is a very small price indeed.

 

 

 

From NewsAlert we learn about some of Piketty’s factual errors.

Leftist economist Thomas Piketty , is yet another of a long line of economists , who know nothing about history. Economist Robert Murphy busts Piketty for his wrong take on American economic history. Here’s Thomas Piketty from his book Capital in the Twenty-First Century pages pages 506-507: …

 

 

 

More from Forbes.

Given the excitement that Thomas Piketty’s new book, Capital in the Twenty-First Century, has stirred up within the political left, the French economist probably should have titled it Fifty Shades of Inequality.

In Capital, Piketty presents a painstakingly researched case for doing what progressives ranging from Paul Krugman to Barack Obama want to do anyway, which is to raise taxes and expand the power and reach of government. Unfortunately for liberals, Piketty gets almost everything wrong, starting with the numbers. …

… If America’s welfare population (along with their lifestyles) were put in a time machine and sent back to the France of 1870, they would be viewed by the ordinary people of that time as a strange new aristocracy.

Our welfare recipients would be envied for their (comparatively) ample and varied food, (comparatively) large dwelling units, (comparatively) huge selection of clothing, amazing creature comforts (e.g., electric lights, indoor plumbing, air conditioning, washing machines, etc.), ability to travel at 80 miles an hour, capability to communicate with each other at the speed of light, and access to dazzling entertainment via flat panels on their walls.

However, what the ordinary French citizens of 1870 would probably be most envious of regarding our welfare population is their immunity to common infectious diseases, as well as their ability to easily cure the ones that they did get. And, of course, the ordinary people of 1870 France would envy our welfare recipients for the fact that they enjoyed their incredible lifestyle without having to work.

We can stop this line of discussion here. The point is that Piketty’s painstakingly researched numbers are worthless, because they ignore the existence of the modern welfare state. Our various welfare programs redistribute a huge percentage of national income, and, therefore, for the purposes of Piketty’s comparisons across time, they redistribute the beneficial ownership of capital.

Now, let’s move on to the (many) other things that Piketty gets wrong. …

… Piketty claims that his tax system would not impact economic growth or entrepreneurial innovation. However a comparison between France and the U.S. renders this assertion laughable. For reference, France, already has a wealth tax, as well as a much higher marginal income tax rate than the U.S. (75% vs. about 43%).

Of the 100 most valuable corporations in the world, 44 are based in the U.S., and 5 are based in France. This means that the U.S., which has less than 5 times the population of France and less than 6 times the GDP, has created almost 9 times as many “Top 100” companies.

The comparison is even more lopsided in terms of the total market capitalizations of the two countries’ “Top 100” companies, with a ratio of more than 13:1 in favor of the U.S.

These comparisons are just the warm-up. The real shock comes when you look at when each country’s “Top 100” companies were started.

The last time that France created a “Top 100” company was 100 years ago: Total Petroleum, in 1924. And, Total was founded at the initiative of the French government. The most recent private French venture in today’s global “Top 100” is L’Oreal, which was founded in 1909.

In contrast, one U.S. “Top 100” company (Facebook) was founded only 10 years ago. Another, Google, which was started in 1998 by two guys in a dorm room at StanfordUniversity, has a market cap approaching that of all 5 of France’s “Top 100” companies added together.

In the 90 years since Total was founded, the U.S. created 17 of its 44 “Top 100” companies, including 1 in the 2000s, 2 in the 1990s, 4 in the 1980s, and 4 in the 1970s.

The progressives want us to believe that high taxes don’t impact growth and innovation. Sure, Professor Piketty. Right. Uh-huh. …

… In believing in their own omniscience, progressive intellectuals fall into the trap described so brilliantly by George Gilder in his book, Knowledge and Power. They seek to intervene in systems that they do not, and inherently cannot, understand.

In the final analysis, progressivism is simply the time-release form of communism. This is fine with progressives like Piketty, because they truly believe that the only thing wrong with soviet communism was that it was run by Stalin, rather than by them. Give them another chance (starting with an 80% marginal income tax rate and a global wealth tax), and this time they will get it right.