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Tag Archives: Thomas Piketty

The Government Inequality Machine

17 Wednesday Jun 2015

Posted by pnoetx in Big Government

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Beautiful Anarchy, Cronyism, Export-Import Bank, Housing Policy, Inequality, Intellectual Property Rights, Jeffrey Tucker, Kevin Erdmann, National Review, Redistribution, regulation, rent seeking, Robert P. Murphy, Scott Sumner, The Freeman, Thomas Piketty, Welfare for the Rich

Cronyism cartoon

Some perceive the government as an ideal agent of redistribution, but they fail to apprehend the many ways in which government policy undermines equality. Scott Sumner and Kevin Erdmann have written an excellent essay on this point entitled “Here’s What’s Driving Inequality” at National Review. They focus on three areas of government action with the unavoidable side-effect of upward redistribution: housing policy (at all levels of government), regulation, and excessive protections for intellectual property.

Sumner and Erdmann briefly cover Thomas Piketty’s controversial view that wealth becomes increasingly concentrated under conditions of secular stagnation. However, they note that over the past few decades:

“... almost the entire change in the share of domestic income going to capital in major developed economies was explained by rising rents on residential real estate. Non-rental capital income (including the corporate sector) still has a fairly stable share of domestic income.“

Housing policy has driven rents upward in myriad ways. For example, restrictive zoning laws, environmental regulation of new building and regulation of bank lending have all made homeownership less feasible and renting more expensive. If you’re already in your own home, you’re safe! If not, welcome to the have-nots! Here’s a story on government insurance programs that offer massive subsidies to wealthy homeowners. All these redistributional effects are compounded by a tax code that has inflated housing prices through the home mortgage interest deduction, and at the same time inflated rents via the incidence of higher taxes on rental income and real estate capital gains.

Regulation of private business activity is often viewed naively as a necessary, protective function of government, but regulation acts in perverse ways:

“Unfortunately, many government regulations tend to favor larger firms. In recent years we have seen the passage of some extremely complex regulations involving thousands of pages of rules, such as Sarbanes-Oxley, Dodd-Frank, and the Affordable Care Act. The Food and Drug Administration, the Department of Defense, and the public health-care complex tend to create opportunities for uber-firms within industries, which act as clearinghouses for public contracts and regulatory demands.”

Large firms tend to pay higher wages and salaries than small firms. By favoring large firms, regulation in turn favors their relatively high-income workers. In addition, regulation such as occupational licensing, labor regulations and local wage controls damage the health and growth potential of small firms and the mobility of individuals at the bottom of the economic ladder.

Finally, Sumner and Erdmann discuss the often bizarre extension of intellectual-property (IP) rights and the way it favors large firms:

“Copyright protections once lasted for 14 years, applied only to maps and books, and could be renewed once if the author was still alive. Now they’ve been extended to many other products, extend for 50 years after the death of the author, and last for at least 95 years for corporations. These extensions are widely seen as reflecting the lobbying power of companies such as Disney. In the high-tech sector, patents are often granted for seemingly minor and obvious innovations.“

Sacred Cow Chips featured a piece on IP several months ago called “Is The Patent a Perversion?” The Libertarian view of IP is skeptical, to say the least, and favors limited protection at most. In that post, I quoted Jeffrey Tucker of the Beautiful Anarchy blog:

“Through intellectual property laws, the state literally assigned ownership to ideas that are the source of innovation, thereby restricting them and entangling entrepreneurs in endless litigation and confusion. Products are kept off the market. Firms that would come into existence do not. Profits that would be earned never appear. Intellectual property has institutionalized slow growth and landed the economy in a thicket of absurdity.“

There is little doubt that economic mobility is not well served by excessive grants of IP rights that extend monopolies indefinitely.

Government fosters inequality in many other ways. The mere existence of a confiscatory mechanism for legal revenue collection, and a complex bureaucracy in charge of distributing the spoils and making rules, will always attract high-powered rent-seeking resources and encourage cronyism. It is a graft machine. The very complexity of the tax code creates fertile ground for transfers via obscure breaks and carve-outs, while higher tax rates on others are required to fund the exceptions. Here’s another: the Export-Import Bank, which subsidizes exports for large corporations. A nice run-down of some of the many areas of “Welfare for the Rich” was provided a few years ago by Robert P. Murphy in The Freeman.

Unfortunately, direct efforts by the government to help the poor are often mere palliatives. At the same time, many of these programs are notorious for destroying work incentives, which undermines equality and economic mobility.

Government is simply not as well-suited to promoting equality as well-functioning markets, free of government meddling and government grants of monopoly. Profits in such markets attract new resources that compete away excess returns and bid prices downward, actions that tend to promote equality. The opportunity to compete without restraint not only vitiates artificial or permanent claims to profits; along with strong property rights, it encourages invention, economic mobility and growth.

Well-Intentioned Souls For Sale

04 Thursday Dec 2014

Posted by pnoetx in Uncategorized

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Ayn Rand Institute, Big government, incentives, Inequality, John Cochrane, Police Power, Political contributions, Redistribution, rent seeking, statism, Steve Simpson, Thomas Piketty, Wall Street Journal

Paint_the_town_red_1885

Most would agree that power corrupts. Some believe that greater wealth begets power, yet they cling to a naive hope that larger government can protect against “evil” private accretion. These well-intentioned souls forget that those holding power in government will not always have preferences that match their own. More importantly, they fail to account for the real-world implications of concentrating power in the public sector, conveniently forgetting that “control” itself is a problematic solution to the perceived “problem” of private power. They would grant ever more controlling authority to an entity possessing the police power, managed by politicians, employees and technocrats with their own incentives for accretion. Public administrative power is often exercised by rule-making, asserting more control over private affairs. It usually results in the granting of favors and favorable treatment, compensable in various ways, to certain private parties. Big government begets big rent seeking and the subjugation of market discipline in favor of privilege. It’s a devil’s playground.

The confusion of the statists, if I can be so charitable, now extends to the desire for control over the related issues of wealth inequality and political contributions. John Cochrane, an economist from the University of Chicago, has an interesting piece on these topics on wsj.com entitled “What the Inequality Warriors Really Want” (if this is gated, try googling the author and title). He points out some of the obvious hypocrisies of those calling for more government control, including limits on political spending:

“… the inequality warriors want the government to confiscate wealth and control incomes so that wealthy individuals cannot influence politics in directions they don’t like. Koch brothers, no. Public-employee unions, yes. This goal, at least, makes perfect logical sense. And it is truly scary.”

The presumption that redistribution of income and wealth can be achieved at low cost ignores the terrible incentives that such policies create for both the nominal losers and winners. In the real world, redistribution is not zero-sum; it is negative sum with compounding. Steve Simpson of the Ayn Rand Institute has some further thoughts on Cochrane’s piece as well as the work of Thomas Piketty, the new intellectual light of the redistributive statists.

Piketty’s Capital Data Fudge

25 Sunday May 2014

Posted by pnoetx in Uncategorized

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Fake Data, Inequality, Thomas Piketty, Wealth Tax

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Capital In The Twenty-First Century author Thomas Piketty is in some hot water, having been exposed for a series of data problems and even data manipulation by a thorough investigation published in the Financial Times. You may recall that Piketty’s book has been called a “Das Kapital” for the 21st century, heralded by the likes of such leftist lights as Paul Krugman and Joe Stiglitz. But his sweeping conclusions regarding inequality were suspect even before the new revelations; many have noted that his conclusions don’t really follow from the data he presents. Now the data itself looks fudged; when corrected, PIketty’s results do not hold up. 

The author of the blog linked above, Pejman Yousefzadeh, is pretty tough on Piketty, and I’m inclined to say he deserves it based only on his advocacy of a destructive wealth tax. Tyler Cowen urges more restraint. Cowen’s first report on the matter is here. 

“Everyone Has Won And All Must Have Prizes”

28 Monday Apr 2014

Posted by pnoetx in Uncategorized

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Inequality, Thomas Piketty

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… said the Dodo to Alice. That philosophy is harmless enough when the subject is party favors. It is extremely unwise when applied to the larger distribution of rewards in society, as it all but guarantees that the total rewards produced by society will diminish over time. Thomas Piketty is preoccupied with the notion that future growth of the capital stock will exacerbate the unequal distribution of rewards in society. He believes the ensuing instability could be the ultimate undoing of capitalism. Piketty has gone to some effort to create a sort of intellectual foundation for this point of view. The egalitarian left is infatuated with his new book, “Capital In The Twenty-First Century.” But Piketty’s analysis is more like a series of assertions, with little in the way of solid empirical and analytical support. Here are two insightful reviews: Garrett Jones in Reason and Ryan Decker on his “Updated Priors” blog.

Piketty’s Bad Trip On Capitalism

22 Tuesday Apr 2014

Posted by pnoetx in Uncategorized

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Capitalism, Inequality, Thomas Piketty

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Clive Crook on Thomas Piketty’s much-acclaimed “Capital in the Twenty-First Century”: The Most Important Book Ever Is All Wrong. I believe the first part of that statement is intended as sarcasm, though Crook admits it’s an important book. It’s been called a Das Kapital for the 21st century. Tyler Cowen also has a review, which he summarizes here.

Piketty’s major thrust is that the return on capital will exceed economic growth in the future, leading to an ever-rising stock of capital and an ever-more-unequal distribution of income. A problem in his analysis (aside from the fact that the data he presents don’t always support his conclusions) apparently stems from a failure to account for wage dynamics: capital deepening increases wage growth. And capital deepening can be expected to lead to diminishing returns on capital. But never mind all that! Piketty says the return on capital will remain well in excess of growth, the capital stock will keep growing inexorably, and capitalists will earn increasing rents while wage income stagnates.

Crook concludes: “Over the course of history, capital accumulation has yielded growth in living standards that people in earlier centuries could not have imagined, let alone predicted — and it wasn’t just the owners of capital who benefited. Future capital accumulation may or may not increase the capital share of output; it may or may not widen inequality. … But even if it does, it won’t matter as much as whether and how quickly wages and living standards rise. That is, or ought to be, the defining issue of our era, and it’s one on which ‘Capital in the 21st Century’ has almost nothing to say.”

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