Wednesday, April 9, 2014

Three more on Piketty

Three four more reviews:

Professor Piketty Fights Orthodoxy and Attacks Inequality (Marxism Leninism Today)

Why hasn’t democracy saved us from inequality? (The Monkey Cage)

The short guide to Capital in the 21st Century (Vox)

Why We’re in a New Gilded Age (Paul Krugman, NYRB)

Reading these reviews, there are a few things that bother me.

One is that Piketty's essential argument is that if the rate of return on capital is higher than overall economic growth, income inequality will increase. This is because salaries typcially increase along with the rate of economic growth, and thus will grow slower than returns to capital.

But this assumes that wages are growing at the rate of the economy. But they are not. If only wages grew along with the economy! Instead they are stagnant or shrinking. The war on wages caused by outsourcing, deindustrialization, automation, mass immigration, H1-B visas, anti-union propaganda and so forth has actually caused wealth and wages to shrink for the average American. The productivity that American workers have produced over the last thirty years has all been stolen by the wealthy owners of capital. So the poor will be lucky to see even wage increases in line with economic growth.
 Income for the top fifth of American households rose by 1.6 percent last year, driven by even larger increases for the top 5 percent of households, said David Johnson, the Census Bureau official who presented the findings. All households in the middle of the scale saw declines, while those at the very bottom stagnated.

“You’re really struck by the unevenness of the recovery,” said Lawrence Katz, an economics professor at Harvard. “The top end took a whack in the recession, but they’ve gotten back on their feet. Everyone else is still down for the count.”

The numbers helped drive an overall decline in income for the typical American family. Median household income after inflation fell to $50,054, a level that was 8 percent lower than in 2007, the year before the recession took hold.
U.S. Income Gap Rose, Sign of Uneven Recovery (NYTimes)
The recent financial crisis left the median American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said on Monday.

The median family, richer than half of the nation’s families and poorer than the other half, had a net worth of $77,300 in 2010, down from $126,400 in 2007, the Fed said. The crash of housing prices explained three-quarters of the loss.

This vast loss of wealth was compounded by a loss of income, as the earnings of the median family fell by 7.7 percent over the same period.
We are not as wealthy as we thought we were (Marginal Revolution)

If Emmanuel Saez and Gabriel Zucman are correct, U.S. wealth inequality has been surging faster than economists ever thought. As I wrote last week, the duo recently unveiled new research suggesting that the richest one-thousandth of all American households now claim roughly one-fifth of the country’s collective net worth, about double their share in the 1980s.

But here’s the kicker to their findings: While the super-rich are growing their piece of the pie, just about everybody else’s portion is shrinking.
The Decline of the 99 Percent (Wealth Inequality Edition) (Slate)

The second thing is that so many reviewers are worried about a new aristocracy forming based on inherited wealth. But this seems to ignore or excuse the huge disparities in income as somehow justified. The average CEO makes over 300 times that the average worker does, up from an average of 30-40 through the years that Piketty uses as his example of capital being constrained. And this disparity just keeps relentlessly increasing:
USA TODAY's analysis of Standard & Poor's 500 companies headed by the same CEO the past two fiscal years shows 2013 median pay — including salary, bonus, incentive awards, perks and gains from vested shares and exercised stock options — jumped 13% to $10.5 million, a level buoyed by soaring stock prices that's likely to rise as more companies meet annual Securities and Exchange Commission filing deadlines...Coming in a year in which corporate earnings gains continue to come mostly from job cuts and streamlining instead of organic growth, as well as nearly a decade of stagnant wage growth for rank-and-file workers, continued gains in CEO pay underscore the disconnect between boardrooms and Main Street. Among the nation's 104.8 million full-time workers, average median annual wages were $40,872 last year, up just 1.4% over 2012. 
Millions by millions, CEO pay goes up (USA Today)

Third, wages are getting ever lower because the economy is only creating high-end and low-end jobs, and a lot more low-end jobs than high ones:
On an absolute basis, the data is miserable: The table consists of stuff like secretaries, food workers, and caretakers. The median salary for the fastest-growing raw-numbers occupations, shown in the table below, is $30,000. Compare that with the average first-year-out-of-college salary of $45,000.
I Looked Up The Fastest-Growing Jobs In America, And Boy Was It Depressing (Business Insider)

So Piketty's picture is actually way too rosy. What we're really seeing is a double-whammy - the returns to capital are increasing faster than economic growth, while wages are are stagnant or going down, and job polarization leaving only winners and losers. So not only will people dependant on their salary not be able to amass the huge fortunes of inherited wealth, but they will barely be able to find a job with a decent salary in the first place. This is making inequality much worse than even Piketty assumes.

And finally, like most discussions about inequality, it obfuscates the growing impoverishment of Americans through debt. Educational debt, medical debt, housing debt - these predatory industries are bleeding Americans dry. Most Americans' net worth is actually negative - getting to zero would be an improvement. The new "American Dream" is just getting out of debt. And the people at the top of the wealth pyramid are the beneficiaries of that debt. So not only do they get to steal the productivity of Americans by not paying decent salaries, they get to suck up what remains of those salaries through debt and interest payments. Piketty, coming from a European social democracy is probably unaware of just how bad this is.

So as bad as Piketty's conclusions are, they are just one past of a picture that is far worse than he imagines.

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