May 31, 2014
Thomas Piketty is a Frenchman who had been promoting wealth redistribution in obscurity. Now that Harvard University Press has published his book, Capital in the Twenty-First Century, he has catapulted into the spotlight.
I didn’t read his book, though you don’t have to in order to understand why it’s mostly wrong. Piketty makes an observation, a diagnosis, and a prescription. His observation is right, so let’s start there.
R > G
Piketty says that return on capital is higher than the growth rate. He believes the return on capital is 5 percent and the growth rate is 1 percent. The share of wealth owned by the rich is increasing.
Consider Exxon Mobil. Today, it’s worth over 400 billion dollars. If Piketty is right, it will be worth over a trillion in 20 years—a multiple of its current value. Compare to your salary. If you earn a hundred grand today, you’ll be making $122,000. Owners are getting farther and farther ahead of workers, or in Marxist terms, capital is taking what belongs to labor.
The Marxist views the economy like a pie that doesn’t grow, so the only thing to do is squabble over the division of it. Remember as a kid, sharing a pizza with siblings? The older ones take fat wedges, and the youngest gets a skinny sliver. Piketty claims that everything will eventually be owned by family dynasties, in “patrimonial capitalism”.
He is right that there is a massive wealth transfer under way. I wrote an article last fall showing that real wages have been falling for decades. However, his diagnosis is faulty. The Financial Times and others now cast doubt on the integrity of his data, but that’s the lesser point.
Piketty thinks that capitalism is the cause, but wealth transfer has nothing to do with capitalism. Look at what Steve Jobs and Steve Wozniak did in a relatively free part of the market. Apple doesn't hog anyone’s pie. It makes money by creating new pies. Apple customers, poor and rich alike, are better off for having graphical computers and tablets.
Piketty’s data does not come from capitalist economies, because no country in the world has capitalism. They never did, though the United States once came close. He makes a fatal error by saying capitalism and the free market are causing rising inequality.
Governments intrude in markets in every way, but let’s just look at central banks like the Federal Reserve. The Fed is the central planner of money. Everyone uses money, which means everyone depends on the Fed’s decisions. By definition, it’s not a free market when the government sets the most important prices.
While no one can take your piece of pie in a free market, it’s a piece of cake for the Fed. Suppose you had a twenty-dollar bill in 1970. It could buy enough gas to fill two cars. If you hid it under the mattress, and took it out today, it now buys about 5 gallons. Most of the value of that bill was sliced off by the Fed’s policy of debasement. This is a direct transfer of wealth, taken from the saver.
For his prescription, Piketty’s takes two planks straight out of The Communist Manifesto. The first is an 80 percent tax on income. Think about that. You work and take risks, and the government steals the lion’s share. Why would anyone bother?
The second is to impose a tax on wealth too. Every year, you will have to add up the value of your wealth and forfeit a percentage. This hurts everyone, of course, but think about a family farm or startup business. It might be worth millions according to the IRS, but you will have to find something to sell so you can pay. The wolf will be back at your door every year, until you lose your assets.
Sure, these taxes will equalize wealth—the way chopping off the legs of tall people equalizes height. Piketty is clear that this is his goal. He doesn’t propose taxes merely to raise revenues. His goal is to keep anyone from growing wealthy.