Thomas Piketty, Robin Hood, and the Demise of Capitalism

 

Takeaway

  • Economist Thomas Piketty argues that the rich are getting richer at a faster rate than others
  • The real median family income in the U.S. has fallen back to the 1995 level, indicating a weakening middle class
  • Spellman predicts the wealth gap will shrink as labor income rises with the end of the recession
  • Stock values are poised to dip when the Federal Reserve phases out its QE program, which would further narrow the gap

Thomas Piketty is a French economist who has given voice to the notion that there has been a growing concentration of wealth at the upper end of the spectrum — that is, the rich are getting richer at a faster rate than others, both in Europe and in the U.S. And of course, this conversation has triggered a Robin Hood reflex to redistribute that wealth.

Aside from Piketty’s work, another factor driving the redistribution reflex is the greater gain in corporate profit relative to labor income over roughly the last 30 years. Both facts, taken together, create a general sense that those who are getting rich are doing so by manipulating labor income, an idea recently expressed by a former Secretary of Labor.

From here we’re only a small step from launching an assault on capitalism with Robin Hood policies aimed at redistributing wealth, income, or both. All of these ideas are now in play, and I anticipate that they will be an important part of the discussion during the fall Congressional elections.

Americans have embraced Piketty’s theories (and their related policy implications) with a Beatlemania-like obsession — all based on a dry economic tome of 576 pages which made it to the top of the Amazon bestselling list within a month of its English translation and publication.

Now, as a blogger who attempts to never exceed 2,000 words so as not to lose today’s time-stressed audience, I find it difficult to believe the book was actually devoured cover to cover except by those wishing to prove him wrong and indeed, errors in data have already surfaced.

But who really cares about devouring the book when you already have an opinion? This was a conclusion seeking confirmation — all anyone needed was the “proof” in their hands.

What creates this environment of easy acceptance is that the U.S. and European middle classes have indeed been dealt a setback. According to a Pew Mobility Project, men in their 30s in 2004 were earning 12 percent less than their father's generation at the same point in their lives. Furthermore, the real median family income in the U.S. is now back to the 1995 level — which makes a ripe audience to engage in policies related to income or wealth redistribution.

There are good and logical reasons for the setback in labor income and the increase in wealth values, and there are also reasons to believe that the unevenness of economic progress, however measured, has been due not to a fatal flaw in capitalism but rather to a series of self-correcting special influences.

For one, the Great Recession is now on the mend. At first, it hit wealth levels harder than labor income levels, and the Federal Reserve’s Quantitative Easing (QE), in early stages, was more effective in resurrecting wealth values than employment and labor income.

But that is all changing now, with trained and effective labor being in short supply and wages increasing. This is not just a transient bounce-back. The prospects for zero labor force growth over the next few decades will provide constant pressure to lift labor income at a rate that outpaces returns on wealth.

The story is also bound to change because both stock and bond values are teetering at levels that will be difficult to sustain when the Fed phases out its mega-QE.

But the bigger cause of the slowdown of labor income over the last 30 years has been globalism. As U.S. markets have opened to suppliers in emerging nations that produce goods with hordes of low-wage labor, the wages of similarly skilled U.S. workers has declined while those in the emerging markets have increased.

But the outsourcing of American products is now at ebb tide as reshoring gradually replaces offshoring. Adding to that thrust is a natural rebalancing effect that causes the currencies of successful emerging market exports to appreciate, making foreign goods even more expensive relative to U.S.-made goods. This is the natural see-sawing mechanism of global trade, in which success sets you up for an eventual correction.

China, for example, allowed its currency to float to the market rate, and sure enough, it appreciated by about 30 percent. And now that it’s the one in trouble, it is attempting to export its way to continued growth. China’s wages and currency have both gained relative to the developed world, making Chinese goods paid for with U.S. dollars considerably more expensive.

Another important factor behind the shifting growth of wages and wealth in the U.S. is a lack of skills, training, and work ethic among the young. Be prepared for a discussion of the ill effects of a school system that awards trophies or high grades for all participants, regardless of the actual outcome.

The readjustment process will take place via job training, and hopefully Americans will someday return to the standard of awarding the trophy only to the winner. This social readjustment might be the more difficult, as it covers not just marketable skills but also more abstract abilities such as developing initiative and responsibility, which have somehow fallen from consideration.

Capitalism has served humanity not just since the birth of the republic but for many centuries before. It took us out of the woods, onto the farms and into the cities — and then into suburbia, and now back to concentrated urban growth in cities that tend to tax at lower rates and do not attempt to provide as much in the way of government services.

What is missing from the redistributionist discussion is the effect of monetary reward as an incentive to meet the market’s test — that is what provides the quantity and quality of goods we enjoy. Indeed, what keeps the redistribution discussion alive is that that economic theory has not incorporated the effect of monetary reward on the willingness to produce, and we can calculate the loss in output as a result of redistribution of income and/or wealth.

Anyone who doubts this should take a trip to Cuba to view the frozen-in-place technology of the 1960s, when wealth was redistributed and capitalistic incentives were snubbed out. It made all equally poor, except for the political class.

In the current state of economic theory, we cannot put a number on what is lost when we lessen rewards via redistribution. This places the redistribution discussion in the realm of philosophy, fairness and equality.
Wealth growth and labor income are essentially joined at the hip — in addition to incentives, accumulated wealth is vital to finance the next generation of ideas (and new jobs) via venture capital or private equity.

In addition to the above concerns about the size of the total pie to be split evenly, redistributors should be aware of the actual difficulty of redistribution. It can be accomplished via, say, a negative income tax or a return to the welfare state that Bill Clinton — yes, a Democrat — eliminated. But somehow the redistributors have lost all faith in the invisible hand of the markets, and they prefer to let the government decide which goods and services should be produced and for what price.

Take, for example, The Affordable Care Act. Through pricing via income level, it has produced significant income redistribution in such a way that the middle class has been seriously compromised. Indeed, all income deciles have suffered except the bottom two, and let us not fail to consider the scarcity of medical providers as they are compensated at rates below market. As for Medicare recipients, good luck finding a private practice physician willing to take you if payment is compensated at Medicare rates.

Affordable Care Act and income distribution chartWhen all respect for the invisible hand is lost, we’re left with the government’s approach to taking services in-house. That is the story of the Veterans Administration — a case study in perversions of incentives to produce.

We didn’t need the deaths from year-long waits at the VA to tell us that. The U.S. Post Office has long been training us to take a number and get in line. But in the case of letters or packages, we can head to UPS or FedEx or the Internet for a higher price that the market seems to be happy to pay. Heading for the private market — if the government allows it — will also be the outcome of healthcare delivery.

All in all, redistribution buys nothing but shrinkage in which all are set back.  

A version of this article originally appeared on Professor Spellman's blog, The Spellman Report.

Disclaimer

The views expressed are those of the author and not necessarily The University of Texas at Austin.

About The Author

Lew Spellman

Professor, Department of Finance, McCombs School of Business, The University of Texas at Austin

Lewis Spellman received his BBA and MBA from the University of Michigan and his MA and Ph.D. from Stanford University. His research interests include...

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