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He just wants to fix it. No comments from this peanut gallery. But Scott Sumner hits a 600 foot homer, do read the whole thing:

Here’s what Yglesias misses. Unequal consumption matters because of opportunity cost—another bedrock of economics. The resources that went into that $200 million yacht could have produced lots of other goodies for average people. But if the psychic benefits of owning a basketball team go to a hedge fund manager, they are denied to one average guy–a problem too trivial to even mention. Yes, there are practical problems with consumption taxes just as with any other taxes. But can’t we all agree that we should start with a progressive consumption tax, and then add on a few fixes for the hedge funds managers engaged in dodging taxes? Can’t we agree that the vast majority of ordinary people with full time jobs and some money in stock and bond funds should pay zero interest on their investment income? At one time I thought really smart progressives like Yglesias would take that bargain, now I see the left drifting away from economic rationality, to the point where they embrace 90% tax rates on the assumption that the rich are producing relatively little of value, and that their incomes are pure exploitation. That’s true in a few cases, but if we go down that road we are essentially throwing in the towel. Admitting we are no better than an oligarchic state like Russia and just need to give up on reform.

I’m not ready to give up yet.

And then Kling steps up to the plate and hits one deeper:

From my January 31st post:

Again, I have not read the book (it will be released in about 6 weeks). Does he come out in favor of privatizing Social Security? If not, then why not?

According to Arpit Gupta, Piketty understands how his analysis helps make a case for privatizing Social Security, but he says

one must bear in mind that the return on capital is in practice extremely volatile. It would be quite risky to invest all retirement contributions in global financial markets. The fact that r > g on average does not mean that it is true for each individual investment. For a person of sufficient means who can wait ten or twenty years before taking her profits, the return on capital is indeed quite attractive. But when it comes to paying for the basic necessities of an entire generation, it would be quite irrational to bet everything on a roll of the dice. The primary justification of the PAYGO system is that it is the best way to guarantee that pension benefits will be paid in a reliable and predictable manner: the rate of wage growth may be less than the rate of return on capital, but the former is 5-10 times less volatile than the latter.

What’s that, Dr. Piketty? There’s risk, you say? Capital income is 5-10 times more volatile than labor income? It is “quite irrational to bet” on capital unless you are “a person of sufficient means”? And these factors only matter in the context of Social Security privatization, but can be ignored in the main part of your book?

In case his point is not obvious, it is that the risk adjusted rate of return on capital is not higher than the rate of economic growth, which Picketty admits. So, much like Kapital in the 19th century, Kapital in the 21st century assumes its conclusion and is build not just on shaky theoretical grounds, but on internally contradictory grounds. And he doesn’t hate “capitalism?”

 

2 Responses to “Thomas Picketty Doesn’t Hate Capitalism”

  1. Michael says:

    I’ve been quite busy lately and so have only been able to scan a few headlines rather than read more in depth. But what did I miss that is making this guy hit a lot of headlines? Is his book even out yet?

  2. Harry says:

    “…the risk adjusted rate of return on capital is not higher than the rate of growth…” Why is this not obvious to all?
    Although I do not want to digress into a discussion of privatizing Social Security, whenever someone suggests that a portion of one’s SS taxes be invested in an account one would own and be invested in, say, a Vanguard 500 index fund (as opposed to penny stocks), all of a sudden the politicians (you know who they are) go into a postal hissy fit over how apocalyptic it will be, everybody’s money going down the drain and the elderly lining up at the soup kitchen.

    Well, it is true that if congress pursues policies that lead to anemic growth and drive business into the ground, then maybe it is not wise to encourage people to invest in equity. But it takes an equal amount of gall to pretend one is protecting other people’s money if one deliberately devalues everybody’s money by printing trillions of of it, not bothering with the printing, even.

    So, if one is a bleeding heart do-gooder, one should favor economic growth everywhere. The question is: which state of affairs is most likely to produce it? Freedom (which has the collateral benefit of freedom) or government-run collectivism?

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