Monday, September 22, 2014

Piketty on Capital

Piketty on EconTalk (podcast) -- a lively discussion between Russ Roberts and guest Thomas Piketty. See earlier post here.
Piketty: ... to summarize very quickly our conclusion, we feel that the theory of marginal productivity is a bit naive, I think for this top part of the labor market. That is to say when a manager manages to get a pay increase from $1 million a year to $10 million a year, according to the textbook based on marginal productivity, this should be due to the fact that his marginal contribution to the output of his company has risen from 1 to 10. Now it seems a bit naive. It could be that in practice individual marginal productivities are very hard to observe and monitor, especially in a large corporation. And there is clearly strong incentives for top managers to try to get as much as they can.

... Now, when the top tax rate is 82%, now of course you always want to be paid $1 million more, but on the margin when you get a pay increase of $1 million, 82% is going to go straight to the Treasury, so your incentive to bargain very aggressively and put the right people in the right compensation committee are going to be not so strong. And also your shareholders, your subordinates, maybe will tend to tell you, look, this is very costly. Whereas when the top tax rate goes down to 20, 30% or even 40%, so you keep 2/3rds or 60% of the extra $1 million for you, then the incentives are very, very different. Now, this model seems to explain part of what we observe in the data. In particular, it's very difficult to see any improvement in the performance of managers who are getting $10 million instead of $1 million. When we put together a data base with all the publicly traded companies in North America, Europe, Japan, trying to compare in the companies that are paying their managers $10 million instead of $1 million, it's very difficult to see in the data any extra performance.

... But let me make clear that I love capital accumulation and I certainly don't want to reduce capital accumulation. The problem is the concentration. So let me make very clear that inequality in itself is of course not a problem. Inequality can actually be useful for growth. Up to a point. The problem is when inequality of wealth and concentration of wealth gets too extreme, it is not useful any more for growth. And it can even become bad, because it leads to high perpetuation of inequality over time, so it can reduce social mobility. And it can also be bad for the working or for the democratic institutions. So where is the tipping point--when is it that inequality becomes excessive? Well, I'm sorry to tell you that I don't have a formula for that.

... In the United States right now, the bottom 50% of the population own about 2% of national wealth. And the next 40% own about 20, 22% of national wealth. And this group, the middle 40%, the people who are not in the bottom 50% and who are not in the top 10%, they used to own 25-30% of national wealth. And this has been going down in recent decades, as shown by a recent study by Saez and Zucman and now is closer to 20, 22%. Now, how much should it be? I don't know. I don't know. But the view that we need the middle class share to go down and down and down and that this is not a problem as long as you have positive growth, I think is excessive. You know, I think, of course we need entrepreneurs. I'm not saying, look, if it was perfect equality the bottom 50% should own 50% and the next 40% should own 40. I am not saying that we should have this at all. I'm just saying that when you have 2% for the bottom 50 and 22 for the next 40, you know, the view that we cannot do better than that [[ because ]] you won't have entrepreneurs any more, you won't have growth any more, is very ideological.

... I am actually a lot more optimistic than what some people seem to believe. I'm very sorry some people feel depressed after they read my book because after all this is not the way I wrote it. In fact, I think there are lots of reasons to be optimistic. For instance, one good news coming from the book is that we've never been as rich in terms of net wealth than we are today in developed countries. And we talk all the time about our public debt, but in fact our private wealth as a fraction of GDP has increased a lot more than our public debt as a fraction of GDP, so our national wealth, the sum of private and public wealth, is actually higher than it has ever been. So our countries are rich. It is our governments that are poor, which is a problem; but it raises issues of organization and institution but that can be addressed.


reservoir_dogs said...

I think inequality of wealth in America reflects less on social injustice and more on the behaviors of the middle 40%, or even the bottom 50%. The median income for this country is something like $52k. To become a dollar millionaire, all one has to do is to save the maximum that is allowed for 401K. Assuming one works 40 years and compound at a 5% rate, you will have a nest egg well in excess of a million by your retirement. The median net worth for an American family is $11,000. The bottom 50% saves nothing, including Kareem Abdul Jabbar, who went bankrupt at the end of his career, the world is indeed an unjust place. How dare these people spend less than they make, that is practically un-american.

When people look at median income instead of median net worth, suddenly the average American is doing much better, and no one can gripe about these poor souls making only $52k a year.

I am not saying that those who saved are more virtuous. It is a big country and to each his own. But if we spent our money, we should not then go on the inequality bandwagon and complain that someone else had so much more.

ElMomentodeVerdad said...

Dear God

So let me make very clear that inequality in itself is of course not a problem...
I'm not saying...

No Stalin or Cheka. Not formally at least. Yet anyone who's made it to the commanding heights must either:

1. Genuinely have no opinion.


2. Must be a sociopath who say anything.

Whenever discussants feel the need to so qualify their opinions the discussion is NOT.

Would that Steve understood this.

Cornelius said...

I should have PhD'ed in econ and then written a book subtly rationalizing the confiscatory policies of governments.Then maybe I'd have concentrated more of that capital that Piketty writes about.

ajsola said...

Nice to see that anonymous commenters still suck up to their superiors. Because the concentration that your rulers really care about is not of wealth, but of status and power. Between Citizens United and these lapdogs, the mega-rich will get rid of pesky notions like meritocracy or democracy really soon.

Rastus Odinga-Odinga said...

"So where is the tipping point--when is it that inequality becomes excessive? Well, I'm sorry to tell you that I don't have a formula for that."
Then sit down and STFU.

Gregory Sedroc said...

What an odd reply! Are you suggesting that those who have become extremely rich got there by saving what a median income family could save? In other words if after paying taxes, mortgage, food for a family of four, clothes, transportation, random medical bills, etc.. are you saying a family should save two to three thousand or more? Perhaps ff they saved for twenty years that's 60 thousand and if lucky returned some additional investment. All of it is then needed for college for two children. Or you make a rule in your family that your kids will be brilliant, have grants and scholarships, and be awarded lucrative patents for their grade school science projects.

That's highly improbable, though not impossible. The fact is money confers an advantage to earning more money. If I double my investment of $5000 in the market (stellar results) its far less than getting a low 5% return on a million dollar investment. According to the rules in a society that advantage may be considered unfair, fair, or a matter of upper class rights. Certainly during the middle ages it was assumed a lord had greater rights to become richer than did his vassals. One of the most persuasive reasons for leaving Europe was that opportunity for personal gain existed in the new world, without being under the thumb of old world wealth.

A question I would like to see debated is if the hoarding of large amounts of capital by a few, slows down capital efficiency, invention, economic progress and prosperity for the country as a whole. Certainly one could prove the extremes of this thesis as being subpar, but what is the optimal distribution? This is an important discussion because that distribution has been changing quickly. As Buffet so aptly put it, "there is class warfare, and we're winning." Recently Standard and Poors released a report that if the trend to wealth concentration in a few continues it will endanger the capitalist system, noting that a thriving consumer society must have consumers and consumers must have money to spend.

andrew oh-willeke said...

In a law firm, one of the main determinants of partner compensation within the organization is what the partner could make if he left the organization and started his own firm with the clients who are loyal to him and his allies personally. People who don't have the capacity to make that threat in a viable way never become true equity partners. And, none of this provides much insight into why partners can generate the fees that they do relative to other lawyers (which has a lot to do with the affluence of your client base - senior lawyers tend to make similar amounts to top figures within your client entities or well paid clients).

But, in a typical publicly held corporation, where the nature of the contributions by different groups within the company is so different in kind and few of the contributors are viable as independent entities selling directly to the corporation's market. This kind of comparison is much harder to make.

reservoir_dogs said...

When you talk about a widening gap, it is the gap between the rich and the poor. I am with you that the rich are getting richer. I am just appalled that the poor are as poor as they are. Take the family who make the median income. One should be able to put away 10% of their income without hurting too much of their life style, especially if Uncle Sam is footing part of the bill, as is the case if you put it into a 401K. In most cases, the company will match your savings into the 401k by an additional $1500 to $6000. Let's say you are the unlucky soul that did not get a company match. at $5200 per year for 40 years, earning 5% annual return all this time. you will have a nest egg of $664,000.00 by the time of your retirement. Factoring in the impact of dollar cost averaging and some help from the employer, you will be close to a mil even with such a modest savings.

The problem with this country is that we have forgotten how to take responsibility for our future, and has relied on the government. It is our responsibility! SSI is a supplement, a safety net. It should not be your sole retirement. We all have to pay taxes, bills, we all have kids that go to college, but if the world gets by with a lot less, and our parents and grand parents got by with a lot less, we should be OK with $52,000.

As to the impact on our economy, people gradually saving more should not have a big impact on our economy, In any case, this is a crutch. I am saving because I have a responsibility to take care of myself. I am not going to sit and pontificate about what this will do to the economy.

Gregory Sedroc said...

There's some danger in not appreciating median and average incomes. A median is also known as the 50th percentile. Exactly 50% of people make less than the median and 50% make more. An average is adding all income and dividing by the number of people.

IF the country as a whole is improving then the median income would be increasing. But its not. Look at this page and note the widening disparity between average income and median income.

Since 1990 the median income has gone from 71% of the average income to 64%. Also note the median income in 2012 is $ 27,519.00. Both parents work only if they can't make it on one salary. You should also consider the breakdown of household income. A quick look at this chart will show how two people working (or more than two) define different income averages.

Last, certainly not least, the American consumer is subject to a constant, unrelenting, in your face, no escape from, advertising and marketing war to steal every dollar and more from your pocket. We are told at every turn its good, its virtuous, its right to go into credit card debt, loan debt, to buy stuff. We buy to "save", we buy to feel better not just because it provides a five minute endorphin release.. but because spending is affirmed everywhere you look.

Out of curiosity I ran a cost comparison between what you pay in Colorado Springs Vs New York City. If you're planning on saving money with your high paying job, forget it.

Consumer Prices in Colorado Springs, CO are 24.92% lower than in New York, NY
Consumer Prices Including Rent in Colorado Springs, CO are 46.92% lower than in New York, NY
Rent Prices in Colorado Springs, CO are 70.34% lower than in New York, NY
Restaurant Prices in Colorado Springs, CO are 35.59% lower than in New York, NY
Groceries Prices in Colorado Springs, CO are 13.06% lower than in New York, NY
Local Purchasing Power in Colorado Springs, CO is 33.11% higher than in New York, NY

There's no doubt one can save for the future to have a nest egg after retirement. Its just against the system to do so.

reservoir_dogs said...

I am glad that we are seeing more eye to eye on this. I live in the Bay Area so I am fully aware of the cost of living in an expensive metro. It is only when the opportunity far exceeds the cost that one should consider moving to one of such a high cost area.

I don't disagree that the average guy is not getting ahead over the last few decades. In my mind, this is due to two trends.

1. The technological innovations that allow for the internationalization of the labor market. This brought over two billion pairs of hands to compete in all job spectrum, but particularly for mid to low end of the bell curve.
2. The technological innovations that allow the right end of the bell curve to add ever increasing value to the system. They, as a result, are paid an increasing share of the pie (as they should).

The question is, how do we keep the peace while these disruptive trends are working their way through the system. Your guess is as good as mine.

Gregory Sedroc said...

They released child poverty statistics last week. One in five American children live in poverty. This is the highest among industrialized countries. We have to reappraise the evolution of our country in many respects. Most of all some of the illusions about ourselves. To those of us who have done well, by luck or by saving, or by pushing the definition of following the rules, this should be an embarrassment of riches.

I agree mostly with your assessment of how we got here. However, I would suggest our captains of industry and our own short term focus on gain through market capitalism is to blame. In pursuit of cheaper labor, looser laws and regulations, turning a blind eye to human standards we exported jobs, manufacturing and investment. Our corporate leaders spent the accumulated corporate wealth created by a hundred years of American workers, to one goal, make it cheaper to raise profits, to make the stock price go up.

I recall countless arguments with colleagues in the late 80's on this sea change of where US capital was being invested. I was told that they were only poor manufacturing jobs, making stamped metal parts, that Mexico, the Tigers, China, India, etc... weren't smart enough to design their own, or engineer their own industries. What arrogance and stupidity! China would take apart and blueprint our most sophisticated machinery, processes, chemisty, metallurgy, and put nearly the same product on the world market in a half a year or less. The rich American population was targeted by our own corporations as the one consumer to sell to with products made overseas. They got rich, we lost our jobs, and went into debt a little deeper each year trusting that things would get better. The illusion that a cheaper overseas product makes up for a lost manufacturing job is the biggest lie of the last twenty five years.

A corporate class has gotten rich, some among them very rich. The attack on American wealth hasn't abated. Its gone after jobs, then leveraging real estate until we had a the mortgage debt swindle that put a big dent in the world economy. Everything has been bubblized by wall street, moving from one asset class to the next, running it up and getting out before handing it off to slow witted investors. We are in one now, the bail-out trillions have run up the current stock market, the Fed did the right thing, but the money they created has gone into the hands of the wrong people. During the worst of times in 2007-8 some individuals made hundreds of millions on huge bets, one made over 3 billion. Yet despite this flood of riches for some, child poverty increased across the country. Despite good paying jobs being shipped overseas for two decades, we've bought into the illusion that anyone who works and saves will get ahead.

Is it as bad as all this? For many, yes, even worse. I was recently up in Albany NY talking with a young couple, each with masters degrees, super intelligent, not able to find work. They are hoping a move to Colorado will lead to more opportunity. She found a job outside her profession, he's counting on some consulting work as a top level programmer. But its not nearly enough and they have debts from school. Nor are they alone, unemployment is very high in the educated under 30 demographic. They are literally fighting with overseas talent for a multi-national job, one they would have easily found in the past. Meanwhile ceo compensation continues to go up. Our society is changing and I don't believe its good for the country.

reservoir_dogs said...

There are many points that you raised, I will try to comment on each one as I have time to.

1. Child poverty rate.
While the average American have not made much gains the last few decades, most have not loss ground in absolute earnings. So what account for an increasing child poverty rate? To me, this is due to two trends.
a. An increase in immigration, particularly illegal immigration, has resulted in more of the immigrant kids living in poverty. However, since they would live even poorer in their native countries, this is not a real problem per say.
b. A break down in morality of the population. People get hitched, then cut and run the first sign of trouble. The rate of single mothers are higher then ever. Like HIV, this is a preventable outcome, but we took the marriage too lightly to care about this.

2. corporate pay.
The pay of the corporate class is determined by the market as much as the janitor of the company. In most of the cases, the CEO is answerable to the board and the board sets the pay. If they can pay him less, certainly they would. Now, he is paid millions, so we could say that this is unfair, but he is paid based the the value he brings to the company. This no different then the millions paid to Diane Sawyer when the next reporter is "almost as good" and paid substantially less. To me, this is the same case as the right end of the bell curve making ever bigger share of the pie. But they still "earn" their pay. Now one can point to the case where CEOs hijack the board and got paid substantially more then they should, or they run the company to the ground. I believe this to be the minority case.

3. corporate greed,
The corporation is chartered to make money, period. We have governmental and charitable organizations that are chartered to take care of the less fortunate. They are supported by the riches made possible by the greedy corporations. A corporation is not chartered to provide jobs. They are just a money making machine. We can talk about taxing them more or less so the taxes are going to help the poor, but I think it is wrong to ask them to just create job for the sake of creating jobs, or to keep the existing jobs that they have. The corporation regularly move within the country to changes. For example, Detroit used to be a good place to make cars. The factories are already set up, so the cost is "sunk" as they say. All they had to do was maintain the place and feed it inputs and cars come out the other end. Due to increasing lawlessness of the population and white flight, they are no longer profitable making a car even with this low bar. They had to close the factories and move to neighboring towns. Now, is this corporate greed? Certainly, but I think Detroit should get the lion share of the blame.

I need to run, so will respond to the rest in a later post.

reservoir_dogs said...

Regarding child poverty rates, Americans have earned more compared to,say the seventies. Certainly people make a lot less in the 1950's compared to today. While it is true that the average Joe have not made much gain in, say, the last two or three decades, they have made some gains in absolute terms. So how else do you explain the increase in child poverty rate when the average person have not fair worse? The European market is not as open as the U.S. and Germany is arguably the most competitive in this quasi-closed market. But we also have the piigs that caught the cold when the U.S. sneezed. That is what happens when you draw a fence around your house, you lose your competitiveness. In the electronic industry, I watched as Europe lose most of the market share to the U.S. and Asia. Now, they have but a handful of companies left.

I don't disagree that CEO pay is increasing compared to the average Joe, but that does not change the fact that they work in competition with other CEOs and corporate officers. The reason their pays are higher is supply and demand. The list of potential candidates are pretty short when it comes to who is qualify because they must at least be a senior officer of some sort. Most of the stock owners want to see the company do well longer term and the boards are suppose to serve their interests. Sometimes that does not happen, but that is the exception. In the companies that I worked, the CEO's are accountable for their actions. As long as their is a competitive market place for their jobs, then one can say that their pay is determined by the market.

It is not that corporations should not do good, but I think it is unwise to make this part of their charter. Many corporations are socially responsible. The question is, who is to determine if a corporation is socially responsible or not, and what is the punishment if they are not? Does the government get to decide this? For example, most of the farms today uses illegal immigrants for much of their work. One can say that this bad corporate behavior and forbid this practice. So many farms, which are not making a ton of profits to begin with, goes under and now we are importing all our vegetables and fruits from Latin America. You can say that some companies should not set up shops oversea, but now, since foreign companies are not subject to this restriction, the American companies are put out of business. You think that won't happen? Try asking Apple to assemble their phones in the U.S. and see how may they sell? Already Samsung is eating their lunch. Should Apple be put out of business for shipping these jobs oversea?

I think that is what we have laws for. As long as the companies work within the law, we should not interfere. It is in our interest as a country to allow the corporations to survive and prosper first. Their contributions will be the tax revenues and the jobs that they create. Trying to decide who is doing good or who is naughty is hard, deciding what to do about it would be even harder. In many cases, the companies don't have to be here. They come to the U.S. because this is a good place to do business. They can move their head quarter to Singapore or Australia.

reservoir_dogs said...

Here is the response to the other points you raised.

4. Chinese stealing our technology.
Technology diffusion has always occur since humans are able to communicate with each other. In some cases, just knowing that something could be done is enough to set one's mind to work to come up with a similar solution. For example, the Chinese had a very backwards military. Certainly they stole some of our technology to get started, but they are also doing a great deal of R & D to catch up. Some of the stuff they come up with has no Western analog, like the anti-ship missile system. About the only thing we can do about the diffusion of know how is to see if we can profit from the up lifting of third world countries.

5. Mortgage debacle.
Certainly there are many corporations to blame on this, but I think we should not absolve the individual from their responsibility. As you might recall, there was a time when people were borrowing well over their ability to pay, hoping to make money on their homes. There are many who did not do this. Only buying what they can afford. While it is easy to blame the corporations for this (and certainly they are partly to blame on this), we should not forget the individual, who is a partner on this crime.

6. Smart people not finding jobs.
You should tell your friend, the super programmer to come the Silicon Valley. He should be able find a good paying job in a hurry. But in general, people have not understood their abilities when it comes to getting a college degree. There are two reasons for getting a college degree. For enlightenment and for enhancing job prospects. We should not conflate the two. Charles Murray have written much on this subject. Since we know our self best, we should know if the additional investment in schooling cost and lost opportunity is worth it. Also, a phd in Midieval history might require a lot of smarts, but would not enhance your job prospects. If we expect to find jobs after college, we need to do the research to find something that will be in demand when we get out.

7. Free tade
While there might be winner and losers, I think there is no alternative. Fortress Europe has not worked out so well for them. In many areas, they simply lost their competitiveness and see entire industries shrivel up and died. All the while, new ones have not come up to replace the old. Contrast this to the U.S, where entire new industries have sprung up. Old companies die and new ones take their place, but the industries are stronger than ever.

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