If you nevertheless believe that the capitalists have been busily rigging the system in their own interest, you’ve got to admit they’ve done a spectacularly bad job of it. How else to explain the quintuple taxation of capital income, where you can invest a dollar that was taxed the day you earned it, then pay corporate income taxes, dividend taxes, capital gains taxes and inheritance taxes on the income it throws off? Surely any concern that the rich are calling the policy shots should melt away in the face of actual policy.
(Please don’t respond that capital gains are taxed at a lower rate than ordinary income. When you tax the same income multiple times, what matters is not any single rate, but the accumulation of *all* the taxes.)
The skinny of Thomas Piketty’s bestseller Capital in the 21st Century is that 5 levels of taxation aren’t enough, so we need a sixth.
Piketty is a bright guy, and is free to make any argument he likes. But why on earth would someone accept that skinny with a straight face?
Oh and … don’t forget … Landsburg is talking about taxes on the flow of income, while Piketty is talking about a new tax on the stock of wealth that generates the flow of income. That’s like ramping up the rates on each of those separate taxes.
Thomas Piketty’s Capital In the 21st Century has been a bestseller in America since its translation came out in the spring. It’s being widely touted as the most important book in macroeconomics in decades.
It’s arguable that this is all a load of BS. It turns out no one is actually reading it.
Here’s how we know. When someone buys a book for their Kindle, they can highlight passages. Part of what you agree to when you buy a Kindle is that Amazon can keep track of those highlighted passages. The most frequently highlighted passages are actually shown towards the bottom right of a book’s webpage on Amazon.
For most books, these passages occur throughout the book. And a good sign that people finish the book is that there’s a heavily highlighted passage towards the end.
The thing is, of the 5 most heavily highlighted passages in Piketty’s book, the last one occurs on … page 26. Not one of the top 5 passages occurs in the last 670 or so pages.
There’s actually theory in statistics about the distribution of what are called record values. That isn’t applied here, but having some exposure to it, I’d estimate that 99.9% of readers never get past page 50 before abandoning the book. For example, suppose that (way back when) people started recording the time it took to run a mile, and kept track of each successive record: if the record times stopped going down once they hit 7 minutes … you might conclude a lot of things, but a pretty obvious possibility would be that no one is running that distance at all.
When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.
When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income.
Knowledge and skill diffusion is the key to overall productivity growth as well as the reduction of inequality both within and between countries.
The sharp reduction in income inequality that we observe in almost all the rich countries between 1914 and 1945 was due above all to the world wars and the violent economic and political shocks they entailed (especially for people with large fortunes). It had little to do with the tranquil process of intersectoral mobility described by Kuznets.
Over a long period of time, the main force in favor of greater equality has been the diffusion of knowledge and skills.
I have a Kindle 2, in which there are no pages, only locations (these are approximately a longish sentence each). Piketty is 13,605 locations long. A page in the hardcover edition of the book is about 19 to 20 locations; the biggest “page” I can show on my Kindle is about 11 locations.
# 1 is from location 88 (0.6% of the way through the book, and I have the second half of that quote highlighted)
# 2 is from location 547 (4.0% of the way through the book, and yes I have that one highlighted)
# 3 is from location 458 (3.4% of the way through the book, and I don’t have anything on that “page” highlighted
# 4 is from location 340 (2.5% of the way through the book, and I don’t have anything on that “page” highlighted)
# 5 is from location 480 (3.5% of the way through the book, and I don’t have that passage highlighted, but I do have two others on that “page”)
To put that in perspective, that’s like getting a text for a class that has they typical 15 chapters in it, and when the books are sold back to the bookstore at the end of the semester, they notice that no one highlighted anything after the first chapter. What would you conclude about a class like that? For my part, I’d conclude that the material wasn’t very interesting, the students weren’t trying hard, and no one was doing quality control to make sure they did.
Currently, I’m at location 1921, and I’ve highlighted 123 passages in the book. And yet I match up with 1.5 out of 5 of the most popular highlighted passages.
It’s a rough conclusion, but an academic macroeconomist, preparing to use the text in an advanced undergraduate class, doesn’t find interesting or worthwhile well over half of what the general reading public does.
I hate to sound elitist, but this doesn’t bode well for the public’s ability to understand macroeconomics even when guided by a book that’s quite readable. I think this is prima facie evidence that the intellectual baggage people bring with them to macroeconomics is huge.
I haven’t started Thomas Piketty’s Capital In the 21st Century yet.
In the meantime, I’ve been overwhelmed by reviews from economists (and others) who have finished it (well, hopefully, at least … I have some doubts about some reviewers).
So I’ve avoided commenting on the book, or on the comments to it; although, like the proverbial duck, I’m doing a lot of work on this that isn’t easily seen.
Anyway, Scott Sumner came out with his review today at EconLog, and I think he makes a number of salient points. I think Scott’s politics and economics are roughly similar to mine: fiscally conservative, socially liberal, and with macroeconomics background more firmly grounded in the mainstream of the 1970’s and 1980’s than academics of older or more recent vintage. Here’s what he said.
I recently completed reading Thomas Piketty's new book entitled Capital in the Twenty-First Century. Piketty explains why the distribution of capital is becoming increasingly unequal, why we need higher tax rates on upper income individuals, and also a wealth tax on the affluent.
That’s a good skinny to start out with. In this next quote, I agree with the first two sentences and while I believe the last sentence, I find the implication a bit appalling:
You probably won't be surprised to hear that I was not persuaded by his arguments. I didn't expect to be persuaded. But here's what did surprise me; the book made no real attempt to persuade me. [emphasis original]
Going into the book I expected Piketty to try to persuade people like me … But he didn't do so; indeed he didn't even make an attempt to do so. The book is aimed at thoughtful non-specialists who don't know about all the cognitive illusions in the public finance literature. [emphasis added]
In short, Sumner argues that the book is aimed at people who think they’re smart enough to avoid the pitfalls, but who are ignorant that they exist at all.
Then Sumner hits on one of my pet peeves:
… He repeatedly uses the term 'wealth' to refer to marketable wealth, when he actually should be talking about total wealth, including the present value of future government benefits like Social Security and Medicaid, as well as human capital. To be sure, there are some purposes for which singling out marketable wealth might be appropriate, but discussing changes in economic inequality over time is not one of those purposes.
My peeve is that we tend to worry most about inequality when it involves something that is both valuable, transferrable, and fungible.
No one care that we have inequality in penmanship, because it was valuable once upon a time but isn’t valuable any more.
No one cares about inequality in ball handling skills, because even with the best coaching they aren’t transferrable.
No one cares about inequality in the tastiness of home cooking, because even recipes don’t make that very fungible.
To me, it’s a sign of real problems when we’re only worried about inequality in relatively liquid assets: like they’re big bags of cash that belong to the holder.
… I am obviously not the intended audience for this book. And if I look beyond my annoyance, I can understand why many readers found the book to be impressive, even a tour de force. … Piketty's book is impressive in some ways. I like his approach to methodology. He might well be correct about some of his predictions. As we saw with the General Theory, a book can contain many individual arguments that don't hold up, and still be a milestone in the intellectual debate.
Cross-posted on SUU Macroblog (which is required reading for my students).
My co-author, Kyle Bishop, got featured on the front page of The Wall Street Journal today.
Kyle Bishop figured it was risky when he applied to a University of Arizona Ph.D. program in English eight years ago by proposing a dissertation on zombie movies.
He was dead wrong.
The program approved Mr. Bishop's proposal, and he is now chairman of Southern Utah University's English department. …
Later, the article discusses other academics working on the undead, including:
Other collections due this year include "Economics of the Undead," which co-editor Glen Whitman, a Cal State Northridge economics professor, says "raises issues of the use of resources" in an apocalyptic event. The work is academic, he says, but might draw readers "with a casual interest in economics."
Kyle, my wife Mary Jo, and I authored Chapter 6 in that book (entitled “What Happens Next? Endgames of a Zombie Apocalypse”). It comes out in a couple of months.
Read the whole thing entitled "Zombie Studies Gain Ground on College Campuses" in today’s issue of The Wall Street Journal.
The DVR … and Tivo … YouTube … and independent films … are legal and popular, in part, because of a 1984 Supreme Court decision that established the precedent of “first sale”.
The legal terrain at that time included the argument that videotape itself should be made illegal because it might be used to make illegal copies.
That sounds silly, and it was shot down.
On the other hand, there is a practical point: if there was no videotape, it would be a lot easier to enforce and defend copyright. So you should be able to see the interest, if not the merit, in that side of the argument.
The precedent established, first sale, holds that if you purchase a legal, original copy, of copyrighted material … that it is yours to do whatever you want with. You can’t sell it for profit, but you can make as many copies as you like — whether or not they are later used illegally.
Flash forward, and the Supreme Court ruled this month that the principle of “first sale” applies to books as well. The case involved a Thai student in America, and the publisher Wiley.
Wiley practiced third degree price discrimination:* it sold the same book at different prices in different markets. In particular, it sold textbooks more cheaply in Thailand. No surprise there: lower incomes in Thailand are likely to make demand more elastic, and thus optimal markup lower.
But, the student saw an arbitrage opportunity: buy the books new in Thailand, ship them to America, and then resell them as mint condition used books. He made $900K doing this. Wiley sued and won. The student appealed, and the Supreme Court sided with the student.
How will this change the managerial economics landscape? Well, price discrimination will still be the first move on the part of managers. But, it may end up being less common in practice.
One thing to note is that this decision applies only to copyrighted goods, not to patented goods. So, pharmaceutical reimportation is still illegal.
* Some authors call this direct segment price discrimination.
I used to work with Phil O’Connor. It has taken us several years to find someone who might be able to replace him: our finance graduates have gone downhill since he left.
Anyway, Phil co-authored a text. I’ve had it for years, but just got around to reading it — cover to cover.
It’s a small masterpiece. I found the book comprehensive, interesting, and at points, innovative.
There really are two books here.
In one, basic finance is laid out with a heavy use of options for insight. The options examples are not daunting, but they do require some basic exposure to options pricing to get much out of. Immersion in options at the start of the text is a fruitful way to go, although it does make the material a bit less accessible. Perhaps that's where the "advanced" in the title comes from.
In the second, there is a literature survey (a bit dated now). The book contains dozen (maybe hundreds) of excerpts from published papers. Essentially, the current research (as of publication in 2002), told in the words of the researchers themselves. Again, a very fruitful approach.
I am not sure about the usefulness of this book for a particular class, but as a general resource for any advanced program in finance, it's definitely worth considering. I strongly agree with the one reviewer who called it a "bottom of the drawer" book: one that will always be close at hand because of its utility.
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