Hudson on the Piketty Phenomenon

[DSpencer]

Re: Hudson on the Piketty Phenomenon

Where does he say this?

they stole the property by fraud and internal bribery, the same way that the great fortunes were made in the United States.

So Piketty’s book, large as it is, didn’t discuss this except at the end to say “Well, you need to somehow tax the wealth away”. Well, that’s true, but that’s for another book in the future. How do you tax it away?

The first quote is mostly talking about other countries and the US in the past, but nothing in the rest of the interview suggests he feels differently about how fortunes are made in the US today.

What would we have without government? What's to stop someone from claiming North America as their own private estate? Everyone keeps talking about "getting rid of government". What is that? What happens when a billionaire buys a private island ? Who does he even buy it from? I cannot even walk on its streets. I can be tossed in to jail for trespassing. Is that not government? Is that "freedom". Do you mean to tell me that when Britain was owned by a few thousand people and tenants were tossed off the land that that was freedom without pesky government interference?

I keep talking about the military, land ownership, money and politics which always exists and cannot be rid of.

The ever-present anarchist straw man argument. Since I don't want a corrupt government controlled by corporate interests, I must want no government at all?

[DSpencer]

Re: Hudson on the Piketty Phenomenon

You're right. Not every takeover is an LBO and not all takeovers are necessarily bad. And, likewise, a company that downsizes is not necessarily extracting rent because most certainly there are some companies that are bloated and can be made more efficient. However, that doesn't mean that all downsizing is to create efficiencies and there are very clear examples of it in recent history where the downsizing is clearly an abusive practice to strip mine a company.

I think the strict meaning of the term "rentier" has a very specific meaning and I believe it specifically refers to people who earn their money from rent from real estate and financial instruments (stocks, bonds, bank accounts). However, it seems Hudson extends it to also mean those to are able to earn money through some sort of monopoly aspect.



I can only speak to how I interpret rentier as used in Hudson's essays. It is use of a monopoly (in this case, the creation of or access to money) to extract monies in excess of what can fairly be earned under normal circumstances. As an example, the massive Wall Street bonuses which arise because of easy access to money and bailouts which make no investment a losing investment. All I know is that when I make a bad investment, I lose money. Uncle Sam doesn't take money from you, my neighbor, your neighbor, and everybody else to keep me from losing money.



It doesn't fall under the purview of what a classical rentier is. I was thinking about wage arbitrage and use of tax havens. If a company does not layoff necessary (but more expensive than third-world) workers, those wages paid to those workers are taxed. Savings made on wage arbitrage do not get hit with an income tax (obviously) but through tax havens in the Caribbean, Ireland, the Netherlands, etc., those salary savings, which are now profit, are not taxed. If I remember correctly, GE got a tax refund just a few years ago despite costing the U.S. taxpayers billions in bailout money for GE FP.

As I've said, this is not classical rentier-ism but the laws that allow this nonsense are the result of rent-seeking behavior.

Put in those terms I think we are mostly on the same page. To clarify, I'm not trying to pigeonhole rentier-ism as only relating to land rent or finance. I think including other forms of modern day rent-seeking, like securing bailouts or patent trolling, is logical.

Wage arbitrage doesn't seem inherently "rentier" to me. In theory, if it's a competitive market, there will be some reduction in prices for consumers which is a benefit to society. (I'm not overall commenting on whether outsourcing is good, just that it potentially has a beneficial aspect.) However, utilizing the tax loopholes only available to companies who can afford the large legal compliance fees is another story.

I think one of the main differences in my perspective is that I don't blame companies for using the loopholes available to them. If Apple or Google can legally lower their taxes and benefit their owners, why shouldn't they? Especially since they have to compete with companies that will. The real question is why have our politicians created a tax code that is 74,000 pages long and filled with loopholes?

[gwynedd1]

Re: Hudson on the Piketty Phenomenon

I understand monopolies and certainly don't deny their existence. My issue is that Hudson's approach is to lump everyone with money into the same category and basically say the solution is to take their money away because they all got it by fraud.

Where does he say this?

To me the real source of the problem is the government's role in engineering these monopolies. We've let the government pick winners and losers and we have to stop letting them do that. One of the ways they do it is through the tax code, but we can't just fix the symptom we have to get to the root of the problem.

What would we have without government? What's to stop someone from claiming North America as their own private estate? Everyone keeps talking about "getting rid of government". What is that? What happens when a billionaire buys a private island ? Who does he even buy it from? I cannot even walk on its streets. I can be tossed in to jail for trespassing. Is that not government? Is that "freedom". Do you mean to tell me that when Britain was owned by a few thousand people and tenants were tossed off the land that that was freedom without pesky government interference?

I keep talking about the military, land ownership, money and politics which always exists and cannot be rid of.

[Milton Kuo]

Re: Hudson on the Piketty Phenomenon

I just don't know what definition of rent you are using to come up with this. A company that downsizes is somehow extracting "rent" from the fired employees? That makes no sense to me.

I can't help but feel like the argument boils down to: Rentier = bad. Hostile takeover= bad. Therefore hostile takeover = rentier.

Now we've gone from hostile takeover to LBO. While I realize that many hostile takeover's are done via LBO, they are not synonyms. A hostile takeover does not require debt. Similarly, a friendly takeover also often involves debt.

You're right. Not every takeover is an LBO and not all takeovers are necessarily bad. And, likewise, a company that downsizes is not necessarily extracting rent because most certainly there are some companies that are bloated and can be made more efficient. However, that doesn't mean that all downsizing is to create efficiencies and there are very clear examples of it in recent history where the downsizing is clearly an abusive practice to strip mine a company.

I think the strict meaning of the term "rentier" has a very specific meaning and I believe it specifically refers to people who earn their money from rent from real estate and financial instruments (stocks, bonds, bank accounts). However, it seems Hudson extends it to also mean those to are able to earn money through some sort of monopoly aspect.

So the question becomes: is the rentier aspect related to the fact that it's a takeover? Or that it's hostile as opposed to friendly? Or that it might involve debt? To reasonably discuss this there needs to be some degree of precision in the terms.

I can only speak to how I interpret rentier as used in Hudson's essays. It is use of a monopoly (in this case, the creation of or access to money) to extract monies in excess of what can fairly be earned under normal circumstances. As an example, the massive Wall Street bonuses which arise because of easy access to money and bailouts which make no investment a losing investment. All I know is that when I make a bad investment, I lose money. Uncle Sam doesn't take money from you, my neighbor, your neighbor, and everybody else to keep me from losing money.

Regarding #2: I don't understand why tax revenue is necessarily lost. The operating profit is either taxed as income of the owners if there is no debt OR it's taxed as repayment of principal by the owners plus interest income of the financier. If it were possible to reduce tax payments as you suggest then every savvy business owner would simply create a second company that loaned money at a huge interest rate to their primary business.

It doesn't fall under the purview of what a classical rentier is. I was thinking about wage arbitrage and use of tax havens. If a company does not layoff necessary (but more expensive than third-world) workers, those wages paid to those workers are taxed. Savings made on wage arbitrage do not get hit with an income tax (obviously) but through tax havens in the Caribbean, Ireland, the Netherlands, etc., those salary savings, which are now profit, are not taxed. If I remember correctly, GE got a tax refund just a few years ago despite costing the U.S. taxpayers billions in bailout money for GE FP.

As I've said, this is not classical rentier-ism but the laws that allow this nonsense are the result of rent-seeking behavior.

[DSpencer]

Re: Hudson on the Piketty Phenomenon

Its very specific to the conditions, but I think they got the idea right with Potters ville without the Building and Loan. However the advantages can be subtle. I live near the train and I save money on parking. If parking is $100 a month than I have a monopolistic advantage to another worker. Its ever so slight but its one example. However it must be noted that I bid for the house with mortgage money. So its baked into the cake. The real windfall was to the original owner before the line was put in. That is how many millionaires were made in the San Joaquin valley when they diverted the water from the Owens valley and turn theirs in a paradise. Come to think of it there is you example of a monopoly controlling all the levers. Insiders bought it up I still think you don't understand Hudson's model again. The surplus is going to the financiers. The Henry George model is a bit obsolete because the land isn't where the money is at anymore. Its in the credit loaned against it. That's why you often don't see wealth locally anymore. I know someone in Connecticut who tells me where the economic surplus is going.. The only ones who work are the servants...

See how a water monopoly works. Water moves towards money and water makes money where it moves.

http://www.sacbee.com/2014/01/05/6046630/outrage-in-owens-valley.html

I understand monopolies and certainly don't deny their existence. My issue is that Hudson's approach is to lump everyone with money into the same category and basically say the solution is to take their money away because they all got it by fraud.

To me the real source of the problem is the government's role in engineering these monopolies. We've let the government pick winners and losers and we have to stop letting them do that. One of the ways they do it is through the tax code, but we can't just fix the symptom we have to get to the root of the problem.

[gwynedd1]

Re: Hudson on the Piketty Phenomenon

http://gameto100.com/?p=2116

The water wars throughout California’s history are sufficient to cast a veil of cynicism over who will sacrifice for the communal good and who will divert as much water as possible to make a profit. It’s hardly encouraging that, over the past two decades, California farmers have made a major shift away from annual crops to nut trees. The Central Valley has been filling up with vast orchards that require year-round watering and long-term commitment. What environmental sense does that make? A lot of Central Valley land is already subsiding from overuse of groundwater.

Funny how brain washed we are about hard work making you rich given how many people live out West these days..Wealth is as easily moved as water. It reminds me of who the better general was between Montgomery and Patton. It was the one who got the gasoline that was the better general.

My advice is not to live in an area like this without some monopolistic control of water rights. Otherwise you are essentially a slave.

[gwynedd1]

Re: Hudson on the Piketty Phenomenon

So how much money does it take to reach this level of being able to monopolize something? And at that level please give an example of what specifically can be monopolized, what return can be expected and how much risk it involves.

Its very specific to the conditions, but I think they got the idea right with Potters ville without the Building and Loan. However the advantages can be subtle. I live near the train and I save money on parking. If parking is $100 a month than I have a monopolistic advantage to another worker. Its ever so slight but its one example. However it must be noted that I bid for the house with mortgage money. So its baked into the cake. The real windfall was to the original owner before the line was put in. That is how many millionaires were made in the San Joaquin valley when they diverted the water from the Owens valley and turn theirs in a paradise. Come to think of it there is you example of a monopoly controlling all the levers. Insiders bought it up I still think you don't understand Hudson's model again. The surplus is going to the financiers. The Henry George model is a bit obsolete because the land isn't where the money is at anymore. Its in the credit loaned against it. That's why you often don't see wealth locally anymore. I know someone in Connecticut who tells me where the economic surplus is going.. The only ones who work are the servants...

See how a water monopoly works. Water moves towards money and water makes money where it moves.

http://www.sacbee.com/2014/01/05/6046630/outrage-in-owens-valley.html

[DSpencer]

Re: Hudson on the Piketty Phenomenon

The rentier in an LBO would be whomever it is that is involved in the financing that enables the takeover of the company. The rent is being extracted from the 1) Workers of the company being taken over as there are typically job losses and benefits reductions 3) taxpayers as the income tax revenue lost must be made up elsewhere 3) Taxpayers again when they ultimately have to bail out something such as workers' pensions. The pensions bailed out can be the pension plan of the taken-over company or another company's pension plan that holds the taken-over company's stock.

I just don't know what definition of rent you are using to come up with this. A company that downsizes is somehow extracting "rent" from the fired employees? That makes no sense to me.

I can't help but feel like the argument boils down to: Rentier = bad. Hostile takeover= bad. Therefore hostile takeover = rentier.

Now we've gone from hostile takeover to LBO. While I realize that many hostile takeover's are done via LBO, they are not synonyms. A hostile takeover does not require debt. Similarly, a friendly takeover also often involves debt.

So the question becomes: is the rentier aspect related to the fact that it's a takeover? Or that it's hostile as opposed to friendly? Or that it might involve debt? To reasonably discuss this there needs to be some degree of precision in the terms.

Regarding #2: I don't understand why tax revenue is necessarily lost. The operating profit is either taxed as income of the owners if there is no debt OR it's taxed as repayment of principal by the owners plus interest income of the financier. If it were possible to reduce tax payments as you suggest then every savvy business owner would simply create a second company that loaned money at a huge interest rate to their primary business.

Regarding #3: I won't argue that lobbying by companies to have private profits and socialized losses is not rent-seeking because I agree it is. However, this is a completely separate issue from hostile takeovers.

[Milton Kuo]

Re: Hudson on the Piketty Phenomenon

Who is the rentier? The company performing the takeover? The target of the takeover? The bank? From whom is the rent being extracted and by what means?

Wouldn't the interest be taxed as income by the bank?

The rentier in an LBO would be whomever it is that is involved in the financing that enables the takeover of the company. The rent is being extracted from the 1) Workers of the company being taken over as there are typically job losses and benefits reductions 3) taxpayers as the income tax revenue lost must be made up elsewhere 3) Taxpayers again when they ultimately have to bail out something such as workers' pensions. The pensions bailed out can be the pension plan of the taken-over company or another company's pension plan that holds the taken-over company's stock.

[DSpencer]

Re: Hudson on the Piketty Phenomenon

Yes. Hostile take over is usually debt leveraged. What this means is that cash flow wise in the short term there is much more money than with equity finance. Financing from banks is a tax deduction equity finance has no such expense. What this also does is require debt maintenance much more vulnerable to volatility. Bond and loan payments must be made in nominal amount while equity rises and falls with the conditions. Thus hostile take overs divert revenue from the state which it will seek elsewhere in income and sales taxes. It also leaves the company vulnerable to economic shock.


Why is interest to a bank a tax deduction? To subsidize financiers. What else?

Who is the rentier? The company performing the takeover? The target of the takeover? The bank? From whom is the rent being extracted and by what means?

Wouldn't the interest be taxed as income by the bank?

[DSpencer]

Re: Hudson on the Piketty Phenomenon

It relates directly to your post. Million dollar assets don't quite make the passive income via the same nature 10 million or 50 million can. You need enough to monopolize something. So even the more well to do are not necessarily doing all that well under these conditions. Once you sit on enough land you increase your monopoly. Three wealthy people with 3 plots requires a little price fixing where one just sets the price. That is where monopoly pricing comes in, and monopoly pricing is essentially passive income,

So how much money does it take to reach this level of being able to monopolize something? And at that level please give an example of what specifically can be monopolized, what return can be expected and how much risk it involves.

[gwynedd1]

Re: Hudson on the Piketty Phenomenon

Can you explain how hostile takeovers are a rentier type activity like Hudson describes?

Yes. Hostile take over is usually debt leveraged. What this means is that cash flow wise in the short term there is much more money than with equity finance. Financing from banks is a tax deduction equity finance has no such expense. What this also does is require debt maintenance much more vulnerable to volatility. Bond and loan payments must be made in nominal amount while equity rises and falls with the conditions. Thus hostile take overs divert revenue from the state which it will seek elsewhere in income and sales taxes. It also leaves the company vulnerable to economic shock.


Why is interest to a bank a tax deduction? To subsidize financiers. What else?

[gwynedd1]

Re: Hudson on the Piketty Phenomenon

Hi gwynedd1,

Well in fact we do have effectively "free money" for some do we not?

Right, more than free, I think, for some. Its free net money since we don't owe any gold mine a spade in the ground. However I think for some its free rental income and a cost to others.

The Fed via seignorage creates money ex nihilo, and provides it through and to the primary dealers and the Treasury who do with it what they please, i.e, spend it on what they want and benefit by being the first to receive it. Now of course it is not really free money, and someone else has to pay for the debasement of the monetary unit. Bretton Woods was a better standard than today IMO b/c it provided some level of check on gov spending; once the currency is floating fiat there are much less constraints on gov printing/spending and so we get misallocation of resources and things like 1) more folks on food stamps AND 2) hyper powerful security/military state, that is a more dependent and controlled (less free) population.

But again, nothing debases money more or catastrophically removes liquidity to discount real asset prices temporarily than credit. That is why Irving Fisher came up with endogenous money theory after having left the room with his tail between his legs. Fiat money just isn't on this scale. Credit is a beast. The trouble was he discovered this after his humiliation so no one was listening....Eliminate credit from expanding the money supply and then we can talk about fiat currency. Otherwise its Godzilla against a sling shot.

The model that credit depends on reserves...I just don't see it. Credit creates its own reserves.

[gwynedd1]

Re: Hudson on the Piketty Phenomenon

I'm not sure how this relates to my post.

It relates directly to your post. Million dollar assets don't quite make the passive income via the same nature 10 million or 50 million can. You need enough to monopolize something. So even the more well to do are not necessarily doing all that well under these conditions. Once you sit on enough land you increase your monopoly. Three wealthy people with 3 plots requires a little price fixing where one just sets the price. That is where monopoly pricing comes in, and monopoly pricing is essentially passive income,

[Milton Kuo]

Re: Hudson on the Piketty Phenomenon

So the rise in CEO pay/average worker is fictional?

Thank you.

I started to write a response to that article but ended up cancelling my response because there was just so much nonsense to address. A good percentage of the CEOs in corporations today appear to be paid exceptionally high salaries to shovel business in Wall Street's direction in the form of M&A fees, stock and bond games, and cutting the quality of the products the company makes (offshoring to lower cost countries with lower skill workers, lower quality materials) to game the earnings. It's nothing but a transfer of wealth from workers and shareholders to management and Wall Street.

Feldstein's comment about wealth being dispersed is also junk. While it is true for little people who don't pull the strings, I don't see how he doesn't see that dynastic wealth is very persistent. The Waltons, Pritzkers, Kochs, Hunts, etc. make it pretty clear that if wealth is being diluted at the very wealthiest tier, it's taking many, many generations in contradiction of what he claims.

It seems to me that Feldstein is another Ivy League stooge a la Ben Bernanke and Dr. Evil (Lawrence Summers).