Hudson on the Piketty Phenomenon

[Thailandnotes]

Re: Hudson on the Piketty Phenomenon

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

[vt]

Re: Hudson on the Piketty Phenomenon

Piketty's Numbers Don't Add Up

Ignoring dramatic changes in tax rules since 1980 creates the false impression that income inequality is rising.

By MARTIN FELDSTEIN


May 14, 2014 7:31 p.m. ET

Thomas Piketty has recently attracted widespread attention for his claim that capitalism will now lead inexorably to an increasing inequality of income and wealth unless there are radical changes in taxation. Although his book, "Capital in the Twenty-First Century," has been praised by those who advocate income redistribution, his thesis rests on a false theory of how wealth evolves in a market economy, a flawed interpretation of U.S. income-tax data, and a misunderstanding of the current nature of household wealth.
Mr. Piketty's theoretical analysis starts with the correct fact that the rate of return on capital—the extra income that results from investing an additional dollar in plant and equipment—exceeds the rate of growth of the economy. He then jumps to the false conclusion that this difference between the rate of return and the rate of growth leads through time to an ever-increasing inequality of wealth and of income unless the process is interrupted by depression, war or confiscatory taxation. He advocates a top tax rate above 80% on very high salaries, combined with a global tax that increases with the amount of wealth to 2% or more.
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His conclusion about ever-increasing inequality could be correct if people lived forever. But they don't. Individuals save during their working years and spend most of their accumulated assets during retirement. They pass on some of their wealth to the next generation. But the cumulative effect of such bequests is diluted by the combination of existing estate taxes and the number of children and grandchildren who share the bequests.
The result is that total wealth grows over time roughly in proportion to total income. Since 1960, the Federal Reserve flow-of-funds data report that real total household wealth in the U.S. has grown at 3.2% a year while the real total personal income calculated by the Department of Commerce grew at 3.3%.
The second problem with Mr. Piketty's conclusions about increasing inequality is his use of income-tax returns without recognizing the importance of the changes that have occurred in tax rules. Internal Revenue Service data, he notes, show that the income reported on tax returns by the top 10% of taxpayers was relatively constant as a share of national income from the end of World War II to 1980, but the ratio has risen significantly since then. Yet the income reported on tax returns is not the same as individuals' real total income. The changes in tax rules since 1980 create a false impression of rising inequality.
In 1981 the top tax rate on interest, dividends and other investment income was reduced to 50% from 70%, nearly doubling the after-tax share that owners of taxable capital income could keep. That rate reduction thus provided a strong incentive to shift assets from low-yielding, tax-exempt investments like municipal bonds to higher yielding taxable investments. The tax data therefore signaled an increase in measured income inequality even though there was no change in real inequality.
The Tax Reform Act of 1986 lowered the top rate on all income to 28% from 50%. That reinforced the incentive to raise the taxable yield on portfolio investments. It also increased other forms of taxable income by encouraging more work, by causing more income to be paid as taxable salaries rather than as fringe benefits and deferred compensation, and by reducing the use of deductions and exclusions.
The 1986 tax reform also repealed the General Utilities doctrine, a provision that had encouraged high-income individuals to run their business and professional activities as Subchapter C corporations, which were taxed at a lower rate than their personal income. This corporate income of professionals and small businesses did not appear in the income-tax data that Mr. Piketty studied.
The repeal of the General Utilities doctrine and the decline in the top personal tax rate to less than the corporate rate caused high-income taxpayers to shift their business income out of taxable corporations and onto their personal tax returns. Some of this transformation was achieved by paying themselves interest, rent or salaries from their corporations. Alternatively, their entire corporation could be converted to a Subchapter S corporation whose profits are included with other personal taxable income.
These changes in taxpayer behavior substantially increased the amount of income included on the returns of high-income individuals. This creates the false impression of a sharp rise in the incomes of high-income taxpayers even though there was only a change in the legal form of that income. This transformation occurred gradually over many years as taxpayers changed their behavior and their accounting practices to reflect the new rules. The business income of Subchapter S corporations alone rose from $500 billion in 1986 to $1.8 trillion by 1992.
Mr. Piketty's practice of comparing the incomes of top earners with total national income has another flaw. National income excludes the value of government transfer payments including Social Security, health benefits and food stamps that are a large and growing part of the personal incomes of low- and middle-income households. Comparing the incomes of the top 10% of the population with the total personal incomes of the rest of the population would show a much smaller rise in the relative size of incomes at the top.
Finally, Mr. Piketty's use of estate-tax data to explore what he sees as the increasing inequality of wealth is problematic. In part, this is because of changes in estate and gift-tax rules, but more fundamentally because bequeathable assets are only a small part of the wealth that most individuals have for their retirement years. That wealth includes the present actuarial value of Social Security and retiree health benefits, and the income that will flow from employer-provided pensions. If this wealth were taken into account, the measured concentration of wealth would be much less than Mr. Piketty's numbers imply.
The problem with the distribution of income in this country is not that some people earn high incomes because of skill, training or luck. The problem is the persistence of poverty. To reduce that persistent poverty we need stronger economic growth and a different approach to education and training, not the confiscatory taxes on income and wealth that Mr. Piketty recommends.
Mr. Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan, is a professor at Harvard and a member of the Journal's board of contributors.

[coolhand]

Re: Hudson on the Piketty Phenomenon

I thought Twain handled the issue well in A Connecticut Yankee in King Arthur's Court.

There has always been inflation. There will always be inflation.

The alternative is no churn and a young generation with no chance.

Those that benefit most are at the top of the pyramid, inflation or no.

Yes - but the problem is when the "creative destruction" occurs in money itself...there can be no turnover without a replacement system...so you end up with bailouts of the money system and therefore the same problem - a no churn oligarchy.

[vinoveri]

Re: Hudson on the Piketty Phenomenon

I am an empiricist and wholly practical man that goers by observation and experience. To me the world view is like Camelot. Who wouldn't want to bring it about. Just tell me how to actually have a free money.

Hi gwynedd1,

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

[santafe2]

Re: steady appreciation?

It's when land/home values are rising in real terms that it may be a very good investment. If home prices/rents are just tracking inflation, it is not that great, but small fish have limited alternatives. It also depends on whether you can do the maintenance yourself and a host of other factors. One of our friends in california bought a condo to rent out, and the tenant stopped paying rent and then started a fire in the kitchen. By the time they sold it, they were far behind financially. The whole problem of finding tenants who will pay the rent, and not trash the place, is such a huge problem.

You would be surprised at the return on a well managed rental home. We currently net about 5% and in this world one should be thankful for that level of return in a nearly risk free business. There may be upside but we don't count on it. If you can't judge people before you rent to them, you have no business in this business. We care about our tenants, we're friends with them. We provide a nice home in a good neighborhood for a fair price and if there's a problem, we fix it. Our tenants are our customers, if we don't satisfy them they will move on. Landlords who don't have that attitude attract the people the deserve.

[gwynedd1]

Re: Hudson on the Piketty Phenomenon

The currency is devalued in ALL circumstances as far as I can tell - and in fact is stated official policy, i.e., inflation targeting. Moreover centralized monetary policy, although not necessarily inherently so, seems to promote the formation of a pyramid where whoever receives the money first benefits more than those who receive it later.


An issue arises because central control of the monetary unit and its value if forced on people, even this itself need not be bad per se, but it is the corruption and the fact again that those who get the money first benefit that is unjust. Letting people deciding what to trade is consistent with freedom.

Hi vinoveri,

Then this country was never free since they declared silver and gold legal money. Its pretty easy to see the special interests involved such as Sherman Silver Purchase Act. However all they need to do is get the government to use that as a tax and they win with no m"market force in sight. Any law on money , including what to collect in taxes creates government inspired monopolies. So I ask in a practical way how will you keep government out of money? If they tax anything you fail. If it goes into debt, you fail. People trade government debt and so much so it becomes money. Its not my spirit that defies you. Its just that I cannot think of how to do it though I have long tried.

Here is where philosophy and worldviews come into play. The world is tough and competitive enough. A society that rewards ingenuity, hard work, risk taking directed toward increasing real wealth by providing goods and services that raise standards of living is righty directed imo. A world of centrally managed fiat creation and devaluation means one has to continually work to turnover their depreciating currency to prevent poverty; one cannot simply work hard, save money and become independent of wage slavery without speculating with savings hoping not to end up with a goose egg. In short, money currently has an effective expiration date.

I am an empiricist and wholly practical man that goers by observation and experience. To me the world view is like Camelot. Who wouldn't want to bring it about. Just tell me how to actually have a free money.

Note this doesn't even touch upon the issue of leverage, and the fact that those with access to easy and unlimited credit causes asset inflation which since it is not uniform causes dramatic inequality. Look what is happening with PE buying up forecloses homes for instance. How close are they to the money spigot vs us?

No it doesn't which is by some measure a far worse problem these days. I am with you in spirit vinoveri, but in body I cannot see how to get government out of money. That is why all I can see both practically and historically is to create competition between governments and its quite a long shot at that, a battle lost more than a century ago. I can only give a moral victory to Patric Henry.

[Polish_Silver]

steady appreciation?

I think we differ on this point. Others here have made the exact opposite argument and I've disagreed with them as well. Real estate in most areas of the US is a good investment. We are doing well as we've moved more into real estate. It's not a way to get rich quickly but it provides good income, nice tax breaks and steady appreciation. I don't think one can ask for much more than that.

It's when land/home values are rising in real terms that it may be a very good investment. If home prices/rents are just tracking inflation, it is not that great, but small fish have limited alternatives. It also depends on whether you can do the maintenance yourself and a host of other factors. One of our friends in california bought a condo to rent out, and the tenant stopped paying rent and then started a fire in the kitchen. By the time they sold it, they were far behind financially. The whole problem of finding tenants who will pay the rent, and not trash the place, is such a huge problem.

[vt]

Re: Hudson on the Piketty Phenomenon

The socialists have elites too:

http://news.yahoo.com/special-report...lTeh8AmifQtDMD

Sadly the working man and woman, and the poor are left out everywhere.

[Thailandnotes]

Re: Hudson on the Piketty Phenomenon

Harper’s Magazine associates Lewis Lapham and Thomas Frank have had their eyes on America and its moneyed rulers for a combined nine decades. In a conversation in late March at the Brooklyn bookstore BookCourt, the two talked about the current “Revolution” issue of Lapham’s Quarterly and named the forces conspiring to drive the nation into another age of upheaval. The discussion was featured in Frank’s column on Salon on Sunday under the title “Our Sad ‘Mad Men’ Revolution: How Consumerism Co-Opted Rebellion.”

To begin, Lapham, who says that as a journalist he has never been concerned with stoking revolution, describes the current issue of his Quarterly as taking on revolutions of various kinds—“political, scientific, technological.” To his mind, he says, those of us alive today are always in the midst of the revolution announced by Karl Marx in 1848, which is “the constant change in the means of production and the reducing of all human meaning and endeavor to a money transaction.”

Americans on both the right and left are anxious for drastic social change. Many are seeking to make it happen themselves. Lapham understands the evolution of civilizations, of which revolution is a part, to occur along lines determined by ongoing historical trends, including the breakdown of a society’s overextended parts in the manner that growing bubbles inevitably pop. “I suspect that if any genuinely revolutionary change takes place it will be forced upon us by a collapse of some kind in the system,” he told the bookstore audience. “That’s another form of revolution that you find across time where the civilization or the ancien regime falls apart of its own dead weight. And in the ruins, the phoenix of a new idea or a new thought or a new system of value takes its place. But that’s not something that can be organized by a committee or preached from a column in the New York Times, or even by a four-day conference about American values sponsored by the Rockefeller Foundation.”

“I don’t think we have to be concerned that we’re not parading around in the streets,” he added. “It will come of its own accord sooner rather than later.”

Frank added that he doesn’t “think Lewis is saying that [social order] will collapse on its own accord. Just that it will become corrupt… Everything else is up to us. To count on the dialectic to change anything or to rescue us is an absurdity. I think it’s a terrible mistake.”

In a chilling story about the limited vitality available to the American counterculture, Lapham described “the death of the Beat Generation in San Francisco in 1959,” which he said he witnessed. He was at the scene’s “last holdout” bar on a Tuesday afternoon. Beat figures John Kerouac, Ken Kesey and Allen Ginsberg were long gone. Out of nowhere a Hollywood producer, “dreadful looking … gold chain, white shirt, paunch, slicked back hair,” walks in and tells all the young, somnolent patrons he wants to cast them as extras in a movie. The pay was $50 a day each, but the boys had to shave their faces and put on khaki pants and blue button-down shirts, and the girls, tweed skirts. “One of you can still look dark and sullen,” the guy said. “This is a movie for Americans.” Everyone ignored him. Then he finally stopped talking.

“There’s a terrible, terrible silence,” Lapham recalled. “And then comes the even more terrible sound of a scraping of chairs. And the entire place emptied out and they were back in an hour, clean-shaven, white blouse, bobby socks. And that was the end of the Beat Generation.”

Frank, the author of “The Conquest of Cool,” a 1998 book about how capitalists subverted the mid-to-late 20th-century critique that it generates conformity by co-opting and commodifying the culture of rebellion, confirmed the meaning of Lapham’s story. “Individual economic leaders can be very stupid people. … But the system itself has a kind of genius. And what the system did back in the Sixties is it took the symbols of the counterculture and used them to reinvent itself. … By the end of the 1960s capitalism is this wonderful, sensitive, fantastic thing,” Frank said.

The conversation moved on to a recognition of the finance sector as a parasite “eating the brains out of the host” of the real American economy, “much of which has been outsourced in one way or another, or entrusted to machines.” Each time the economy collapses, Lapham explained, the foundation upon which it rests “gets thinner” as “the debt gets higher.” Frank recognized that the opposition located in today’s American left consists mainly of “journalists and bloggers,” lacking almost entirely the organized labor that “actually used to get things done.” Their enemy is not an idea known as capitalism, but simply an economic “mechanism” that goes by the name, which is captained and exploited by the leaders of “heavily entrenched interests.”

“The only idea that I can ever see in the minds of the moneyed interests is that money is good for rich people and bad for poor people,” Lapham said. “That’s about the beginning and end of their idea, I think.”

But what about opposition to economic selfishness masquerading as an idea? Where is the will to set things right? Lapham addressed himself to the genuine ideas that informed the values stated in the U.S. Constitution and their ability to survive in the atmosphere of moral and creative deprivation that enshrouds the country today.

“Civilizations, empires only last as long as there is a morale and an idealism and an energy sustaining it. To me, that seems to be exhausted,” he said. “There’s a good deal of cynicism. We don’t have enough people in this society who believe in democracy. That goes to your point about they’re there for the speech and then they leave for the rest of it. [Ralph] Nader has written wonderful books about this. He said, If a million people in the United States would give $100 and 100 hours of their time we could make truly significant change. But if you don’t have people who believe in it passionately it loses its energy. It dies according to the second law of thermodynamics. It’s a form of moral entropy.” Hence our present kind of civilization, “based on the global capitalist system of money,” faces virtually no external threat.

Among the conversation’s themes is the idea that capitalism threatens itself. One of the ways it does so is by continually abusing the population, of which many members are nonessential to its operation. Frank said that many of his young friends “supposed to be going out and starting life” carry over $100,000 in student debts. Lapham referred to the efforts of economist Michael Hudson, whose scholarly and popular work is concerned with the conversion of American citizens into debt slaves, as if democracy never existed.

http://www.truthdig.com/eartothegrou...ution_20140504

“That is how we will enslave the American people,” Lapham said. “I mean, the great source of capital, of course, is milking the American public on their debt. That’s how the credit card companies operate. You think of cattle in pens in California, the way they grow beef. You might as well think of the American population as giving off interest, stuffed with junk commodities and then paying forever with … just standing still.”

[DSpencer]

Re: Hudson on the Piketty Phenomenon

Apply the logic to what he says. To paraphrase he says that you cannot drive someone lower than their subsistence in a sustainable way. He also says the surplus will move to the more wealthy. So it predicts that once the upper middle class is the only one of the general class to retain a financial surplus then they are next. So I think you are missing it by looking at it statically. I have been predicting that the "wealthy" will begin to consume each other for this reason.

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

[DSpencer]

Re: Hudson on the Piketty Phenomenon

I don't know what part of hudson's work you are referring to. But they do have the characteristic that an individual with liquid capital can deploy it to make large returns at the expense of the larger society.

Another of Hudson's complaints was that a landowner gets rich by sitting on land until tax paid infrastructure makes the land valuable. Then he sells for a profit which is due to the investment undertaken by the larger society. An example would be if you own land in the middle of nowhere, which becomes valuable because an interstate freeway intersection is built near there. This is far from the top of my worry list, since many of the people who benefit are middle class to start with.

A worry much higher up is this: there seem to be a group of people, which would include real estate magnates and bankers, which profit by blowing asset bubbles.
They enrich themselves by sucking money of the middle class and government.
This process seems to be sustainable. I don't know if Hudson talks about this or not.

I'm referring to the concept of people extracting economic rents. I don't see how a hostile takeover really fits that.

Your second paragraph is basically what I'm talking about in a general sense. My point is that it's easy to make up a fictional scenario where people get rich by sitting on land. Certainly it happens in real life in some case although like you said the most famous situations involve the old woman who turns down millions for her tiny house so that a mall can get built. But to actually BE in the position of having lots of money and deciding "I'm going to buy a bunch of vacant land, pay the taxes on it and hope that one day someone builds a highway near it" is not quite the fool-proof rent-seeking scam that Hudson makes it out to be.

Put another way: Hudson seems to imply that if you're rich, there's free lunches to be had everywhere. But imagine you are a rich guy with lots of liquid capital. Michael Hudson calls you up and says "I know the system inside and out and I've decided that if you can't beat them, join them. Just give me your 10 million dollars and I'll make you even richer" Would you trust that he could do it? I sure as hell wouldn't.

I also believe there are scams robbing the public. I just see them in situations like Solyndra where taxpayer money is given to friends of those in power.

[gwynedd1]

Re: Hudson on the Piketty Phenomenon

Hudson always seems to imply that if you are a rich "monopoly guy" and have $1 million you can go down to the rentier club and simply exchange that $1 million for $2 million risk free and repeat the process over and over.

If he or one of his itulip fans knows of how this actually works in the real world, I'd love to hear all about it. Whether you personally have the money or not, if you can find risk-free passive income (aka rentier)investments with a good return then you can make all the money you want.

The problem is that I'm not convinced this actually exists in the real world. In the real world investors bid up the prices of those type of investments until they don't offer low risk and high returns anymore.

Apply the logic to what he says. To paraphrase he says that you cannot drive someone lower than their subsistence in a sustainable way. He also says the surplus will move to the more wealthy. So it predicts that once the upper middle class is the only one of the general class to retain a financial surplus then they are next. So I think you are missing it by looking at it statically. I have been predicting that the "wealthy" will begin to consume each other for this reason.

[Polish_Silver]

Re: Hudson on the Piketty Phenomenon

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

I don't know what part of hudson's work you are referring to. But they do have the characteristic that an individual with liquid capital can deploy it to make large returns at the expense of the larger society.

Another of Hudson's complaints was that a landowner gets rich by sitting on land until tax paid infrastructure makes the land valuable. Then he sells for a profit which is due to the investment undertaken by the larger society. An example would be if you own land in the middle of nowhere, which becomes valuable because an interstate freeway intersection is built near there. This is far from the top of my worry list, since many of the people who benefit are middle class to start with.

A worry much higher up is this: there seem to be a group of people, which would include real estate magnates and bankers, which profit by blowing asset bubbles.
They enrich themselves by sucking money of the middle class and government.
This process seems to be sustainable. I don't know if Hudson talks about this or not.

[DSpencer]

Re: Hudson on the Piketty Phenomenon

I think that's a very good point. I'll give two examples that do sort of work like Hudson's model:

1) hostile takeovers of the kind done by Bane capital/Romney
2) trading treasuries in a long term environment of lowering rates. You can use leverage and various
tricks to increase your yield.

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

[Polish_Silver]

Re: Hudson on the Piketty Phenomenon

Hudson always seems to imply that if you are a rich "monopoly guy" and have $1 million you can go down to the rentier club and simply exchange that $1 million for $2 million risk free and repeat the process over and over.

If he or one of his itulip fans knows of how this actually works in the real world, I'd love to hear all about it. Whether you personally have the money or not, if you can find risk-free passive income (aka rentier)investments with a good return then you can make all the money you want.

The problem is that I'm not convinced this actually exists in the real world. In the real world investors bid up the prices of those type of investments until they don't offer low risk and high returns anymore.

I think that's a very good point. I'll give two examples that do sort of work like Hudson's model:

1) hostile takeovers of the kind done by Bane capital/Romney
2) trading treasuries in a long term environment of lowering rates. You can use leverage and various
tricks to increase your yield.