Discuss.

A quick announcement – we’ll be publishing Thomas Piketty’s response to the seminar in early January, it being the time of year when many readers are likely to be spending time with their family or being otherwise engaged. In the meantime, readers may be interested in the Foreign Affairs debate on economic inequality (which evidently owes a ton to Piketty) and Dan Hirschman’s paper on why Piketty’s work seemed so surprising when it first came out. And to all who celebrate it, happy Christmas, and to those who don’t, happy holidays! Myself, I’ll be spending it with my extended family in the West of Ireland (including Milo, the Crooked Timber Christmas dog

Note I wrote two pieces in response to Piketty’s Capital and managed to get confused as to which one was meant for this seminar. Here’s the piece I sent in originally, and which is referred to in Piketty’s forthcoming response. The crucial point is that, thanks to a combination of strong employment growth and redistributive taxation and welfare policies Australia has, to a substantial extent, avoided the sharp increase in inequality seen in other English-speaking countries. The conclusion

Australia’s experience belies the claim that any attempt to offset the growth of inequality must cripple economic growth. On the contrary, the evidence suggests that there is plenty of scope for progressive changes to tax policy that would partly or wholly offset the trends towards greater inequality documented by Piketty.

[click to continue…]

One of the more depressing features of Capital in the 21st Century is the air of inevitability attached to the much-discussed r > g inequality. This is exacerbated, on the whole, by the fact that Piketty’s proposed policy response, a progressive global tax on wealth, seems obviously utopian.

What about a much simpler alternative: increasing the rate of income tax applied to the very rich, and removing preferential treatment of capital income? Piketty’s own work with Saez yields the conclusion that the socially optimal top marginal rate of taxation, after taking account of incentive effects, would be 70 per cent or more. Such rates prevailed, at least nominally, in the mid-20th century, without obvious ill effects. Again, Piketty provides the relevant evidence.

So, is there something about a globalised world economy that renders a return to high marginal rates of taxation impossible?

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Professor Piketty and his colleagues at the Top Income Distribution
Study have put us all in great debt for the great increase in our
knowledge of historical development of inequalities in income and in
wealth in a number of leading countries.

Notice I have already mentioned two inequalities, income and wealth.
There is one more leading inequality which does not receive much
attention in Piketty’s work: consumption. Papers and books have already
appeared which try to measure this inequality. Many more inequalities,
e.g. health, educational achievement, race, and gender differences have
been the subject of study, but these are more specialized and less
central to economic analysis.

There is a strong argument for emphasizing consumption. Why, after all,
do we consider inequality in wealth, income, or consumption to be
undesirable? If we consider only economic arguments, it is because the
poor are being deprived of goods that are valuable to their lives,
exactly because they are more basic than the desires of the rich.

This has important implications for how we evaluate Piketty’s arguments
about inequality. It suggests an alternative metric of inequality, one
under which some of the problems that Piketty identifies are not, in
fact, problematic.

Consider a world, like that envisioned by Piketty, in which the rich
consume relatively little (compared with their property income). They
accumulate wealth by investing in industry, thereby increasing output in
the future. If they do not consume more in the future, but instead,
simply continue to accumulate, then the additional future output is
available for the consumption of the poor.

If, instead of being available to the poor, the additional output were
somehow reinvested in the productive sector, we would find a world in
which the ratio of investment to consumption is steadily rising. This is
not the world we live in, and would produce visible results contrary to
even casual observation.

In the neoclassical picture, consumption is the ultimate end of the
economy. The rich accumulate for ultimate consumption, perhaps of
generations in the far future, or, in some significant part, for
philanthropy. Piketty seems instead to have a picture of the economy as
a process of automatic accumulation, without regard to planned
consumption. Estates grow at the market rate of return (100% saving out
of property income). This is not a realistic account of how rich people
– or indeed anybody – treats their income. It also leads us to ignore
the politics of how this wealth is actually consumed.

Taking consumption seriously has important implications for measurement.
If we are truly concerned with inequality, we should be most concerned
with the distribution of consumption. The measurements we should look to
are measurements of inequality in consumption, since it is differences
in consumption that we really ought to care about.

This also has implications for policy: for example, if what we care
about is differences in consumption, we might consider a progressive tax
on total consumption of an individual. This would have to be done on an
annual basis, like the current income tax, not at point of sale. Such a
tax was long ago proposed by John Stuart Mill and later by Irving Fisher
and Nicholas Kaldor. Piketty refers to Kaldor’s work but does little to
refute it, saying only that no such tax exists. This is true, but of
course the progressive wealth tax favored by Piketty is equally untried
in practice.

We might be especially moved to consider a consumption tax if we
consider that Piketty’s proposed wealth tax seems in any case to be much
higher than it sounds. If we are to assume, say a 5% return on property,
then a 2% per annum tax on wealth would amount to about 40% of property
income. If investment is financed by property income, this implies a
very considerable reduction in investment. Is this desirable? One might
doubt it, especially since the effects on investment would be
substantial, even apart from incentive effects, which might also be
quite considerable.

Thomas Piketty’s *Capital in the Twenty-First Century* presents a
troubling puzzle for social democrats and for parties of the
centre-left, as well as for academics interested in developing a more
egalitarian public policy agenda. Supported by a previously unimagined
wealth of statistical detail, gained through the archival labour over
many years of a large team of researchers, Piketty’s book confirms
profound concerns about the long-range dynamics of capitalism. Wealth
does not naturally disperse down to the many, but sticks to the few, and
especially to those who carry the arbitrary advantages of patrimonial
inheritance. The facts of inequality are devastating, and come with an
accompanying sense of deflation at the level of policy and political
action. We may have come to see the grim facts of capitalism’s internal
dynamics more clearly than ever before, but it is much less clear that
we have the tools to cure capitalism’s disfiguring disease of
accelerating inequality. Hence we see that a common reaction to
Piketty’s work on the left is one of resignation or even despair. The
sardonic good humour and cautious optimism displayed by Piketty himself
can seem oddly out of place against the background picture that has been
created by his years of ground-breaking research. [click to continue…]

A brief conversation with 2 students crystallized for me why two things I have been doing in my classes for a while work well, and I want to recommend them to other teachers; and also make a recommendation for students.

Background to the conversation. The class is very small, just 14 people (this is unusually small — my normal class sizes are around 25, 80-100, 150-170). R&M live together; G, who is also in the class, lives with them. They have a 4th roommate, MA. Class was once a week on Wednesday nights.

R: “MA might come to class on Wednesday. I mean, it’s like she’s in the class, so she might as well just come along”
Me: “What do you mean?”
M: “Well, we all just argue about class in our apartment for half the week, and she can’t really avoid it”
R: “Yes, as soon as the memos start coming in on Sunday, we start reading them to see what everyone says”
M: “We always look to see what S [a very poised, provocative, freshman] says, because at least one of us will disagree with her”
R: “And even if M and I agree, G always disagrees with us. Our apartment is just full of argument from Sunday through Wednesday”

So what are the two things I do?

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Abraham Newman and I have a piece in the new Foreign Affairs, discussing the Safe Harbor decision, and arguing that it’s really an example of the US finding some of its own preferred extraterritorial rules being used against it. Since Foreign Affairs allows me to put the whole piece up for a few months, here’s the full text for anyone who’s interested …

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*Capital in the Twenty-First Century* was a classic as soon
as it was published.[^21] It deserves a place on bookshelves beside its
illustrious namesake of the 19th century. Capital, in
*Capital*, is the wealth of nations. It extends beyond
firms’ traditional productive capital to encompass the entire public and
private patrimony that can be sold on a market (thus excluding
non-transferable forms of capital such as human, cultural and social
capital). The book is the culmination of fifteen years of individual and
collective research on the evolution of income and wealth inequalities.
Thanks to data based on the collection of income tax, Thomas Piketty and
his colleagues had already widely explored income inequality in France,
the United-States, India, China, and more generally in the world by the
early 2000s, fuelling a unique and remarkable dataset: the *World
Top Incomes Database.* However, this work focused on income
rather than wealth, and hence provided an incomplete account of economic
inequality. This new book fills in this gap in a very timely fashion. [click to continue…]

It’s the unfortunate fate of greatly influential books to be greatly
misunderstood. When a book is sufficiently important to reshape
intellectual and political debates, it escapes, at least to some extent,
its author’s intentions. People want to latch onto it and use it as a
vehicle for their own particular gripes and concerns. Enemies will
distort the book further, some because they dislike the book’s message,
others because they feel that they, rather than the book’s author,
should have been the messenger adorned by history with
laurels. The book will further be subject to the more ordinary forms of
misprision and adaptation (some helpful; others less so) that all books
are subject to. [click to continue…]

Imagine that you’re a person who is obsessed with airplanes. Naturally
you’re excited when everyone starts talking about this big new book,
*Aviation in the 21st Century.* You get your copy and start
reading. Just as you’d hoped, there’s a detailed discussion of the
flight characteristics of a vast variety of plane types and a
comprehensive record of different countries’ commercial fleets, from the
beginning of aviation until today, plus a few artfully chosen
illustrations of classic early planes. But long stretches of the book
are quite different. They are devoted to the general principle that, in
an atmosphere, heavier objects fall faster than light ones, building up
to the universal law that lighter-than-air objects will float. Finally,
in the conclusion, you find some bleak reflections on the environmental
consequences of air travel – hardly mentioned til now – and a plea for
the invention of some new technology that will allow fast air travel
without the use of fossil fuels. How do you feel, when you set the book
down? You would be grateful for the factual material – even if the good
stuff is mostly relegated to the online appendices. You would be
impressed by the rigorous logic with which the principle of buoyancy was
developed, and admire the author’s iconoclastic willingness to break
with the orthodox view that all motion takes place in a vacuum. You
probably share the author’s hopes for some way of eliminating the carbon
emissions from air travel. But you might also find yourself with the
uneasy feeling that the whole is somehow less than the sum of its parts. [click to continue…]

A friend asked me last week how I watch cricket. Do I sit for 8 hours at a time, or watch highlight reels, or what? So I explained that when possible I watch live during breakfast when the kids have left the house, and actually take a short lunch break if there is live cricket to watch. If I am cooking, or cleaning the house, I have it on, turned up loud, in case anything unmissable happens (only if my cooking is uncomplicated enough to . But, if I know a game is likely to get tense and exciting, and will not be able to see it at all — teaching, days of meetings, etc — then I try to avoid learning what happened, and watch either highlights or, sometimes, long parts of innings, later (sometimes much later). He scoffed. How hard can it be to avoid learning what happened in a Test match when you’re in Wisconsin? [1] He, much more impressively, has to avoid learning the scores in a Packers game (I didn’t say that, in fact, this is something I manage to do all season every season, with no effort at all). Anyway, he told me that when he was a kid, on days that his dad couldn’t see a game, he (the dad) would come home and say “We’re in the cone of silence. Nobody say anything” and expect complete cooperation from everyone in his herculean effort to avoid learning the score.

Well, every Briton over the age of 40 knows what comes next. But surely there must be an episode from an American sitcom with exactly the same plot, no?

[1] During the World Cup I had the misfortune of teaching a class with a smart and lovely Indian lad, who did his absolute best to keep results to himself, but…well, his best often wasn’t good enough.

As I’ve argued on my own blog, it seems likely [^1] that the global agreement on reached at COP21 in Paris will mark the turning point in efforts to stabilize the global climate. If so, it will mark the defeat of the right in one of the most bitterly contested arenas of their long-running culture war, and also one of the hardest to explain. There’s no obvious reason, apart from tribal hostility to “enviros” why this should have been a culture war battleground at all.[^2]

There was, by 1990 or so, a well developed literature on “free market environmentalism” which pushed the idea that environmental problems were the result of inadequate property rights, and that the solution was to create such rights: in this case, tradeable emissions permits. Environmentalists were generally hostile to the idea, preferring direct regulation. Eventually most environmental groups came around to the view that a carbon price was essential to solving the problem. Instead of claiming victory, the right opposed the idea ferociously and effectively, with the result that the policy outcome has included much more intrusive regulation, and much less reliance on markets, than would have been optimal. The oddity of a supposedly market-oriented government in Australia preferring “Direct Action” over price-based policies is by no means unusual.

Has the climate change culture war helped or harmed the right? The harm is obvious enough. The scientific and economic evidence on climate change is so clear cut that mounting a case against it requires a huge amount of willing gullibility (the fact that is labelled “scepticism” is one of the smaller ironies of the story). The result has been a big contribution to the lowering of intellectual standards that allows someone like Donald Trump to become a plausible candidate for the Republican nomination in the US.

The intellectual damage has been particularly severe for libertarians, who have traditionally thought of themselves as the smart, logical types, deriving their policy positions from rigorous deduction. As the case of climate change has shown, you can get any answer you want if you make up your own facts. Now, we have the sorry spectacle of self-described libertarians making the kinds of spurious claims, in relation to the health effects of wind power, that were once the province of the least credible environmentalists, and demanding the appointment of highly paid government regulators. At the turn of the century, libertarianism had a plausible case to be the way of the future. Now, as far as I can see, it has disappeared from view in the US and survives in Australia only because of the vagaries of the Senate electoral system.

Against that, the struggle to save the planet from dangerous climate change has chewed up a huge amount of energy and effort on the left. Arguably, that has distracted attention from economic issues, and allowed the steady rise of the 1 per cent to go unchallenged. That analysis fits with the widely held view that the culture wars are just a device to keep the rightwing base agitated enough to turn out, losing time after time, but still providing the votes needed to keep pro-rich politicians in office.

[^1]: A Republican win in 2016 would certainly be a major problem. But the momentum is such that it would probably not make much difference. Even if a Republican Administration weakened environmental standards, no one is going to build a new coal-fired power station in the US, knowing that it might have to shut down after the next election.

[^2]: There was, initially, some significant support from fossil fuel interests (notably Exxon) through bodies like the Global Climate Coalition. But that dropped off quite early as most big corporations worked out that they were better off changing their business models to incorporate renewables than fighting to save the old ways of doing things. For at least the last decade, the economic issues have been secondary – it’s all culture war all the time.