David R. Henderson  

Henderson on Piketty, Part 6

An odd incident in modern libe... The problem of population...

This is my final installment from "The Unintended Case for More Capitalism," my review of Capital in the Twenty-First Century by Thomas Piketty.

Piketty, not to his credit, sometimes uses ad hominems in place of actual argument. I note two. Although Piketty does not name the targets outright, one ad hominem is targeted at my Hoover Institution colleague Kenneth Judd and economist Christophe Chamley. Judd and Chamley, in separate articles, found that under certain strong assumptions, the optimal tax rate on capital is zero. Under those assumptions, they concluded, taxing capital would, by reducing capital, make workers worse off than otherwise. How does Piketty deal with their finding? By challenging their motives. Piketty writes, "Some economists have an unfortunate tendency to defend their private interest while implausibly claiming to champion the general interest." It might surprise Piketty that Judd is a dyed-in-the-wool registered Democrat with whom I argue about redistribution. (I'm the one who's against it.)

Piketty's second ad hominem is, surprisingly, against Yale University economist William Nordhaus. In discussing global warming, Piketty contrasts the views of Nordhaus and British economist Nicholas Stern. Stern wants governments to act quickly and massively to reduce global warming. Nordhaus wants a more gradual approach. Piketty claims that Nordhaus's position is "opportunely consistent with the U.S. strategy of unrestricted carbon emissions." Besides being an ad hominem, Piketty's accusation of opportunism makes no sense. Why? Because Nordhaus is one of the leading U.S. economists who does want the U.S. government to use carbon taxes to restrict carbon emissions.

On this issue, Piketty is also badly misinformed in another way. He argues correctly that one main difference between Stern and Nordhaus is the interest rate they use to compute future benefits of reducing carbon, but he incorrectly claims that Stern uses a discount rate of about 1 percent per year. In fact, Stern uses a discount rate of 0.1 percent per year, a big difference when considering benefits out over 100 years.

Interestingly, Piketty does not completely understand the economic case for carbon taxes as a way to deal with global warming. He writes, "There is good reason to believe, however, that the price signal [that carbon taxes would lead to] has less of an impact on emissions than public investments and changes to building codes (requiring thermal insulation, for example)." Certainly some level of carbon taxes could have a greater effect on emissions. But that is not the point. The case for carbon taxes over government picking of winners and government regulation is that they lead to a given reduction of emissions at a lower cost.

Early in the book, Piketty writes about his frustration with mainstream economics: "My thesis consisted of several relatively abstract mathematical theorems." I share that frustration. But there is a lot of very good economics, both within and outside the math. You do not need much math to show the superiority of carbon taxes over government spending and regulation.

I should not leave this review without mentioning a glaring historical error on tax rates. According to Piketty, the top income tax rate under President Herbert Hoover, Franklin D. Roosevelt's predecessor, was 25 percent. In fact, it was Hoover, a president from the progressive wing of the Republican Party, who raised the top rate to a whopping 63 percent.

I end with a positive: In his chapter on global capital taxes, Piketty writes:

A seemingly more peaceful form of redistribution and regulation of global wealth inequality is immigration. Rather than move capital, which poses all sorts of difficulties, it is sometimes simpler to allow labor to move to places where wages are higher.

He calls immigration "the mortar that holds the United States together." Unfortunately, he also sees immigration as something that "postpones the problem" of global wealth concentration. Let's see: Deregulation of labor markets will allow hundreds of millions of poor immigrants to be substantially better off but will only postpone a problem that Piketty worries about and I don't. I'll take it.

COMMENTS (8 to date)
ThomasH writes:

Good to see a forthright recognition that carbon taxation is the lowest cost way of reducing harmful accumulation of CO2 in the atmosphere. Now comes the harder and less interesting part: figuring out the optimal path for the tax rate, allowing for improving technologies for substituting non-carbon based energy sources for carbon based one and technologies that reduce the harm from CO2 accumulation.

Andrew_FL writes:


Good to see a forthright recognition that carbon taxation is the lowest cost way of reducing harmful accumulation of CO2 in the atmosphere.

I did not see any claim above that taxation was:

1. The lowest cost way, only that the cost is lower than another method (regulation).

2. That accumulation of CO2 in the atmosphere is "harmful."

Piketty is in a long line of chart followers.

He defines capital in an arbitrary way and as an aggregate without detail.
He refers to general economic well being and growth as another arbitrary aggregate.
He observes that the return on this capital aggregate has been greater than this economic growth for a few hundred years. He ignores that aggregate capital has changed greatly over the time considered.

How is the return on investments even comparable to average salaries? Nothing prevents median wage earners from buying stock and participating in the inequality.

He takes a mathematical pen and draws out this relation for a few hundred years, as if it is unchanging and a law of the physical universe. He concludes that any family that owns some capital now will be a lord of the realm at that time.

His solution is, surprise, to take the wealth of people now to prevent this future inequality, and give the wealth to the utopian, kind, and farseeing stewardship of progressive politicians.

This is ludicrous from the moment that Piketty names aggregates which are undefined and impossible to measure, then takes out his pen and ruler, places it on the chart, and extends the trend off the paper to the right.

This is Marxism with a mathematical cover. Marx saw that machines were more productive than the people they were replacing, and he proclamed that the machine owners would rule a future of wealth for themselves and grinding poverty for the workers. This, even though the wealth would come from merely pushing buttons on the machines. That prediction was ludicrous, but still believed by such as Piketty.

For Piketty, capital in general is the machine with the push button. If you don't have capital, you will eventually, off the right of the graph, live in poverty, desperate for a survival wage pushing the buttons on capital.

Piketty's motto is "I want to enslave those who have accumulated wealth for the good of us all". Like the bank robber who says "I take money from the bank where it is only lying around, and I spend it around town improving the lives of everyone I meet."

I havent read Piketty's book, but some reviews and discussion. From those discussions, reading the details would be a waste of time. So, maybe some detail above is incorrect, but I think not the overall analysis. Tell me if I'm wrong.

Andrew_FL writes:

@Andrew_M_Garland-I agree with much of what you've said, but I think you're wrong about Marx's predictions. In fact, Marx saw what you see him predicting of the future as either already occurring, or but the first stage of the process by which a socialist revolution was inevitable.

Piketty is Marx without the "optimism." For Marx, arguably, no action was necessary, because socialism was inevitable. For Piketty, the revolution must be helped along and is not inevitable at all. Instead, the only inevitability is increasingly unequal capitalism. And even that is a contingent inevitability, which may allegedly be forestalled or stopped by government action.

Pajser writes:

Piketty claims he is not influenced by Marx, not even the title of his book. It is almost certainly true. He doesn't even discuss socialism seriously.

David R. Henderson writes:

To all who addressed the connection with Marxism:
You’ll notice that I didn’t mention Marx in my review. Why? Because I think, as you’ll see if you read the whole review, that one can judge Piketty’s book independent of Marx.
To take the extreme case, imagine that Piketty said explicitly that he is a full-blown Marxist. I would still want to judge his argument and his evidence, as you should too.

Andrew_FL writes:

To be clear, I in fact think Piketty lacks the defining traits of a Marxian. Socialist "optimism" is one of those traits.

What I meant by my comment was Piketty as an observer of social trends and a predictor of the future, resembles Marx. You could as well say he resembles Malthus.

floccina writes:
"There is good reason to believe, however, that the price signal [that carbon taxes would lead to] has less of an impact on emissions than public investments and changes to building codes (requiring thermal insulation, for example)."

This seems not to true in the case of CAFE which seem close to building codes to me (building codes for cars): MIT study compares CAFE to Carbon tax.

For comparison, she defined FES and RFS regulations that would achieve a 20% cumulative reduction in gasoline consumption between 2010 and 2050. She also designed a gasoline tax policy that would elicit the same cumulative reduction. (The tax was implemented as a constant percentage of the gasoline price, starting at $1.00 per gallon in 2010.) Consistent with other studies, her analysis of those three measures indicates that taxing gasoline is 6 to 14 times less costly than the alternative policies in achieving a 20% reduction in the use of that fuel between 2010 and 2050.
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