Understanding Piketty, part 4
We now come to the exciting conclusion of Thomas Piketty’s monumental work, Capital in the Twenty-First Century. This is not an exaggeration: the final part of the book contains findings that I consider to be simply bombshells in their significance.
In Part 4, “Regulating Capital in the Twenty-First Century,” Piketty calls for a new “social state” for the new century, as well as a new way of taxing, a progressive tax on capital. Highlighting the United States, France, the United Kingdom, and Sweden as representative, he shows that all followed similar trends in taxation. Until World War I, all four collected less than 10% of gross national income in taxes. By 1980, the figures had increased to levels ranging from about 30% in the United States to 55% in Sweden. Since 1980, those levels are essentially unchanged.
As discussed by Alan Krueger, countries with high inequality tend to have lower inter-generational income mobility. This holds true in particular for the United States. In fact, Piketty says “the most firmly established result” of research on this question is that the U.S. has the highest correlation of income from one generation to the next (lowest mobility), and the Nordic countries the lowest correlation (highest mobility). The fable often told by conservatives that “we may have inequality, but that changes over generations” is not true today and, more surprisingly, was not true in the twentieth century when the U.S. had lower inequality than Europe.
One reason for this lack of mobility could be the high cost of college, especially among top schools. According to the Harvard financial aid website, tuition and fees come to $43,938 per year. Piketty estimates that the average (mean) income of Harvard students’ parents is $450,000 per year, which is enough to put you in the top 2% of U.S. incomes. Harvard notes that “>70% of our students receive some form of aid,” which isn’t surprising when you run the cost calculator. A family of three with just the one child going to Harvard can receive financial aid even with an annual income of $240,000.
While I have written before about the coming retirement crisis, Piketty points out that it’s not just the United States where Social Security is the only thing standing between seniors and poverty. He writes (p. 478), “in all the rich countries, public pensions are the main source of income for at least two-thirds of retirees (and generally three-quarters).” Ending senior poverty which, as he says, was “endemic as recently as the 1950s,” is the third main outcome of the expansion of the social state (after education and health expenditures). As I’ve said before, we need to keep senior poverty from reappearing.
Piketty considers the future of pensions in a low-growth environment. He notes that in pay-as-you-go (PAYGO) systems, such as Social Security was before the creation of the Trust Fund in the 1980s, “the rate of return is by definition equal to the growth rate of the economy.” Thus, he says, it would be wise to promote rising wages, for example through increased education funding and even policies to increase the birth rate (pp. 487-88). When r>g, however, it seems logical that money for future pensions should be invested to take advantage of the higher return on investment. That was one of the arguments for privatizing Social Security. However, transitioning to a PAYGO system runs into the huge problem that “an entire generation of retirees is left with nothing.” Of course, this is exactly what has happened in the United States and why we are looking at a looming middle class retirement crisis. However, it has not taken place in the Social Security system, but in the area of private pensions. That is, while public pensions in continental Europe equal 12-13% of national income (p. 478), they are only 7-8% in the United States so, traditionally, private pensions picked up the slack. But we now face a situation where 49% of private-sector workers have no pension at all, 31% have been stuck with a defined-contribution plan (401-k, 403-b, etc.), and only 20% have a true pension. Since the 1980s, workers have been transitioned off of defined-benefit pensions and on to — nothing! Well, almost nothing, as we can see from the $6.6 trillion shortfall between what people need to maintain their current standard of living and what they’ve actually saved for retirement.
Moreover, investment-based systems suffer from having much higher variance in their returns, a problem that is magnified when investment accounts are individual rather than collective, i.e. as with the Trust Fund. Indeed, as Piketty says, “the rate of wage growth may be less than the rate of return on capital, but the former is 5-10 times less volatile than the latter.” This is especially a problem, I would argue, when the level of retirement benefits is low relative to pre-retirement income, as it is in the United Kingdom and the United States. Piketty’s preferred solution is to keep PAYGO pensions, but supplement them with guaranteed rates of return for small savers that are closer to r than to g. However, this may have problems of its own. First, where will lower-income people get the money to save in the first place, with falling real wages and all? Second, how will government finance the guarantee in a way that is cheaper than just expanding Social Security? Expanding Social Security has the advantage of shielding individuals from the volatility of the market (and the fact that small investors earn lower rates of return than large investors) while offering a risk-free return (the Trust Fund is invested in Treasury bonds).
Piketty next turns to the progressive income tax, which he calls “the major twentieth-century innovation in taxation” (p. 493). However, in the twenty-first century, it faces two related challenges. First, it is being undermined by international tax competition, including from tax havens. Second, at the very top of the income hierarchy, the income tax is turning regressive, i.e., having lower rates than for those further down the income scale. This is the point Warren Buffett refers to when decrying the fact that he pays taxes at a lower rate than his secretary.
Piketty argues that one reason the progressive income tax is coming under intellectual attack today is that it was adopted chaotically, without time for all its implications to be debated. The tax, he says, “was as much a product of the two world wars as it was of democracy” (p. 498). That is, while many countries had adopted income taxes before World War I, it is only in the aftermath of the war that the top tax rate in major countries exploded. For example, the U.S. top marginal rate went from 7% in 1915 to 77% in 1918. In the United Kingdom, it went from 8% to 60%; in Germany from 4% to 40%, and in France, from 2% to 50%, all in the space of a few years.
Indeed, in both income and estate taxation, the United States was a leader with high rates. Piketty points out that the top marginal rate in the U.S. averaged 81% for the 48-year period from 1932 to 1980. While Britain had similar rates over a long period of time, no other European country did.
Okay, now for the bombshells. As you probably know, top marginal tax rates fell after 1980 everywhere among developed OECD (Organization for Economic Cooperation and Development) member countries. This seems to have increased the incentive for high earners to increase their compensation. In fact, in all 18 countries in the World Top Incomes Database, “the two phenomena are perfectly correlated: the countries with the largest decreases in their top tax rates are also the countries where the top earners’ share of national income has increased the most (especially when it comes to the remuneration of executives of large firms)” (p. 509).
Having the incentive to try for bigger pay raises, managers took advantage of the fact that “it is objectively difficult to measure individual contributions to a firm’s output” and persuaded their employers to give them big raises, often helped by the fact that their compensation committees were composed of people like themselves. So, Piketty says, it is really a question of bargaining power at the top (and don’t forget that he already told us that there is no correlation between executive compensation and firm performance).
Not only did the countries with the biggest cuts in their top marginal tax rate see the greatest increases in top income shares, but at the same time they did not show any greater increase in productivity growth. So top managers were not creating some generalized increase in productivity that they had some kind of moral claim to. In fact, as Piketty points out, productivity growth was 2.3% annually from 1950-1970 but only 1.4% per year in 1990-2010. Yet it is the latter period in which executive pay mushroomed, not the former.
You can probably see where this is going. The entire idea that people’s pay level is based on their marginal productivity, such that they “merit” the incomes they earn, is bunk. It is innately hard to measure marginal productivity, and some people have more bargaining power than others (not to mention greater incentives to bargain hard) for reasons that have nothing to do with productivity. In fact, Piketty, Saez, and Stantcheva found that executive could achieve big raises without great performance most easily in countries with the lowest top marginal tax rate. Thus, the theoretical edifice for the claim that inequality is “fair” collapses.
What can counter the massive increase in incomes at the very top of the distribution? If we stick with income tax, Piketty says that the optimal top marginal rate in the United States is 82% (p. 512). This would apply to the top 0.5% or top 1% of incomes only. This would not affect productivity because it would largely wipe out some economically useless activities. Because those activities would disappear, a tax that high would not raise much revenue. If the United States wanted to raise revenue, Piketty suggests a marginal tax rate of 50-60% on incomes in the top 5%. It’s important to note that while the United States could do this because it is the world’s largest national economy, it is not possible for European countries unless they achieve fiscal coordination. This is extremely difficult due to EU rules requiring unanimity on votes affecting direct taxation (personal and corporate income tax).
The ideal solution, he argues, would be a global tax on capital plus “a very high level of international financial transparency” (p. 515). Piketty recognizes that this is infeasible right now, although he says it might be possible “incrementally,” at the European level, for example (which would still run up against EU voting rules). He argues, though, that the alternative could well be worse: If people view inequality to have reached unacceptable levels, the response might be a breakdown of the global economy via widespread protectionism. (I offer a similar argument at the end of Competing for Capital.) A tax on capital allows high levels of trade to continue while directly addressing the problem of inequality.
One important element of achieving international financial transparency is shutting down bank secrecy. For Piketty, without solid information on inequality (and hence on individuals’ ownership of capital), it is impossible to have a democratic debate about the type of taxation and government services that individuals want. Tax havens and their defenders will whine about this being an intrusion on people’s privacy, but Piketty’s response is compelling (p. 522):
No one has the right to set his own tax rates. It is not right for individuals to grow wealthy from free trade and economic integration only to rake off the profits at the expense of their neighbors. That is outright theft.
For this reason, he advocates the automatic exchange of bank information to ensure transparency.
Piketty argues that we should not rely solely on an income tax. The fact of the matter is that capital ownership generates much economic income (such as capital gains) that doesn’t have to be declared year-to-year. As a result, income tax filings grossly understate rich people’s true income. This means that the problem of tax regressivity at the top is even worse than he discussed under the income tax. He goes back to the example of L’Oréal heiress Liliane Bettencourt. Her wealth exceeds €30 billion, and her rate of return is somewhere between 6% and 7% a year (€1.8-€2.1 billion in economic income). Yet she herself has said that she has never declared more than€5 million per year in income. Even if she’s paying 50% of this figure in income taxes (France’s top bracket is currently 53%), that €2.5 million is barely 0.1% of her economic income. It is hard to get taxation more regressive than that.
Not only would a tax on capital create financial transparency while raising a modest amount of revenue (Piketty envisions 2% of European GDP), but Piketty argues that an extraordinary tax on capital on the order of 15% could wipe out Europe’s current debt problems. As he says (p. 540), “From the standpoint of the general interest, it is normally preferable to tax the wealthy rather than borrow from them.” The alternatives are inflation, which governments have frequently used, and austerity, which Europe is currently using with predictably bad results. Moreover, he says, it is possible to get more precise targeting of the distributional consequences you want with a wealth tax than with debt repudiation or inflation.
I mentioned before that Piketty believes that the United States is large enough by itself to levy an 82% top income tax rate, whereas Europe isn’t. The same is true, in his view, on a capital tax (he also thinks China might be able to effectively tax capital). Europe’s problem is that tax competition is particularly intense, a problem he lays at the feet of the smaller economies, particularly Ireland (no surprise there). Piketty sees the creation of fiscal union (with EU-wide corporate income taxes apportioned to each country by formula) as no more utopian than the idea of creating the euro. Indeed, he seems to think that political union is ultimately necessary to end destructive tax competition, though he is pleasantly surprised at the traction gained for instituting a European financial transaction tax. He proposes a “budgetary parliament” for the Eurozone that could make democratic decisions on fiscal matters, and argues that it should not be bound by any fixed rules limiting deficits or debt — which will be nearly impossible to get Germany to agree to.
He concludes by reminding us that we cannot escape the possibly infinite concentration of capital that follows from r>g unless governments take proactive policies, most importantly an annual progressive tax on capital. The inequality r>g does not follow from market imperfections, so it cannot be solved simply by making markets more competitive. While he acknowledges that there is a real risk that increased European integration could lead to the shriveling of the social states constructed in each nation, the problem is that this is inevitable in the absence of creating a political entity large enough to regulate capitalism. “If we are to regain control over capitalism, we must bet everything on democracy — and in Europe, democracy on a European scale.”
For those of us in the United States, we already have a political entity big enough to battle the pressures for greater inequality. But of course we have numerous obstacles in our way as great wealth buys high levels of political influence, especially in the Citizens United era.
My next post will provide a summary and critique of the book (after a chess tournament break).
Cross-posted from Middle Class Political Economist.
“it would be wise to promote rising wages, for example through increased education funding and even policies to increase the birth rate (pp. 487-88). When r>g, however, it seems logical that money for future pensions should be invested to take advantage of the higher return on investment.”
I agree that more people working equates to more revenue for the present and the future. I do not feel this is going to happen in the US given globalization, automation, etc.
– What would It hurt to shorten the work week from 40+ hours to 32 hours?
– Millennials are the next cohort larger than the baby boomer cohort. They are scrambling for jobs and are the best educated cohort. With this in mind and the fact that they are already less employed than other cohorts, how does Piketty reconcile the education/employment argument? The discussion seems circuitous in in that more education equates to more work when it does not appear to be occurring.
– Even if we were to educate more people, we have not addressed those who may not seek higher education for other reasons. What is the intent for them? Guaranteed income? Some type of manual labor?
You did a lot of work on Piketty and I enjoyed the series. Thank you for making the effort.
while well intended this post fails to understand Social Security… i would guess that so does Piketty.
The point of SS is NOT to let you retire at the same standard of living you had while working. The point is to let you retire at all… with a minimally decent standard of living.
If you want to create a welfare state… good luck to you. but meanwhile don’t destroy Social Security by trying to make it what it isn’t, was never meant to be, and cannot be.
Meanwhile it hardly seems sensible to increase the birthrate at a time when all environmental projections are suggesting the planet has passed a “sustainable” level of population…. at the present standard of living.
you could certainly “transition” to a “market based” retirement system by having workers invest part of their wages is a government managed market-based plan. there would be no reason to cut… or change in any way… social security, which would remain as the “if all else fails” back up.
it would have to be government managed to avoid the failures of the current fully privatized (401-k) system that was supposed to supplement SS. State pension systems seem to work pretty well on this basis.. they could be expanded to include all workers in a given state. The politics should be fairly simple. But I think there would need to be some oversight to keep the STATES from cheating the workers as has begun to happen.
meanwhile it is simply intellectually flabby for people… however brilliant… to look to “Social Security” to solve all of society’s problems.
Let SS do what it does well. See if you can build something completely separate to do what SS does not do. Trying to ride all of your good intentions on the back of SS will simply break the back of SS and make the people who hate the whole idea of worker security happy.
This has been a useful series, and generates good comments–thanks. Re Piketty’s findings on optimal tax rates, FWIW, Angry Bear (Kimel) has in the past offered considerable evidence and analysis that the optimal rate for US economic growth probably is close to 70 percent–historically applied to high levels of ordinary income and dividends (above 7-figures in today’s dollars) but not to long-term capital gains. (This was meant to encourage company use of receipts for growth to enhance capital gains, rather than use of receipts for high salaries and dividends that could be used for anything.) Elsewhere, Saez has cited a similar 70 percent figure as optimal for US government revenue-raising. Not ready to toss these findings away based on Piketty.
regarding generational mobility re wealth, and sweden vs us.
if you start out with a homogeneous population, you are going to see more “mobility” than if you start out with a population already separated by “differences”… i will not speculate as to the cause of those differences, but anyone who has any experience of people at different levels of wealth will have no trouble recognizing that differences in lifetime levels of wealth-achievement have much more behind them than differences in “opportunity.”
nor is it obvious that “improving education” is going to increase the incomes of workers as a class. i know too many people with ph.d’s to believe that “education” is any more than the way the ownership class trains the level and type of servants it needs… and trains more than it needs in order to bring down the price of that kind of labor.
The fact that the SS Trust Fund is invested in treasury bonds has nothing to do with the “rate of return” to your SS “investment.” That rate of return is based on the growth in wages which is a function of growth in average wage and growth in population.
Because of “inequality” the growth in wages of workers below the cap has been slower than the growth in wages above the cap. The “obvious solution” of raising the cap is problematic because those workers over the cap would not enjoy a commensurate increase in benefits, nor would they want one, because they believe they can make a better return on their own. Meanwhile they do not object strenuously to SS as currently configured because they DO understand the value of SS as insurance up to a point.
Since workers below the cap can continue to enjoy growing benefits simply by raising thier own “tax” (its really a savings rate) by one tenth of one percent per year for a number of years until either the economic/demographic situation stabilizes OR SS does become an unreasonable burden…. it is far, far from that now.
Making it into an unreasonable burden on “the rich” may seem like the cosmic justice way to “fix” SS (it ain’t broke), but if you try it it will just give the SS haters the ammunition they need to cut benefits, and if you succeed, you will just turn SS over to the SS haters who will turn it into means tested welfare by way of destroying it.
Rates of return for “small savers” are ALREADY adjusted to levels far above what most savers, small or otherwise, could hope to achieve on “the market.”
It is unconscionable that people who don’t know anything about Social Security should lazily offer opinions about about it.
Buffet’s angst about paying a lower tax rate than his secretary could be eased by his knowing that Social Security is not a tax. It is simply a way to protect his secretary’s savings from inflation and market losses, while allowing workers to insure each other against a lifetime of lower than average wages.
If he really feels bad for her, he could give her a raise.
This does NOT mean I don’t believe in “progressive taxation.” But the yammering about it here is ignorant and unrealistic. The high marginal taxes on the wealth were “needed” because the money was needed and the wealthy were the ones with the money. That’s the way it should be. High marginal taxes merely to “equalize” income between the rich and the poor…while no doubt “democratically” popular. … will likely backfire… those tax havens… and they are offensive to at least this worker. If you give me a fair chance to earn a fair wage, and a government that prevents criminal business models, i would far rather take care of my own needs than rely on a government dole. If the rich were smart… and they are not…. they would recognize this themselves.
Thanks for this series of informative posts. I second concerns from previous commenters on depending on growth (other than technological growth) to fix our problems, and on converting Social Security to an investment scheme – not that these are Piketty’s proposals, but one thing that might be lacking in his assessment is to couple his financial analysis to analyses of resource depletion and other global trends that are linked to growth in consumption.
“…The fable often told by conservatives that “we may have inequality, but that changes over generations”…”:
There is some truth in this fable: people like Buffet, Gates, Welch, Turner, etc. can can start off among the 5% or 10% (occasionally even lower) and rise to the 0.1% or 1% – but so what? Inequity is still inequity, and the usual case is that they get there by being … not nice guys, as when Gates moved his company from Arizona to Seattle when Arizona told him he had to pay his clerks and secretaries overtime when he wanted them to work for 60 hours a week on 40 hours pay. (Don’t get me started on Jack Welch.)
and just to continue my raving… i don’t see the advantage of the lower quintiles all moving into the higher quintiles while the higher quintiles move into the lower quintiles.
an economy in which everyone doubled their “real” income every generation without changing their RELATIVE position might be “better” for everyone. or would it?
if in fact above a certain level “poverty” is seen as “relative” to the Jones’s… as certainly is at least somewhat the case, probably you don’t want people to feel locked in to “their place.” (less than someone else).
i suppose one of the secrets to Reagan’s success was that he convinced people that he was preserving an economy where they “could” get rich. and i suppose that after that didn’t happen, there may be some disgruntlement.
but i can’t see where getting more by taking it away from other people makes anyone feel better… except those who are still fighting the revolution of 1848.
again… i am not opposed to taxing the rich. and i am certainly not opposed to government efforts to reduce poverty and create realistic opportunities. i am opposed to a brain dead mantra that can’t think of anything but “tax the rich.” and that mostly because it is not only not effective, but counterproductive.
@PJR, Saez was one of the authors of the “82%” paper (it’s linked in the article). In any event, Piketty says not to be fooled by the apparent precision of the result, because tax rates need to be decided by informed debate and democratic experimentation. I’d certainly be happy with 70% even.
@Coberly, I’m not sure why you think Sweden is so homogeneous. It has a higher percentage of foreign-born population than the United States (http://en.wikipedia.org/wiki/List_of_countries_by_foreign-born_population). And it’s not like Piketty or I are surprised that countries with high inequality have low income mobility — Piketty is just pointing out that conservatives who argue the contrary with a straight face are simply wrong.
@Coberly, Piketty’s point on high returns for small savers is outside of Social Security, not within in it, so I am not seeing your point.
I don’t think I understand your opposition to a higher replacement rate for Social Security. You seem to be saying that trying to make it better will open the gates for its political opponents. But they seem to be doing their best to cut it already. At a technical level, it’s already universal and spreads risk. Improving it would make it cost more, but there are enough examples of countries successfully taxing 40-55% of GDP out there to know it is a feasible variety of capitalism. And by successful, I mean they have productivity per hour worked equal to the U.S.
“He notes that in pay-as-you-go (PAYGO) systems, such as Social Security was before the creation of the Trust Fund in the 1980s, “the rate of return is by definition equal to the growth rate of the economy.”
I don’t know if the parenthetical about Social Security was in Piketty or seen as implied in him by Thomas but either way it is just wrong on the facts.
The Trust Funds were NOT created in the 80s nor did their functions change in any important way. In particular Social Security remained Pay-Go in the late eighties and early nineties and never relied on Trust Fund assets or interest earnings on them to fund even a penny of benefits.
Two points here. One an examination of the actual operations of the Trust Funds since 1941 shows that there was proportionally more ‘prefunding’ of Social Security in the 40s and early 50s than ever after, by the measure used by the Trustees Social Security in 1955 had higher reserves than it does today. In fact if you examine the history of SocSec the only period where it was truly Pay-Go in the sense of income balancing cost with a prudent reserve was from about 1962 to 1971.
Two an examination of those same numbers shows that Social Security was technically insolvent every year from 1983 to 1993, the deal that came out of the Greenspan Commission arguably put SocSec on a glide path to solvency but the numbers how that it didn’t reach that point for a full decade.
The idea that the Trust Funds were created in 1983 and used as a vehicle for pre-funding Social Security and/or financing Reagan tax cuts for the wealthy is widespread among progressives. But in the cold light of the data tables these are simply myths.
The First Report of the Trustees of the Social Security Trust Fund was released on Jan 1, 1941. This was not some pre-cognitive event nor were the reported operations of the Trust Fund for the year 2040 significantly different than those of say 1985.
To repeat Social Security was more pre-funded in 1950 than it ever has been since. And for some of the same reasons that Social Security today carries reserves equal to nearly 4X cost. In both cases there weere and are expected surges in beneficiaries scheduled over the next years, in 1950 because the Title 2 program was finally being fully phased in, I’m 2014 through more purely demographic numbers.
The 1983 deal was important. But it didn’t fundamentally change anything about Social Scurity on the scale of the Amendments of 1939, 1950 or 1955 did. Each of which fundamentally changed the structure of the program. While the 1983 deal just tinkered with the funding but didn’t in the larger scheme change anything fundamental.
1940 not 2040.
(2040 would be pre-cog indeed)
you want to “improve” SS… make it pay more?
fine. good idea. just get the workers to agree to pay more in so they can get more out.
don’t use SS as a vehicle to win the revolution… i.e. make the rich pay for all the normal living needs of the rest of us. the idea is offensive to me, and i’m not rich.
currently most of “the rich” don’t give a damn about SocialSecurity one way or the other. It is the insane rich (Peterson) who are trying to destroy it. And their big lie is that SS “will be a huge tax burden on us (the rich)” You are trying to turn Petersons lie into a true.
Meanwhile SS is set where it is as a reasonable compromise between forced savings of enough to avoid the worst possible poverty in old age, and allowing workers to spend their money the way they want to.. including by investing it for higher,but riskier, returns.
SS is neither a welfare program nor an investment plan. But it works. People who don’t understand what it is are always offering bright ideas for “fixing” it.
As for the Swedes and their upwardly mobile immigrants… I wasn’t aware they had been in Sweden long enough to see the wealth change over generations. While Americas poor have always been with us. I have a feeling that a serious look at your claim would dissolve in “yes, but’s”
@Bruce, that’s my error, not Piketty’s. Thanks for the correction.
To add a point that Dean Baker makes all the time.
If the traditional relation between labor productivity and real wage that held in most of the post-war period up until 1980 and then again briefly in the late 1990s had held up then Piketty’s argument about Pay-Go systems would be right on the mark. Under those conditions Social Security’s Low Cost alternative demonstrates that the system would self fund without any need for FICA increases.
Which is maybe where Dale and I have our important point of departure. It is certainly true that even under Intermediate Cost projections of real wage growth over the next few decades that the cost of fully funding Social Security’s scheduled benefits is just a fraction of that (around 6%). So put that way and so in comparison to any other plan to ‘reform’ Social Security directly this makes some a FICA based increase the best possible deal for workers on a bang for the buck calculation. But only if you confine yourself within the Intermediate Cost Alternative. Which Dale for some very good and defensible reasons (both tactical and strategic) is willing to do but which I (for reasons that seem equally defensible) disagree.
Let me put it this way. Social Security is not in crisis and can be ‘fixed’ with minor tweaks to the revenue formula. Fixes which need not require any adjustments to the current cap formula which itself exists for a reason. On the other hand you have a much larger argument that we could dub the Piketty-Baker-Rosser (and perhaps Lambert) position that there is a fundamental distortion of the relation of labor share to ‘g’ as compared to that of ‘r’. And it just turns out that certain approaches to reducing the Piketty formula of “r > g” turn out to fully fund Social Security along the way. And if you will inadvertently.
That is sure we can fix Social Security even out of the currently depressed labor share of productiviy gains. At a price that adds up to less than a dollar per worker per week per year. On the other hand any successful attempts to adjust “r > g” on a pre-tax basis shift in share of labor productivity to (duh) labor addresses most of Piketty’s larger thesis while solving Social Security’s current paper solvency issues as a mere aside.
There are good reasons to put the FICA based fix ahead of the more problematic Real Wage fix. But those reasons are primarily political and not economic at all. Fix the relation between labor productivity and real wage and all kinds of things become possible. At the risk of being even more tedious than normal just about every item on the progressive economic wish list from funding Heat Start to funding Social Security can be accomplished via the simple five word slogan:
More Jobs. At Better Wages.
(Which doesn’t mean we shouldn’t listen to and implement Coberly’s ideas in the meantime. Belt AND Suspenders.)
and bruce webb
i am sure you are both better educated and smarter than i am. but i can’t follow the logic that you each think is so compelling. best if i just drop out.
there are good reasons to fix the economy. among them would be that fixing the economy would automatically fix SS. but there are two problems with the recommended approaches: “do nothing” leaves you increasingly vulnerable to what happens when “nothing” doesn’t work. and “tax the rich” as the only “something” on the table is far more likely to provoke an energetic backlash than a very simple case by case “what can we do about this?” built on negotiations with even “the rich.” they will accept tax increases they don’t see as a black hole of welfare. and they will accept changes in government policy that protect even them from the bad guys.
but i have said that so many times and get back replies that vary from hostile to merely tangential.
gotta tend my garden.
MJ. ABW. is neither “Nothing” or “Tax the Rich”
The question of whether we should attempt a direct Social Security fix OR some steps on the income inequality front FIRST is mostly a political one. And as even Dale admits policy chances on the income side would positively benefit Social Security solvency. Where he seems to take offense is any discussion of Social Security that doesn’t start and stop with his proposal, or at least to rhetorically privilege it over any other discussion that touches Social Security or uses its financing in the rhetoric of that discussion.
This single minded focus repeated in every comment thread that even touches on Social Security can ba little tiring in the “Yeah we get that” sense. And to the degree that those comments can tend to take on a dismissive tone it is not surprising that responses at times drift into “hostile to merly tangential” territory . Particularly in situations where insertion of the Northwest Plan into the discussion is itself arguably tangential
“That reminds me of the time that I —–“. Yeah we knew it would.
well, i went home. but here i am taking a peek again.
i’d have said nothing, but being called out by name seems to require at least a brief reply.
Mr Bruce misunderstands what I say… but that’s not unusual. And if he is tired of hearing “eighty cents” it is odd that he is not tired of hearing “nothing” or “raise the cap.”
i would have shut up about eighty cents long ago if those who call themselves defenders of Social Security (not Bruce, who at least saw that eighty cents per week “would” solve the “problem”) were not working as hard as the Petersons to keep off the table and away from the people the FACT that a raise in the payroll tax paid by the workers of about eighty cents per week per year WILL solve the “Social Security Crisis” for as long as it lasts. When it … the crisis… stops lasting, then “nothing” BECOMES “the coberly plan.”
But “do nothing maybe they will go away” is not an intelligent policy while the huns are gathering at the gates.
And “raise taxes on the rich” is not an intelligent political message when the Petersons are shouting “they will raise taxes on the rich.”
Roosevelt didn’t think so either.
On the other hand… no one is listening to any of us. And it wouldn’t matter if they did. People CANNOT let go of the bright ideas of their youth. They can be led, but they can’t be taught.
One of the biggest fallacies (and there are many) Picketty falls into here is the r>g assumption. News flash: IT’S WRONG.
Looking at an article from two years ago, which looked at GDP growth vs. S&P500 returns over the previous 27 years, r>g only happened in SIX of those twenty-seven years!
How can this be? Don’t those top 500 companies have all the leverage to manipulate the markets? Don’t they have all the hooks in the crooked politicians mouths?
The fact is that the most growth happens in small companies — little mom-and-pop like Cabela’s, which started as a mail-order business on a kitchen table selling fishing lures Cabela picked up as a bulk purchase at a show, or like my friend’s company, Classic Kitchens, which he does so well he no longer accepts jobs if the materials will cost less than $30k.
The big investors simply cannot invest in such operations — because the investor with $1M cannot interview thousands of people to figure out which hundred to invest $10,000 with. Big investors have to make big deals — smaller one’s are not worth the time, even if they provide greater returns.
Seems I misread the chart — there are two different y-axes.
Never mind. Can we just delete my previous comment? 😀
Jack, not so fast deleting your first comment. 2 axes indeed, but follow your original idea anyway.
I calculated cumulative growth for the S&P and GDP over the 27 year period from the article you cited. The average annual growth rate for the S&P was 5.72%, while GDP growth averaged 5.06%. The S&P fell behind the GDP growth rate in 9 of the 27 years, or 1/3 of the time.
While your premise was wrong, your intuition was right. With all of the supposed influence that the largest corporations have, they still have not been able to outpace the economy by even 1% per year in the medium run.