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Insightful, provocative and well written, but I don't agree with solution
on May 25, 2014
I'm a software developer by trade, but for career advancement reasons I obtained financial certification a few years ago with CFA Institute, and am now required to maintain my professional credentialing through continued education. This book has generated a lot of discussion in recent months, so I thought it would be a worthwhile read. I was not disappointed.
First, I have to say that the English translation is very good throughout most of the book. I get the feeling that towards the end they were a little rushed to get to print, but overall a very nice job.
As I said, I have only recently started learning finance as an adjunct to my primary career (I work as a systems analyst for a small fixed income investment firm) and as part of this I have begun to learn the fundamental theories of economics and the various systems, predominantly monetary and market, which underpin it. So I can't really argue the merits of this book from an academic basis, as I'm a neophyte in this area.
However, I am encouraged by Piketty's assertion at the end of his book that it is precisely people like me who should be taking a more active interest in how capital is distributed in today's world, and in the political systems that serve to enable such distributions. The author wants the little guy to get the big picture, and has written a book that speaks to us.
So, from a little guy's perspective, I have a few observations to share about Piketty's book:
- Data. In recent days (I am writing this in late May 2014) doubt has been cast in some conservative circles as to the accuracy of Piketty's data collection methods. I get the impression that the accusations themselves are overblown, as the data trend lines for some graphs presented by the Financial Times differ mainly in degree, not direction, to those presented by Piketty. However, some plausible gaps have been identified in the data presented in the book, and these need to be addressed in a future edition.
- Plausibility. Data aside, do I agree with Piketty that the rich are getting richer and the poor poorer? Well, yes, if one believes his data, there is certainly a trend over the past 30 years that indicates an ever-increasing concentration of wealth in the upper decile of the population. But Piketty also concedes that the share of wealth in the (patrimonial) middle class, measured both in terms of income and asset ownership, has also increased in post war America and Europe, and is rising in Asia. In other words, the rich are getting richer, but the less rich have also never had it so good (by pre-WWI standards). The poor who occupy the bottom 50% may indeed be getting poorer, but they have always been poor, at least as far back as the data allow us to measure such things. In fact, they were much, much poorer over a century ago when one takes into account what they had access to in terms of goods and services.
- Solutions. The primary solution offered up by Piketty as a means to stem the growing divergence of capital is a progressive tax on the top earners, especially the so-called "rentier" class, whose ownership of assets, either through inheritance or entrepreneurship (or a combination both) allows them to continually accumulate income without necessarily generating jobs (r > g).
A progressive tax idea is nothing new, and is obviously at the core of all the controversy, pro and contra, surrounding Piketty's work. After all, we are talking about taking something from one set of people and depositing it elsewhere.
It's the elsewhere that bothers me. As Piketty notes, taxes are necessary, as they provide for the common defense and basic social needs of a society. With the aging of the population in the Western world there will be an ever -increasing strain on budgets to provide care to people whose life expectancies far exceed those of their not-too-distant ancestors. Fair enough. We need to have mechanisms in place to care for the vulnerable in our society.
My problem with progressive taxes, however, has to do with human nature itself. We naturally tend to abhor those in the top centile of earners who loll around all day, while earning income from others (in the form of rents of one sort of another), on account of the assets they inherited. Deep down, I think almost all believe that one should be worthy of his wage. The idea of meritocracy is a universal principle, one could argue a moral one. If you have a good idea and are willing to work for it, you should be rewarded.
So it is natural and good that we look with disdain upon people who are enjoying the good life without having to work much to maintain that lifestyle. This applies just as much to the lazy rich trust fund kid (think of the Dudley Moore movie) as it does to the listless welfare recipient. We just know it's not fair. It's funny though how we are always happy for the lottery winner, as if an act of fate based on random number selection exempts them from the same kind of scrutiny as those who benefit by other means.
So back to taxes. A yearly progressive tax, based on net assets, would definitely help to close the divergence gap between the top decile and the rest of us. The question is, what will be done with that money? Piketty mentions education as the primary beneficiary of such funds. This is not surprising, as he is, well, an educator. Yet, I wonder if his arguments regarding super-manager salaries and the concept of "marginal productivity" cannot be equally applied to that of education. In other words, what guarantee do we have that throwing money into the public sector is going to make our kids smarter? Will we end up with more bureaucrats making (semi) super-manager salaries, followed by super-pensions in the last three decades of their life? If you want a taste of this, Google salaries for state employees in Massachusetts. You'll find that most of the highest paid occupy positions in the half dozen or so state universities. What exactly are all these people who are making 100k+ doing? And are they in fact productive?