We now have two leading Democrats talking publicly about the implications of Thomas Piketty’s Capital in the Twenty-First Century: Jason Furman, the head of the Council of Economic Advisors, and Hillary Clinton. Piketty met with the Council of Economic Advisors on his recent trip to the US. There is no substance in the reporting of the event, but Furman took up the book in a speech to The Institute of International and European Affairs in Dublin, Ireland on May 7. Then Hillary Clinton spoke on the subject to the New America Foundation. I could pay $175 for a transcript, but I’ll settle for media coverage. It’s pretty much what you’d expect from the timorous leadership of Not-Republicans Party: simple common sense steps that are already part of the supposed policy structure of the party and just happen to be sufficient to solve the problem, just like banning plastic shopping bags as a solution to climate change.
First Furman. The New York Times headline is “Obama’s Top Economist Has Some Problems With Piketty’s Book”. In the speech, Furman follows Piketty in breaking down inequality into into three categories: a) within labor income, b) within capital income and c) in the division of income between labor and capital.
Overall, the 9 percentage point increase the share of income Piketty and Saez find going to the top 1 percent from 1970 to 2010 is accounted for by: 68 percent increased inequality within labor income, 32 percent increased inequality within capital income and 0 percent a shift in income from labor to capital.
That last sentence seems impossible, given the decline in the labor share. The data comes from Piketty and Saez and from the Congressional Budget Office. Furman goes further, and provides information about the labor share from the National Income and Product Accounts. He says this shows that about 20% of the increase in inequality is generated by a shift in income from labor to capital. He describes this chart as showing that the big decline in the US labor share occurred only after 2000. I’d say that chart shows general declines since 1960, and a crash beginning with the Second Coming of the Bushes to power, uninterrupted by the current administration.
Furman then quibbles with Piketty’s argument that the rate of return to capital will exceed growth, resulting in an increase in inequality. He makes three points, all arising from Econ 101. When the supply of capital increases, the price of capital will go down. The amount of capital is determined by people’s willingness to save. The more they save, the lower the return to capital. The third point is whether the rate of return to capital will fall with lower growth rates.
None of this deals with the real world, where interest rates are set by central banks and have nothing much to do with the amount of savings. The Federal Reserve generally operates to benefit the rich, as Nomi Prins shows in her book All The President’s Bankers. We’ve all seen the drive to privatize government activity and ownership of assets. That’s another way capital captures increasing returns regardless of the growth rate. Furman doesn’t address Piketty’s point that the central power of capital is its ability to influence political outcomes in its favor, a point made in both economic studies and studies of oligarchy, such as Jeffrey Winter’s book Oligarchy. Furman doesn’t allow for the fact that most of the working class and much of the middle class, using Piketty’s definitions, are unable to save. All in all, Furman’s argument seems weak.
Turning to solutions, Furman offers mostly pap, which provides an easy segue to Hillary Clinton’s speech. It is “was laced with statistics and details from economic and social studies” says the New York Times, and tries to rally the progressives and appeal to populist sentiments. She says the big problem is upward mobility, and the solution is education. Tell that to the legions of college grads working at restaurants and unpaid internships. Or to the people in Jennifer Silva’s Coming Up Short, who bought into that human capital nonsense, invested in themselves, and can’t find jobs anyway. Oh, and then there’s this:
She added that the Clinton Global Initiative, for its conference in Denver next month, is assembling a network of businesses that are committed to “expanding hiring, training, mentoring — hopefully to create a virtuous ripple throughout the economy.”
That’s a joke, right? Or is it Noblesse Oblige?
Clinton doesn’t mention higher taxes, which is the solution offered by Piketty. To his credit, Furman does.
Since 2009 the United States has made three sets of permanent (or semi-permanent) changes to its tax code relative to the policies that were previously in effect: (1) many of the high-income tax cuts that were initially passed in 2001 and 2003 were allowed to expire in 2013; (2) a new 0.9 percent tax on earnings dedicated to Medicare, and a parallel 3.8 percent tax on unearned income, both for high-income households, went into effect in 2013; and (3) tax credits for lower-income households with children and college students were expanded for 16 million households by an average of $900 (these expansions expire after 2017, but President Obama has proposed to make them permanent). Taken together these policies will reduce the Gini coefficient, a standard measure of inequality, by 0.6 index points—the equivalent of about half a decade of increased inequality.
Furman also discusses the importance of taxes in his policy solutions. Of course, Clinton doesn’t, despite Piketty’s potent argument that increasing taxes on the oligarchy is the only way to insure that inequality does not increase, and Furman’s demonstration that higher taxes on rich people don’t have a significant impact on growth.
In other words, Clinton continues the Democratic Party’s conservative turn. Get an education that you pay for with debt serfdom. Save for retirement if you have a job, meaning don’t buy anything except what you need to stay alive. It’s all on you, and if you fail, it’s your fault. Where once the Democratic Party at least paid lip service to the importance of solidarity among citizens, today’s party frankly embraces the pernicious doctrines of neoliberalism, with a dollop of Earned Income Tax Credit on the side.
Apparently the Democratic Party intends to continue its massive irrelevance to the lives of the working and middle classes.