Economists fight over “Capital”: Piketty vs. establishment

BOSTON – N. Greg Mankiw, Harvard economist and former chair of George W. Bush’s Council of Economic Advisors, was reduced to making personal attacks as he tried to overcome, evade, deny and confuse Thomas Piketty’s key theses about capitalism and its inherent tendencies toward unsustainable inequality. For example, Mankiw to Piketty: “I like rich people – you clearly hate rich people – but you made millions on your book.”

Piketty, a French economist, is the author of last year’s transformative work, “Capital in the 21st Century.”

Mankiw is a persistent apologist, to the point of prostitution, for anti-democratic robbery of working people by the billionaire class, the 0.1 percent, and its giant corporate extensions. And he knows no shame. He recruited some fellow scalawags and merchants of doubt to help him stage this public attack on Piketty, at the Jan 3-5, 2015, American Economics Association annual gathering here.

Mankiw’s presentation was titled: “Yes, r [the rate of return on capital] is higher than g [the growth rate] – so what?” Professional economists and graduate students in economics crowded, standing room only, into the grand ballroom of the Sheraton Hotel in Boston’s Back Bay to hear Piketty respond. They were not disappointed.

Here are the rest of Mankiw’s “gang of four,” their primary criticisms, and Piketty’s responses:

David Weil of Brown University attempted to water down Piketty’s definition of capital to include not only all marketable wealth (land, equipment, housing, financial assets, patents and copyrights, etc, both public and private) but also “human capital.”

Human capital is an important emerging concept in economics, but it has a fairly squishy definition. Some include the cost of all education from infancy onward. Others include only such education and training, or experience, as may separate unskilled from all other forms of labor. But, in any event, Weil’s objective was to nullify Piketty’s observations and data showing very high concentrations of wealth, by including the costs of education and adding them to the “wealth” of workers. Whether the worker was indeed starving from unemployment despite his “wealth” need not be considered in this view.

Piketty refuted this almost out of hand by explaining that human capital could only be considered as wealth in any economic sense if the worker were enslaved. This would be wealth for the worker’s owner, not the worker, of course.

Weil also tried to call Social Security “transfer wealth” – in other words, capital for the worker – with the same objective in mind. Mainstream economics often considers capital and “streams of income” as equivalent in some contexts. Piketty’s retort on treating Social Security as capital generated lots of amusement: “I only have three problems with that: 1) it does not “belong” to the retiree; 2) it isn’t traded or used as collateral on loans; 3) it is extinguished on death.”

Alan Auerbach, a University of California, Berkeley, expert on taxation and social security, and  Kevin Hassett of the right-wing American Enterprise Institute took aim at Piketty’s proposal of a global wealth tax on capital income as a starting point in reversing income inequality.

I have found it is a simple matter to determine which academic or pundit economists are either directly or indirectly in the pay or patronage of the billionaire class: Their primary assignment is always to oppose taxes on the rich, corporations, or capital income – no matter the context or circumstances.

For Auerbach (and Mankiw) this takes the form of proposing a “progressive consumption” tax in place of any tax on capital, global or otherwise. Sales taxes, or value-added taxes (as in Europe) are consumption taxes. However, as Piketty pointed out, it’s impossible to define what is “consumption” for a billionaire. Should you count the politicians they buy? The personal jets they write off for business expenses? The academics they buy? (The crowd cheered him here, knowing Mankiw is a wholly owned property.) Further – although consumption taxes are widespread in Europe, they are not progressive, but flat.

Then there is the matter of political fraud. Mankiw and Auerbach talk “progressive consumption,” but when Bush cut taxes on the rich, there was no mention of progressive consumption tax replacement then!!

Auerbach also took aim at Piketty’s determination of the historical rates of return on capital (between two and seven times the rate of economic growth) by alleging much lower, even negative, rates once they were “risk adjusted.” That implies there are lots of loser capitalist investments that are undercounted. But the billionaire class has such inside information that they rarely lose. And when they do, the government they have bought bails them out as too big to fail.

Piketty rebuffed all this with a telling anecdote from a direct conversation he had with Bill Gates, richest man in the world. Gates proclaimed himself ready to pay taxes on his consumption, but wanted his capital left alone on the theory he knew more productive ways to use it than the government could ever achieve. Piketty asked Gates if he were prepared to pay taxes on his political “contributions” since billionaires can plainly consume politicians. He asked Gates if it was really his position that each billionaire should pretty much decide their own tax rates unlike the rest of the population.

Both Piketty and Emanuel Saez, another pioneer researcher on inequality, have co-authored an important paper showing that consumption taxes without wealth and income taxes on the rich do little or nothing about inequality. Both kinds of taxes are necessary. Indeed, tax rates of 40%-60%, or more, on capital wealth show no negative effects on either growth, investment or productivity.

It is difficult to fully explain the force of Piketty’s arguments and framework at what feels like a turning point in mainstream economics. He makes his presentation in imperfect English, but with wit and generosity of spirit. At the same time, he is made of some strong stuff. He turned down the French government’s highest honors this past week in protest against the austerity policies of the Francois Hollande government.

Mankiw put together some of the top names in economics to defeat Piketty. But among the several hundred attendees for this discussion excitedly talking outside the hall, the sense that Piketty had knocked all the challenges out of the park was overwhelming.

Photo: Economist Thomas Piketty. Wikimedia Commons