It has been somewhat less than two years since Thomas Piketty's "Capital in the 21st Century" was published, and less tthan a year since its English translation was made available to those who do not speak French. In that timeframe the book created quite a sensation, and indeed I distinctly recollect that it made the cover of such disparate publications as 'The Nation' and 'Bloomberg Business Week' (I know this because I read both cover articles). Nevertheless, it is a weighty tome, and I get the ijmpression the work is more talked about then carefully read; generally it is not read at all by those on the right (and not reading it has not prevented a number of screeds being written against is, some of which are still bouncing around) but I also wonder how many in the Progressive camp truly took the time to read what it says and why...and reading Paul Krugman summarizing it does not count.
Now I don't condemn those who have busy lives and limited leisure for not completing the work. In fact, many I realize that many are not economic nerds and bookworms like myself and thus can grasp its lesson without having to parse it page by page. Nevertheless since I did, I feel qualified to both recap a little summary of the work, and also I cam across a little blurb from one of my investments that more than anything sheds a little light on the matter. I am one with those who think a good essay is sometimes one that quickly cuts throught the obfuscation and gets to a nice sharp point
Hence this unplanned contribution today
I can quote a reasonably adequite summary of the thesis from wikipedia:
The central thesis of the book is that inequality is not an accident, but rather a feature of capitalism, and can only be reversed through state interventionism.[16] The book thus argues that, unless capitalism is reformed, the very democratic order will be threatened.[16]
Piketty bases his argument on a formula that relates the rate of return on capital (r) to the rate of economic growth (g), where r includes profits, dividends, interest, rents and other income from capital; and g is measured in income or output. He argues that, when the rate of growth is low, then wealth tends to accumulate more quickly from r than from labor and tends to accumulate more among the top decile and centile, increasing inequality. Thus the fundamental force for divergence and greater wealth inequality can be summed up in the inequality r>g. He analyzes inheritance from the perspective of the same formula.
The book argues that there was a trend towards higher inequality which was reversed between 1930 and 1975 due to some rather unique circumstances: The two World Wars, the Great Depression and a debt-fueled recession destroyed much wealth, particularly that owned by the elite. These events prompted governments to undertake steps towards redistributing income, especially in the post-World War II period. The fast economic growth of that time reduced the importance of inherited wealth.
There are many reasons why this should be so: The world may very well be moving toward a period of both slower economic growth and slower population growth as well, both of which contribut to a low g and hence a higher r/g even of the return of capital doesn't grow very much either. Furthermore, using data from University endowments, r may actually rise with wealth; if you have more money, you can get a better return on it, certainly relatively better than us poor schmucks who manage their money themselves (as does yours truly). Thus even if the return of capital does diminish with time, wealth will still outpace growth., Finally - and this is my point, a sentiment shared by most readers on this blogsite, I suspect, that the wealthy can often through political and financial means rig the game in their favor. Everyone is out for themselves, and while the superwealthy may give to charities and various endowments, I have yet to read of anyone structuring their business so that it returns less to them.
Further, there is another aspect which merits more commentary than it seems to get - that senior executives of large companies, which more or less, I guess grow at the rate of the economy plus how good the business is - are in a position to enrich themselves at the expense of the company and its shareholders, simply because of their position and the cycle of every other big firm being used for comparison purposes and acting as a catalyst for further salary increases. How much this contributes to total inequality is not certain, and varies by country. But it strains crudulity to think that it does not contribute something. The CEO is thus in a happy position of helping himself (or, occasionally herself) to a nice slice of the profits when a company is winning, but when they are not, to fall back on an elevated baseline salary and various incentives merely under the argument of that is what it costs to keep a CEO for a large company.It is 'Heads I win..tails I still win something'. Nice work, if you can get it.
And so, I quote from I blurb I just got about a company I myself have a tiny position in, as a matter of fair disclosure. It is Baker Hughes, a company that sells equipment for oil and gas drilling; the quintessential 'picks and shovels' mining company. Because of the recent decline in oil and gas prices, the company isn't doing very well, and recently agreed to merge with Halliburton, an even bigger purveyor of all the stuff it takes to get oil and gas out of the ground, where it can warm ouselves and the planet quite nicely:
8:32 EDT - Martin Craighead, CEO of the world's third-largest oilfield services company Baker Hughes (BHI), announced the layoffs of 7,000 of his employees in January amid a slump in oil prices and a planned merger with oil services rival Halliburton (HAL). But so far Mr. Craighead still has his job, and in a filing late Friday the company said his total compensation last year was $14.7M, up from $9M in 2013. Few details were provided regarding severance payments for the thousands of recently laid off BHI workers, but the filing noted that if Mr. Craighead were to lose his job he'd get $27.5M.
So there you have it. The shareholders get a little bit, proportionate to how much money they invested in the company (I bought a little myself back in 2009 when it was cheap). The ordinary workers, many of whom I would imagine do not have the financial capital to play heavily in the market lose their jobs and get nothing...unless of course their retirement was in the company stock, so they'll get that in lieu of a pension. Don't get me started on that. But the big winner is of course the CEO, who, by negotiating to sell the company will walk away with almost 15 million, on which he will pay a nice low rate of taxes because he is clearly a 'job creator'
So the top 10% get a little, the top1% get most of the proceeds, and the bottom 50% - the workers - get mostly nothing. Except the scorn of those who will now call them 'takers' and 'parasites' for collecting unemployment.
There, modern economics in a blurb. Complete with inequality
Easy to understand, isn't it.
1:30 PM PT: Wow, super cool, the Rec list. Say, I just came across this in that bastion of the liberal media, the New York Times:
http://www.nytimes.com/...
Note the vote along party lines. Thus doth inequality perpetuate itself. you know you can still read people who will claim with a straight face that wealth inequality doesn't have anything to do with political equality or subversion of democracy