The ultimate thesis in Thomas Piketty’s Capitalism in the Twenty-First Century is that the return on capital is higher than the growth in output and wages, so the owners of capital will see their wealth, and therefore, incomes, rise faster than those who earn the bulk of their incomes through labor.  The distribution of wealth and income will become increasingly skewed to the benefit of the owners of capital.

Piketty recommends progressive taxes on income and capital as the remedy to the growing inequality he forecasts.  He says (p. 471), “…the ideal policy for avoiding an endless inegalitarian spiral and regaining control over the dynamics of accumulation would be a global tax on capital.”  The tax (p. 516) “…ought to be a progressive annual tax on individual wealth.”

Piketty makes clear that the purpose of the progressive taxes he recommends is not to provide funds to raise the incomes of those at the bottom, but rather to lower inequality by reducing the incomes of those at the top.

I’ve made some observations about Thomas Piketty’s Capital in the Twenty-First Century already, here, here, and here, and in this post want to note the way that the twentieth-century welfare state has contributed to the inequality that Piketty has observed.

Piketty observes that growing inequality is the result of the return on capital being greater than the growth in wages (which is determined by aggregate economic growth).  If people owned capital in proportion to the wages they earn, inequality would not increase, but because those at the top of the income distribution own significantly more capital, their incomes and wealth grow faster than those at the bottom.

One way to mitigate this inequality would be for those at the bottom of the income distribution to increase their ownership of capital.  Indeed, Piketty notes that this happened for the middle class in the twentieth century.  The middle class that was almost as poor as the lower class at the beginning of the century had accumulated substantial wealth by the end of the century.  But the lower class remains with almost no wealth, which serves to increase inequality.

The Obama administration continues to move the goalposts of the so-called “bailout” of health insurance companies that lose money in the Obamacare exchanges. Formally labelled “risk corridors,” the bailouts are a process by which the administration will take money from insurers that profit more than expected in the exchanges, and transfer that money to insurers that lose more money than expected.

Unfortunately, taxpayers are at risk because the revenue coming into the risk corridors is determined by insurance premiums, whereas the payouts are determined by medical claims. If, overall, the insurers charged premiums that are too low, the risk corridors will suffer deficits. We have covered this topic thoroughly in past blog posts, and we expect significant deficits. Our previous entry on the topic questioned the administration’s assertion that the risk corridors would be budget neutral.

The Department of Health and Human Services (HHS) has just published the final rule for 2015, which includes two things relevant to the “bailout.” First, it confirms that it will increase the payout from the risk corridors, as first proposed in March.

“Universities have not only failed to stand up to those who limit debate, they have played a part in encouraging them.” —Ruth R. Wisse

As American colleges and universities go through the 2014 commencement season, a recent series of ugly incidents show illiberal attitudes do not vanish by graduation. The civil liberties organization Foundation for Individual Rights in Education (FIRE) is keeping a detailed record of the current “disinvitation season” where an increasing number of high-profile speakers have been prevented from speaking at commencement due to the agitating of grievance groups.

• Women’s rights advocate and prominent Islam critic Ayaan Hirsi Ali had her honorary degree and invitation to speak at Brandeis University rescinded after successful petitioning from Muslim activists upset by her record of “hate speech” and “Islamophobia.”
• Former Secretary of State Condoleezza Rice backed out as Rutgers University’s commencement speaker after strident protests from students and faculty over her involvement in the Iraq War and the Bush administration’s waterboarding controversies.
• Christine Lagarde, managing director of the International Monetary Fund (IMF), withdrew as commencement speaker at Smith College after nearly 500 people signed a petition demanding she be “reconsidered.” Largarde’s crime? Presiding over an institution allegedly responsible for the “strengthening of imperialist and patriarchal systems that oppress and abuse women worldwide.”
• Robert J. Birgeneau, former chancellor of the University of California, Berkeley, bowed out of speaking at Haverford College’s commencement after student and faculty objections regarding his leadership during a 2011 incident when UC police used force to break up an Occupy protest over rising tuition costs.

According to FIRE, these disheartening events have become more common in recent years. Between 1987 and 2008, there were 48 protests of planned speeches that led to 21 incidents where the invited guest was prevented from speaking. Since 2009, there have been 95 protests which resulted in 39 cancellations. Based on this trend, these numbers are likely to rise in coming years.

When Antoine van Agtmael of the International Finance Corporation coined the term “emerging markets” in 1981 and helped launch the first global fund aimed at investing in those countries, he was desperate to change the negative perception about the “Third World.” Little did he know that, a few decades later, the problem would be exactly the opposite—excessive expectations.

One such case is Brazil, whose socioeconomic model is responsible for the country’s dismal performance of the past four years and is being severely questioned by both the establishment that once supported it and the rising middle classes saddled with debt after the government-fed consumption boom.

Another such case is India, whose annual economic growth rate is now, at 4.5 percent, half of what it was a couple of years ago.

Once viewed as an up-and-coming economy that was making terrific progress, India is a country where corruption is all-pervasive, bureaucracy has paralyzed infrastructure projects, and foreign capital is barred from important markets, while Vodafone, Nokia, IBM, Shell, and other multinationals have faced the consequences of tax laws that allow the authorities to reopen old cases. It also suffers from a big fiscal deficit, inflation, and general mismanagement.

Little wonder, then, that Primer Minister Manmohan Singh, who as finance minister undertook impressive but insufficient reforms in the early 1990s, is now departing his tenure in utter humiliation.

In April, the Centers for Medicare & Medicaid Services (CMS) dumped a treasure trove of raw data into the public domain: The Medicare Provider Utilization and Payment Data: Physician and Other Supplier Public Use File.

Resisted for years by organized medicine, this release publicizes a dataset of Medicare payments to doctors by name. The data released are for 2012, and CMS plans to release more data in the future.

The New York Times was well prepared for the data dump, and has created an easily navigable website where subscribers can enter any doctor’s name and find out how much he earned from Medicare in 2012. Doctors whose Medicare revenue was in the millions of dollars found TV cameras at their offices the next morning, and had microphones stuck in front of their faces. The data continue to be analyzed, with interesting results: ProPublica has concluded that 1,800 providers billed the most expensive rate for any given procedure at least 90 percent of the time, although those rates are for only the most complex cases.

Needless to say, organized medicine is freaking out. The American Medical Association (AMA) has written an open letter to CMS, complaining that “untrained observers nonetheless are using the data to make flawed regional, specialty, or other comparisons that CMS should do more to discourage.” Instead of releasing a multitude of raw data, the AMA would like the government “to develop and refine a more selective data set…”

As pointed out in my forthcoming Independent Institute book, Patent Trolls: Predatory Litigation and the Smothering of Innovation, the American patent system is in need of an overhaul. This is no laughing matter, but Stephen Colbert, in the following, recent segment from “The Colbert Report” on Comedy Central takes Amazon to task for claiming a patent over “a white background.” Yes, the U.S. Patent and Trademark Office will grant a patent for just about anything.  Enjoy a laugh, but realize that that such patent foolishness is costing our economy billions of dollars.

“In Patent Trolls, William Watkins provides a thorough, yet surprisingly concise and readable, description of one of the most serious problems facing technological innovators: patent litigation and patent trolls. Thoroughly researched and documented, this book should be read by all who are concerned about the decline in America’s competitiveness in the world market.”
—Alex Kozinski, Chief Judge, U.S. Court of Appeals for the Ninth Circuit

“Williams Watkins, Jr.’s Patent Trolls makes a powerful and urgent case for patent reform. Instead of fostering innovation, the current regime encourages legal artifice and extortion. Watkins’ proposals for common sense reforms should be the starting point for this vital national discussion for change.”
—Philip K. Howard, Founder and Chairman, Common Good; author, The Death of Common Sense: How Law is Suffocating America and Life Without Lawyers: Restoring Responsibility in America

The current U.S. population is about 318 million. Approximately 25 percent of these people are younger than 18 years of age, which leaves roughly 239 million adults. Of these, therefore, the 1% with the greatest incomes number about 2,390,000 persons. How many of these do you suppose possess extraordinary political clout?

My not-entirely-wild guess is perhaps 460,000 persons (300,000 at the county level only [that’s allowing roughly 1,000 per county on average], 150,000 at the state level only [that’s allowing roughly 3,000 per state on average], and 10,000 at the federal level). I’m certain that this overall estimate is on the high side of the truth, given any reasonable definition of “extraordinary political clout.”

Therefore, of the 1% of the adult population with the greatest incomes, fewer than 20% of them might conceivably be charged with using political clout to achieve their high standing on the income scale. My personal hunch is that the foregoing back-of-the-envelope estimates greatly overstate the number of people with extraordinary political clout. My better guess would be that such people amount to perhaps 10% of the so-called 1%—that is, to roughly 46,000 persons—at most.

So lighten up, envy fiends. And do bear in mind how many of the top earners are professional athletes, entertainers, successful doctors, lawyers, architects, scientists, engineers, software developers, and other professionals—hell, even some professors make it into the group—as well as owners and managers of medium-size businesses of various sorts; in short, members of a group with few politically powerful members. If you’re looking for plutocrats, you’ll need better aim than the present “Occupy” people purport to employ. You’ll need to aim not at the 1%, but at the 0.1%, and you’ll need to spread your fire, too, because most of them are nowhere near Washington, D.C. Good hunting.

While you are firing away, however, you might consider that your actual quarry—the genuine, honest-to-God plutocrats—may well not amount even to the 46,000 estimated above, but only to half that many, or even fewer. Moreover, many of these hated rulers of the universe are persons who, notwithstanding their use of state power to help enrich themselves, are sufficiently talented and driven that they would earn very high incomes even if stripped of their political clout. In sum, revolutionary Occupiers, do not set your guillotines to work too vigorously. You might just notice that after you have lopped off all the heads you consider unworthy of remaining attached to plutocratic bodies, the economy no longer works as well as it did before.

In a recent post on The Beacon I argued that what Thomas Piketty called “the first fundamental law of capitalism” in his recent book, Capital in the Twenty-First Century, depicted the causal relationship between the value of capital and the return earned by capital backwards.  Representing the return on capital as α, the rate of return as r, and the value of capital as β, Piketty argues that the value of capital, multiplied by its rate of return, determines the return on capital, or in mathematical notation, α=rxβ.

In fact, the value of capital is determined by the return it earns, so a mathematically equivalent but more economically correct way to restate Piketty’s fundamental law is β=α/r.  See my earlier post for a more complete explanation.

In an accounting sense, Piketty’s equation is correct, but my restatement gives a more accurate representation of the causal relationships.  I discussed the role of α in my earlier post, but this restatement also more accurately represents the role of r, the rate of return on capital.

Thomas Piketty’s Capital in the Twenty-First Century is well-written and well-researched, as I have indicated already, but it has some fundamental problems with the way it depicts capital.

Piketty says “the first fundamental law of capitalism” is that the share of income going to capital, α, is equal to the return on capital, r, times the capital/income ratio, β, or in equation form, α=rxβ.  I can accept this as an accounting identity, although even then with minor issues.  I have more of an issue with the way Piketty uses this to describe the interrelationships among the three variables.

The minor issue is that β measures capital as an aggregate monetary value, whereas in fact capital is a heterogeneous collection of producer goods that, combined with labor, produce output.  So already, there is an oversimplification by aggregating a heterogeneous stock of capital and calling it equal to its money value.