About that inequality…

The French economist Thomas Piketty is being referenced a lot at the moment. In case you don’t know, Piketty has written a book called Capital in the Twenty-First Century – the title deliberately Marxist in tone – about the problem of growing inequality, and how capital’s ever-greater share of the world’s riches is leading us towards a system where inherited wealth is central to one’s personal fortunes (or otherwise).


Piketty proposes global wealth taxes and top rates of 80% as potential means of solving the inequality problem. The usual suspects (Krugman et al) have lined up to cheer. I haven’t read the book, so can’t pass much comment on its contents. I suspect though that Daniel Finkelstein (writing in today’s Times) is on the money:


Thomas Piketty’s work has many assumptions and a good deal of heroic extrapolation. It is a hypothesis. Against this is the certainty that in a free enterprise system, education for all and hard work promises prosperity and liberty under law.


What I find interesting in all these debates about inequality is how little attention is paid to inflation as an engine of inequality. An excellent editorial from The New York Sun, critiquing Piketty’s book, makes this very point, on the surge in inequality post-1971:


Hmmm. What could account for that? Could it be the last broadcast of the “Lawrence Welk Show?” Or the blast off of the Apollo 14 mission to the Moon? Or could it have something to do with the mysterious D.B. Cooper, who bailed out of the plane he hijacked, never to be seen again? A timeline of 1971 offers so many possibilities. But, say, what about the possibility that it was in the middle of 1971, in August, that America closed the gold window at which it was supposed to redeem in specie dollars presented by foreign central banks. That was the default that ended the era of the Bretton Woods monetary system…


It doesn’t take a Ph.D. from MIT or Princeton, however, to imagine that in an age of fiat money, the top decile would have an easier time making hay than would the denizens of the other nine deciles, who aren’t trained in the art of swaps and derivatives.


On the Left, banker bashing doesn’t extend to central-banker bashing. Again, curious given the enormous power that central banks wield in our economic system, and given their central role in bailing out large private speculators in recent decades (see the infamous LTCM bailout in 1998, orchestrated by the New York Federal Reserve, which set the tone as far as moral hazard was concerned for the next decade).


What President Andrew Jackson said in the 1830s about the rich and powerful bending “the acts of government to their selfish purposes” applies just as much today. Another of Jackson’s quotes is worth considering, in the context of central banking and inequality:


Gentlemen! I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out, and by the Eternal, I will rout you out!


See here for our collection of rare historical economic data.

Posted May 7, 2014