My thoughts so far on Piketty and corruption

There are a lot of people that are arguing over Thomas Piketty’s new book, Capital in the 21st Century. I’ve been reading it, i’m about a third of the way through the book. It’s pretty interesting in the way only dry economics can be. A lot of people are both tearing it apart and praising the content. He’s done something really novel and that’s to create an economic theory around the accumulation of wealth and the impact on the return on capital on growth and vice versa. This naturally is causing some concerns because the findings are disturbing people. Financial Times has found about a 12 errors that they feel invalidate the results, however, their graphs aren’t really all that different. I’m not convinced you’d reach different conclusions based on the data Piketty has accumulated.

I’m more interested in the results in relationship to behavior it drives in reinvestment in capital that can drive further growth. Based on what I’ve read so far, the fact that growth is less than the rate of return on capital means that capital will not invest in innovation, but rather in goods that they can easily receive rents from.

What does this mean? It means that those with capital will invest in lower risk or safer places for their money. This means that they will buy land and houses which acrrue value and provide a steady income of new capital to be reinvested elsewhere. If you’ve ever read the book Rich Dad, Poor Dad, that’s exactly what the author proposes doing. Once you have enough money to buy a house, you buy one pay enough down and improve it to get a profit, leverage favorable taxes so that you can sell it and upgrade to a duplex and have two familie paying rent. Repeats until you’re able to buy apartments and continually expanding the number of people paying you to have money.

This approach works, but doesn’t really do much of anything to actually help the economy grow, it helps increase wealth as it’s own goal. This is how Donald Trump got rich. It doesn’t help the economy grow because it doesn’t provide new jobs it relies on others to create new jobs. Furthermore, as the population naturally increases and the types of jobs change more people will move into the area and will continually to increase rents. Further increasing the wealth of a wealthy individual. Sure, the person might be a self made millionaire and possibly a business owner around their real estate empire, but that doesn’t truly mean that they are adding more value to the economy than they are extracting, which may prevent growth.

This creates a serious risk to the people that use both the Wall Street Journal and Financial Times, because these book papers help support the wealthy get wealthier. They have a vested interest in seeing Piketty’s theories be disproven and discarded before policy makers have a chance to leverage them. I believe that this book along with the Origin of Wealth can point out ways to manage risks to our economy. Piketty’s theories are a purely macro economic construct, while the Origin of Wealth is a Micro theory that expands up through maro theory. I believe that Piketty’s theories help illustrate the impact of micro and behavior economic theories. We have inequality and it is unlikely to get better, unless we take action to change our policies and fight corruption.

I believe that the root cause of our problems relate back to a type of political corruption in nearly all our political bodies. Wealth is able to use their wealth to shape policies that create more wealth, while the poor are unable to do so. I think this is something that everyone can get behind regardless of your political beliefs. A true libertarian political body can’t exist with corruption any more than a complete comunist political body. Fighting corruption requires more than mouse clicks it requires people to act. People to force their leaders to be accountable for their actions. Inequality and power imbalances come through short terme thinking, political regimes, and historical choices. We can’t do much about the past, but we can drive change in our politics through voting, donating, action,  and through informing people.

Campaign finance laws and its limits

Today, marked the second time the Supreme Court ruled against setting maximum campaign contributions. First, it was a limit on corporations, now it’s the limit an individual can contribute in a given year. The first ruling is called Citizens United and I was initially very against this ruling because I felt that it would give undo influence to corporations. However, based on the argument Lawrence Lessig provides in “Republic Lost” – that at what point does an arbitrary limit on spending make sense? For example, if I decide to spend a lot of money on ads for a specific candidate through multiple different channels. The problem isn’t that I, as an extremely wealthy person or organization, can spend as much as I want, it’s that there’s an inequality between what You, as a poor pleb, are able to spend. This creates an inequity in the free-ness of speech.

We know that the amount of money a person can raise heavily influences their success rate in the election. This isn’t a surprise as the candidate is able to run more ads and reach a broader audience than the candidate with less money. There’s nothing new to this. Furthermore, the current structure of our media makes it amenable to rich people that spend a lot of money. The limit of $123,000/year/candidate didn’t really impact how much money a wealthy individual actually spent on the elections. Based on this biased news source, the Koch brothers spent over $2 million in more than one state. So, the campaign limits didn’t really work as designed regardless of the limits set. The Supreme Court Ruling basically just aligned the law with reality and didn’t change a whole lot.

Campaign Finance reform is just a band aid over a much greater systemic problem. This is something that Lessig was trying to address in his book, other writers have tried to address through different books, and tech leaders through cruise ships off the coast of San Francisco.

However, I think that this Atlantic image really shows the problem:

The Atlantic: Top .01% income growth

We live in a highly unequal society and the finance rules for campaigns was an attempt to set arbitrary limits to control the influence of the wealthiest Americans. It wasn’t working. The Supreme Court admitted it. Now we need to figure out how to actually fix this extremely difficult problem – that some portions of the population refuse to see as a problem.

I don’t have a solution to this problem. Lessig proposes we use laws to encourage accepting public funds and the creation of that fund through taxes. This would eliminate the influence on donations – which directly or indirectly impact the vote from a person in Congress. Creating something that more effectively through the right incentives and behavior modification is a good start to address the inequality we have in our country.

I think that the growing inequality is hurting our country. When we were much more equal in terms of economic status, we were innovating, for real innovation, not applications. We were developing things to send people to the moon. The greater the separation the top percentages has from the bulk of the population the more risk adverse they’ve become. They aren’t helping push us towards bigger and better things. We need the equality to help drive innovation. That’s the root cause of the problem. Campaign Finance reform was attempting to address a symptom and not even well. Let’s figure out how to address the root cause.

Inequality, is the attention going to drive change?

In the last few weeks there has been a huge amount of focus on inequality. The attention has been riding a bit of roller coaster since the Great Recession started in 2008 when the focus was on Occupy Wallstreet and the inequality because of the action of the bankers. However, Elizabeth Warren began to really shift the conversation away from just inequality to the total system that enables the inequality. In fact, she started to argue that our minimum wage wasn’t keeping up with the rate of productivity of the economic system. As I argued in my piece on Minimum wage there’s not much impact on local jobs comparatively to the theories that minimum wage increases would dramatically increase unemployment.

However, Wal-Mart and McDonald’s brought the conversation back to the fore through the food drive for Wal-Mart employees that couldn’t afford food for Thanksgiving. According to many theories of efficiency to maximize profit Wal-mart must continually drive lower costs through less employees doing more. However, there’s been some negative repercussions to this beyond the extremely low salaries for the majority of employees, it’s also impacted the stocking of shelves which can reduce sales. Wal-Mart’s salaries and behaviors have caught the attention of professors at Harvard, recently there was an HBR Blog post about Wal-mart’s food drive – I strongly suggest reading that article. It provides great perspective about the impact of low salaries. Essentially, if the bulk of Wal-Mart employees work full time at $7.25 per hour they are well below poverty line, which means that these employees would end up getting food stamps. Employees with a family of 4 need to make at least $15/$16 per hour to be above the poverty line. That gap of $7.75 that provides food stamps and medicare for these employees. The author is arguing that these government benefits aren’t purely entitlements for minimum wage workers, but also entitlements for the companies as well.

Of course HBR isn’t the only place arguing that inequality is a serious problem. Paul Krugman, the Pope, and the recent article in the Guardian (that I wrote about in Taking the Long View) are as well. Paul Krugman arguing this isn’t exactly surprising, he’s been arguing that inequity and the result of the recession has had massive negative impact on the economy. The long term under employment of workers is continuing to cause damage to our economy.

The real question is will this conversation actually drive any change? Will we see any change in policy? There has been some recent shifts in the republican perspective of the budget. Which may actually relax the demands on cutting unemployment and other “entitlements.”  Studies have shown that every dollar spent on unemployment adds about $1.64 into the economy. So this is something that will likely have a positive impact on the economy, if we do some different thinking about what we’re spending money on. That being said, I’m very skeptical that in our current state of politics that we’ll see any serious change in how to treat economic inequity in terms of changes in tax policy which can reduce inequality.

I think that at this point it would require a serious popular swing in opinion to drive the change through the elections. In most states that are negatively impacted by inequality, this is an unlikely occurrence as they are republican strongholds.

What can we do about inequality? Well, if you’re an employer work to make sure you pay fair wages. As a consumer we can make choices to buy products at locations that provider higher wages and access to benefits – we can also chose to boycott companies that do not pay a living wage. As I explained in my article about health costs, proper healthcare reduces quality of life and reduces inequality. As a employee of a company that pays low wages, you can work to ensure all employees that work for you receive a living wage through salary increases or other support. This won’t drive systemic changes though and if we want those we’ll have to work through contact our political leaders to drive change. Without these choices we will not see changes and will continue to have inequality. This inequality will likely only get worse over the next several years.