April 26, 2014

Is Thomas Piketty, with his “Capital” unwittingly working for the big time Oligarchs and Plutocrats?

Sir, I refer to Gillian Tett’s “The lessons from a rock-star economist”, April 26.

Anyone wanting to tax more wealth and income, in order to make up for an inequitable distribution, without first identifying and remedying the causes of such inequities is, de facto, working to increase the wealth and power of the big time Oligarchs and Plutocrats, because if no other changes, to them is where all those new taxes paid by the other wealthy is going to go, before the end of the day.

And I have not really understood the reason for the great hullaballoo around Thomas Piketty´s 685 pages long Capital in the Twenty-First Century. Of course it contains many interesting arguments but… what is really its new news? Gillian Tett might be quite right when she says “it has forced Americans to confront a growing sense of cognitive dissonance”… though perhaps one could equally describe that as having created the opportunity for some to exploit a growing sense of cognitive dissonance.

The book is based on a gross simplification that forces reaching the wrong conclusions. Already in the flap cover we read: “The main driver of inequality-the tendency of returns on capital to exceed the rate of economic growth-today threatens to generate extreme inequalities…But economic trends are not acts of God. Political action has curbed dangerous inequalities in the past, Piketty says, and may do so again”.

Much more accurate, and meaningful, would have been to start the analysis by asking … why is there a tendency of returns on capital to (in between crises) to exceed the rate of economic growth”. Most, if perhaps not all of those causes, are to be found directly linked to one sort of rent seeking or crony capitalism, something which clearly involves the hand of politics and governments, and something which has little to do with real capitalism. But that might not have been a welcomed conclusion to those who want to work at both ends… where the inequalities and the headaches are created and where the aspirins are handed out.

And of course to me, when Piketty writes “there is absolutely no doubt that the increase of inequality in the United States contributed to the nation’s financial instability” he is totally wrong. It was bad bank regulations which basically permitted banks to work with less and less capital, and the exaggerated importance given to the financing of home ownership, which caused the nation’s instability.

And when Piketty writes: “one consequence of increasing equality was virtual stagnation of purchasing power… which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks… freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms”, it frankly reads like a simple provocateur pamphlet. By the way “increasing generous terms”? What a laugh! He clearly never saw the terms of the bad mortgages awarded to the subprime sector. 

And when Piketty writes “the financial crisis as such seems not to have had an impact on the structural increase of inequality”, we are left with the question of … why do you think that is so Professor?, since he seems to wish to ignore the role of Tarp and QEs in saving the wealth, at the price of even increasing the inequalities.

What can I say? I just hope for the sake of many fans, that by next year they will not see in bookstores a bestseller titled “How we masterfully launched Piketty’s Capital”.

PS. I have read about one third of the book jumping from here to there. If I find something that will make me change my opinion while reading the rest, I will let you know.