Manna from Heaven


When we talk of economics, we often do it by means of labels and mantras. Discussing economic subjects in this way means that we do not fully discuss them; we just use words and phrases that suggest preconceived notions. I think this is because economics is predominantly political, and “political” is another way of saying “snake oil sales.”

One mantra that I often hear is people’s invocation of a Robin Hood morality, the morality of robbing Peter to pay Paul: Robin Hood cared for the poor downtrodden (Paul) with the wealth he stole from the fat cats (Peter). What is ignored about this fairy tale is that Peter is the lord of the land who uses his governmental authority to confiscate the property of Paul, the peasants. Robin is a hero because he fights the totalitarian government of Peter to return confiscated wealth to oppressed taxpayers.

What got me thinking about the labels that political commentators use in discussing economics was Hillary Clinton’s assertion that Donald Trump’s plan to cut taxes in order to revive the economy was just “Trumped up trickle-down.” “Trickle-down” is the label often used by the political enemies of leaving wealth in the hands of CEOs and others of corporate administrative rank. The “trickle-down” label comes from the idea that these people spend the wealth hiring workers to construct whatever their companies’ products may be. Thus, wealth “trickles down” from the wealthy administrators to the needy workers.

Robin Hood is a hero because he fights the totalitarian government to return confiscated wealth to oppressed taxpayers.

But what is the government’s economic system of high taxes and “wealth redistribution”? In its intention, the wealth redistribution system is also trickle-down. In this system, government takes the place of corporate administration. It accumulates wealth — by taxation. This wealth is then supposed to trickle down to the subjects of the government, by means of redistribution programs. So, why is trickle-down bad when wealth trickles down from company administration, but good when it trickles down from government?

The feudal system that I mentioned when talking about Robin Hood was actually a wealth redistribution system. But in such systems, does wealth really trickle down? “Trickle-down” is appropriate to the sales pitch used by politicians when they claim that they intend to do such things as pay for infrastructure, education, and retirement. However, the wealth redistribution system is, in fact, trickle-out. “Trickle-out” means that the government takes wealth from its subjects and distributes it to its preferred lobbyists. Think military contractors, Elon Musk, and Planned Parenthood. Those are a few examples. Does the wealth ever get back to the subjects? Well, some does, but the amount that the subjects get is inversely proportional to the number of lobbyists who get some of the wealth before it makes its way back.

Politicians claim the place of God: they sell themselves as all-powerful beings that you need to take care of you.

The lobbyists and their clients reward the government by giving back some of the loot they received, prompting politicians to increase their take by selling more and more “economic stimuli” to the public, as if they were actually providing some kind of free food.

In the book of Exodus, God gives the children of Israel a miraculous food called manna, which is meant to sustain them on their journey out of servitude to the king of Egypt. In the modern form of this story, politicians claim the place of God: they sell themselves as all-powerful beings that you need to take care of you. They prefer this story about themselves to the reality of “trickle-down,” which is how we truly get our bread from heaven. In every light rain, water trickles down from above; this water is the food for plants, and thus the origin of our daily bread. And I think this is why politicians hate trickle-down economics: our food comes from sources beyond their control. This kind of economics dethrones them from their delusion of almighty power; and it exempts us — if we reflect on it — from our dependency on them.

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Going Halfsies


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Impossible Dreams


Climate change experts from more than 190 countries are said to be on the verge of forging a binding international accord that will reduce humanity's CO2 emissions to a level sufficient to stave off future global warming. The details of the agreement will be negotiated this December in Paris, France at the 2015 United Nations Framework Convention on Climate Change (UNFCCC), aka COP-21, short for"the twenty-first session of the Conference of the Parties” (COP) — to distinguish the futility of the Paris summit from thatof the previous 20 such conclaves, the first of which was held at the Rio Earth Summit, by the climate shamans of 1992. Who knows? The 21st time might be the charm.

President Obama thinks so, and is counting on it. According to Politico, Mr. Obama has been working furiously behind the scenes (and the backs of Republican climate deniers in Congress) to "seal his environmental legacy" by creating "the broadest, farthest-reaching deal in history, reworking environmental regulations for governments and corporations around the world and creating a framework for global green policy for decades."

As with the Iran nuclear weapons deal, Obama's objective is the agreement, not what the agreement will accomplish. His goal is to obtain any "broadest, farthest-reaching deal in history" that enshrines his name at the top of the signatory list. The goal of the Paris agreement, which is to reduceglobal greenhouse gas (GHG) emissions to a level that prevents the average global temperature from increasing more than 2°C by 2100, is an irrelevant, environmentalist dream, impossible to achieve — even if Obama possessed congressional endorsement or public support, both of which he does not.

China and India (who, together, are responsible for 30% of the world's CO2 emissions) only pledged to reduce their emissions. A pledge is not a commitment.

Obama's Clean Power Plan (CPP) and his cancellation of the Keystone XL pipeline were not designed to curb global temperature increase. They were merely symbolic gestures contrived to invoke similar gestures from countries such as China and India. The CPP (15 new EPA regulations, estimated to cost Americans $230 billion) will have essentially no affect on global temperature. The Iran agreement will: from four to five million barrels per day of new Iranian oil unleashed into the atmosphere — a glib concession just to secure an agreement, any agreement. Apparently, that was not "the moment" that Obama spoke of in his 2008 nomination speech, "when the rise of the oceans began to slow and our planet began to heal."

To hear Obama tell it, securing an agreement in Paris will be a simple matter of establishing an emission reduction commitment for each nation, a process that will now be less contentious because of his encouragement and leadership. Last month, after a five-day climate session was held in Bonn to draft the blueprint of the Paris negotiations, Obama took credit for persuading India and China to reduce their emissions. He hopes to use their pledges "to leverage the entire world for the conference." Once the Paris deal is reached, the nations of the world will begin the task of fulfilling their commitments by replacing fossil fuels (coal, oil, and natural gas) with renewable energy (solar and wind) — right after Obama proclaims victory for the planet, and, of course, for himself.

Of the climate negotiations, Mr. Obama might tritely say that the devil is in the details. But the real devil is in what he has not mentioned in his crusade to promote the deal. China and India (who, together, are responsible for 30% of the world's CO2 emissions) only pledged to reduce their emissions. A pledge is not a commitment, and no mention was made of the revolt at the Bonn meeting by 130 developing nations, who rejected a preliminary draft because it omitted their most important concern: climate justice — aka reparations for damages done to poor countries by rich countries, whose wealth has been obtained through the rampant injection of CO2 into the atmosphere since the beginning of the Industrial Revolution. That protest, which has now expanded the negotiations into the realm of extortion (of money and technology from rich countries), was led by China and India. Obama may simply have "leveraged the entire [third] world" to line its pockets with climate justice money from the industrialized world.

Developing countries will not install the solar and wind farms that Obama incessantly praises as earth's only salvation. They can't afford to do so — not if they want to raise their burgeoning, destitute populations from what is by Western standards abject poverty. The energy they need will be generated from cheap, abundant fossil fuels. As he blatantly flaunts a storybook promise of renewable energy, Obama is obstinately silent about its harsh reality. Despite technological strides, renewable energy remains prohibitively expensive and woefully inadequate for generating the quantity of clean energy required to stave off global warming. After decades of development and untold billions spent (more than $150 billion by the Obama administration alone), solar and wind power combined generate less than 4.5% of US electricity, and both industries would immediately collapse without taxpayer-funded subsidies.

Developing countries will not install the solar and wind farms that Obama incessantly praises as earth's only salvation. They can't afford to do so.

Nor has he mentioned the global carbon budget, which setsan upper bound on the quantity of CO2 that humanity can emit without pushing the average global temperature over the 2°C threshold before 2100. According to Oren Cass of the Manhattan Institute, under optimistic assumptions regarding energy efficiency and the adoption of renewable energy, total emissions by the end of the century are projected to be almost five times greater than the quantity budgeted to save the planet. What is the point of committing the US to costly emission reductions of 26% to 28% by 2025, when the global carbonbudget will be consumed by the early 2030s?

No matter what the US does by 2025 to reduce its emissions, by 2030 it will already be too late to “save the planet” — a tidbit of climate change knowledge that Obama is reluctant to divulge. Indeed, no matter what wealthy nations collectively do is futile. Observes Cass,

If developed-world CO2 emissions ceased tomorrow, the developing world would still need to instantly slash its emissions by more than half — and hold at that level indefinitely — to remain within the carbon budget until 2100.

Any success that Obama has in Paris, therefore, will depend on his ability to "leverage" developing nations into meaningful emissions reductions. His chances are slim, if he even cares to try. As Cass notes:

In short, no evidence — distant or more recent — indicates any willingness by developing nations to make even nonbinding pledges to slow the growth of CO2 emissions, let alone accept the dramatic reductions required to substantially alter the trajectory of atmospheric concentrations.

To climate catastrophists such as Mr. Obama, the solution to this conundrum is simple, self-evident, and not to be discussed in public: an enormous transfer of wealth from rich nations to poor nations, where the money will be used (a) to buy solar panels and windmills, (b) to create decent jobs and lives of dignity, and (c) to defray the cost of adapting to the coming storms, droughts, floods, famines, terrorism, rape, and innumerable other products of the Industrial Revolution.

The idea is not new, and has captured the effusive support of Hillary Clinton, Pope Francis, and other climate change experts. In his encyclical on climate change, the Pope asserted that wealthy nations owe an “ecological debt” to poor nations and argued for “mechanisms and subsidies which allow developing countries access to technology transfer, technical assistance and financial resources.” As Secretary of State, Hillary Clinton proposed a Green Climate Fund that would provide at least $100 billion annually to developing nations. Last year, at COP-20 in Lima, Peru, Alex Rafalowicz of Friends of the Earth (FOE) demanded that rich countries pay poor countries more than $1 trillion annually.

Obama can be expected to agree. After all, there's not much distance between social justice and climate justice. But he has not indicated what concessions he would be willing to make to the clamoring bloc of 130 developing countries (representing more than 85% of the world's population) who insist that climate reparations must be the centerpiece of the Paris negotiations.

No matter what the US does by 2025 to reduce its emissions, by 2030 it will already be too late to “save the planet.”

FOE has developed a method of allocating the global carbon budget in a manner that it believes should be adopted by climate treaty negotiators. Known as Climate Fair Shares, it calculates the emission reduction commitments and reparation amounts that must be allocated to each nation to preserve earth through 2100. Beyond the appeal to planet salvation, it no doubt has political appeal: what nation could object to paying its fair share?

To illustrate how the negotiations would work out under the FOE scheme, China would be allowed to increase its GHG emissions from its current level of 12.1 billion tons to 16.2 billion tons by 2030. It would also receive $604 billion annually in climate justice payments from rich countries. In contrast, the US would be required to reduce its emissions from its current level of 6.7 billion tons to 1.8 billion tons by 2030 — a reduction of 73%, even though Obama has thus far commited the US to only a 26% to 28% reduction by 2025.

After all, there's not much distance between social justice and climate justice.

The US cost to achieve a 73% reduction would be many trillions of dollars, and require that all coal- and gas-fired power plants be replaced with extravagant solar and wind farms. On top of this immense cost are climate justice payments, $810 billion per year by 2030. According to Climate Fair Shares, these payments, compliments of US taxpayers, will "create 24,291,600 new decent jobs" and "deliver renewable energy for lives of dignity to 810 million people" — in other countries.

The developing world expects the Paris negotiations to produce an agreement along the lines of the Climate Fair Shares scheme. Mr. Obama has not addressed that possibility, nor has he indicated where the money will come from if it materializes. The US, which is in much better shape economically than most countries, is more than $18 trillion in debt, not to mention the crushing debt of Medicare and Social Security, enormous programs that will be insolvent by the early 2030s — right around the time when humanity blows its entire carbon budget and irreversible, hellish climate catastrophe begins, 70 years ahead of schedule.

These are some of the obstacles that face Mr. Obama in his quest for prominence in the annals of climate history. He has dismissed most of them, or chosen not to bother the American public with their stark realities. Then there is the warming pause, now in its 18th year, which threatens the anthropogenic global warming hypothesis motivating the Paris charade, and which Obama denies (a clumsy irony, since “denier” is his principal argument against any and all global warming skepticism). To secure his environmental legacy and fulfill his promise to heal the planet, the desperate Obama must find common ground between rich and poor countries. But in the Venn diagram of possible treaty outcomes, the intersection of planet salvation and climate justice is the empty set. The negotiators from developed nations and the negotiators from developing nations have only one thing in common: both parties seek a goal that they know, and have known all along, is impossible to achieve.

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The Stains of Social Justice


The United Nations defines social justice as "the fair and compassionate distribution of the fruits of economic growth." Furthermore, social justice is impossible "without strong and coherent redistributive policies conceived and implemented by public agencies." Social justice is an axiom held dearly by socialists — apparently reconciled by the belief that great wealth and prosperity would have been created in places such as North Korea, East Germany, Cuba, and Venezuela, if only the "strong and coherent redistributive policies" had been, well, stronger and more coherent. In reality, social justice brings stagnation and decline, which, to socialists, look like fruit ever ripening into new and increasingly meddlesome forms of social justice. To socialists, distributing poverty and despair (even abysmal poverty and despair) is acceptable, as long as they are handling the distribution.

The socialists (more precisely, eco-socialists) in charge of US redistribution have managed to create a new American phenomenon: permanent economic stagnation. While speaking at the November 2013 IMF Economic Forum, Harvard University economist Larry Summers, was puzzled as to why, after four years, the US economy had not yet recovered. Noting that efforts to prevent a future crisis might be counterproductive, he concluded his speech by saying, "We may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back, below their potential."

Translation: even at extremely low interest rates, bank lending has been flat since 2009 because businesses are afraid to invest in an economy tainted by socialist mischief. Since social justice (delivered through the redistributive policies of Climate Change, the Stimulus, Obamacare, Dodd-Frank, etc.) is "a chronic and systemic inhibitor of economic activity;" we need to think about how to manage future stagnation, after some unspecified number of "years ahead" in continuation of the present stagnation.

The socialists in charge of US redistribution have managed to create a new American phenomenon: permanent economic stagnation.

Think about that. In the election year of 2008, we had a do-something-about-it-now problem. Today, in 2014, as the stagnation persists, is Washington ready to do something about it? No. Will Washington be ready to do something in the years ahead? No. But by then it will be ready to think about it. Maybe. The 2008 promises of jobs and economic growth were replaced by the vast, warm fuzziness of social justice vagaries such as equality, diversity, fairness, dignity, renewability, and sustainability. What happened to the grandiose 2008 plan for economic revitalization? In 2009, eco-socialist lawyers and academics reached into their magic hat of "strong and coherent redistributive policies" and pulled out a plan to build a new economy. Why fix an outdated economy that was driven by greed, racism, overconsumption, and planet-heating "fuels of yesterday"? Today, more than five years into the new economy of stultifying compassionate distribution, they reached back in and pulled out a Plan B: inurement.

But as this elite cabal was settling into a genial Washington DC, their big heads bubbling with theories (touted by bigger-headed sociologists and environmentalists) on how to build a shiny new economy, a handful of crass entrepreneurs was settling into the rude world of fracking, creating an oil and gas revolution that would blight the dreamscape of the social justice crowd. The New York Times article "North Dakota Went Boom" eloquently describes the discovery and development of the Bakken Shale Formation in western North Dakota, a rugged, empty area blemished by "roaring fires and messy drill pads." But the blemishes are producing a flood of jobs, prosperity, and cheap energy, infuriating eco-socialists, who have produced but a trickle of anything with their centrally planned economy of government-approved renewable energy. Then there is the horror that the great wealth befalling North Dakota is the result of "an economic imperative that dates back to the triumph of the treaty breakers who usurped the Native Americans and commodified the land, and to the waves that came in their wake, the great white hunters who cleaned out the buffalo." God have mercy. Has there ever been social justice in North Dakota?

Eco-socialists are unwanted in North Dakota, where household income is $2,214 higher than the national average, unemployment is the nation's lowest, and budget surpluses accrue even after major income tax cuts (more than 50% since 2009). But many of them can be found at the North Dakota border, weeping over economic fruits they are helpless to distribute. Tears blind them to "the allure of a derrick dressed up in lights and looming 10 stories over a desolate landscape where the leading academic solution to social and economic stagnation had been to surrender and let the land lapse into buffalo commons." Alas, the North Dakota buffalo commons strains the vision of prying eco-socialists peering into the state. It is a pathetically small plot (only 4% of North Dakota is federal land), barely large enough to hold a respectable climate change sit-in without its whimpers being heard in at least a few of the more than 6,000 wealth-producing drilling sites on private land, where 90% of the wells reside. Other eco-socialists are faced with the task of hawking income inequality or green jobs (such as solar panel installation at $38,000 per year) to the sullied hordes of climate deniers rushing into the state, on their way to oil and gas fields where the average annual wage is $90,225.

It has been said that veterans of the oil patch can estimate the productive capacity of an oil well from the size of its flare gas flame (which burns off the natural gas contained in the well). A seasoned eco-socialist can no doubt make a similar estimate based on the size of the yellow puddle at his stomping feet, as he rages against the carbon emissions that flaring spews into the atmosphere. Out of self-interest, oil companies eventually build gas-gathering pipelines that channel the gas to a processing plant, where they make even more money –while saving the gas. But for wells on federal land, these pipelines require the bureaucratic approval of the National Environmental Policy Act (NEPA) — the same law that has delayed the Keystone XL Pipeline for more than five years. Oil companies, therefore, are forced to flare off gas while they wait for their permits. In Wyoming, for example, the average wait time is seven years. According to Forbes Magazine, the state's "lost opportunity cost associated with the delay of oil and natural gas development is $22 billion in labor income and $90 billion in economic output over a ten-year period." Not a problem, when social justice is at stake.

Eco-socialists are unwanted in North Dakota, where household income is $2,214 higher than the national average, unemployment is the nation's lowest.

Under social justice policies, GDP growth during the "recovery" has averaged 2% annually, dropping to an alarming -2.9% in the most recent quarter. This is stagnation. But to eco-socialists, it is not failure. It is merely an economic aberration that their intellectuals will have to think about managing in the years ahead. In the world of social justice, success is not measured by wealth, growth, jobs, or income; the expansion of "strong and coherent redistributive policies" is the only yardstick. Accordingly, with $17 trillion of debt, medium household income down 8.3%, labor participation down to 62.8% (the lowest since 1978), and 46.5 million Americans living in poverty, eco-socialists shamelessly exclaim that we are "heading in the right direction."

And that they have "more work to do." That work largely involves stifling the US oil and gas industry — the only bright spot in an otherwise moribund economy. While forging the new green economy, eco-socialists have suppressed oil (down 6%) and gas (down 28%) production on federal land. Fortunately for our stagnating economy, oil and gas production has increased dramatically (61% and 33%, respectively) on non-federal land. Thanks to entrepreneurs such as Harold Hamm (who discovered the prolific Bakken shale "play") and innovators who developed fracking and horizontal drilling, the US oil and gas revolution has created well over one million jobs, reduced annual oil imports by 800 million barrels, slashed our annual energy bill by $100 billion, and cut carbon emissions by 300 million tons. It has also increased GDP by more than 1.7% — a contribution without which eco-socialists could not claim (at least not shamelessly) that we are "heading in the right direction."

While most of us celebrate these achievements, eco-socialists fear them. Their vision of social justice calls for our vast oil and gas resources to "lapse into buffalo commons." Otherwise, the income inequality gap might widen or the earth's temperature might rise (by the end of the century) or a flame might shoot out of someone's faucet, etc. Besides, the economic contributions from the oil and gas revolution amplify the failure of their immense, whimsical green energy investments, and expose the disingenuous tenets of their overreaching scheme to rebuild the US economy. According to the insightful Hamm, “That’s why these guys are raising so much hell, because suddenly they realize that everything they’ve invested in isn’t going to work . . . They know they’re misleading the public.”

Nevertheless, the social justice parade marches forward. Armed with NEPA, the Clean Air Act, the Clean Water Act, the Endangered Species Act, and other social justice regulations, eco-socialists won't be happy until our utility bills "necessarily skyrocket" and the price of US gasoline matches the price in Europe — thereby paving the way for government-approved solar panels, windmills, and electric cars. Forget about oil and gas. They are yesterday's fuels, dirty and finite. We will have renewable energy in a sustainable economy, even if it takes permanent stagnation to get there.

Social justice leads to stagnation, which leads to scarcity, which leads to rationing, which is what eco-socialists do best.

The good news is that America's oil and gas boom is winning. Eco-socialists, in denial of its benefits, are resigned to the desperate hope that it will be like other booms — short-lived. But estimates of its increasing longevity have revealed a brown stain on the seat of the pants of eco-socialism. There is no stagnation in North Dakota, where energy experts expect the Bakken play to last for 100 years or more. There, the odor of flare gas is preferable to the stench of socialism and, with an annual salary of $90,000, oil field workers can buy all the social justice they need.

This sentiment, of course, is shared by Texas, home to the Eagle Ford and the Permian Basin, and the leading oil and natural gas producing state in the nation. And recent breakthroughs in drilling technologies have the boom spreading to Oklahoma, Utah, Colorado, Wyoming, and New Mexico, where the combined shale oil production has increased 57% in the last three years — causing, no doubt, a proportionate enlargement of that nasty brown stain. Mr. Hamm — whose oil company is developing a drill pad packing technique that could put more than 100,000 wells into North Dakota — would probably estimate a much larger and darker stain.

Social justice leads to stagnation, which leads to scarcity, which leads to rationing, which is what eco-socialists do best — with their "strong and coherent redistributive policies." They believe that through such policies we now have affordable healthcare, a kinder Wall Street, a cutting-edge renewable energy industry, and a world-class education system. Soon, electric vehicles will pour out of a rejuvenated Detroit, millions of Americans will work at high-paying green jobs, and solar panels and windmills will bring us energy independence. By then, their economists may have begun thinking about how to manage the permanent stagnation. That is their story, and they are sticking to it, even if it means squandering the world's most prolific source of fossil fuel energy, a resource that, if properly exploited, could revitalize the economy overnight, increase the wealth of every one of us, and finance self-help programs for anyone still afflicted by social injustice.

Nothing will change the minds of eco-socialists. But America's enormous, expanding oil and gas revolution may eventually make them change their pants.

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Another Perspective on Piketty


Someone acquainted only secondhand with Thomas Piketty’s book translated as Capital in the Twenty-First Century or who has only skimmed it might well dismiss it as a mere leftist, redistributionist tract. That would be a mistake and injustice — and thus counterproductive. Libertarian critics should try to answer Piketty’s findings, attitudes, and recommendations respectfully and seriously (unless, of course, they find themselves converted away from their own doctrine).

His tome of viii + 685 pages, full of tables, charts, and citations, is an impressive work of resourceful scholarship. A massive and detailed web site supplements it. I have neither the time and energy nor the competence to verify his voluminous statistics. Pieced together, as some of them are, from fragmentary sources (such as tax and probate records) of decades and even centuries ago, they must incorporate some elements of interpolation and educated guessing. Still, no reason is apparent for questioning his and his collaborators’ diligence and honesty.

Piketty avoids the pretensions of so much academic economics — decorative mathematics and dubious econometrics. (“[M]athematical models ... are frequently no more than an excuse for occupying the terrain and masking the vacuity of the content,” p. 574.) His book employs, and sparingly, only the simplest algebra; but I did find a few symbols and their definitions bothersome.

Piketty’s case for reforms is not mainly an economic argument but a sustained appeal to the reader’s intuition against extreme inequality.

For example, Piketty makes much of the inequality r>g as the condition of growth of the ratio of capital (wealth) to national income, g being the growth rate of the denominator. The condition would be trivially obvious if r, the numerator, were the growth rate of the capital stock; but Piketty usually, and misleadingly, calls it the “rate of return on capital.” That description would apply if all and only the earnings on capital were saved and reinvested. Expenditure of some capital earnings on consumption instead would reduce the growth of the capital stock and the capital-income ratio, as Piketty occasionally mentions; and saving or dissaving from labor income would also affect the ratio’s growth (or shrinkage).

Nevertheless, Piketty’s compilation of long-term statistics for several countries suggests a trend to him. Only occasionally does he mention that most of his income figures are of income before taxes and before supplementation by government redistribution. Anyway, the long-term trend of the capital-income ratio seems to have been upward, exacerbating the inequality of both wealth and income. The chief historical exception is the period 1914–1945, when wars and depression destroyed so much wealth.

Piketty gives particular attention to the concentration of income and wealth in the top 1%, or even the top tenth or hundredth of 1% of their distributions. He seems particularly concerned about great inherited fortunes and the lavish leisured lifestyles that they make possible (as in novels by Jane Austen and Honoré de Balzac, mentioned as a welcome change of pace from dense argument).

His remedy for great inequality would be not only highly progressive income and inheritance taxes but progressive annual taxes on total wealth itself. He recognizes the political unlikelihood of getting his wealth taxes enacted and enforced, however, because implausibly close international collusion of governments would be required. He draws on the literature of Public Choice little if at all. He supplements his arguments with page after page of the history of taxation in different countries.

Nowhere, as far as I noticed, and to his credit, does Piketty blame inequality for economic crises and depressions or commit the crude Keynesianism of recommending redistribution to raise the propensity to consume. He does not maintain that the apparent trend toward greater inequality will continue without limit. He does not maintain that the extreme wealth of only a few thousand families will give those few tyrannical power over their fellow citizens — far from few enough, actually, to be a coherent oligarchy. Nor does he (or his translator) toss about words like “unfair” and “unjust,” although he does occasionally aspire to more “social justice” and “democracy” in the inexpediently and popularly stretched sense of the latter word.

One might expect concern about inequality to include concern about further concentration of resources and power in the state. However, Piketty does not expect his more drastic and broad-based progressive taxes to raise much more revenue. Nor, perhaps inconsistently with not expecting this, does he worry about damaging incentives to work and innovate. Possibly he agrees with John Stuart Mill in thinking that the distribution of wealth can be separated from its production. Possibly, like José Ortega y Gasset’s Mass Man (The Revolt of the Masses, 1930), he regards the wonders of modern industrial civilization as automatically existing, like facts of nature. Although an avowed socialist in the loose European sense of the term, he does not want to destroy capitalism. He even welcomes considerable privatization: government agencies and employees need not themselves provide all the services that tax money pays for.

Wealth is not something that belongs to the government, which it may leave to its producers or redistribute as the country’s rulers see fit.

For Piketty, reducing inequality is a goal in its own right. I agree so far as reducing it means undoing government measures that actually foster it. These include aspects of crony capitalism: subsidies, tax privileges, protection from both domestic and foreign competition, and most of what makes highly paid lobbying worthwhile. Also at others’ expense, arguably, a policy of artificially low interest rates benefits Wall Street operators and wealthy stock investors and traders.

As I ended reading his book, I realized that Piketty’s case for reforms is not mainly an economic argument but a sustained appeal to the reader’s intuition, although not explicitly to envy. Intuition presumably carries more weight if the reader comes to share it himself without having actually been told what to think. If so, Piketty’s economic language and massive quantities of ingeniously gathered statistics amount to what I call a Murray Rothbard or Alan Reynolds style of argument: deploy such an array of facts and figures, dates, places, mini-biographies, and even personality sketches that, even if they scarcely add up to a coherent argument, you come across to your reader or audience as a consummate expert whose judgments command respect. But saying so may exaggerate; for Piketty’s tables, charts, and sketches of characters in novels may usefully jog the intuition. Anyway, one should not disparage Piketty’s impressive research and methods and their likely application in projects beyond his own.

As for an intuition against extreme inequality, I confess to one of my own, although it does not mean welcoming heavier and more progressive taxes. We should worry about undermining respect for private property as a human right and essential pillar of any functioning economic system. Wealth is not something that belongs to the government, which it may leave to its producers or redistribute as the country’s rulers see fit.

Still, the intuition persists, as it did with Henry Simons, that saint of the Chicago School of economics in its early days, who found inequality “unlovely,” and as it persisted with Nobelist James Buchanan, prominent libertarian, who advocated stiff inheritance taxes. Somehow, I am uneasy about the pay of executives said to be 600 times as great as the pay of their ordinary workers, even though they may well contribute more than that much to their companies’ revenues. I am uneasy about lifestyles of opulent leisure permitted by great inherited wealth, rare though they may be. I cannot justify or explain my intuition, which, anyway, is not crass envy.

I don’t call on public policy to heed that intuition, any more than I share the apparently spreading expectation that some authority take action against whatever offends somebody, whether the lifestyle, the behavior, the speech, or the suspected thought of someone else. I wouldn’t want an egalitarian intuition implemented in anything like Piketty’s ways. Government measures to alleviate or avoid actual poverty, even beyond the “safety net,” are something quite different.

An intuitive dislike of extreme inequality does not rule out unease at Piketty’s line of thinking. Again, however, I warn libertarians: don’t risk a boomerang effect by unfairly dismissing his work as a mere ideological tract. It is indeed a work of genuine scholarship. Dealing with its challenging ideas can strengthen the libertarian case.

Editor's Note: Review of "Capital in the Twenty-First Century," by Thomas Piketty, translated by Arthur Goldhammer. Belknap Press, 2014.

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Mind the Gap


“Capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine democratic societies.” — Thomas Piketty, Capital in the 21st Century

French professor Thomas Piketty’s new book — ranked #1 on Amazon and the New York Times — is a thick volume with the same title as Karl Marx’s 1867 magnum opus, Capital. Many commentators have noted the Marxist tone — the author cites Marx more than any other economist — but that’s a distraction.

The author discusses capital and economic growth, and recommends a levy on capital, but the primary focus of the book is inequality. In mind-numbing minutiae of data from Europe and the United Staes, Piketty details how inequality of income and wealth have ebbed and flowed over the past 200 years before increasing at an “alarming” rate in the 21st century. Because of his demonstrated expertise, his scholarship and policy recommendations (sharply higher progressive taxes and a universal wealth tax) will be taken seriously by academics and government officials. Critics would be wise to address the issues he raises rather than simply to dismiss him as a French polemicist or the “new Marx.”

According to his research, inequality grows naturally under unfettered capitalism except during times of war and depression. “To a large extent, it was the chaos of war, with its attendant economic and political shocks, that reduced inequality in the twentieth century” (p. 275, cf. 471) Otherwise, he contends, there is a natural tendency for market-friendly economies to experience an increasing concentration of wealth. His research shows that, with the exception of 1914-45, the rate of return on property and investments has consistently been higher than the rate of economic growth. He predicts that, barring another war or depression, wealth will continue to concentrate into the top brackets, and inherited wealth will grow faster with an aging population and inevitable slower growth rates, which he regards as “potentially terrifying” and socially “destabilizing.”

If market-generated inequality is the price we pay to eliminate poverty, I’m all in favor.

His proposal? Investing in education and technical training will help, but won’t be enough to counter growing inequality. The “right solution” is a progressive income tax up to 80% and a wealth tax up to 10%. He is convinced that these confiscatory rates won’t kill the motor of economic growth.

One of the biggest challenges for egalitarians like Piketty is to define what they mean by an “ideal” distribution of income and wealth. Is there a “natural” equilibrium of income distribution? This is an age-old question that has yet to be resolved. I raised it in a chapter in “Economics on Trial” in 1991, where I quoted Paul Samuelson in his famous textbook, “The most efficient economy in the world may produce a distribution of wages and property that would offend even the staunchest defender of free markets.”

But by what measure does one determine whether a nation’s income distribution is “offensive” or “terrifying”? In the past, the Gini ratio or coefficient has been used. It is a single number that varies between 0 and 1. If 0, it means that everyone earns the same amount; if 1, it means that one person earns all the income and the rest earn nothing. Neither one is ideal. Suppose everyone earns the same wage or salary. Perfect equality sounds wonderful until you realize that no economy could function efficiently that way. How you could hire anyone else to work for you if you had to pay them the same amount you earn?

A wealth tax destroys a fundamental sacred right of mankind — the right to be left alone.

Even social democrats William Baumol and Alan Blinder warned in their popular economics textbook, “What would happen if we tried to achieve perfect equality by putting a 100% income tax on all workers and then divide the receipts equally among the population? No one would have any incentive to work, to invest, to take risks, or to do anything else to earn money, because the rewards for all such activities would disappear.”

So if a Gini ratio of 0 is bad, why is a movement toward 0 (via a progressive income tax) good? It makes no sense.

Piketty wisely avoids the use of the Gini ratios in his work. Instead he divides income earners into three general categories, the wealthy (top 10% income earners), the middle class (40%), and the rest (50%), and tracks how they fare over the long term.

But what is the ideal income distribution? It’s a chimera. The best Piketty and his egalitarian levelers can do is complain that inequality is getting worse, that the distribution of income is unfair and often unrelated to productivity or merit (pp. 334–5), and therefore should be taxed away. But they can’t point to any ideal or natural distribution, other than perhaps some vague Belle Époque of equality and opportunity (celebrated in France between 1890 and 1914).

Piketty names Simon Kuznets, the 20th century Russian-American economist who invented national income statistics like GDP, as his primary antagonist. He credits Kuznets with the pro-market stance that capitalist development tends to reduce income inequality over time. But actually it was Adam Smith who advocated this concept two centuries earlier. In the Wealth of Nations, Smith contended that his “system of natural liberty” would result in “universal opulence which extends itself to the lowest ranks of the people.”

Not only would the rich get richer under unfettered enterprise, but so would the poor. In fact, according to Smith and his followers, the poor catch up to the rich, and inequality is sharply reduced under a liberal economic system without a progressive tax or welfare state. The empirical work of Stanley Libergott, and later Michael Cox, demonstrates that through the competitive efforts of entrepreneurs, workers, and capitalists, virtually all American consumers have been able to change an uncertain and often cruel world into a more pleasant and convenient place to live and work. A typical homestead in 1900 had no central heating, electricity, refrigeration, flush toilets, or even running water. But by 1970, before the welfare state really got started, a large majority of poor people benefited from these goods and services. The rich had all these things at first — cars, electricity, indoor plumbing, air conditioning — but now even the poor enjoy these benefits and thus rose out of poverty.

Piketty and other egalitarians make their case that inequality of income is growing since the Great Recession, and they may well be correct. But what if goods and services, what money can buy, becomes a criteria for inequality? The results might be quite different. Today even my poor neighbors in Yonkers have smartphones, just like the rich. While every spring the 1% attend the Milken Institute Conference in LA that costs $7,000 or more to attend; the 99% can watch the entire proceedings on video on the Internet a few days later — for free. The 1% can go to the Super Bowl for entertainment; the 99% gather around with their buddies and watch it on an widescreen HD television. Who is better entertained?

Contrary to Piketty’s claim, it’s good that capital grows faster than income, because that means people are increasing their savings rate.

Piketty & Co. claim that only the elite can go to the top schools in the country, but ignore the incredible revolution in online education, where anyone from anywhere in the world can take a course in engineering, physics, or literature from Stanford, MIT, or Harvard for a few thousand dollars, or in some cases, for absolutely nothing.

How do income statistics measure that kind of equal access? They can’t. Andrew Carnegie said it best, “Capitalism is about turning luxuries into necessities.” If that’s what capital and capitalism does, we need to tax it less, not more.

A certain amount of inequality is a natural outcome of the marketplace. As John Maynard Keynes himself wrote in the Economic Consequences of the Peace (1920), “In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth of and of capital improvements which distinguished that age [the 19th century] from all others.”

A better measure of wellbeing is the changes in the absolute real level of income for the poor and middle classes. If the average working poor saw their real income (after inflation) double or triple in the United States, that would mean lifting themselves out of poverty. That would mean a lot more to them than the fortunes of the 1%. Even John Kenneth Galbraith recognized that higher real growth for the working class was what really mattered when he said in The Affluent Society (1959), “It is the increase in output in recent decades, not the redistribution of income, which has brought the great material increase, the well-being of the average man.”

Political philosopher James Rawls argued in his Theory of Justice (1971) that the most important measure of social welfare is not the distribution of income but how the lowest 10% perform. James Gwartney and other authors of the annual Economic Freedom Index have shown that the poorest 10% of the world’s population earn more income when they adopt institutions favoring economic freedom. Economic freedom also reduces infant mortality, the incidence of child labor, black markets, and corruption by public officials, while increasing adult literacy, life expectancy, and civil liberties. If market-generated inequality is the price we pay to eliminate poverty, I’m all in favor.

I have reservations about Piketty’s claim that “Once a fortune is established, the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size.” To prove his point, he selects members of the Forbes billionaires list to show that wealth always grows faster than the average income earner. He repeatedly refers to the growing fortunes of Bill Gates in the United States and Liliane Bettencourt, heiress of L’Oreal, the cosmetics firm.

Come again?

I guess he hasn’t heard of the dozens of wealthy people who lost their fortunes, like the Vanderbilts, or to use a recent example, Eike Batista, the Brazilian businessman who just two years ago was the 7th wealthiest man in the world, worth $30 billion, and now is almost bankrupt.

Piketty conveniently ignores the fact that most high-performing mutual funds eventually stop beating the market and even underperform. Take a look at the Forbes “Honor Roll” of outstanding mutual funds. Today’s list is almost entirely different from the list of 15 or 20 years ago. In our business we call it “reversion to the mean,” and it happens all the time.

Prof. Piketty seems to have forgotten a major theme of Marx and later Joseph Schumpeter, that capitalism is a dynamic model of creative destruction. Today’s winners are often tomorrow’s losers.

IBM used to dominate the computer business; now Apple does. Citibank used to be the country’s largest bank. Now it’s Chase. Sears Roebuck used to be the largest retail store. Now it’s Wal-Mart. GM used to be the biggest car manufacturer. Now it’s Toyota. And the Rockefellers used to be the wealthiest family. Now it’s the Waltons, who a generation ago were dirt poor.

Piketty is no communist and is certainly not as radical as Marx in his predictions or policy recommendations. Many call him “Marx Lite.” He doesn’t advocate abolishing money and the traditional family, confiscating all private property, or nationalizing all the industries. But he’s plenty radical in his soak-the-rich schemes: a punitive 80% tax on incomes above $500,000 or so, and a progressive global tax on capital with an annual levy between 0.1% and 10% on the greatest fortunes.

There are three major drawbacks to Piketty’s proposed tax on wealth or capital.

First, it violates the most fundamental principle of taxation, the benefit principle. Also known as the accountability or “user pay” principle, taxation is justified as a payment for benefits or services rendered. The basic idea is that if you buy a good or use a service, you should pay for it. This approach encourages efficiency and accountability. In the case of taxes, if you benefit from a government service (police, infrastructure, utilities, defense, etc.), you should pay for it. The more you benefit, the more you pay. In general, most economists agree that wealthier people and big businesses benefit more from government services (protection of their property) and should therefore pay more. A flat personal or corporate income tax would fit the bill. But a tax on capital (or even a progressive income tax) is not necessarily connected to benefits from government services — it’s just a way to forcibly redistribute funds from rich to poor and in that sense is an example of legal theft and tyranny of the majority.

Second, a wealth tax destroys a fundamental sacred right of mankind — financial privacy and the right to be left alone. An income tax is bad enough. But a wealth tax is worse. It requires every citizen to list all their assets, which means no secret stash of gold and silver coins, diamonds, art work, or bearer bonds. Suddenly financial privacy as guaranteed by the Fourth Amendment becomes illegal and an underground black market activity.

Third, a wealth tax is a tax on capital, the key to economic growth. The worst crime of Piketty’s vulgar capitalism is his failure to understand the positive role of capital in advancing the standard of living in all the world.

To create new products and services and raise economic performance, a nation needs capital, lots of it. Contrary to Piketty’s claim, it’s good that capital grows faster than income, because that means people are increasing their savings rate. The only time capital declines is during war and depression, when capital is destroyed.

He blames the increase in inequality to low growth rates, when, says, the economic growth rate falls below the return on capital. The solution isn’t to tax capital, but to increase economic growth via tax cuts, deregulation, better training and education and productivity, and free trade.

Even Keynes understood the value of capital investment, and the need to keep it growing. In his Economic Consequences of the Peace, Keynes compared capital to a cake that should never be eaten. “The virtue of the cake was that it was never to be consumed, neither by you nor by your children after you.”

What country has advanced the most since World War II? Hong Kong, which has no tax on interest, dividends, or capital.


If the capital “cake” is the source of economic growth and a higher standard of living, we want to do everything we can to encourage capital accumulation. Make the cake bigger and there will be plenty to go around for everyone. This is why increasing corporate profits is good — it means more money to pay workers. Studies show that companies with higher profit margins tend to pay their workers more. Remember the Henry Ford $5 a day story of 1914?

If anything, we should reduce taxes on capital gains, interest, and dividends, and encourage people to save more and thus increase the pool of available capital and entrepreneurial activity. A progressive tax on high-income earners is a tax on capital. An inheritance tax is a tax on capital. A tax on interest, dividends, and capital gains is a tax on capital. By overtaxing capital, estates, and the income of our wealthiest people, including heirs to fortunes, we are selling our country and our nation short. There’s no telling how high our standard of living could be if we adopted a low-tax policy. What country has advanced the most since World War II? Hong Kong, which has no tax on interest, dividends, or capital.

Hopefully Mr. Piketty will see the error of his ways and write a sequel called “The Wealth of Nations for the 21st Century,” and will quote Adam Smith instead of Karl Marx. The great Scottish economist Adam Smith once said, “Little else is required to carry a state from the lowest barbarism to the highest degree of opulence but peace, easy taxes, and a tolerable administration of justice.” Or per haps he will quote this passage: “To prohibit a great people….from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind.”

Editor's Note: Review of "Capital in the Twenty-First Century," by Thomas Piketty, translated by Arthur Goldhammer. Belknap Press, 2014.

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Cambodia: Not to Be Forgotten


The Nazis killed Jews, Gypsies, gays, Polish cavalry, retarded people, and assorted other specific groups, intending to annihilate them. The Khmer Rouge killed anyone and everyone, indiscriminately, to make “ecologically sound” fertilizer.

First, the raw materials for the fertilizer — human beings — were made to dig a giant trench. Second, they were made to kneel along the edge. Third, Khmer Rouge soldiers went from one to another ”useless mouth” delivering a sharp blow with an axe to the nape of the neck — to save ammunition.

Over the first layer of bodies, rice husks would be spread, followed by a sprinkling of gasoline. This procedure would be repeated, layer upon layer, until the pit was full. It was then set ablaze. After the pit cooled, the bones were separated from the ashes, ground on giant mortars and pestles, then recombined with the ashes and packaged in jute sacks to fertilize paddy fields.

Denise Affonco, an ethnic Eurasian French citizen, was convinced by her husband, a Vietnamese Communist, to stay in Phnom Penh and welcome the liberators. She lost everything, including her entire extended family, except one son. Hers is a story of a miraculous four-year survival under the Khmer Rouge’s countryside resettlement policy.

What makes this book special is that there aren’t many Cambodian genocide survival stories in English. It is a miracle that the story has been written and published. Days after they arrived to liberate her, the Vietnamese insisted — and paid her — to record an account of her four years in hell, to be used in a subsequent trial-in-absentia of Pol Pot and Ieng Sery. She did; and as an afterthought squirreled away a carbon copy of what she had written. Twenty-five years later, in Paris, she heard an academic opine that the Khmer Rouge did “nothing but good” for Cambodia. She then realized it was time to publish her account.

The book has the immediacy of something written on the fly. There are quite a few translation and run-of-the-mill typos, but they do not detract — you’ll not easily lay it down. Reportage Press is a small UK outfit. A portion of the proceeds are contributed to a scholarship fund, set up in memory of Affonco’s daughter, who died of starvation. The book is available from Amazon and

Editor's Note: Review of "To the End of Hell: One Woman’s Struggle to Survive Cambodia’s Khmer Rouge," by Denise Affonco. Reportage Press, 2005, 165 pages.

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Mittimal Damage


After being badgered incessantly by Gingrich, Perry, and Santorum, “vulture capitalist” Romney finally released his tax filings. We finally got to see what dirt was being covered up in his returns.

And the dirt was — nothing!

The press sifted through the 500 plus pages of Romney’s 2010 filing (and his projected filing for 2011), desperately looking for something to hit him with, and Romney came out totally clean. The media mission was to find new material that their guy Obama could use to bash Romney, but the mission was an abject failure.

True, the released material shows Romney to be a very rich man. But the filings only confirm what anybody could have found by Google-searching the dude and reading his Wiki entry, to wit, that he is worth around a quarter of a billion bucks. Listen, don’t get me wrong: I would love to have that kind of scratch. But it doesn’t put the man on the Forbes 400 Richest Americans list — he’s nowhere as wealthy as such media-darling leftist billionaires as Warren Buffett and George Soros.

Progressives are cheap when it comes to spending their own money to help others. They are generous only with other people’s money.

To be precise, in 2010 Romney earned $21.7 million, of which $12.6 million was capital gains, $3.3 million taxable interest, $4.9 million dividend income, and the remaining million or so money coming from various business gains, refunds, and speaking fees. Romney gave a whopping $3 million to charity — about 14% of his income.

Taxes on cap gains, dividends, and interest rates are a flat 15%, and charitable donations are quite legally deductible — which explains why he “only” paid about $3 million in taxes (about a 14% effective tax rate).

In short, he legitimately minimized his taxes, and paid no more than he was legally required to. This puts him in the same boat as the rest of us, Obama and Biden (and Buffett and Soros) included. I confess that I try to minimize my taxes legally. I never — repeat, never — pay more than the law requires, and I have nowhere near Romney’s tax burden.

The mainstream media was reduced to nitpicking. It turns out, for example, that Romney — whose portfolio is in a blind trust, please note, so invests without his knowledge or control — had small investments in Swiss and Cayman Island accounts. All quite legal if declared to the government — and it was.

Of his generous charitable giving, half of it went to the Mormon church, and the rest to a variety of charities, including one for researching MS (an ailment that afflicts his wife).

His projected 2011 filing, which he has promised to release in April when it is filed, shows similar income, charitable outlays, and tax rate.

There is no doubt that Obama will use as much of this as he can to hammer Romney in the fall, assuming that Romney is the Republican nominee, which I regard as virtually certain. But there is little ammo here.

Indeed, Romney’s lavish charitable giving actually underscores Obama’s cheapness when it comes to charitable giving. Compare the nearly 14% of his income ($3,000,000) that Romney gave, to what the Obamas did: from 2000 through 2004, they gave about 1% to charity (or less than $11,000), and in 2007 they gave 5.7% (or about $240,000). Even more tight-fisted was VP Joe Biden, who averaged a pathetic 0.3% (a truly risible $349) in annual charitable giving in the decade before he became vice president, and not much more since. Last year, Biden gave 1.4% ($5,300) to charity. Truly nothing compared to Romney.

The national average for giving is about 5%.

This illustrates the thesis of Arthur Brook’s estimable Who Really Cares?, a book I reviewed for these pages some time back (March 2009, 43–6): the progressives are cheap when it comes to spending their own money to help others. They are generous only with other people’s money.

Even the 14% tax rate that Romney enjoys is hard to use against him. Remember, the John Kerry household paid 13%, and the Democrats had no problem voting for him as their nominee. And for Obama to push the capital gains and dividend rates back up is for him to risk a major downturn on the stock market, as well as in the lavish support he is getting from his billionaire buddies. That could cost him the election.

In the end, after relentless attacks by Gingrich, Perry, and Santorum, all that has been revealed about Romney is that he legally and ethically earned a large amount of money, paid his taxes, and is a devout member of his church. In short, what is known now is what everybody knew all along.

Given that Obama has few accomplishments he can run on, we can also expect from him what we knew all along. His likely $2 billion reelection campaign (the $1 billion his campaign will have to spend, and the $1 billion that will be spent by groups that support him) will be entirely negative. And it will be as repetitive as it will be negative. It will simply repeat that Romney is rich, rich, rich! And he is white, white, white! And he is Mormon, Mormon, Mormon!

I am weary already.

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