Stupid Piketty Question: Why does it matter if the rich get (nominally) richer?

Thomas Piketty’s Capital in the Twenty-First Century urges readers to take drastic action to prevent what he says is an inevitable explosion in the wealth of rich people worldwide. Piketty assumes the following: (1) rich people get a better return on their investments than regular investors, (2) governments will stop taxing dividend and capital gain income, (3) the world economy will grow at best slowly for the next 50-100 years, (4) the return on capital will be high, and (5) rich people won’t consume too much (which means most of their income gets plowed into additional investment). If one accepts these assumptions today’s disgustingly rich will become tomorrow’s ridiculously rich in a runaway process. This is why we need to take immediate action to tax wealth so that it doesn’t spiral upward out of control (and actually Piketty says that we need also to take immediate action on climate change for the same reason).

I have a feeling that this is a stupid question but I haven’t figured out a clear answer…. Why does it matter if today’s billionaires become tomorrow’s trillionaires?

As the Detroit realtor no doubt would have said 20 years ago, “they’re not making any more land.” I.e., once rich people own most of the world’s land all that can happen is that the nominal price of the land goes up, but the total amount of land owned doesn’t change. Similarly, there are only a certain number of factories in the world. If every rich person suddenly has 100X the wealth it will take a long time before more factories are built so the dominant effect will be bidding up the price of existing factories. General Electric is still the same company even if its shares in the aggregate become worth 10X as much as they are today.

How about personal lifestyle? Will the huge wealth increases allow rich people to live more lavishly? Not if they want to live around other rich people and show off. See the June 1, 2014 “Sky-High Demand for Luxury” in the New York Times: “multimillion-dollar apartments have been snatched up hours after they hit the market and buyers have shelled out $1 million over the asking price to secure a winning bid.” Sure the S&P 500 is up, but the price of a Manhattan duplex, a Range Rover, and a parking spot for that Range Rover, have gone up even more. A rich person could now buy all of Detroit, but why would he or she want to?

Will the super rich becoming super duper rich affect the lifestyles of the non-rich? Consider that millions of Americans have a lifestyle that is set by the government in absolute terms, i.e., they are provided with whatever housing, medical care, and food that a government official decides that they should have. Additional millions of Americans are employees of the government or government contractors. Once again, the government decides what to pay these employees, generally without reference to the market (example). How about the shrinking group of private industry workers who don’t work for government contractors? Can the uber rich force them into accepting minimum wage? It seems unlikely. The rich have to give the capable and hard-working some incentive to show up, so the wage of a good worker should be bid up until it is sufficient to support a comfortable lifestyle.

Natural resource consumption seems like the place where the rich could do some serious damage to the middle class. When people who don’t care about money travel, for example, they burn a lot of oil. The President of the United States, for example, will send out a couple of Air Force cargo planes a couple of days ahead. These are stuffed full of SUVs, helicopters, and other vehicles. Then the President shows up in his private Boeing 747. If there were another 10,000 people worldwide who traveled in the same style this would put a real dent in oil supplies and middle class people might be reduced to walk/biking/Guatemalan chicken bus. The middle class private car era will draw to a close.

But except for oil, what good will it do the rich to become uber rich? Won’t they just bid against each other and generate inflation in the prices of 20-carat diamonds, townhouses in Paris, used Gulfstream jets, etc.? Once the rich own all of the world’s land, all of the world’s factories, and all of the world’s gems and gold, how can they actually get richer from a functional point of view?

And finally why does it matter to the rest of us if a family holds onto a lot of wealth for a while? If they’re holding it aren’t they investing some of it in productive enterprises? And don’t they have to eventually spend a lot of it to get any value out?

16 Comments

  1. jseliger

    June 2, 2014 @ 11:44 pm

    1

    Megan McArdle wrote a version of your post in “The Inequality that Matters,” and a few days ago I wrote a response to hers: “The inequality that matters II: Why does dating in Seattle get left out?

    The question can be re-expressed to, “Does absolute wealth matter, or does relative wealth matter?” I get the sense that this question is too rarely discussed.

  2. Gary Bloom

    June 2, 2014 @ 11:54 pm

    2

    Because the ultra-wealthy can buy every election.

  3. philg

    June 3, 2014 @ 12:08 am

    3

    Thanks, J, for the links. Ms. McArdle certainly is dispensing economic advice that is contrary to the law in many U.S. states. She says “It’s sub-optimal to have a kid unless you have two stable parents in a committed relationship to raise it.” But from a financial point of view it is better to have a child in a one-night encounter with a drunken high-income person (potential for $100,000/year to $1 million/year in tax-free child support) than to get married to a person earning a median income (about $28k/year, but taxable (see http://www.ssa.gov/oact/cola/central.html )). New York law gives a person who has three children with three different co-parents 2X the child support that three children with a common co-parent would yield (assuming the people targeted for child support all have roughly the same income).

    At least for those who don’t take a sentimental view of marriage or children, Piketty certainly seems to be giving out more practical economic advice.

    Gary: So the ultra-wealthy have bought every election… how does that make my life different? Remember that I live in Massachusetts where most of the candidates run unopposed.

  4. David Wihl

    June 3, 2014 @ 4:12 am

    4

    Great questions. It does not matter to me whether Bill Gates is worth $76B or $760B – he already has too much to give away that his charitable contributions have leveled off (source). The uber rich tend to be world citizens which weakens a specific nation’s power and ability to tax, which I think is a good overall benefit. The uber rich also have a vested interest in preserving their wealth and may therefore make more rational decisions for long term growth and sustainability than a politician seeking to win the next election.

  5. Fabien

    June 3, 2014 @ 4:51 am

    5

    Wealth accumulated within one lifetime is not the major issue; the main problem is when wealth is transmitted to heirs, who’ll own the world without having ever produce anything of value to even partially deserve it. Think of it as welfare, but distributing fortunes rather that food stamps, to the tiny fraction of the population who’s been lucky to be born from the right person at the right time.

    If you somehow effectively prevent inheritance, most of Picketty’s issues lose most of their relevance.

    And of course, as pointed by others, once you command most of the world’s resources, you’ll always find ways to override democracy and to confiscate other people’s liberty.

  6. Kyle Marek-Spartz

    June 3, 2014 @ 8:30 am

    6

    “Consider that millions of Americans have a lifestyle that is set by the government in absolute terms…”

    What percentage of Americans have a lifestyle set by a government? Saying millions of Americans is misleading. It seems to imply a majority.

  7. philg

    June 3, 2014 @ 9:20 am

    7

    Fabien: How is it that rich people have tried to “confiscate other people’s liberty?” Can you give some examples? In the modern era, people who have become dictators or absolute rulers generally did not start out rich, did they? http://en.wikipedia.org/wiki/Pol_Pot says that he was the eighth child of a rice farmer, for example. By contrast, look at Bill Gates, Warren Buffett, and Larry Ellison, the three richest Americans. All have made substantial donations to the Democratic Party (see http://newamericangazette.com/2011/01/top-20-richest-people-democrats/ for example) but I am not aware of them advocating for the Democrats to do different things that what middle class supporters of the Democrats advocate. The real problem with these uber rich folks, from the U.S. government’s point of view, is that two of them (Gates and Buffett) are sending a much higher percentage of their wealth to other countries than would Americans of more modest means. http://www.gatesfoundation.org/Who-We-Are/General-Information/Financials/2011-Annual-Snapshot-of-Grants-Paid says that the Gates Foundation spent about $1.65 billion on foreign stuff and only $487 million on U.S. stuff. That’s not the kind of foreign-aid-to-domestic-spending ratio that American voters support.

    Kyle: If you think that most Americans would interpret “millions” to mean a majority among a population of 318 million then I think we know why employers have to keep moving to China to get the arithmetic-competent workers that they need! But you have a good point that it would be nice to estimate this more tightly.

    Anyway, I think that approximately 20 percent of Americans are on food stamps (SNAP). http://kff.org/medicaid/fact-sheet/the-medicaid-program-at-a-glance-update/ says that approximately 20 percent of Americans are on Medicaid. So for “millions” you could read “about 64 million”. But you could also say that much of the standard of living of America’s older population is determined by government. The government determines what Medicare will cover, for example, and about 50 million Americans are on Medicare (see http://kff.org/medicare/state-indicator/total-medicare-beneficiaries/ ). The government also determines Social Security benefit levels and may provide subsidies for elder housing. So that’s about 114 million Americans, or 36 percent, whose lifestyle is determined by central planners. http://www2.census.gov/govs/apes/2012_summary_report.pdf says that there were 22 million government workers in the U.S. back in 2012, not including military. If we assume that each government worker is part of a three-person household, that’s 66 million additional Americans whose lifestyle is determined by the government. http://www.cfr.org/defense-budget/trends-us-military-spending/p28855 shows that about 2 million people are direct members of the U.S. military (and their per-person compensation was nearly doubled from 2001 to 2012, indicating that the government has the flexibility to determine military compensation without reference to any market (since American workers in general did not get a 2X compensation increase)). http://security.blogs.cnn.com/2011/09/22/defense-cuts-the-jobs-numbers-game/ says that the total including contractors and civilians is about 6.1 million. Applying the same 3-people-per-household rule, that’s another 18 million. So in total, central planners determine the lifestyle of about 198 million Americans or 62 percent of the total population.

    [I have to admit that I am surprised by this result! I hadn't thought it would work out to a majority! But the real point is not whether or not this is a majority. My point was that there are a lot of people whose lifestyle is not affected by whether or not someone else is rich.]

  8. lv

    June 3, 2014 @ 9:44 am

    8

    I think most of your questions can be answered if you answer just the last two:

    “And finally why does it matter to the rest of us if a family holds onto a lot of wealth for a while? If they’re holding it aren’t they investing some of it in productive enterprises? And don’t they have to eventually spend a lot of it to get any value out?”

    No and No. Or perhaps only “not enough”. The utility of money can level off even as returns on capital accumulate – so the rich are bidding up diamonds and jets and basketball teams which is not productive from a social perspective (more people might enjoy great roads or public transport, or clean parks or universal daycare or subsidized maternity leave, or cheaper education) these “human capital” costs make life undoubtedly better in the society and perhaps produce long term returns but the returns do not accumulate to one investor so it’s hard for private enterprises to invest in them.
    Nor is lavish spending, recirculating those resources enough – there are only so many diamonds you can keep buying even at inflated prices.
    Finally, an oligarchy “seizing the commanding heights of the economy” has generally been frowned upon in this country as corrupting.

  9. Robert

    June 3, 2014 @ 10:52 am

    9

    One problem with the richer getting richer is fairly evident in NYC and other major cities. The amount of decent real estate to support a modest middle class lifestyle (think 3 bedroom apartment for a family of four) is very limited. This apartment in Manhattan will cost around $3M. The ultra rich keep pushing this price higher and creates a disincentive for the next generation to work. The richer the very top gets, the more real estate they need to buy to preserve their wealth and they often leave it vacant as evident in many upper east side buildings and London’s billionaires row.
    http://www.theguardian.com/society/2014/jan/31/inside-london-billionaires-row-derelict-mansions-hampstead

    Today, in order for a poor young family to buy a $3M apartment in order to live and work in NYC, you almost have be either an I-Banker, a surgeon, maybe big law partner. It use to be the teachers and musicians getting priced out, now it’s most lawyers and doctors too. Imagine if the same apartment now costs $30M, no job can afford to support that level of cost and next generation of smart poor kids will have to give up and just live on welfare.
    I do however agree on goods such as yachts and gems, they are not a necessity for middle class lifestyle so who cares if they cost $1M or $1B.

  10. philg

    June 3, 2014 @ 11:34 am

    10

    Robert: Agreed that New York is not affordable except for the rich (who can buy or rent at today’s prices) or the poor (who get free housing from the government). But that’s why I don’t live in New York! We have a reasonably mobile society. Why is it so bad that a few square miles of U.S. territory become havens for the rich? Let them have Davos, Manhattan, certain neighborhoods in San Francisco, and Santa Monica. That leaves plenty of room for the rest of us, no? Am I suffering because I live in the Boston area and can’t rub shoulders with the uber rich in Manhattan? I don’t know those people. They aren’t my friends. They don’t invite me to Davos. I had never even heard of Davos until 15 years ago when an MIT professor got invited (and then he worked it into every conversation, e.g., “This salad reminds me of the salad that Bill Gates and I shared at Davos.”) Why should I get upset about the fact that I can’t live in Manhattan due to lack of affordability when there are a huge number of other places on the planet where I also can’t live, e.g., because I am not a citizen of those countries or because there are no jobs for people with my skills in those places or because I have no friends there and/or don’t speak the local language?

  11. George

    June 3, 2014 @ 12:49 pm

    11

    I see no issue with the mega-rich, as long as we are not going back to the ages where Pharaohs, Emperors and Kings ruled. Are we?

  12. Olentzero

    June 3, 2014 @ 1:09 pm

    12

    There is an “inflation rate” that is often ignored, the growth of people’s expectations. We expect from life much more than our grandparents, and we expect to get those desires satisfied with far less effort (in a way Monty Python’s “Four Yorkshiremen” sketch, http://en.wikipedia.org/wiki/Four_Yorkshiremen_sketch, rings very true).

    We expect our wars to be without casualties (including our enemies), our hospitals, roads, and airplanes to be absolutely safe. Plumbers desire to live in houses just like the ones belonging to cardiologists. Nowadays, we expect that every kid should be able to learn without effort if provided with the right prescriptions.

    We also ignore the tremendous progress that we have made in other areas where inequality used to be a significant issue. Arguably, we live in a society that is relatively free of discrimination. We have a non-white president, and recently a member of the despised very rich class has had ownership taken from him because there is a recording that suggests that he is a racist. Ask any gay person if he/she would rather live in the “less imbalanced world” of the sixties.

    I grew up in a country where a trip to the beach could involve one or two mandatory highway stops at a police control. When I was young, flags would fly from newly erected buildings to celebrate that construction was accomplished without any fatality. It is hard to believe that high-speed rail now have replaced trains were used to film Doctor Zhivago. I’m sure people from China or other Asian countries who are my age have even more striking tales to tell.

    And I’m convinced that, no matter what Piketty thinks, my son will live in an even better society.

  13. philg

    June 3, 2014 @ 1:12 pm

    13

    Robert: Now that I think about it, New York is actually a good example of the practical limits of what happens when you can’t spit in the street without hitting someone uber-rich. Consider New York University, one of the richest entities in the United States ($2.9 billion in endowment plus real estate that is probably worth even more). In order to keep its tuition profits flowing, it needs a local workforce of teachers. It has to pay teachers enough so that they can afford to live a reasonably normal lifestyle while based in Manhattan, which includes housing for children, a parking space for a car, and a nice summer vacation each year. For a lot of teachers, NYU simply provides them with an apartment and a parking space at rents that are set without reference to the Manhattan market but instead by reference to however much NYU happens to pay.

    It seems hard to believe that the average location in the world could ever become as income-polarized as Manhattan and yet, even in Manhattan, when an employer wants workers it needs to pay them enough to live at what would have been a very high standard of living just a few decades ago.

  14. E. Rekshun

    June 3, 2014 @ 6:08 pm

    14

    Additional millions of Americans are employees of the government or government contractors.

    Yep. In the 29 years since I graduated with my BS in Computer Science, I’ve been a salaried employee for the federal government, a state government, a city government, and a government defense contractor. During that time, I’ve earned two masters degrees. I’ve never come close to earning a six-figure salary, nor will I.

  15. Russil Wvong

    June 4, 2014 @ 2:39 am

    15

    I think the fatal flaw in the scheme you’ve described — increasing concentration of wealth, ameliorated by redistribution of income via the government — is the revolt against taxation.

    If the wealthy aren’t willing to see a sizable portion of their income redistributed to the rest of the population via taxes and transfers, the system isn’t workable. And there’s plenty of evidence that this is the case: the obsessive focus on tax cuts (even when they result in large deficits), the campaign against inheritance taxes (the “death tax”), aggressive tax planning like the Jackie O. trusts employed by the Walton family.

    Money has tremendous influence in the US political system, so it’s probable that the desires of the wealthy will get translated into policy, in the form of tax cuts which result in deficits, which then require cutbacks to balance the budget. You could argue that this is short-sighted and irrational — that the wealthy benefit from social stability, and therefore have an interest in continuing redistribution rather than dismantling it — but it certainly appears to be a strong force in US politics.

    More than $7 billion was spent during the 2012 presidential election. Recent 5-4 Supreme Court decisions (Citizens United, McCutcheon) have removed even the weak restrictions that existed previously. Ezra Klein of Vox summarizes: The most terrifying graph about democracy is a straight line.

    Here in Canada, I think there’s less resistance to taxes and redistribution, and the influence of money on politics is quite limited (individual donations are capped at $1200/year). So I think Canada is probably in a better position to deal with increasing concentration of wealth than the US.

    More subjectively, another French observer (Tocqueville) noted that Americans are remarkably ambitious (more so than Canadians, I would say). This has many benefits (ambition drives individuals to do great things), but ambition and envy are two sides of the same coin. Alain de Botton:

    Feeling grateful about the good aspects of our lives is something we all know we should do a bit more often. And yet there’s often something curiously uncomfortable, even maddening, about being reminded to do so.

    In part, that’s because the call to be more grateful stands in deep conflict with a central drive in human nature: ambition. We know in theory that we should be grateful for what we have, but day to day, we are dominated by striving: for better relationships, working lives, communities and nations. The advocates of gratitude sound like they are recommending that we be content with how things already are. Mediocre situations could (these people seem to be saying) be so much worse. People in developed nations, irritated by the ineptitudes of their governments, should be more grateful that their politicians are not like those in Zimbabwe. Someone fed up with having a cough should be very glad they don’t have bronchitis…

    This sort of thinking is deeply at odds with the underlying attitudes of modern societies. Capitalism stimulates constant ambition and longing and rewards astute, intense assaults on excellence. Restlessness is the precondition of progress. Nothing should be good enough for very long. The idea of being content with what we have and who we are has come to feel strange and dangerous. At best, gratitude appears like the consolation prize – the loser’s counsel.

    I’m not sure we can make any solid predictions about what’s likely to happen when you have increasingly concentrated wealth combined with frustrated ambition on the part of the majority, and a political system that’s incapable of responding to that frustration. But social and political upheaval seem pretty likely.

  16. Fabien

    June 4, 2014 @ 7:31 am

    16

    > How is it that rich people have tried to “confiscate other people’s liberty?” Can you give some examples?

    I’m not thinking Pol-Pot style takeover. This is insanely risky, and only done when you haven’t any safer way to influence politics. With enough money you get what you want through lobbying more effectively than through undisguised violence.

    The decision about whether to go to war, for instance, is rarely taken against the interests of the wealthiest and best connected citizens. War used to be about old and wealthy people deciding to preserve their interests, by sending young and poor ones to kill each other (I use past tense, because WMD make war between major countries detrimental to everyone, including the richest). It’s painted over with patriotic discourses, but that’s just brainwashing that happens to work better than the North Korean way.

    The definition of “Intellectual Property” currently chosen favors old money (it’s changing, now that new money has its say, and the likes of Google Facebook etc. start using their newly acquired influence).

    The litigating culture in the US drains money, from productive people to lawyers, because lawyers have much better money and connection than people who’re busy being useful. The child support nonsense that justifiably drives you mad is just a mean to funnel more money through them. The reluctance against any form of “Loser pays the fees” provision, which would slash the amount of frivolous lawsuits and is widespread in the rest of the world, is another example.

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