Henderson on Piketty, Part 3

From EconLog.

"More excerpts from my recently published review of Thomas Piketty's Capital in the Twenty-First Century.

For those who are worried about growing wealth inequality because their own wealth is not growing, there is a simple solution: save more and invest in stock market index funds. And, to the extent possible, do so with tax-favored 401(k) and 403(b) plans and Individual Retirement Accounts (Roth or non-Roth.) When a friend who studies saving patterns of various ethnic groups in America visited me some years ago, I told him that my wife and I normally save between 15 and 20 percent of our before-tax income. His eyes grew wide. "You're Korean," he said, jokingly. Of course, hitting that saving rate meant that we didn't go to Europe or Asia, didn't buy $40,000 cars or $200 shoes, didn't buy expensive clothes, and didn't drink alcohol when we went to restaurants. What a tough life! 

Piketty does not give any space in his tome to making that point. He writes as if he is the central planner making decisions from the top down and essentially disregards the fact that people are individuals who want to deal with their individual situations.

But even as central planner, Piketty fails. The driver of his model is his strongly held assumption that the rate of return on stocks will substantially exceed the growth rate of the economy and the growth rate of real wages. Under Social Security, your benefits will grow at no more than the growth rate of real wages because your benefits are paid by Social Security taxes on current workers. So, wouldn't it make sense to let people invest their Social Security taxes in stocks rather than get only the low rate of return that they get now? Piketty says no. He makes one good argument for this, one I myself have made: the transition problem out of the Social Security Ponzi scheme is wicked. But his other argument is that investing in stocks is "a roll of the dice." What happened to his confidence about the rate of return on stocks?

Given his emphasis on--and distaste for--inequality and his conclusion that owners of capital will get an increasing share of an economy's output, it is not surprising that Piketty favors much higher taxes on wealthy people. He argues briefly that the optimal top income tax rate in richer countries is "probably above 80 percent." He claims that such a rate on incomes above $500,000 or $1 million "will not bring the government much in the way of revenue"--I agree--but will drastically reduce the pay of high-paid people. He also suggests an annual "global tax on capital," with rates that would rise with wealth. "One might imagine," he writes, "a rate of 0 percent for net assets below 1 million euros, 1 percent between 1 million and 5 million, and 2 percent above 5 million." One might imagine many things: I take it, as virtually every reviewer pro or con has, that Piketty is not just "imagining" those taxes, but actually advocating them. He adds that "one might prefer" a stiff annual tax of "5 or 10 percent on assets above 1 billion euros."

But if there is anything we know in economics, it is that incentives matter. An annual tax on capital will reduce the incentive to create capital. With less capital than otherwise, the marginal product of workers will be lower than otherwise. Bottom line: Piketty's proposed tax on capital would hurt labor."

Why Free Market Oriented Texas Has Less Poverty Than Liberal States Like California

See Housing and poverty by Scott Sumner of EconLog.

"The traditional definition of poverty in America has been criticized for ignoring factors such as government benefit programs and regional variation in the cost of living. Now the Census Bureau has released new estimates of poverty, which account for various types of benefit programs and cost of living differences. For some states the figures are about the same, whereas for others they are substantially different. Here are a few examples:

State -- Original poverty rate -- Adjusted poverty rate
California ------ 16.0% ----------- 23.4%
Massachusetts 11.5% ------------ 13.8%
New York ----- 16.0% ----------- 17.5%
Texas --------- 17.2% ----------- 15.9%

In the unadjusted figures, Texas looks the worst of these 4. The adjusted figure for Texas is exactly equal to the national average, but I'll argue that in fact it's far better than the national average, which partly explains why so many people are moving to Texas.

Let's compare Texas to California, which comes in dead last in the adjusted figures. Both states are "majority-minority," with non-Hispanic whites being less than 50% of the population. Both states have huge Hispanic minorities. The main difference between the two is that in Texas blacks are the second largest minority group by a wide margin, while in California it's Asians, with blacks a distant third. Because Asians tend to earn more than blacks, just looking at demographics you'd predict Texas to have more poverty. Instead it has far less.

If you are liberal the news gets worse. California has one of the most generous welfare states in the country, and Texas has one of the stingiest. And yet Texas has far less poverty.

Indeed if you adjusted for demographics, I'd guess Texas actually has less poverty than the US as a whole, and probably even less than heavily white Massachusetts.

So what explains the Texas success in race-adjusted poverty rates? There are probably many factors, but the housing market is almost certainly the biggest difference from California. Housing regulations (often enacted by well-intentioned liberals) are one of the biggest causes of poverty in America. And these regulations don't just hurt progressive areas. Elsewhere I've argued that the biggest problem with otherwise free market Hong Kong is the restrictive building regulations, which keep housing prices absurdly high. I don't have any data for Hong Kong, but I'd guess that much of the poverty level consumption in that city is due to the high housing prices, caused by restrictive housing regulations.

In the modern developed world most people have enough to eat (partly due to food stamps.) Indeed obesity is now a problem among the poor. Clothing is now really cheap, as are many basic home appliances like TVs and washers. There's free public education and Medicaid. The main cause of poverty is housing costs, and more specifically restrictive zoning laws that make it hard to build. Fix that and you fix much of the problem---focus on welfare, minimum wages, etc., and you are likely to be disappointed."

One commenter over their said "Joel Kotkin provides supporting analysis and stats."

A precautionary ban has made things worse for bees

See Bees and pesticides by Matt Ridley. Excerpts:

"All across southeast Britain this autumn, crops of oilseed rape are dying because of infestation by flea beetles. The direct cause of the problem is the two-year ban on pesticides called neonicotinoids brought in by the EU over British objections at the tail end of last year. The ban was justified on the precautionary ground that neonics might be causing the mass decline of bees. There is, by the way, no mass decline of bees, as I shall explain.

Neonics are primarily used as a seed dressing: seeds are soaked in the chemical so that the plant grows up protected from pests and — crucially — often does not need to be sprayed. The beauty of this is that it targets pests, such as flea beetles, that eat the plant, but not the bystanders such as other insects. In the laboratory, bees exposed to high doses of neonics do indeed die or become confused. So they should — that’s what the word “insecticide” means.

Yet large-scale field studies and real world evidence consistently demonstrate that rape pollen does not contain a high enough dose to have an impact on bee colonies. The Department for Environment, Food and Rural Affairs report on the subject concluded that lab studies used to justify the EU ban severely overdosed their bees and that bees are not affected by neonics under normal conditions. Australian regulators claim that neonics have actually improved the environment for bees by replacing older pesticides. And in the US, the Department of Agriculture and the Environmental Protection Agency have so far resisted calls to ban neonics for much the same reason.

Well, the environmentalists were wrong. The loss of  the rape cropthis autumn is approaching 50 per cent in  Hampshire and not much less in other parts of the country. Farmers in Germany, the EU’s largest producer of rape, are also reporting widespread damage. Since rape is one of the main flower crops, providing huge amounts of pollen and nectar for bees, this will hurt wild bee numbers as well as farmers’ livelihoods.

Farmers are instead reluctantly using pyrethroids. These older insecticides are less effective against pests (flea beetles are becoming resistant to them), more dangerous to other insects, especially threatening to aquatic invertebrates when they seep into streams and less safe to handle. So the result will be more insect deaths. In a panic, Defra has just announced that it will allow the use of two neonics, but — and here you have to laugh or you would cry — both are  sprayed on the flowering crop, rather than used to dress seed! So they definitely can harm bees.

Back to bees. What decline? The number of honeybee hives in the world is at a record high. The number in Europe is higher than it was in the early 1990s when neonics were introduced.

There was a severe problem eight years ago caused by the mysterious colony collapse disorder — a phenomenon that has happened throughout history and seems once again to have disappeared. Greens tried to blame it on genetically modified crops, but it happened in countries with no GM crops. The battle against the varroa mite continues to be hard. A newly virulent strain of tobacco ringspot virus has made the rare leap from infecting plants to infecting bees.

What about wild bees, and bumblebees in particular? Having read again and again of the terrible decline of bumblebees, I set out to find some graphs or tables. I came away empty-handed. In Britain some species contracted their ranges and some expanded during the 20th century. The specialist species seem to have suffered while the generalists have thrived. But claims of a continuing fall in the abundance of bumblebees over the past 20 years seem to be entirely anecdotal.

As Dr Goulson recounts in his book, it’s hard to study bumblebee nests because so many get destroyed by badgers. The huge expansion of the badger population in recent years cannot have helped the populations of their favourite prey."

Socialists Push For $20 Minimum Wage But Won’t Pay Workers That Much

From Reason.

"The Freedom Socialist Party wants the minimum wage to be $20 an hour. However, they don't feel compelled to compensate their own workers with that kind of cash.

The party is looking for a web developer, and posted a job listing on Craigslist a week ago and Indeed.com yesterday, and it's been raising eyebrows on social media.

Although the average annual salary of a web developer in the U.S. is around $62,500, the Freedom Socialist Party only wants to pay $13 an hour, which would be $26,000 a year. Except that the party won't hire someone full-time, so their next web developer's total compensation won't even be that modest chunk of change. Perhaps they're just trying to protect their employees from the temptations of "capitalist greed."

In case it vanishes or gets amended, the entire listing is below:

According to the party's last presidential platform, these self-described Marxists want:

"jobs program at union wages with childcare available"
"no cuts to Social Security, Medicaid or Medicare. Raise the minimum wage to $20 an hour. Provide a guaranteed annual income. Free medical care for all, including reproductive services and abortion."

Reason contacted the party and confirmed that the listing is legitimate, and that in spite of the party's commitment to unionizing laborers, the available position is not a union job. Don't count on any of those other sweet benefits either, part-timer.

The Freedom Socialist Party applauded the push for a $15 minimum wage in Seattle earlier this year, stating that the city is unlivable otherwise, "compromise destroys solidarity," that the party must "leave no one behind."

One could argue that it's not fair to pick on small organizations like the Freedom Socialist Party, because they can't afford high-pay web developers. Given the requirements they list, chances are they're looking for a high school or college student who is just starting out in the field. But, these are exact reasons why people argue against artificially high minimum wages. It's not "capitalist greed," but an understanding that it puts a barrier between small organizations with limited funding and low-skill workers who want to earn experience."

What if we could confiscate 100% of CEO compensation for all S&P 500 companies and redistribute to average workers?

From Mark Perry.

"

As I’ve reported before on CD, the AFL-CIO Executive Paywatch website decries the fact that in 2013 the CEO-to-worker pay ratio was 331:1, based on a comparison of the average compensation of 350 CEOs in the S&P ($11.7 million) to the $35,239 average annual pay for the 94.5 million workers in the BLS employee category “production and nonsupervisory workers.” According to the AFL-CIO, the CEO-to-worker pay ratio has increased from 46:1 in 1983, to 195:1 in 1993, to 301:1 in 2003 and to a record 331:1 last year. Further, we learn from the AFL-CIO that:

America is supposed to be the land of opportunity, a country where hard work and playing by the rules would provide working families a middle-class standard of living. But in recent decades, corporate CEOs have been taking a greater share of the economic pie while wages have stagnated and unemployment remains high. Today’s ratio of CEO-to-worker pay is simply unconscionable. While CEO pay remains in the stratosphere, production and nonsupervisory workers took home only $35,239 on average in 2013.

OK, let’s assume that the AFL-CIO is correct that corporate CEOs have been gobbling up a greater and greater share of the payroll pie over the last 30 years. Well then what would happen if we could either: a) confiscate 100% of the compensation paid last year to all of the S&P 500 CEOs and redistribute that money to the 94.5 million production and nonsupervisory workers, or b) cap the 2013 CEO-to-worker pay ratio at either the 1983 level (46:1) or the 1993 ratio (195:1) and confiscate and redistribute the excess CEO pay above those caps to the 94.5 million workers? The table above summarizes how that confiscation of CEO pay and redistribution would affect the average worker’s annual income and hourly pay rates. Here’s a summary:

1. The AFL-CIO reports that CEOs of companies in the S&P 500 received $11.7 million in total compensation last year on average, based on an analysis of available data from 350 companies in the S&P 500. Assuming that $11.7 million was the average pay for all S&P 500 companies, the CEOs as a group would have generated $5.85 billion in income last year. If we could confiscate that total amount of almost $6 billion and redistribute it equally to all 94.5 million workers that the AFL-CIO uses for its “average worker pay” calculation, each worker would have received $61.90 in extra annual pre-tax income last year, or about 3 cents per hour for a 40-hour workweek and about 3.5 cents per hour for a 35-hour workweek (see first row in the table above).

2. If we could impose the 1983 CEO-to-worker pay ratio of 46:1, the average S&P 500 CEO compensation last year would have been only about $1.6 million, and the 500 CEOs would have earned only $810 million in 2013, instead of $5.85 billion. Distributing the approximately $5 billion in excess earnings last year to the 94.5 million workers would have increased their annual pay by $53 and their hourly pay by about 3 cents, before tax (see middle row in the table above).

3. Imposing the 1993 CEO-to-worker pay ratio of 195:1 would mean that the average CEO compensation last year would have been only about $3.4 million, generating nearly $2.5 billion in excess CEO pay to redistribute to average workers. Each of the 94.5 million workers would have seen an increase in their annual pay of less than $26, and their hourly pay would have gone up by less than 2 cents, before tax (see last row in the table above).

MP: Even if the AFL-CIO could have engaged the services of a magic genie (or the federal government) to confiscate 100% of the compensation of all US CEOs in the S&P 500 last year, and then redistributed that $6 billion of executive compensation to America’s 94.5 million middle-class workers, the average worker’s income would have only increased by about $1 per week – and that’s before taxes. And if the AFL-CIO could have capped CEO compensation last year at the 195:1 ratio of CEO to average worker pay that prevailed 20 years ago, and redistributed the excess above last year’s actual CEO pay, the average worker would have seen his or her pay increase about 50 cents a week. Big deal.

There might be a lot of reasons that average worker pay has stagnated over the last decade – intense international competition, an increase in fringe benefits as a share of total worker compensation that has slowed monetary wage increases, the Great Recession, the jobless recovery, the new two-tiered wage systems of autoworkers and other industries — but the increased compensation for America’s top executives certainly isn’t one of them."

Piketty’s proposed tax on capital would hurt labor.

From Cafe Hayek.

"David Henderson reviews, in Regulation, Thomas Piketty’s Capital in the Twenty-First Century.  A slice:

But if there is anything we know in economics, it is that incentives matter. An annual tax on capital will reduce the incentive to create capital. With less capital than otherwise, the marginal product of workers will be lower than otherwise. Bottom line: Piketty’s proposed tax on capital would hurt labor.

How does Piketty handle this serious problem? He doesn’t."

Diseases of Poverty: Neglecting the Obvious

From Bryan Caplan of EconLog.

"Before blogging Ebola, I've been reading up on the broader category of "diseases of poverty."  The low-point of the Wikipedia entry:

There are a number of proposals for reducing the diseases of poverty and eliminating health disparities within and between countries. The World Health Organization proposes closing the gaps by acting on social determinants. Their first recommendation is to improve daily living conditions. This area involves improving the lives of women and girls so that their children are born in healthy environments and placing an emphasis on early childhood health. Their second recommendation is to tackle the inequitable distribution of money, power and resources. This would involve building stronger public sectors and changing the way in which society is organized. Their third recommendation is to measure and understand the problem and assess the impact of action. This would involve training policy makers and healthcare practitioners to recognize problems and form policy solutions.

On etymology alone, you'd think that economic growth - i.e., producing more wealth per person - would top the list of cures for "diseases of poverty."  But it isn't even mentioned.  Instead, we get to choose between:

1. Targeted redistribution to women and children.

2. General redistribution/bigger public sectors.

3. Better policy evaluation and training of policymakers and health workers.

It's almost like the last two centuries never happened.  Quick recap: During the last two hundred years, living standards exploded even though the distribution of income remained quite unequal.  How is such a thing possible?  Because total production per person drastically increased.  During this era, no country escaped dire poverty via redistribution, but many escaped dire poverty via increased production.  And while the effect of moderate redistributive policies on growth is unclear, there is no doubt that populist and socialist movements determined to "tackle the inequitable distribution of money, power and resources" and "change the way that society is organized" sharply retard growth.  As I told the Gates Foundation when they asked for my input:

Anyone serious about reducing world poverty must come to grips with a single key fact: Redistribution from rich to poor has not and cannot solve more than a tiny fraction of the problem.  Even if you could perfectly equalize income in Third World nations with zero effect on production, the citizens of Third World countries would remain mired in poverty.  Take Bangladesh.  With a GDP of $256B and a population of 164M, equalization would at best give each citizen an income of $1561 per year - about $4 a day.  Countries do not overcome poverty by sharing production more equally.  They overcome poverty by increasing production - what economists call "economic growth."

Diseases of poverty are sadly real, but happily curable.  Avoiding populism and socialism is a good first start.  Economic freedom, especially for reviled multinational corporations, is also vital.  And if First World countries want to lend a hand, nothing cures global poverty faster than open borders."