Thomas Piketty Goes Global
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(1) Owning a home in the US is a good investment.
(2) Housing in the US is affordable.
Both 1 and 2 cannot be true over the long term, if the price of housing appreciates faster than inflation and wages it is a good investment and if it does that it is no longer affordable because wages have not kept up with the cost of housing.
Housing-as-investment seems to come in two forms, but I don't think either needs unsustainable growth?
1) you'll have at least one asset going into retirement, or
2) you're going to borrow against the first one to buy another, rent it out, etc, which doesn't need a ton of appreciation in value as you start getting the cumulative income streams
Consider that in many parts of the country housing is still a "good investment" but you don't have coastal-California-level unaffordability.
Housing prices in the most desirable cities are a result of extremely heightened inequality. However, ownership is a path to security and insulation from the whims of the super-wealthy, so undercutting that doesn't seem like a great anti-inequality strategy.
1. In many markets in the US housing has been a good investment (for a bunch of reasons too long to discuss here).
2. Owning a home with a mortgage on it forces the owner to "put money in savings" each month as they pay down principal on the loan.
The rent v. own discussion is a complex financial decision. If you buy a house with 20% down you're using 5:1 leverage. Even in historically strong housing markets if you put the same amount of principal into a 5:1 levered SP500 you'd have made much more money buying stocks than you would that home. So if your rent = interest + maintenance and you could afford to invest the same in principal in equities you'd do much better. Now I don't know any investment advisor who would tell a client (and I'm not one at all so take my advice for what it is -- the thoughts of a business person) to go all in on a 5x leveraged equity portfolio.
Like any investment it depends on the price
> (2) Housing in the US is affordable
The US is so big, there are plenty of places in the US with affordable housing
To your third point, throughout history most people have not had access to other wealth assets besides a house. So even if the value of a house just tracked inflation it was doing its job of storing wealth.
There are places in this world were a cow is an investment, and being able to get your hands on anything that preserves wealth is valuable
as a very top level explanation (appealing to things you already know and don't dispute), your retirement should be invested in the stock market; and yet, the stock market is "fairly priced", no company's shares are clearly better priced than any other's. So, "you are better off in the stock market than not in the stock market, and you are better off owning a diversified, market-weighted basket of stocks".
The stock market is (1) a good investment and (2) not only affordable, but is so affordable you can't afford not to invest.
(3) the investment aspect of the housing market is not appreciably different except you don't easily get to diversify your portfolio. Luckily, location location location does a type of risk averaging, though you are exposed to the risk of location value changing. Housing does have another aspect, consumption: if you live it in, you are renting the house from yourself, consuming the space-time and depriving yourself of the rent you could be entitled to. Therefore, if you live in an expensive house, you are paying expensive rent.
Owning equity in a business, either through the stock market or private ownership, is different than a house. Simplistically the equity goes up in value as the business grows or goes down if it shrinks. A business is not a single fixed capital asset.
A house is a fixed asset that does not grow. In order for a house to increase in price you have fixed asset appreciation. If that appreciation increases in price faster than wage growth or inflation it's a good investment and it isn't as affordable in the future for the median wage earner.
What is a house's expected appreciation compared to inflation? that's all bound up in the "crowdsourced" current market price already.
It's something else that makes a house a good investment, rather than your definition, and I tried to illustrate that in my first answer by pointing out that stocks are good investments without knowing precisely how individual stocks will perform in the future.
Piketty's calling out some good things, but by linking r to interest rates, Piketty's telling us we need to lower interest rates to deal with inequality, when in reality lower interest rates just benefit those already wealthy...
> but by linking r to interest rates
Where does he do this? I was under the impression that this is, to a first approximation, the return on equities—of which the top 10%/1%/0.1% own the vast majority of.
This is pretty off base from the 80-20 rule, and way out of line with what people think is fair.
Since $100k net worth puts you in the top 8.4% globally -- a lot of us probably fall into that category.
I think the biggest problem is that 70% of the world has a net worth less than $10k. We're not properly investing in our human capital.
Taking from the rich to give to the poor sounds great, and the rich probably have way too much. But a lot of people think it's just a distribution problem. It isn't. The pie isn't big enough yet. It really is the biggest problem.
If all the wealth was shared equally, the average person would have $32k. That won't even buy you a shack in Nigeria.
My idea of a bigger pie, is not debasing the value of our currency. I think you're assuming that if we "made more money" Venezuela-style that the value of money would be less / things would be more expensive. I'm not saying we should "make more money". I'm saying we should "make progress".
Progress is REAL growth. We measure GDP growth in REAL terms. An inflated pie would not be a bigger pie. A pie that's bigger in REAL terms would be a bigger pie.
Where does those numbers come from? And for the record, my net worth is nowhere near $100k!
> But a lot of people think it's just a distribution problem. It isn't. The pie isn't big enough yet. It really is the biggest problem.
How do you know that? How large does the pie needs to be and for how long should we wait for it to grow?
If you look at the data that Piketty puts forward in his earlier book ('Capital-21st'), it shows that things were much more evenly distributed in past decades, and that since ~1980 there's been a lot more concentration of wealth.
Further, if you look at Gini coëfficient (a metric which Piketty is not a fan of, but it can be useful) of various countries, you can see some have more equality than others.
The US is at roughly 41, but Canada is at 34; that hot bed of socialism, Switzerland, is at 32.
* https://en.wikipedia.org/wiki/List_of_countries_by_income_eq...
Why can't the US be 34 (or 32) as well? Why is the pie not big enough for the US, but is in CA or CH? In 1979 the GINI for the US was 34:
* https://fred.stlouisfed.org/series/SIPOVGINIUSA
The pre-tax income share of the Top 1% was below 15% from 1953 to 1983 (almost going down to 10%), but now it is at 20%: what about the "pie" has changed such that it cannot be brought down again:
* https://en.wikipedia.org/wiki/File:U.S._Pre-Tax_Income_Share...
* https://en.wikipedia.org/wiki/Income_inequality_in_the_Unite...
> If all the wealth was shared equally
Straw man: how many people are asking for 'perfect' inequality, i.e., a Gini of 0? Norway is at 26, Denmark and the Netherlands at 28, Austria at 30, Germany at 31. Are these places where you can't buy a private jet because the government is taking away "too much" from the rich?
I could be wrong, the thing is like 500 pages and it's been a while. Does anyone know how he gets his r?
https://en.wikipedia.org/wiki/File:TaxRateAndGrowthPiketty10...
Say we have 2 people who spend all their money every year. $A makes 100K a year. $B has 1M capital. Say the rate of growth is 2%, and that the return on capital is 10%. Year 0, $A makes 100k, $B makes 100k. Year 1, $A makes 102k and $B makes...100K, again.
Even if they both save 50% of income, the worker still "wins", although his performance asymptotically trends towards the other's performance as a greater share of income comes from capital.
Even though the return is 5x greater than growth ( and growth is part of the return), the person who relies on salary (ie not capital return) benefits and the other does not.
Now if $B has 10M, and r=g at 2%, lets recalculate. Year 0 $B makes 200k, $A 100k, then at year 1 $A 102k, $B 200k. But consider, to have the same consumption, $B can save 50% and invest the other 100K. If he did that he would have 102k to spend like $A.
Obviously this is a convoluted scenario, but for me, it seems this example punches a huge logical hole in the r vs g thing. Inequality seems to have more to do with personal savings rate than r>g. And note - its WEALTH inequality that rises, not consumption inequality (in that case, does it even matter?).
I don't really know what to think about this subject anymore.
first year: $100k spending, $100k extra capital gains, $2.1M total capital
second year: $102k spending, $108k extra capital gains, $2.208M total capital
third year: $104k spending, $117k extra capital gains, $2.325M total capital.
The real argument against Piketty is that people don't stay rich for long, i.e. they don't really get R, but a crazy volatile version of R. There's a large rotation in the top %. Nassim Taleb is quite vocal on the fact that, in the end, pretty much nobody gets market returns. Most people get below average returns, while very very few outperform a lot.
This is the same reason why stocks should outperform bonds - they're more risky, and you need more capital to take more risk. Therefore not everyone can afford stocks, therefore stocks are cheaper (from a return point of view).
Consider the person who makes 50K a year. Or the person with 10M capital.
It should be increasingly clear that "personal savings rate" alone is going to have an exceptionally hard time to overcome those starting points. Especially if the wealthier people don't dramatically fuck up and spend >100% of income...
But even in your initial situation, yes, the difference between wealth inequality and consumption inequality is crucial. Person A has limited options to maintain that lifestyle. Maybe their boss is abusive but they haven't gotten any other job offers that pay the same. Maybe they have to commute 2 hours a day and can't spend time with their kids. And so, then, is the difference in time inequality. You have one person who's working full time to make their living, and other who is not working at all.
> They include a schedule of taxation on income and wealth that reaches ninety per cent and the elimination of nation-states in favor of “a vast transnational democracy,” which will secure “a universal right to education and a capital endowment, free circulation of people, and de facto virtual abolition of borders.”
I think arguments like these can serve a useful function. Based on their appeal, maybe we'll move in the right direction. But the arguments themselves? A "transnational socialistic union" is a bizarre dream. And dreams can be dangerous when people take them too seriously.
Even small countries can't get agreement on what the gov't should be doing, so how could possible do that across the globe?
I'm going to guess like most "revolutions" it involves taking care of those "reactionaries" to make sure they don't upset the plan.
Hmmm, I’d like to not pay more taxes and for healthcare to be cheaper
I think the perception of such a dream depends on a series of factors. One of them is the ability of the person to deal with complexity. See: https://www.youtube.com/watch?v=mW4LTqRJDW8&t=2s
A person on the third order of consciousness (Social) would tend to find the idea repulsing.
A person on the forth order of consciousness (and 5th) would tend to find the idea attractive.
Trouble is that we are not yet at 4th order at a global level. We are actually nowhere near that. Unfortunately, not even the leadership is there yet. Some are but not all.
The higher one goes on this scale of development the clearer the interconnectedness of everything is.
Kegan even argues that the reason we live longer might have something to do with needing to develop the higher levels of consciousness that are required to deal with the global challenges that we face. It is impossible to deal with global consequence by using the 3rd order of consciousness. The ability of people with this type of consciousness to deal with the complexity of the issue is simply inadequate.
It seems straightforward to employ those versed in valuing various stores of wealth for the implementation of a wealth tax. Certainly, some assets might be more difficult to value than others (art, antiques, exotic vehicles, certain business ventures), but a value can be determined nonetheless. Real estate? Financial instruments? Effortless and automatable.
That's what insurance company are (perhaps) for: what are they covered for? That's what you tax them at.
There's also this idea, which could be useful for discouraging undervaluing assets for a wealth tax: the owner puts a value on the asset, and the tax authority has the option of purchasing it for that price. If someone tries to cheat the system by severely undervaluing their assets, their bluff can be quickly called.
Sounds like we are overthinking the problem and coming up with unreal scenarios
Basically, to disincentivize under-reporting the property's value for tax purposes.
Many, many business manage to get away with egregious undervaluing to avoid property taxes today. For instance (IIRC) Apple values some of its headquarters buildings at $1 for tax purposes using an egregious tax theory, and they've gotten away with it for some time. They wouldn't do that if Cupertino could literally force a sale of that building for $1, it would be too risky for them.
the radicalXChange people have revitalized a somewhat older idea, harberger taxation. The mechanism is relatively straight forward, people self-assess the value of their stuff and pay a periodical tax on it. At any point in time, anyone can force the sale of said commodity.
Point being that if someone sets the price at above market rate, they're reducing allocative efficiency (by exercising monopoly power over their property) so they pay a tax. If goods are exchanged at market rate, then that improves the utilization of the property.
yes, that's the point (or rather the other way around). Taxing you for exercising a monopoly over a property that you only like for sentimental value, while someone else might put the property to productive use if they could purchase it at market rate is exactly the desired effect.
As a practical example, if you say, own a single home on a large plot of land in the middle of a city that desperately needs denser housing, then this tax imposes a cost on you if you self-assess the value highly / are unwilling to sell.
So you start a company. In addition to all the risks of a start-up, you have to deal with having to fire selling the shop if someone questions your assessed value? What do you think would happen when a powerful entity and a less-powerful entity disagree?
Nothing out of the ordinary really. If you were to put up your company at some multiple of its market value you'd either pay the tax or be bought out.
The only novel thing here is the tax btw, large corporations acquiring smaller companies at a multiple of their value is the wet dream of people who run startups
This example is a little contrived, but one could do something similar by just aggressively neglecting one's property.
I'm pretty sure laying traps like that is illegal, like felony illegal.
What kind of system is he proposing in which capital doesn’t create leverage?
Piketty is merely suggesting control by a different group. The non-wealthy often respond very positively to that, thinking their sandwich will be bigger and they'll have some enhanced influence - which never actually happens in practice. The types of people that pursue power in very concentrated systems of any sort, almost never like to share their accumulated power.
You have to either nationalize wealth and production formally (Socialism), so that bureaucrats or authoritarian citizen boards/panels (or the military as often happens) govern the use & distribution of all wealth and production; or you have to aggressively regulate all possible uses of private wealth, which also requires similar authoritarian control groups for oversight & dictate, that will de facto rule as fascist entities (a veneer of private ownership scenario).
This is Socialism vs Fascism, in which one formally nationalizes and doesn't usually bother to pretend about who owns & controls what; and the other de facto nationalizes but leaves you with fake property ownership & control (which they can and will revoke at any time). If you want to pursue any Piketty style premise, all roads go to the same place. There will be no exceptions, there has never been an exception. You can vary the details, it doesn't matter, you get inherently violent, humanity crushing authoritarianism in every scenario if you actually pursue it very far. Piketty requires authoritarian-heavy structures, you can't redistribute and equalize enough in any other manner.
We've already figured out the furthest you can go before you tip over: various European nations have experimented out in the open with very hefty welfare state concepts for generations now. They've taken it as far as it can go, before tipping into authoritarianism. Several have had to roll back their burdensome welfare states at times, including eg Sweden, as they rolled into stagnation. It's a challenging balancing act that requires careful management to continue operating well.
Piketty has proposed nothing new, these are very old ideas and they've all been trialed in the real world repeatedly, all have failed repeatedly. Piketty is a rehash for modern times, Marx lite. The only response you will ever get when you point out that it has all been tried already, is: well, they didn't crush enough skulls (insert alternative fantasy story here: they didn't invent a technocratic utopia smart AI solution that was good enough to achieve harmony), or it would have worked.
Can you expand on that? What countries are you talking about?
> as they rolled into stagnation.
In today's context of over-abundance: why is "stagnation" a bad thing?
adventured listed at least one - Sweden.
> In today's context of over-abundance: why is "stagnation" a bad thing?
In today's world where too many people still live in extreme poverty, stagnation is condemning millions of people to misery and/or death.
Yes, I would like to know exactly when Sweden accidentally turned to authoritarianism.
> In today's world where too many people still live in extreme poverty, stagnation is condemning millions of people to misery and/or death.
Extreme poverty is not a problem of stagnation of the economy, it's a problem of extreme inequality. Growth is but a workaround to this.
Democracy is compatible with socialism, so are free markets. Owning money to control businesses is not. The people who do the work are in charge.
That doesn’t make sense, the board doesn’t own the company.
Creates less leverage (per unit). Make it less efficient for a single investor to invest a lot and reap all the profits, giving more room for multiple people to invest instead.
The other kind of society is one in which the best way to establish a secure place for yourself is to take secure control of some piece of income generating property. Piketty uses Jane Austen's novels to show what these societies look like: marriage and other political arrangements become far more important than how hard working you are. Hard work and toil is generally associated with the poor.
So Piketty's argument is that, while we may believe we are in a pull-yourself-up-by-your-bootstraps society of hard work, the numbers show that we are in fact in a work-your-political-connections-to-establish-control-over-productive-capital society.
So it should be no surprise that HN is a great place to find counterarguments for Piketty's theories. :) But that's his theory, and I believe it's worth keeping an open mind as to whether it's true. If it were, we would see that it's easier to get richer by already being rich or making friends with the rich than it is to get rich by working to build something yourself.
Point being that wealth is a lagging indicator. If I'm 25, I'm making my way in a different world than the one my grandfather grew up in.
And a world in which the return on capital is equal to, or less than, economic growth is simply one where capital gains are taxed more -- enough so that they're less than economic growth.
It's literally that simple. I'm curious what you're having trouble envisioning about such higher tax rates? It doesn't seem to have anything to do with utopia or even socialism.
[1] https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Ce...
https://www.cato.org/sites/cato.org/files/pubs/pdf/anti-pike...
Before you examine something published by Cato, you can predict its position, and will rarely if ever be surprised by what you read there. The data will be cherry picked or massaged and the argument will be contorted to support the pre-chosen position favorable to the donors funding it.
Cato generally opposes all kinds of taxes and regulations, supports privatization of public institutions and services, opposes a public safety net, opposes campaign finance reform, disputes or downplays global climate change, etc.
No, it doesn't work like that. Reputation matters, and taking it into account is a way to deal with the sad fact of the Bullshit asymmetry principle. Jacobolus is basically saying Cato has cried wolf too many times to be given the benefit of the doubt anymore.
[1] https://en.wikipedia.org/wiki/Bullshit#Bullshit_asymmetry_pr...: "The amount of energy needed to refute bullshit is an order of magnitude bigger than to produce it."
Cato is known for having bias, not for spewing bullshit. The NYTimes has bias and Piketty has bias. The bullshit asymmetry principle never applies when discussing ideas regardless of the bias. Otherwise you could never argue with any human.
That principle is a lazy cudgel used by people in echo chambers who are incapable of defending ideas or linking to simple refutations of re-used arguments.
Personally I would just rather skip reading them in the first place and focus on sources whose intellectual integrity I have some faith in. I have found it saves time and mental energy with little downside.
But feel free to read what you like.