The Robin Hood Reflex Once Again Confronts Capitalism
The Robin Hood Reflex Once Again Confronts Capitalism
Thomas Piketty, a name you are not likely familiar with, is a French economist who has given voice to the notion that there has been a growing concentration of wealth at the upper end of the spectrum both in Europe and the U.S. That is, the rich are getting richer at a faster rate than others. And of course, what follows is the Robin Hood reflex to redistribute.
Aside from Piketty’s work, another factor adding to the redistribution reflex is the relatively greater gain in corporate profit than in labor income over roughly the last 30 years.
Both facts taken together create a general sense that those who are getting rich are getting rich by manipulating labor income, an idea recently expressed by a former Secretary of Labor.
From this it becomes a small step to launch an assault on capitalism with Robin Hood redistributive policies, whether of wealth or income or both.
All these ideas are now in play and I anticipate that they will, in one way or another, be an important part of the discussion during the fall Congressional elections.
Americans’ propensity to accept Piketty’s facts, his theory and his policy implications has led to Beatlemania-like obsession with his celebrity — all based on a dry economic tome of 576 pages which made it to the top of the Amazon bestselling list within a month of its English translation and publication.
Now, as a blogger who attempts to never exceed 2,000 words so as not to the lose today’s time-stressed audience, I find it difficult to believe the book was actually devoured cover to cover, except by those wishing to prove him wrong and indeed, errors in data have already surfaced.
But who really cares about devouring the book or the data when you already have an opinion? Now all you need is the proof in your hands: It was a conclusion seeking confirmation.
What creates the environment for belief and acceptance is that the U.S. and European middle classes have indeed been dealt a setback. According to a Pew Mobility Project, men in their 30s in 2004 were earning 12 percent less than their father’s generation at the same point in their lives.
Furthermore, the U.S. real medium (middle of the distribution) family income is at the 1995 level — which makes a ripe audience to engage in income or wealth redistribution policies.
There are good and logical reasons for the setback in labor income and the increase in wealth values, and there are also reasons to believe that the unevenness of economic progress, however measured, has been due not to a fatal flaw in capitalism but rather to a lot of self-correcting special influences.
For one, the Great Recession is now on the mend. At first, it hit wealth levels harder than labor income, and the Fed’s QE has been more effective in resurrecting wealth values than employment and labor income so far.
But that all is now changing with trained and effective labor being in short supply and wages increasing. This is not just a transient bounce–back, but with the prospects for zero labor force growth over the next few decades, it will provide constant scarcity pressures to lift labor income more than the returns to wealth.
The relative growth of wealth story is also going to change with both stock and bond values teetering at levels that would be difficult to sustain when the Fed phases out its mega QE.
But the bigger cause of the retardation of labor income over the last 30 years has been globalism. That is, opening U.S. markets to emerging-nation suppliers that produce goods with hordes of low-wage labor caused the wages of similarly skilled U.S. workers to decline and emerging market (EM) wages to increase.
This is the natural economic phenomenon better known as factor price stabilization, which, for a time, worked against developed country labor income — and now its time is over. (Sorry Robert Reich, it had nothing to do with a corporate conspiracy.)
But the outsourcing of products from U.S. markets is now at ebb-tide with re-shoring replacing off-shoring. What adds to that thrust is the natural rebalancing that causes the currencies of those successful EM exporters to appreciate, making foreign goods even more expensive relative to U.S.-made goods. This is the natural see-sawing mechanism of global trade, where success sets you up for a correction ahead.
For example, China accepted the notion that it must allow its currency to float to the market rate, and indeed it did so by appreciating 30%. So now China is the one in trouble when it comes to exporting its way to continued growth. Its wages and currency have both gained relative to the developed world, making Chinese goods paid for with U.S. dollars considerably more expensive.
Another important factor that supports Piketty mania is that retarded U.S. wage and labor income growth to a segment of population is due more to a lack of skills, training and work ethic among the young. Be prepared for a discussion of the ill effects of a school system that produces trophies (or high grades, a trend that has now been extended to the university level) for all participants, whether they won or lost in whatever academic or athletic competition they are engaged in.
The readjustment process will take place via job training, and hopefully Americans will regain a sense that the trophy goes to only to the winner. This socialization readjustment might be the more difficult, as it covers not just skills but also things such as developing initiative and responsibility, which somehow fell from academic consideration.
Another source of wealth concentration buildup over the previous decades is the outsized windfall that financial sector participants accrued by connecting foreign savers to U.S. financial securities and markets leading to the housing boom (and bust). This too is over.
Capitalism has served humanity not just since the birth of the republic but for many centuries before. It took us out of the woods, onto the farms and into the cities — and then into suburbia and now back to concentrated urban growth in cities that tend to tax at lower rates and do not attempt to provide as much in the way of government services. This is the counterrevolution I wrote about called Plan B.
What is missing from the redistributionist discussion is the effect of monetary reward as an incentive to meet the market test. That — not some kneejerk robotic employer — is what provides the quantity and quality of goods we enjoy. Indeed, what keeps the redistribution discussion alive is that that economic theory has not incorporated the effect of monetary incentives to the willingness to produce, so that we would be able to calculate the loss in output if income or wealth were redistributed.
That is, at the current state of economic theory, we cannot put a number on what is lost when we lessen rewards via redistribution which places the redistribution discussion in the realm of philosophy, fairness and equality.
But those doubting that redistribution matters to output and product development can now take a trip to Cuba to view the frozen-in-place technology of the 1960s, when wealth was redistributed and capitalistic incentives were snubbed out. It made all equally poor, except for the political class. Or one can take a trip to China and marvel at the transformation that occurred when monetary reward was re-introduced to a communist economy.
Basically wealth growth and labor income are joined at the hip — in addition to incentives to produce more or different goods, entrepreneurial accumulated wealth is vital to finance the next generation of new ideas and next generation jobs via venture capital or private equity. Certainly government would not or could not do that.
In addition to the above concerns about reducing the size of the total pie if it were to be split evenly, redistributors should be aware of the difficulty of actually redistributing. It can be accomplished, say, via a negative income tax or the welfare state that Bill Clinton (yes, a Democrat) eliminated.
But somehow the redistributors have lost all faith in Adam Smith’s invisible hand of the markets incentives guiding what to produce efficiently. They prefer to let the government decide which goods and services are produced and at what price.
Take, for example, The Affordable Care Act. Through pricing via income level, it has produced significant income redistribution in such a way that the even the middle class has been seriously compromised. Indeed, all income deciles have suffered except the bottom two with a pretense that the medical services purchased are actually available.
Politicians who are seeking re-election are nervous about this fact.
That is, let us not fail to consider the scarcity of medical providers as they are compensated at rates below market. As for Medicare recipients, good luck finding a private practice physician willing to take you if payment is compensated at Medicare rates.
When all respect and understanding for the invisible hand is lost, there is always the government’s role in taking the provision of services in-house. That is the story of the Veterans Administration, and that will show you perversions of incentives to produce. We didn’t need the deaths at the VA from year-long waits to tell us that. The U.S. Post Office has long been training us to take a number and get in line.
In the case of letters or packages, we head to UPS or FedEx or e-mail at a higher price that the market seems to be happy to pay for efficient service. Heading for the private market if the government allows it, will also be the outcome of healthcare delivery.
All in all, redistribution or government production of goods buys nothing but shrinkage in which all are set back.
So, Thomas Piketty, it appears that you fall into the long list of French philosophers and economic tinkers who have had dubious effects on the economic benefits to man.
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