JOURNEYS TOWARDS FREEDOM AND EQUALITY

A Self-Made Man: The Political Life of Abraham Lincoln Vol. I, 1809 – 1849 by Sidney Blumenthal. Simon and Schuster. 2016.

The Politicians and the Egalitarians: The Hidden History of American Politics by Sean Wilentz. W.W. Norton & Co. 2017.

Two excellent books, the first minutely detailed, the second done in broad strokes of the historian’s brush, but illustrated with telling specifics. Both show how the struggle for freedom and equality in the United States has succeeded when idealists have found a successful political leader, with the skill to get things done through government action.

Blumenthal traces the process by which Abraham Lincoln went from poor white settler on the western frontier to well established lawyer and politician, on the cusp of turning his conviction that slavery was unjust and should be confined to the states where it already existed, into full blown opposition to slavery everywhere. Blumenthal’s second volume, Wrestling with his Angel, covers the years 1849-1856, when this conviction became more firmly set, and Lincoln joined the nascent Republican Party.

Part of the pleasure of this book is the details of Lincoln’s political activity during the ferment of the 1830s and 40s, the age of the Jacksonian Democrats and Whigs. I wrote about some of this earlier, in my post about Joshua Gidding’s The Exiles of Florida. In those days local party-affiliated newspapers provided outlet for the kinds of extravagant political commentary that thrives today on Facebook, and the partisanship was, if anything, even more violent, with dueling still sometimes practiced and plenty of plain old brawling. Lincoln was no simple country lawyer, telling homely stories about widows and lost horses, but an accomplished political satirist with a knack for vicious caricature, much of it printed anonymously. He had some fights, though he seems to have generally avoided them.

One of the most interesting sections for me was the account of the Mormons in Illinois and Missouri during this period, just before the migration to Utah. Their penchant for violence, even if cast as self defense, and the methods used to gain and keep adherents, make all but the nastiest of today’s cults seem not so bad. Lincoln and Illinois politicians both courted and feared these fanatics, eventually turning against Joseph Smith and accepting his murder with little indignation. This sort of mob violence became more common as politics became more polarized, leading up to the destruction of anti-slavery newspaper offices and, in one famous case, the murder of the editor.

Lincoln’s experience with politics up to 1848 was mostly in party caucuses and the Illinois legislature, with a single term in the House of Representatives. There, he was an active supporter of efforts to counter what was beginning to emerge as the Slave Power, the unified southern bloc that was determined to expand slavery as far as possible. Unlike many of the founding generation, who at least paid lip service to the idea that slavery was incompatible with the ideals of the Declaration of Independence, these men argued that it was a positive good and that southern society was morally superior to that of the North. Lincoln estimated that he had voted at least fifty times in the House for the Wilmott Proviso, an amendment that would have banned slavery in the new territory acquired in the Mexican War.

I’m looking forward to reading the next volume.

Wilentz’s book covers the same history as Blumenthal’s book in essays on Lincoln, Andrew Jackson and Frederick Douglas. There’s also one on John Brown. Besides these, he writes about Thomas Paine, Thomas Jefferson, Teddy Roosevelt, Franklin Roosevelt and Lyndon Johnson. He briefly touches on many others who can be classified as either egalitarian idealists or politicians who fought for freedom and equality. Throughout, his central point is that idealism by itself accomplishes nothing: only when joined to astute political manipulation can it take concrete form. Besides this, he challenges specific authors who have seen in men like Lincoln and Johnson sudden epiphanies that led them to do great and good things despite their basically rotten political nature. He argues strenuously that these men’s core beliefs in freedom and equality grew up naturally as they matured and rose to power, often at odds with other ideas and attitudes, but never appearing by magic at the singular moment.

Wilentz thinks that a deep seated American distrust of party politics, from the early founders like Washington and John Adams to the vast numbers of citizens who today claim to be independents, is fundamentally wrong headed. He thinks that partisanship, even as parties form and dissolve and change their spots, like the modern GOP, are essential to the progress that we have made since 1787. From 1860s and 70s Republicans, to the 1960s and 70s Democrats, he cites the ways powerful party leaders were able to pass such vital legislation as the Thirteenth and Fourteenth Amendments, the wage and hour laws, the progressive income tax, Social Security, the Fair Labor Standards Act and the Civil Rights and Voting Rights Acts. These are the changes that make a real difference in the lives of ordinary people, and we ought to be alarmed when politicians and judges begin to chip away at their protections, but we can only resist effectively by petitioning and protesting in ways that lead to concrete political action. Wilentz uses John Brown to argue that violent protest is generally counter-productive in American politics. The Homestead Strike is another example he gives to show how reactionary forces take any hint of violence (in that case, threats by anarchists) as a pretext for even more violent repression, to the great loss of those trying to achieve real gains.

Reading Wilentz’s broad depiction of the sweep of the American struggle for freedom and equality makes me want to go even deeper into these causes. I have loved Robert Caro’s Lyndon Johnson, despite his bias against the man, and as a high schooler I enjoyed delving into labor history, including one of my idealist heroes, Clarence Darrow, through such books as his own Attorney for the Damned (1957). I need to learn more about  periods such as Reconstruction and about areas Wilentz does not discuss, like women’s rights. There is no lack of fascinating and inspiring history along these many and various paths.

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Looking for the Logos of Lucre I

Thomas Piketty. Capital in the Twenty-First Century. Translated by Arthur Goldhammer. Harvard University Press, 2014.

[Illustration: Victor Dubreuil, Barrels of Money, 1893]

I’ve been slow in posting these comments on a book I finished reading last spring, but recent developments in federal tax laws seem about to begin an experiment to test some of the author’s ideas. I’ll write more about that once the tax bill is done with, but meanwhile, here’s a summary of what I learned from Piketty. If you have time and inclination to read the whole 700 pages and take careful notes like I did, I say, do it. Otherwise, this somewhat lengthy post is my best effort to describe some very important work.

Piketty left his position at an American University because he felt American economists were too childlike in their fascination with mathematical models and too ignorant of the historical patterns of economies in the real world. He feels that economics in America was too divorced from the other social sciences to contribute usefully to understanding the changes in global society. While Piketty does rely heavily on economic data, and he uses a few very simple equations, for the most part, this is a book about history and what it suggests about the future. In some ways Thomas Piketty sounds like Alexander Herzen (whom I posted about last year). He admits that he cannot really predict what capital will do in the twenty-first century, because as he says, “history always invents its own pathways.”

In part one of the book he shows that growth rates for the two factors that control economic output, population and productivity per capita, have undergone a dramatic rise and fall since about 1700. This started in Britain, France and the US, and then spread to the rest of Europe and later to Asia. According to Piketty, the most likely scenario is that the rest of the world will catch up in the 21st century. Overall this leads to a rise and fall of economic growth, with a likely leveling off around 2100 at 0.2% population growth and 1.2% per capita output growth, for 1.4% growth in total economic output.

Piketty believes inequality rises because the rate of return on capital (r) is higher than the overall growth of output (g), or simply, r > g. The rich, who own capital, benefit from r, while the lower ranks, who depend on wages, can usually only gain as the economy grows (g). Economic inequality was very high throughout the nineteenth century and then declined in the early twentieth. The top ten percent’s share of income was about 45% from 1910 to 1940, fell to about 35% from 1940 to 1980 and has risen since to 47-50% [without any signs of slowing down, I think]. From this, there also follows a shift in the capital to income ratio, that is the value of accumulated goods compared to annual domestic production.

In part two, Piketty talks about how the character of capital has changed. The nineteenth century novels of Honore de Balzac and Jane Austen illustrate the way well to do people then lived off rents, mostly land or government bonds, although Balzac’s characters often owned factories or mercantile houses at some time in their lives.

Beginning about 1914 there was a huge drop in accumulated wealth across the developed world, but a much smaller reduction, or even growth, in economic output. What caused the big twentieth century dip in the ratio of capital to income? Physical destruction in war does not account for more than a third of the drop. He attributes the rest to the collapse of foreign assets, low savings rates and low valuation of assets in the politically unstable times. Wealthy people sold assets to maintain their level of consumption during the Great Depression, etc. Government bonds’ value was lost through inflation. “Ultimately the decline in the capital/income ratio…is the history of Europe’s suicide, and in particular the euthanasia of European capitalists.”

America never had the drastic swing that Europe did in the 20th century, so we may tend to regard capitalism with less suspicion, according to Piketty. Also today, because of Europe’s slower growth, economic and demographic, accumulated wealth is even more important there than here. Britain and France have capital/income ratios of five or six, compared to the US ratio of four. Germany is also at four, which he says is because German corporations are more controlled by stakeholders (unions, government, citizens) relative to stockholders, which keeps their stock prices down. The global ratio of capital to income stands at about 4.5:1 as of 2010. Piketty projects that it will rise to something like 7:1 by 2100.

The capitalist’s versus the laborer’s share of national income in Britain and France has gone from 35:65 in the eighteenth century, to as high as 45:65 between 1830 and 1870 (think of Ebenezer Scrooge) to as low as 15:85 between 1925 and 1980 and back up to 25:75 today. Picketty also tries to assess the rate of return on capital, which generally seems to be about 5% but got somewhat higher around 1920 and a lot higher (>10%) around 1950. He stresses that non-wage work, such as in small business owners and partnerships are hard to assign correctly to labor vs return on capital and that even pure return on capital like interest or dividends, requires quite a bit of work. Adjusting for this to get a “pure” return on capital lowers and flattens the temporal variation. He thinks larger individual or corporate fortunes earn higher rates of return. On really large fortunes and things like endowments, it may be well above 5%.

He expects that the rate of return on capital will not decline as the capital to income ratio increases in the future, which will lead to a higher share of national income for capital, possibly as much as 30 or 40% by the end of the century. This depends on whether capital is able to go on substituting for labor (by computers, robots, etc.) or whether the increasing demand for skilled operators will strengthen labor’s share in the long run, as some economists believe. It never crosses his mind that we might go with Ivan Illich and begin liberating ourselves from industrial goods and technology by political means.

He begins his third section, on inequality at the individual level, by returning to Balzac’s Pere Goriot, specifically Vautrin’s lesson to Rastignac about the futility of work and study as a route to wealth. Only an inheritance, direct or through marriage, could enable a man to become rich in Paris in the first half of the nineteenth century. Piketty points out that inherited wealth lost much of its importance in the twentieth century, so differences in income began to have more to do with talent and effort. You could go quite far by work and study after the great decline in capital to income ratio triggered by the world wars.

He observes that capital is always more unequally distributed than income from labor. This is true across all periods and all countries. The top ten percent of income earners get about 25-30% of wages, while the top ten percent of owners have 50-90% of wealth. The bottom 50% of workers get about 25-33% of wages, but the bottom 50% generally own only 5% of wealth. One problem in measuring these inequalities is lack of good data on lifetime earnings for labor, which would even out some of the fluctuations that individuals experience. If wealth were largely accumulated to protect against such fluctuations or provide for retirement, the wealth could be more equally distributed than current wages or as evenly distributed as lifetime wages, but this is never the case.

Inequality in wealth shows similar patterns across all age cohorts, so it’s not simply a matter of lifetime accumulation. The two keys are inherited wealth and different rates of return on capital, especially on large vs. small amounts.

He gives a detailed history of inequality, as far as the data permit, showing how the distribution of both income and wealth across percentiles has evolved since the eighteenth century. Inequality declined sharply during the 20th century, but after 1980 it began to shift back towards higher inequality. During the same period, the US went from one of the more egalitarian societies, particularly with respect to wealth, to the least egalitarian with respect to income distribution of any society for which he has data. These trends have continued apace since 2010, of course. The big change has been the rise of a professional elite that receive pay many times the national average. He wonders if this is in fact a supermeritocracy, as some have termed it, but he does not draw any conclusion in this part. He points out that the upper percentiles, above 90%, are quite diverse, including academics, doctors, lawyers, small business owners, upper managers and at the very top the small number who still earn huge amounts from dividends, interest, rents, etc.

The New York Times had an editorial, 21 February 2017 explaining that neither immigration nor automation causes the current discontent of the people at the bottom. It is due to the policies that have led to the top 10% getting 60% of all the gains in the economy since 1980, while everyone else stays the same or little better, with income growth of a half percent per year. Weakened collective bargaining, stagnant minimum wage, reduced support for education and changes in tax laws have all contributed to the ascendancy of the upper levels. Tax reform, curbs on financial practices that hurt workers and support for childcare, elder care and fairer scheduling (I would add healthcare and affordable housing) would do much to restore balance, according to the Times [dream on…the GOP has just done the exact opposite].

Piketty tries to show that the rapid growth of inequality cannot be the result of growing differences in individuals “marginal productivity,” that is, how much value a CEO or other manager adds compared to lower level employees. There are some increases in the difference between the unskilled, the older skilled and the younger, tech savvy workers (the race between technology and education), but this is not enough to account for the gap, which in the US is greater than it was in apartheid South Africa. It is also hard to see why the gap is less in Europe and Japan, if technological innovation were the only cause.

He points out that the notion of “marginal product” of a CEO is nearly impossible to define; instead it is determined largely by factors like ideology, hierarchical relations and bargaining power. Once the elites start to grab a bigger share, they can point to one another and say, “look how much other CEO’s make.” [This is certainly how it works for college administrators.] The ultimate problem becomes what sets limits. It must be social norms (there seem to be no legal norms) but why do Europe and Japan differ so much from America? One factor may be a greater degree of “extreme meritocracy,” the tendency to attribute success to individual ability and effort, as opposed to collective effort, good fortune, etc.

Changes in top marginal tax rates since 1980 have provided a much greater incentive to raise top pay. In a clear example of positive feedback, the resulting windfalls have gone, among other places, into donations to political parties, PACs and think tanks, whose platforms and policy recommendations include keeping those taxes as low as possible. [It seems to be working out for them].

At the beginning, the US started more equal, but it was catching up to Europe by 1910 (~80% wealth to top 10%) This caused concern in political circles that the US might lose its egalitarian ethos and this in turn led to establishment of progressive federal estate and income taxes, according to Piketty. He contrasts that with the talk among economists and politicians today that US inequality (which has surpassed Europe since the 1970s) is good because it drives entrepreneurship. Conservatives and libertarians think Europe is now too equal. [Congress is about to abolish the estate tax, which they cleverly call the “death tax,” so we will see plenty more inequality in the future.]

Piketty says that there is no reason to expect a stable distribution of wealth in the future. The real reasons inequality was lower from 1914-1970 were the series of multiplicative shocks to capital from wars and financial crises and the taxes governments imposed in the twentieth century. If, as seems to be happening, those taxes are abolished or greatly reduced, then inequality will rise.

In the nineteenth century inheritances and gifts accounted for about a quarter of national income. Between the world wars this went down to only about ten percent, but now it is increasing again, because the capital to income ratio has gone back up from around two to about five or six. The golden age of self-made fortunes is past. Of total wealth, well over half is inherited, more so, if you count gifts and income earned from capital. Underlying all this is the r>g phenomenon, which means those who inherit can accumulate faster than those who labor. The big change from the nineteenth to early twentieth century was that more middle class people accumulated some wealth that they could pass along. Today, most people, however, still inherit nothing. Accumulated wealth does not go mainly to support us in old age; it goes to the heirs of the very wealthy.

Piketty describes the inherited wealth of the nineteenth century as seen in Austen and Balzac, where only a tiny elite could live much above subsistence. Equalizing everyone’s wealth and income at that point would have perhaps severely diminished “civilization.” William Hinton makes a similar point in Fanshen: when the peasants overthrew the landlords in China in 1948, there just wasn’t much wealth to go around. None of the nineteenth century novelists, Piketty says, were under the illusion that these differences in wealth were merited. Today, with the rise of the meritocracy, we tend to assume otherwise, but the evidence is mixed, at best. [Take a look at Trump and his offspring.]

There seems to be a global trend for the share of wealth held by the richest, the multi-billionaires (he’s speaking of fewer than 300 individuals in this class, who together account for about 0.9% of the world’s wealth) to be increasing at about twice or three times the rate of the average per capital wealth globally. Probably 60-70% of this wealth comes from inheritance, the rest from entrepreneurship, but it all increases at 6-7% a year, more for the very richest, like Bill Gates. The differential rate of increase, if it extends down into the top 1/1000 of the population (the 10 million dollar fortunes) could increase that group’s share of global wealth from the current 20% to 60% by 2050. This would have profound consequences. Only progressive taxation can control them, he says.

The question is how to constrain what Piketty calls the “inegalitarian spiral,” so as to protect the public interest and democratic values from “patrimonial capitalism.” The principal alternatives are a global tax on capital, which would have the added advantage of opening wealth up to public scrutiny, in turn making regulation of the financial system possible, or a retreat into nationalism, which sacrifices the advantages of openness and global competition.

Between the 1930s Great Depression and the 2000s Great Recession, the role of government in society changed tremendously. Financial regulation and confiscatory taxes on high incomes have been evolving in the industrialized democracies since the 1930s, and they have been under constant attack since the 1970s. Piketty says these arguments are natural and proper, especially since both financial capitalism and government controls have become more complex and opaque to most people. How can the issues and responses be made clear? The starting point is to look at the growth of the “social state” since the nineteenth century.

At the beginning of the twentieth century, taxes in what were in many ways still “regal” states consumed less than ten percent of income in the industrialized countries, covering basically police, courts, the military, foreign affairs and administration. Education and health consumed only 1-2% of national income. From World War I to the 1980s, the share of income devoted to education and social welfare increased, leading to levels of taxes (including all compulsory payments to government at all levels) that range from 30% in the US to 50 or 55% in France and the Nordic countries. These rates have been almost constant since then. Piketty notes that the amount dedicated to the functions that dominated in the nineteenth century (defense, etc.) still consume around 10% of income, so the increase has been almost entirely devoted to building the “social state,” namely education and health (10% to 20% of income) and income transfer payments (welfare, unemployment and social security, also 10% to 20% of income). He notes that the US spends more (20%) than European countries (10-12%) on health, if private insurance is included. He thinks the lower levels and slower growth of social state spending in the US is attributable in part to racism. The US is the only democratic country that essentially uses prisons as an alternative to welfare, especially for young black men. We have the highest incarceration rate in the world. We are also unique in using food stamps, because we fear that otherwise welfare money will be spent on drink or vice, possibly another legacy of racist attitudes. This may also account for our fondness for other voucher programs. Hating and mistrusting the poor is a decidedly American trait (now being seen in Europe as refugees and immigrants become more difficult to deal with). Perhaps this is because of the successive waves of immigrants, including freed slaves, that have characterized US social history.

He links the growth of the social state to the notion of rights as expressed in the Declaration of Independence and the Declaration of the Rights of Man, especially the latter’s claim that inequality can only be justified by social utility. Piketty argues for a Rawlsian definition of utility, relating it to benefits to the least advantaged, as opposed to a utilitarian preference for a mathematical sum of benefits across the social spectrum.

What is the future of the social state? Piketty thinks that is will continue but is unlikely to grow much, at least in Western Europe. Slower growth of income and productivity will mean that raising taxes would slow or reverse income growth and constrain private consumption. Also, the social state becomes hard to manage if it grows too large. Of course, he says, a lot of the infrastructure of education and healthcare, which make up 20% (or more) of the overall economy, is privately owned and managed (hospitals, colleges, etc.) The pattern differs from country to country and is changing as new modes of organization develop.

An important point he raises is that the absolute level of taxation is less important than whether taxes are collected fairly and transparently. I assume that also goes for how they are spent, so whatever the organization of the social state, it needs to be open to scrutiny by all citizens. This is where so many organizations break down (for example, the Port Authority of New York and New Jersey) and why people are suspicious of public/private partnerships. If they function to shut out scrutiny and debate about how taxes are spent, they are anti-democratic.

He thinks that in Western Europe the debate about the social state will be mainly about reforming and modernizing the existing structures. One major issue is access to education. He asks whether education has fostered social mobility, rather than just upping qualification requirements across the board. Generally the answer is no. Sweden shows the most upward mobility, while the US shows 30% less, with the other Western European countries in between. Mobility is hard to measure across generations, so these comparisons are imprecise. Still, this may fairly accurately reflect the much more unequal access to the best education in the US vs Europe. Parental income is an accurate predictor of university access in America. The average income of parents of Harvard students is in the top 2%, despite the claim that admission is based only on merit. This is a case where the actual process is a closely guarded secret.

Even in Europe, where tuition is free or low, there are other factors at work in universities that insure that the public spending on them goes to reinforce or exacerbate existing social hierarchies. In the one French grande ecole that he could get data for, the students came disproportionately from the upper 10% of the income hierarchy (he quotes the school’s founder from 1872, saying essentially that the upper class had to stop being idle and “invent meritocracy” in order to save itself from the rising democratic tide). Piketty notes that the US has a large share of the world’s top universities in part because they can charge high tuition [the Republican tax plan, which will make graduate assistants pay taxes on waived tuition, may change this]. He thinks that it would be possible to have greater access to elite universities if the government provided a lot of funding to independent schools [As scholarships? Is that really consistent with independence? It could be, if students could use them anywhere they chose, like National Merit Scholarships].

He also talks about pay as you go pension systems like Social Security, which work well with high economic and demographic growth, as prevailed from the 1930s to the 1980s. A capitalized system would avoid the problem of slower growth and take advantage of rates of return likely to be at least 4%, but there is no simple way to make the transition. The US probably has more flexibility than Europe, because FICA taxes are lower than the 25% the French pay (so he says) and we don’t tax all wages and salaries. He believes that there’s no way to eliminate Social Security in the immediate future. I personally am very happy with my capitalized TIAA-CREF retirement plan, but not everyone can save 10% of pay, even with an employer match.

He briefly surveys the developing and emerging countries and finds that they have low rates of taxation, basically in proportion to their level of economic development, not enough to adequately support a social state. Some have even seen levels decline, as neoliberal or ultra liberal policies are forced on them by international organizations. Loss of tariffs revenue is a key factor. He says the rich countries are using the less developed (and the old communist countries) as guinea pigs for economic theory testing and not giving them a chance to follow the historical course that the west did itself. If they try to build a social state on a regal state level of taxation by underfunding police, military, etc. they risk cops on the take, anarchy or a military coup. China seems on the right path as far as taxes and social services, with great uncertainty, political and demographic, while India seems stuck in a regal rut.

Piketty defines proportional, progressive and regressive taxation, and then shows that at present, overall taxation is generally regressive at the highest levels of wealth and income. Because of the importance of mandatory contributions like Social Security and because income taxes have become less progressive, especially since 1980, the rich pay a lower percentage than the poor of their income. Add to that that corporate income and income from capital are taxed at lower rates than wages and that the rich have greater access to tax havens, and you get even more regressive overall taxes. Piketty worries that this will begin to undermine the consensus supporting the social state’s financing, especially among the middle class, which bears the heaviest burden of progressive taxation. It also takes away the consolation to those in the lower ranks, who have already been hurt most by globalization. These trends were painfully clear in the US 2016 political campaign. The Republican response has been to advocate for dismantling the social state and replacing it with either the system that existed in the 1920s under Coolidge and Hoover, or some kind of free-market fantasyland, possibly with some Christian charity thrown in. Bernie Sanders tried to get people to see what the real problems were, but Hillary Clinton and the business as usual neoliberals pushed him aside. Both candidates tried to sell feel good nonsense to their base constituencies, but neither had any real plan. [Trump actually did: it turns out to be the congressional Republican plan.]

He looks at the history of attitudes towards returns on capital, noting that the Greeks and Christian Europe distrusted or banned interest on lending, but not rent on land. This facilitated social control, but it stymied economic growth. Communism banned all returns on private capital by abolishing it. The problems then were not related to increasing inequality, since r=0, but to the difficulty of having g not go to 0, without the incentives of free markets. Efforts to control the economy ended up in tyranny. In the course of the democratic revolutions in America and Europe, taxes on property were set to insure the proper registration of titles more than for revenue. I think customs and excises provided most revenue until the twentieth century. Then the long discussed progressive taxes began to be implemented in the chaos of war and depression, etc. In the twentieth century, taxes on capital, including real estate, that did exist were low and often inefficient because they were not based on current market values. Furthermore, the real property tax was regressive, in that the lower your wealth, the more of it tends to be in real estate.

Progressive taxation is an almost entirely twentieth century phenomenon, according to Piketty, arising out of the changes caused by World War I. The need for revenue to pay for wars and the rise of the social state led to rapid increases in top tax rates on income and estates. He says the very highest rates, above seventy percent, which were first enacted in the US, were intended to make it difficult, if not impossible, to achieve very high levels of wealth. The intent was economic leveling. Piketty feels this is the best way to balance equality and freedom. As Kenneth Boulding said about the estate tax, it makes it harder to accumulate huge fortunes, and so promotes equality, without necessarily discouraging productivity or penalizing those who promote it. The estate tax, in particular, does not fall on those who actually earned the money. Piketty refers to Irving Fisher’s 1919 presidential address to the American Economic Association as one example of the degree that people worried then about inequality. Like Boulding and Josiah Wedgewood, Lewis favored estate taxes as opposed to taxes on profits and other returns on capital. The Great Depression started right when inequality was at an all time high in the US, driven by huge capital gains on stocks. One of Roosevelt’s first actions in 1933 was to increase the top income tax rate from 25 to 63 percent, and then to 94 percent by 1944. It stayed around 90 percent until the mid-60s and was still 70 percent in 1980. These high rates in the US and Britain applied to unearned income (rents, interest, dividends, etc.) and earned income rates were often lower. Furthermore, these top rates never applied to more than 1% of taxpayers, usually more like 0.1-0.5%.

This passion for leveling lasted from the 1920s to the 1970s in the US and Britain and then did a 180, leading to top tax rates much lower than in France and Germany, which had not gone in for so much leveling. This has caused proportional increases in the share of income going to the upper percentiles in both countries. Piketty thinks that part of the driving force behind Thatcher and Reagan was anxiety about the way France, Germany and Japan were catching up to the US and Britain by the 70s, even though this was just the inevitable consequence of their having fallen so far behind because of the wars. Piketty doesn’t find any relation between the decline of these tax rates and productivity increases. He thinks that the cuts just made it more worthwhile for top executives to angle for huge raises, of which they got to keep a much bigger share. His solution is to reinstate top rates of about 80% on incomes over $500,000 and 60% on those above $200,000. This would rein in top salaries, without, he says, reducing productivity. The government would then have revenue to begin to strengthen the weak social state, especially in health and education.

Piketty’s long-term solution to the problem of capital is a global tax on all wealth. The rate would amount to about 0.5% of global income. It would be progressive, designed to slow or halt the growth of really large fortunes. It would require complete transparency of who owns what globally.

Today, he says, it is hard to even discuss the problem of capital, because we don’t know where most of it is. Private wealth is hidden in tax havens, foreign investments, etc. Ownership of huge assets is often concealed by layers of dummy corporations. That’s why you cannot get the world’s debts and credits to balance. As Piketty says, it looks like Earth must owe money to Mars, a scenario rendered plausible only by the TV series, The Expanse. Lack of transparency also makes it difficult and dangerous to try to deal with global financial crises. He has a lot to say about transparency and its relation to free markets and trade, including that it is criminal for some countries to siphon off the assets of others (e.g. Cayman Islands from the US), although one could see that as payback for colonialism, if the locals were benefiting.

He argues for automatic sharing of banking data globally. We have this in the US now, and are supposed to have it for foreign assets (excluding some important classes, like some trust funds and foundations) under the 2010 Foreign Account Tax Compliance Act. We don’t think that the domestic rules are so onerous; they insure fairness better than self-reporting would. A lot of places apparently have automatic adjustment of real estate values, too.

A tax on capital, once we knew how much there was and where, would first insure that the super rich, like Bill Gates, contribute their fair share of taxes. Income taxes, even when rates are 50-60% or more, rarely capture the gain in wealth of these individuals (6-7% annually, in some cases, while reported income amounts to 0.01% of that same fortune). The observed positive correlation between rate of return and size of fortune, shows that a progressive tax on capital would amount to a progressive tax on income as well.

He notes that such a tax would also act as a strong incentive to seek highest returns on capital, instead of leaving assets in low earning investments. This may be somewhat beneficial, or not. For instance, relying only on taxes on capital and not on income, would hurt companies when they get into difficulty.

What would an international tax on capital be like? It would have to be fairly small, like real estate tax, if it were collected annually. In Europe a zero, one, two percent progressive tax, with breaks at one million and five million euros, would bring in revenue of 2% of Europe’s GDP a year. With complete transparency, you could replace the property tax with 0.1% tax on wealth under 200,000€ and 0.5% on 200,000 to 1,000,000€. This could be done by individual countries on their own, making the property tax structure much more progressive, especially if debts were deducted from assets. Right now, I pay taxes on the market value of my house, even though I owe a lot of that to the bank, which doesn’t pay any tax on its share. Piketty thinks the fairest system for large fortunes, above 5,000,000€ would be to set rates based on a rolling average of rates of financial return. Such rates, when returns are running above 6% say, should be adjusted up above 2%. By setting this rate to effectively reduce the gap between r and g, you can constrain the increase of economic inequality in whatever way you decide is fair and socially desirable. You can even engage in leveling, while still keeping free markets.

The alternatives to a carefully designed, progressive tax on wealth to regulate patrimonial capitalism are protectionism and controls on capital. Protectionism can protect undeveloped economic sectors and punish transgressions of international order, but doesn’t in itself generate growth. Capital controls are being considered in many countries to counter the instability created by free flow of capital. Free flow was advocated in the 1980s to 2008 by IMF, the World Bank, etc. Since then, faith in self-regulating financial markets has declined, and countries are looking to protect themselves by holding on to lots of reserves of foreign exchange. China has never allowed free flow of capital, having a currency that can’t be freely exchanged. They also restrict capital investment from outside and outflows of capital assets. Unlike Russian oligarchs, Chinese capitalists can’t move to Switzerland with their assets, or continue to collect their dividends from Chinese companies. China has a progressive income tax and invests a lot in health and education, unlike the former Soviet bloc countries on the one hand and India on the other.

Another question is how to deal with the unequal distribution of natural resources. Oil is the big one, of course. The unequal distribution of these assets is a nasty issue, caused in part by postcolonial boundary drawing. We see the huge costs it imposes in the form of perpetual was and strife in the Middle East. Some countries, like Qatar, have hundreds of billions in annual revenue, while Egypt can invest only five billion to educate thirty-five million people. Piketty thinks a global wealth tax should be designed in part to remedy situations like this.

Immigration is another way the world has adjusted the distribution of resources, most obviously the US. Immigration has long served as a counterweight to accumulation of patrimonial fortunes here, and it continues to keep us from returning to the social conditions of Old Europe. Immigration supports g, in the face of r. Still, it is immigrants (and of course, blacks and women) who absorb most of the growing inequality of labor income here, too. Such redistribution via immigration works in Europe and the oil countries to some extent as well. Trouble is, this kind of redistribution only delays the growth of inequality to when g levels off around the world. Also, with immigration, you need to maintain that strong social state and progressive taxation, or you will get a backlash from those who lose out to globalization. We can see the truth of that warning in the election of Trump, who along with the GOP, seems bent on continuing the policies that got him elected by the discontented (see Chris Ladd on the White Socialism that used to provide America’s social state and why its beneficiaries voted for Trump).

Another alternative to taxes is public debt. The US and even more so Europe, have lots of private wealth but heavily indebted governments. Piketty says that, given a choice, it is better to tax the rich than to pay them for the use of their money (through borrowing). Tax cuts for the rich have been followed by accumulation of high levels of public debt in the rich countries (close to 100% of annual national income vs. 30% in the developing world). [In New Jersey and other states, tax cuts for the rich have been made up for by stiffing low paid public employees, via benefit cuts and unfunded pension obligations, a common form of economic austerity].

Reducing unsustainable debt can be done by taxing capital, allowing inflation (the historical solution) or austerity (the current solution). Privatizing all public assets in Europe would also just about wipe out public debt (the totals being about equal). This would replace interest on public debt with rent on previously public assets. Something similar is going on as funding for public higher education dwindles. This, he suggests, is simply shifting the form of the problem. Default, total or partial, has unpredictable consequences, which may hit small savers and the banks they rely on much more than the richest 10% who have more options for escaping the crisis default would trigger.

He thinks a one time progressive levy on all financial assets, amounting to about 15% of total financial wealth would be the best way to reduce excess public debt. This, of course, requires complete financial transparency. If the target were only a fraction of public debt, rates could be lower. After WWII, France imposed a one-time tax of from 0-25% to reduce its massive debt.

Letting inflation rise is a solution that has also worked before. Going from 2% to 5% inflation reduces the value of public debt by about 15% he says. France and Germany got rid of a lot of debt in the 20th century by inflation of 10% and sometimes a lot higher. The US and Japan are doing some of that now, much more subtly. Europe, which has rules against letting inflation rise, is faced with ten or twenty years, possibly more, of austerity policies to reduce its debt. Britain applied austerity throughout much of the 19th century to eliminate its debt from the Napoleonic wars. They spent twice as much on debt service as on public education, with likely consequences for their competitive position in the 20th century. This is what Europe is currently doing.

Inflation is hard to control. France had four consecutive years of 50% inflation, Germany a year of inflation that multiplied prices by one hundred million. I know this from stamp collecting: the inflationary issues of Germany and France are very familiar: hundred franc and billion mark values from those periods are found in any mixture of cheap stamps. Inflation also wipes out small savings and retirement funds, adding to poverty. In Germany, nearly everyone was ruined by the 1922 hyperinflation. This is partly why these countries and their bankers are so inflation averse today. The hard hit on savings, especially smaller accumulations, is somewhat offset by the reduction in indebtedness for other poorer people, but not enough to justify inflation as a solution, he thinks. The only good thing it does is punish the rich who have unproductive capital.

These issues lead Piketty to consider the role of central banks. When gold was the standard, inflation and deflation were tied to discoveries of gold and silver, but once the standard was abandoned in the early 20th century, central banks had to be responsible for regulating money. They failed in the run up to the Great Depression, being too tight fisted to allow the borrowing that could have saved many banks and other investors. Milton Friedman and others then took the view that all that was needed to keep the economy and society on an even keel was careful growth of the money supply. Social state programs were irrelevant. Piketty thinks that in the 1970s the disparity between Europe’s postwar growth and the slowdown in the US helped fuel the claim that growth of government was causing American decline. This opened the path for the conservative backlash under Reagan. The social state was stopped from completing its growth, and progressive taxation was abandoned, leading to our current dilemma. Piketty concludes that central banks have an important but not exclusive role as lenders with limited portfolios, alongside taxation and the social state.

Piketty discusses the future of capital and public debt and concludes that there is no magic formula involving the quantities discussed earlier that will decide what level of capital accumulation is desirable. This is a problem for democratic debate. The focus on common currency, the euro, was not enough without looking at taxes and debt for Europe.

The big issue for the future, thinks Piketty, is climate change. From an economic perspective, the problem is not figuring out the future cost, which we know within the limits of uncertainty, but deciding how much to discount that to determine how much current investment is needed to offset it. If you chose the current growth rate of 1-1.5% you get a different outcome than if you chose the current return on capital of 4.5-5%. He thinks the higher rate is way too optimistic. It suits the US do little attitude, but it is not in line with what is likely to happen. The opportunity is there, he says, to invest heavily at low rates of interest, if governments would decide to push for solving the problem. Green public investment, in other words, is a good idea.

The other thing he recommends is to develop new ideas about property and new approaches to democratic control of capital. He seems to be saying that mixed forms of public and private ownership in areas like education and health are good. What is essential is transparency on both sides, with the public fully informed. How much is that true in New Jersey? I suspect not to any great extent. He thinks that full public disclosure of corporate balance sheets is crucial, as well as seats for workers on the boards of directors.

In the conclusion, Piketty restates that r > g means past wealth grows faster than output and wages, or as he says, “the past devours the future.” This is a huge problem, without an obvious solution. Investing in education and research and development can’t raise g to 4.5-5% any more than cutting taxes has. Currently, even the Trump administration figure of 3% long term growth is deemed unrealistic. Free markets can’t correct the inequality. Wealth accumulation to such an unequal degree likely stifles innovation and opportunity, further reducing g. His progressive tax on capital seems to be the best solution, but it needs a lot of international cooperation to make it work. The US and China are big enough to achieve some things on their own, but Europe would need more complete democratic integration to make any progress.

I have noticed that economists here have very little useful to say about Trump and Republican policies generally. Most discourse is limited to the grossest kinds of generalities about markets, jobs, wages, growth, etc. based almost entirely on competing theories, with no real data to support them. It’s like talking about what to do about climate change, when your interlocutor has no clue what the data show and denies that they are relevant. You can’t make policy on abstract theories and catch phrases.

I have read a number of articles critical of Picketty, and I find that many of the authors seem to have overlooked things that I felt he dealt with. Studying economics solely through models is like studying evolution only through theoretical population genetics and ignoring systematics, biogeography and paleontology. The history of what actually has happened matters a lot. That’s Piketty’s major point: we can’t predict the future of capital, but we can look at its history, apply a few basic models that seem to account for what happened and try to see whether these models yield plausible ideas about the future. I see him doing that very consistently, all the while applying what we know from other social sciences to help understand what shapes the different histories of different countries and regions so that the simple economic factors produce diverse results. This is how evolutionary biology uses ecology, earth sciences and other disciplines to make the simple population genetics models produce the diverse results we see around the world.

One interesting parallel strikes me, since Piketty talks so much about inequality: increasing inequality may be a rule in evolution as well as economics. We know from studies of the Amazon rainforest that despite its enormous species diversity, a few species of trees make up a very high proportion of the biomass. Thus the abundance of species is very unequal. Perhaps this is a trend throughout evolutionary history as the somewhat better adapted species grow at higher exponential rates than the rest. This is very similar to Piketty’s r > g, since those are also exponential growth rates. In European economies, increasing inequality was the trend throughout the nineteenth century, until what Piketty calls the “shocks” of the World War era set back the wealthy and led to greater equality among the classes. Perhaps the shocks of abrupt shifts in climate, massive volcanism or meteor strikes are doing the same thing to the dominant (as ecologists call them) groups of organisms throughout the history of life. That is certainly the story we hear about the dinosaurs and other once abundant groups, now vanished or greatly reduced in abundance.

The one difference is, as Darwin long ago pointed out and others have maintained, since maybe 200 million of so years ago, g for overall life has been close to zero, that is, the biosphere is not getting bigger, leaving all life forms to fight for a share of an constant sized pool of living matter. Also, there is no distinction between income from capital and income from labor in the biosphere. There are no rentiers in a Darwinian struggle for existence, so it is just a matter of some species’ r values (here meaning the exponential rate of population growth) being higher than others’. In economics there are only two species, capitalists (rentiers) and workers, but they grade into one another in the middle. In ecology, there are literally millions of species, but intergradation is highly variable. Just as in economics, we can measure all wealth and income in terms of monetary value, in the biosphere all success must be measured in energy, of which biomass is an equivalent. There are complexities: how to account for the very high respiratory rates of some organisms, like wolves, or better, shrews, versus others with much greater biomass but less respiration, like trees. So total income for each species may be better than how much they accumulate, but you would not say that of humans when comparing a thrifty saver to a wastrel. So both accumulated biomass and total energy flow (= income) are legitimate ate measures of dominance or success in the biosphere, just like income and wealth need to both be included in economic analysis.

 

Evolution and Revolution

Kelly, Aileen M. 2016. The Discovery of Chance. The Life and Thought of Alexander Herzen. Cambridge MA. Harvard University Press. 592pp.

painting by Frédéric Sorrieu

I was drawn to this book on the library shelf because I thought it was about mathematics and probability, but I took it to read because on closer examination, it was about the first thinker to connect politics and biological evolution. He was not, however, a crude social-Darwinist. In fact, Alexander Herzen was thinking about evolution and politics even before Darwin’s theory came out. Besides that, he was a fascinating individual.

This is an intellectual biography of one of the founders of Russian socialist thought. Herzen, an illegitimate son of a minor aristocrat, was born in 1812, the year Napoleon took and then retreated from Moscow. Educated at Moscow University, he was part of the intelligentsia of the 1830s, under strict czarist censorship. As a young man, Herzen experienced several periods of exile to towns in the provinces. Back in Moscow, his circle was influenced by romanticism and various versions of Hegel’s philosophy, but Herzen was distinguished by his interest in biology, especially early evolutionary thought. By the late 1840s, he was in exile in the west, eventually settling in London, where he operated a radical printing house and edited publications aimed at fellow Russian exiles and the reformers and radicals back in Russia.

He came to believe that human societies are subject to the same natural laws as the rest of the living world and do not develop along lines laid down by overarching forces of History or Reason. Kelly’s title reflects Herzen’s view that although ideas like liberty may arise and take root in societies, they are expressed in ways that depend on the individual circumstances, just as the selective value of a biological variant is determined by the environment. Thus it is impossible to predict the future form of society, and there is no final end towards which civilization develops, as Hegel and his followers believed. In Darwin’s theory, the function of a trait, or gene, may change over the course of evolution into something completely different than it had originally. The idea of individual freedom may have one manifestation in the agrarian and proto-industrial world of Jefferson and Hamilton (taking US history as a case) another in the rapidly industrializing world of Lincoln, another in the industrial world of the Roosevelts and still another in the post-industrial world of today. However much conservatives may deny it, these meanings do evolve, and forcing people to accept old understandings is no easier than forcing them to accept a radical utopia. The same is true of policies: in one situation, restriction on markets may be inimical to human welfare, in another, it may be the only way to protect it. Socialism may stifle initiative and essential development, or it may promote them.

I see a connection between Herzen’s thought and the developmental theory of Stanley Greenspan and Stuart Shanker, described in The First Idea: How Symbols, Language, and Intelligence Evolved from Our Primate Ancestors to Modern Humans (Da Capo Press, 2006). In their view, human intellect and language develop through the interactions of the infant and its caregiver. The inborn genetic potential must be realized through specific interactions to create in each individual a capacity what they call “co-regulated exchanges.” The process cannot be fully controlled or predicted in advance. Furthermore, as societies developed historically through these contingent processes, the environment that individuals encountered varied, applying selection pressure on the frequencies of genetic variations in each separate group. Learned behaviors thus fed back into innate tendencies. It seems to me that these modified Darwinian perspectives on the questions raised by social and behavioral sciences may yield useful understanding. I plan to write more about this later.

Herzen came to despise the allegiance of his fellow radical exiles to ideologies, like communism, that promised a perfect society after the revolution. He argued strongly that one must focus on the present reality and seek whatever opportunity for advancement presents itself. My reservation about this, and I think Herzen would have admitted it, is that unlike plants or animals in the struggle for existence, we humans are influenced by our imaginations, the things we hope for. Since Plato’s Republic, imaginary societies have helped us focus our attention on what we believe to be the good. The trouble comes if we expect them to be made into realities by superhuman forces.

Herzen also became skeptical of the effectiveness of violence, especially after he saw how the revolution of 1848 ended. He was convinced that the way forward in Russia in the 1860s was through the peasant communes, a rudimentary form of socialism, tied to their commitment to common ownership of land. He agitated for a constituent assembly, without distinction of classes, to begin the transition away from autocracy. It never happened. As he feared, the autocracy stood almost until the Bolshevik revolution in 1917. Herzen was right that the course of history did not follow a progression towards some ideal society, whatever the revolutionaries may have claimed. The outcome was a mixture of the communist idealistic view with the pure naked power of the police state, yielding Leninist and Stalinist totalitarianism. This appeared to have finally faded out under Gorbachev and Yeltsin. Post-communist Russia in the 21st century seems to be a mix of elements from the past plus the globalizing ideology of neo-liberalism. But will the old way be given new life under Putin?

Looking at the American 2016 election, what elements in the current debates will be the ones that comprise the next stages in our history? It’s like trying to predict the course of evolution, or trying to see how to give one species an advantage in the struggle for existence: the problem is simply too complex. As in Darwin’s analogy between the struggle for existence and throwing up a handful of feathers, there are too many forces besides simple gravitational pull that determine the precise place each feather will land, where each species will survive or how each society will develop. This does not stop futurologists, but it ought to give the rest of us pause.

I think Bernie Sanders resembles Herzen. He is opposed to the repressive neoliberalism of the current establishment that brings growth only at the cost of rising inequality and environmental degradation. Like Herzen, he hopes for a peaceful transition to Socialism, meaning not abolition of the market and private property or government ownership of industry, but rather, a democratic government restraining the excesses of the free market and the financial system. He wants to insure that the economy benefits everyone, not just the rich owners of private capital. Like Herzen, he knows that history is contingent, not invariably progressive, not moving towards a perfect future, but sometimes presenting opportunities for progress and reform. In that understanding, he gives his support to Clinton, because she promises at least some reforms, and she will be a better guardian of the public interest than the crude nationalist, Trump. Sanders’ followers divide into those willing to go along with the compromise, who see the critical danger in an overthrow of basic values of tolerance and inclusion, etc. and those who want revolution and an ideal world now, no matter how impossible that is. It will be interesting to see which candidate they choose come November.

There are many more interesting ideas in the worthy book, which I think everyone inclined towards radical politics would do well to consider. Herzen’s major work, From the Other Shore, is available online.