The National Debt: A Guide for the Perplexed (and Alarmed)

Since coming back to the US, I have been surprised how often the national debt comes up in conversations about most any political topic.  In discussions about inequality, for instance, I hear that we can hardly trust the government to address inequality given its own financial incompetence, and that if there is financial injustice about, surely the greatest injustice is the government’s systematic stealing from our children and grandchildren, whom we are saddling with an intolerable burden of debt.  The theme of the travesty and looming catastrophe of US government debt has fueled the rise of the Tea Party, and played a role in the ridiculous fiscal standoffs in Congress over the past couple years.  Of course, it is an important fiscal concern that both parties should be attentive to, but this is not usually how one hears it discussed—i.e., in the context of particular policies for fiscal responsibility.  Rather, it is used as a universal putdown—a way of claiming, no matter what the particular point is under discussion, that the government cannot be trusted because its debt is both irresponsible and immoral, and that only a radical overhaul (one might almost say “overthrow” from some of the rhetoric) of our government can save us from imminent disaster.

As someone who used to be something of a national debt alarmist myself, I thought it might be helpful to put the issue in the proper context.  The following is an expanded form of a little explanation I gave to a friend on the question after a political discussion last week.

1) Use real numbers
For one thing, inflation is generally ignored.  All you have to do is yell out $16 trillion—an obviously immense sum—and point proven, right?  “Over the last forty years, the debt has risen from $500 billion to $16 trillion—our debt is spiraling out of control.”  Adjust for inflation, though, and it’s only risen from $2.4 trillion to $16.8 trillion.  Obviously, however, that’s still a pretty substantial increase.  That’s why it’s important to: Read More


Piketty Notes and Quotes, 4: The Nub of the Problem

It would be a mistake to attempt, as many bloggers, pundits, and commentators have done, to summarize such a vast collation of history and data as we find in Piketty’s Capital into a single simple argument, which can then be discredited by one fell swoop of counter-evidence.  It is a sprawling work composed of dozens of theses and sub-theses, supported by many different sources and types of data.  However, the basic gist is fairly straightforward and intuitive, and worth grasping for those who don’t have time to read the whole book.  It is best stated in his own words:

“When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income.  People with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole.  Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will attain extremely high levels—levels potentially incompatible with meritocratic values and principles of social justice fundamental to modern democratic societies.

What is more, this basic force for divergence can be reinforced by other mechanisms.  For instance, the savings rate may increase sharply with wealth.  Or, even more important, the average effective rate of return on capital may be higher when the individual’s initial capital endowment is higher (as appears to be increasingly common).  The fact that the return on capital is unpredictable and arbitrary, so that wealth can be enhanced in a variety of ways, also poses a challenge to the meritocratic model. . . .

To sum up what has been said thus far: the process by which wealth is accumulated and distributed contains powerful forces pushing toward divergence, or at any rate toward an extremely high level of inequality.  Forces of convergence also exist, and in certain countries at certain times, these may prevail, but the forces of divergence can at any point regain the upper hand, as seems to be happening now, at the beginning of the twenty-first century.  The likely decrease in the rate of growth of both the population and the economy in coming decades makes this trend all the more worrisome.

My conclusions are less apocalyptic than those implied by Marx’s principle of infinite accumulation and perpetual divergence (since Marx’s theory implicitly relies on a strict assumption of zero productivity growth over the long run).  In the model I propose, divergence is not perpetual and is only one of several possible future directions for the distribution of wealth.  But the possibilities are not heartening.  Specifically, it is important to note that the fundamental r > g [return on capital is greater than the economic growth rate] inequality, the main force of divergence in my theory, has nothing to do with any market imperfection.  Quite the contrary: the more perfect the capital market (in the economists’ sense), the more likely is to be greater than g.  It is possible to imagine public institutions and policies that would counter the effects of this implacable logic: for instance, a progressive global tax on capital.  But establishing such institutions and policies would require a considerable degree of international coordination.  It is unfortunately likely that actual responses to the problem—including various nationalist responses—will in practice be far more modest and less effective.

. . .

In the late nineteenth century, conservative French economists such as Paul Leroy-Beaulieu often used this argument to explain why republican France, a nation of ‘small property owners’ made egalitarian by the Revolution, had no need of a progressive or confiscatory income tax or estate tax, in contrast to aristocratic and monarchical Britain.  The data show, however, that the concentration of wealth was as large at that time in France as in Britain, which clearly demonstrates that equality of rights in the marketplace cannot ensure equality of rights tout court. [italics mine]  Here again, the French experience is quite relevant to today’s world, where many commentators continue to believe, as Leroy-Beaulieu did a little more than a century ago, that ever more fully guaranteed property rights, ever freer markets, and ever ‘purer and more perfect’ competition are enough to ensure a just, prosperous, and harmonious society.  Unfortunately, the task is more complex.” (pp. 26-27, 30)


Piketty Notes and Quotes, 3: A Childish Passion for Mathematics

From the Introduction, one of my favorite passages in the book, and one that really sets the methodological basis for the whole argument:

“I should perhaps add that I experienced the American dream at the age of twenty-two, when I was hired by a university near Boston just after finishing my doctorate.  This experience proved to be decisive in more ways than one.  It was the first time I had set foot in the United States, and it felt good to have my work recognized so quickly.  Here was a country that knew how to attract immigrants when it wanted to!  Yet I also realized quite soon that I wanted to return to France and Europe, which I did when I was twenty-five.  Since then, I have not left Paris, except for a few brief trips.  One important reason for my choice has a direct bearing on this book: I did not find the work of US economists entirely convincing.  To be sure, they were all very intelligent, and I still have many friends from that period of my life.  But something strange happened: I was only too aware of the fact that I knew nothing at all about the world’s economic problems.  My thesis consisted of several relatively abstract mathematical theorems.  Yet the profession liked my work.  I quickly realized that there had been no significant effort to collect historical data on the dynamics of inequality since Kuznets, yet the profession continued to churn out purely theoretical results without even knowing what facts needed to be explained.  And it expected me to do the same.  When I returned to France, I set out to collect the missing data.

To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences.  Economists are all too often preoccupied with petty mathematical problems of interest only to themselves.  This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.  There is one great advantage to being an academic economist in France: here, economists are not highly respected in the academic and intellectual world or by political and financial elites.  Here they must set aside their contempt for other disciplines and their absurd claim to greater scientific legitimacy, despite the fact that they know almost nothing about anything.”

 

It is a testimony to the incorrigibility of the economics profession in America that the most substantial critique of Piketty’s work to emerge from that quarter is that “Unless I’m missing something, the formal [mathematical] apparatus in Piketty’s book simply is not capable of generating the results he touts.”  In other words, “Sure he’s demonstrated that something actually happened historically, but he hasn’t proven mathematically that it’s capable of happening!”


Piketty Notes and Quotes, 1: From McDonalds to Wall St.?

I finally got my copy of Thomas Piketty’s blockbuster Capital in the Twenty-First Century last Friday (it was on backorder for almost a month, such is the demand), and have been spending every minute of spare time since reading and pondering it.  My brain is getting too full to store all the ruminations, so I’ll start depositing them (along with choice quotes) here, beginning with this little passage on pp. 299-300, which ends with a nice example of Piketty’s trademark wry understatement:

“This unprecedented increase in wage inequality [in the US, 1975-present] does not appear to have been compensated by increased wage mobility over the course of a person’s career.  This is a significant point, in that greater mobility is often mentioned as a reason to believe that increasing inequality is not that important.  In fact, if each individual were to enjoy a very high income for part of his or her life (for example, if each individual spent a year in the upper centile of the income hierarchy), then an increase in the level characterized as ‘very high pay’ would not necessarily imply that inequality with respect to labor—measured over a lifetime—had truly increased.  The familiar mobility argument is powerful, so powerful that it is often impossible to verify.

But in the US case, government data allow us to measure the evolution of wage inequality with mobility taken into account: we can compute average wages at the individual level over long periods of time (ten, twenty, or thirty years).  And what we find is that the increase in wage inequality is identical in all cases, no matter what reference period we choose.  In other words, workers at McDonald’s or in Detroit’s auto plants do not spend a year of their lives as top managers of large US firms, any more than professors at the University of Chicago or middle managers from California do.  One may have felt this intuitively, but it is always better to measure systematically wherever possible.”


Working for All You’re Worth: Some More Thoughts on the Minimum Wage Debate

A few weeks ago, I wrote a brief reflection on the recent debates over the minimum wage for Capital Commentary.  My purpose there, and in the several conversations I’ve had in social media on this question, was not really to advocate for or against raising the minimum wage; in my view, the economic and political complexities of the issue are such that I’m inclined to be suspicious of anyone who’s confident they know the right answer to the question.  My main concern is to call out really bad arguments against the minimum wage, particularly those peddled by Christians.  There may well be a good case to make against the minimum wage, but it seems awfully hard to find people making it sometimes.

So I want to reflect a bit more fully on what’s wrong with one of the common conservative arguments against the minimum wage: that the laborer is only worth his productivity.  The argument goes something like this: Sure, it sounds wonderful to pay people a living wage, but a worker’s job is to contribute productivity to a business, adding value by his labor, and ultimately, the business cannot afford to pay him any more than what he brings in.  If a McDonald’s worker can only contribute an average of $6 profit per hour to the company by his labor, then McDonald’s will go broke pretty quick paying him $10/hr.  Accordingly, raising the minimum wage will simply increase unemployment, and instead, therefore, we should focus on raising worker productivity.  So Acton’s Joe Carter says,

“Instead, we should focus on faster economic growth and improving productivity of low-skilled workers. By increasing the value of a worker’s labor, we make it possible for them not only to feed their family but also to help fulfill the needs and desires of their neighbors….The goal should not be to merely give people a living wage but to help them gain the ability to make a life for themselves based on the value of their labor. What the working poor need most is marketable skills and productive jobs, not more handouts disguised as ‘wages.'”   

Now, arguments like this have a weaker, pragmatic form, and a stronger, moral form.  The moral version, favored by doctrinaire free marketeers, argues that a laborer ought not to be paid more than his productivity, which marks the just price of his labor—as someone put it to me in a Facebook discussion, “if you can’t find somebody who values your labor at $X/hr., then you have no right to employment.”  The pragmatic version would be: “It’s a cold hard world out there, and the fact is that the only way you’re going to get McDonald’s to employ people at $10/hr. is by making their labor worth $10/hr.”    There are problems with both versions, but I will begin by tackling the moral problem.

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