Inequality and oligarchy

Greg Mankiw’s column over the weekend, “How inherited wealth helps the economy” is the latest entry into a burgeoning genre of Thomas Piketty’s rebuttals that appear to be written by people who aren’t familiar with what proposals Piketty is advancing.

But Piketty isn’t against the idea of wealth accumulation or even against the idea of young people inheriting accumulated wealth from their ancestors.

Larry Summers is one of several reviewers of Piketty I’ve seen who cast some doubt on his theories with reference to the Forbes 400 list:

This is an interesting point, but when I interviewed Piketty he had a rebuttal namely that the Forbes methodology undercuts inherited wealth.

Alpha magazine is out with its annual “rich list” detailing the successes of the highest earning hedge fund managers in America. The news once again is that it’s good to be a successful hedge fund manager: the top 25 earned a collective $21.1 billion this year.

Even within that group there’s considerable inequality. The top earner, David Tepper, took home $3.5 billion which is about five times as much as either of the two men tied for the tenth slot.

Over the weekend, Ezra Klein posted Nobel Prize winning economist Thomas Sargent’s sub-300 word summary of what you need to know about economics and included the point that “there are tradeoffs between equality and efficiency.” This is true but, I think, also false. And in many ways it’s become one of the big myths of our time. There really are tradeoffs between equality and efficiency. But there is no sound basis for believing in a tradeoff between an equitable distribution of income and the creation of a society that is efficient in generating the material basis of prosperity.

If anything it is the opposite. The present highly inegalitarian distribution of economic resources is highly inefficient and makes it inordinately difficult to solve serious problems.

At the core of Washington’s economic-policy debate is a premise shared by both Democrats and Republicans: raising taxes on the rich will hurt the economy by discouraging super-talented, super-productive rich people from working as hard.

But in a recent paper “Taxation and the Allocation of Talent,” Benjamin Lockwood, Charles Nathanson, and Glen Weyl challenge that assumption. Higher tax rates, they argue, could push talented individuals to eschew lucrative-but-socially-useless jobs in favor of more broadly beneficial careers in teaching and research.

The Laffer Curve — the idea that tax cuts can sometimes increase tax revenue — is one of the most influential and widely debated ideas in the past two generations of American politics. Beloved by the right and despised by the left, one thing that both sides have tended to agree on is that knowing what side of the curve we’re on should be a key driver of tax policy.

We already accept this principle for tobacco taxes. If all we wanted to do was raise revenue, we might want to slightly cut cigarette taxes. And since cigarettes are about the most-taxed thing in America, we certainly would want to cut out all our other anti-smoking initiatives. But we don’t do that because we care about public health. We tax tobacco not to make money but to discourage smoking.

Two guys named Marc Lasry and Wes Edens purchased the Milwaukee Bucks NBA franchise on Thursday, April 17 for $550 million. You may thing this is of picayune interest to professional basketball fans or Wisconsin residents, but it’s actually an incredibly telling episode about the nature of inequality in the United States.

To understand why, you have to start with who the Bucks are. They are, this year, one of the worst teams in the NBA. And it’s been a long time since they’ve been good. It’s a small market that, unlike Salt Lake City or Portland, the NBA doesn’t have all to itself. The Bucks need to compete with a pro baseball team in Milwaukee and with a pro football team in Green Bay for the allegiance of Wisconsin sports fans and corporate sponsors. In other words, this $550 million sale price probably reflects a floor on the possible value of an NBA team. The other 29 are all even more valuable than this.

It’s easy to think of the Doom Loop of Oligarchy as driven by political spending. But it’s also driven, more mundanely, by political engagement. The more affluent you are, the more likely you are to do, well, anything related to American politics. That includes the most basic political act of all:

The graph comes from a recent report the think tank Demos did on political inequality. As they note, the gap can be even larger in midterm elections.

In the year’s scariest economics book, Thomas Piketty argues that capitalism, left unchecked, subverts democracy by always and everywhere concentrating wealth at the tippy-top. That creates a class with so much economic power that they begin wielding tremendous political power, too. And then they use that political power to further increase their wealth, and then they use that wealth to further increase their political power, and so on.

You might call this the Doom Loop of Oligarchy: wealth buys power, which buys more wealth. You can see it playing out over the last two weeks in American politics.

Thomas Piketty’s Capital in the 21st Century is the most important economics book of the year, if not the decade. It’s also 696 pages long, translated from French, filled with methodological asides and in-depth looks at unique data, packed with allusions to 19th century novels, and generally a bit of a slog.

The good news is that there’s no advanced math, and anyone who puts in the time can read the book. But if you just want the bottom line, we have you covered.