Peter Schiff Slams PikettyMania

Tyler Durden's picture

It's all the rage... Pikettymania is sweeping the nation and liberal economists are throwing their academic panties on his theoretical stage...

 

 

So here is Peter Schiff to debunk the euphoria...

 

Submitted by Peter Schiff of Euro Pacific Capital,

There can be little doubt that Thomas Piketty's new book Capital in the 21st Century has struck a nerve globally. In fact, the Piketty phenomenon (the economic equivalent to Beatlemania) has in some ways become a bigger story than the ideas themselves. However, the book's popularity is not at all surprising when you consider that its central premise: how radical wealth redistribution will create a better society, has always had its enthusiastic champions (many of whom instigated revolts and revolutions). What is surprising, however, is that the absurd ideas contained in the book could captivate so many supposedly intelligent people

Prior to the 20th Century, the urge to redistribute was held in check only by the unassailable power of the ruling classes, and to a lesser extent by moral and practical reservations against theft. Karl Marx did an end-run around the moral objections by asserting that the rich became so only through theft, and that the elimination of private property held the key to economic growth. But the dismal results of the 20th Century's communist revolutions took the wind out of the sails of the redistributionists. After such a drubbing, bold new ideas were needed to rescue the cause. Piketty's 700 pages have apparently filled that void.

Any modern political pollster will tell you that the battle of ideas is won or lost in the first 15 seconds. Piketty's primary achievement lies not in the heft of his book, or in his analysis of centuries of income data (which has shown signs of fraying), but in conjuring a seductively simple and emotionally satisfying idea: that the rich got that way because the return on invested capital (r) is generally two to three percentage points higher annually than economic growth (g). Therefore, people with money to invest (the wealthy) will always get richer, at a faster pace, than everyone else. Free markets, therefore, are a one-way road towards ever-greater inequality.

Since Piketty sees wealth in terms of zero sum gains (someone gets rich by making another poor) he believes that the suffering of the masses will increase until this cycle is broken by either: 1) wealth destruction that occurs during war or depression (which makes the wealthy poorer) or 2) wealth re-distribution achieved through income, wealth, or property taxes. And although Piketty seems to admire the results achieved by war and depression, he does not advocate them as matters of policy. This leaves taxes, which he believes should be raised high enough to prevent both high incomes and the potential for inherited wealth.

Before proceeding to dismantle the core of his thesis, one must marvel at the absurdity of his premise. In the book, he states "For those who work for a living, the level of inequality in the United States is probably higher than in any other society at any time in the past, anywhere in the world." Given that equality is his yardstick for economic success, this means that he believes that America is likely the worst place for a non-rich person to ever have been born. That's a very big statement. And it is true in a very limited and superficial sense. For instance, according to Forbes, Bill Gates is $78 billion richer than the poorest American. Finding another instance of that much monetary disparity may be difficult. But wealth is measured far more effectively in other ways, living standards in particular.

For instance, the wealthiest Roman is widely believed to have been Crassus, a first century BC landowner. At a time when a loaf of bread sold for ½ of a sestertius, Crassus had an estimated net worth of 200 million sestertii, or about 400 million loaves of bread. Today, in the U.S., where a loaf of bread costs about $3, Bill Gates could buy about 25 billion of them. So when measured in terms of bread, Gates is richer. But that's about the only category where that is true.

Crassus lived in a palace that would have been beyond comprehension for most Romans. He had as much exotic food and fine wines as he could stuff into his body, he had hot baths every day, and had his own staff of servants, bearers, cooks, performers, masseurs, entertainers, and musicians. His children had private tutors. If it got too hot, he was carried in a private coach to his beach homes and had his servants fan him 24 hours a day. In contrast, the poorest Romans, if they were not chained to an oar or fighting wild beasts in the arena, were likely toiling in the fields eating nothing but bread, if they were lucky. Unlike Crassus, they had no access to a varied diet, health care, education, entertainment, or indoor plumbing.

In contrast, look at how Bill Gates lives in comparison to the poorest Americans. The commodes used by both are remarkably similar, and both enjoy hot and cold running water. Gates certainly has access to better food and better health care, but Americans do not die of hunger or drop dead in the streets from disease, and they certainly have more to eat than just bread. For entertainment, Bill Gates likely turns on the TV and sees the same shows that even the poorest Americans watch, and when it gets hot he turns on the air conditioning, something that many poor Americans can also do. Certainly flipping burgers in a McDonald's is no walk in the park, but it is far better than being a galley slave. The same disparity can be made throughout history, from Kublai Khan, to Louis XIV. Monarchs and nobility achieved unimagined wealth while surrounded by abject poverty. The same thing happens today in places like North Korea, where Kim Jong-un lives in splendor while his citizens literally starve to death.

Unemployment, infirmity or disabilities are not death sentences in America as they were in many other places throughout history. In fact, it's very possible here to earn more by not working. Yet Piketty would have us believe that the inequality in the U.S. now is worse than in any other place, at any other time. If you can swallow that, I guess you are open to anything else he has to serve.

All economists, regardless of their political orientation, acknowledge that improving productive capital is essential for economic growth. We are only as good as the tools we have. Food, clothing and shelter are so much more plentiful now than they were 200 years ago because modern capital equipment makes the processes of farming, manufacturing, and building so much more efficient and productive (despite government regulations and taxes that undermine those efficiencies). Piketty tries to show that he has moved past Marx by acknowledging the failures of state-planned economies.

But he believes that the state should place upper limits on the amount of wealth the capitalists are allowed to retain from the fruits of their efforts. To do this, he imagines income tax rates that would approach 80% on incomes over $500,000 or so, combined with an annual 10% tax on existing wealth (in all its forms: land, housing, art, intellectual property, etc.). To be effective, he argues that these confiscatory taxes should be imposed globally so that wealthy people could not shift assets around the world to avoid taxes. He admits that these transferences may not actually increase tax revenues, which could be used, supposedly, to help the lives of the poor. Instead he claims the point is simply to prevent rich people from staying that way or getting that way in the first place.

Since it would be naive to assume that the wealthy would continue to work and invest at their usual pace once they crossed over Piketty's income and wealth thresholds, he clearly believes that the economy would not suffer from their disengagement. Given the effort it takes to earn money and the value everyone places on their limited leisure time, it is likely that many entrepreneurs will simply decide that 100% effort for a 20% return is no longer worth it. Does Piketty really believe that the economy would be helped if the Steve Jobses and Bill Gateses of the world simply decided to stop working once they earned a half a million dollars?

Because he sees inherited wealth as the original economic sin, he also advocates tax policies that will put an end to it. What will this accomplish? By barring the possibility of passing on money or property to children, successful people will be much more inclined to spend on luxury services (travel and entertainment) than to save or plan for the future. While most modern economists believe that savings detract from an economy by reducing current spending, it is actually the seed capital that funds future economic growth. In addition, businesses managed for the long haul tend to offer incremental value to society. Bringing children into the family business also creates value, not just for shareholders but for customers. But Piketty would prefer that business owners pull the plug on their own companies long before they reach their potential value and before they can bring their children into the business. How exactly does this benefit society?

If income and wealth are capped, people with capital and incomes above the threshold will have no incentive to invest or make loans. After all, why take the risks when almost all the rewards would go to taxes? This means that there will be less capital available to lend to businesses and individuals. This will cause interest rates to rise, thereby dampening economic growth. Wealth taxes would exert similar upward pressure on interest rates by cutting down on the pool of capital that is available to be lent. Wealthy people will know that any unspent wealth will be taxed at 10% annually, so only investments that are likely to earn more than 10%, by a margin wide enough to compensate for the risk, would be considered. That's a high threshold.

The primary flaw in his arguments are not moral, or even computational, but logical. He notes that the return of capital is greater than economic growth, but he fails to consider how capital itself "returns" benefits for all. For instance, it's easy to see that Steve Jobs made billions by developing and selling Apple products. All you need to do is look at his bank account. But it's much harder, if not impossible, to measure the much greater benefit that everyone else received from his ideas. It only comes out if you ask the right questions. For instance, how much would someone need to pay you to voluntarily give up the Internet for a year? It's likely that most Americans would pick a number north of $10,000. This for a service that most people pay less than $80 per month (sometimes it's free with a cup of coffee). This differential is the "dark matter" that Piketty fails to see, because he doesn't even bother to look.

Somehow in his decades of research, Piketty overlooks the fact that the industrial revolution reduced the consequences of inequality. Peasants, who had been locked into subsistence farming for centuries, found themselves with stunningly improved economic prospects in just a few generations. So, whereas feudal society was divided into a few people who were stunningly rich and the masses who were miserably poor, capitalism created the middle class for the first time in history and allowed for the possibility of real economic mobility. As a by-product, some of the more successful entrepreneurs generated the largest fortunes ever measured. But for Piketty it's only the extremes that matter. That's because he, and his adherents, are more driven by envy than by a desire for success. But in the real world, where envy is inedible, living standards are the only things that matter. 

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Flakmeister's picture

Schiff must be getting tired of losing vast amounts of money for his clients, assuming he has any left...

Spitzer's picture

Unmm.. Why ? He made a killing leading out of 2009. And he was never bearish on equities.

Moron.

bobnoxy's picture

I remember back when the market was getting crushed back in 2008 and on his radio show, one of his clients called and complained about how much he was losing in Schiff's best ideas, mainly emerging markets and gold stocks.

Schiff loudly told him to calm down. Getting very defensive at being called out like that so publicly, he said;  "You haven't lost anything until you sell!''. So holding something that's down 75% isn't really a loss if he held on to it?

Lost a lot of respect for him on that one.

Oh, and technically, every citizen of Norway is a millionaire from the nationalized oil sales and the profits being pumped into their national wealth fund. Can you imagine if that had been done here? I'm sure his retort to that woould be that it shouldn't have worked. Doesn't conform to his theory.

Pladizow's picture

“While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit from such policies, having such a direct interest in them, will argue fir them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting the case. And it will finally either convince the general public that the case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.” – Henry Hazlitt, Economics In One Lesson - Page one, 1946.

gh0atrider's picture

Pytor Schiff was wrong (about Bitcoin).

Pladizow's picture

“It is often sadly remarked that the bad economist present their errors to the public better than the good economists present their truths.” - Henry Hazlitt, Economics In One Lesson, 1946.

max2205's picture

If they don't keep giving to the ever increasing FSA they know they will lose all their power.

 

Happy Pomo Day....when's it start damn it!

Vampyroteuthis infernalis's picture

So this French moron want to tax wealthy incomes up to 80%? Who is going to stop these high income tax donkeys from changing passports? Nothing. Go back to your commie infested generator of educated idiots!!!

taketheredpill's picture

 

 

If the Top 50 Bankers in the U.S. stopped working, would the average person in the U.S. be worse off or better off.

Mercuryquicksilver's picture

If the Top 5 Banks in the U.S. stopped, would the average person in the U.S. be worse off or better off?

MillionDollarBogus_'s picture

"Certainly flipping burgers in a McDonald's is no walk in the park, but it is far better than being a galley slave."

Interesting comment, considering that Shiff's dad chose to go to prison (certainly living like a galley slave) in his fight against the IRS.

I can understand the source of Peter's bitterness..

Spitzer's picture

Europac Metals accepts btc

gh0atrider's picture

Begrudgingly by the sounds of it har har har.

bobnoxy's picture

Numerous investors and entrepreneurs agree that runaway inequality hurts the economy, including:

 

http://www.ritholtz.com/blog/2014/03/whos-who-of-prominent-economists-ag...

I wonder what Schiff knows that those people do not.

Notsobadwlad's picture

Of course because financial inequality decreases money velocity.

Similarly the fewer banks, the less equality in lending.

stev3e's picture

The likes of Bill Gates, Warren Buffet, et al. were very silent on income inequality while they were getting theirs.  Now that is it safely stored within complex legal trust structures where it cannot be redistributed and from where their managment decisions will have some power even after they have died, they would like to see income distribution for everyone else.

They should remove their wealth their protected structures and offer it up to the same processes they now hypocritically support.

The list you presented is the worst of the worst of humanity, and many people are fooled by their silver tongues.

bobnoxy's picture

Wealth inequality wasn't much of an issue back in the day when they made theirs. Today it's worse than any time since the years leading into the Depression, which kind of supports their point. And they have agreed to give it away.

Steaming_Wookie_Doo's picture

"agreed to give it away"

If you believe that, then there's a Nigerian email claiming to give you rights to the Brooklyn Bridge (for a small processing fee). Rockefeller may have spent his elder days giving away dimes, creating "charitable foundations", etc, but I didn't notice any of his descendants in poverty. Same for any of the Robber Barons of the 1800s.

I can't quite get with the level inequality, though I do understand the sheer numbers. Of course, really adjusting for inflation would probably make more of a difference than was glossed over in the article. The poor in this country still have running hot/cold water, electricity, indoor toilets, phones, color TV (probably with cable), and the lowest relative costs for clothing anywhere in the world. Not saying living in a public housing unit would be great, but compared to a ghetto in India or the Philippines, these guys have nothing to bitch about.

Sean7k's picture

Yet, none of them do anything about it. None of them work at creating a better system, knowing that the simple acts of eliminating fractional reserve banking and State regulation would work wonders. Not everyone is tgnorant enough to accept one words at face value, but actually look to works.

Agstacker's picture

Can you imagine if that had been done here?

 

Alaska does.

 

http://pfd.alaska.gov/

TheReplacement's picture

If you are so smart why don't you write a rebuttal and disclose your wealth?

Spitzer's picture

I like his bank. The first thing he does is throw the seppos under the bus when you log into the site. Europac bank

Greenskeeper_Carl's picture

What an astute observation. And very relevant to this article....

But one thing I haven't heard many say, and I'm surprised schiff didn't, is that the fed is responsible for almost all of this. There are always going to be rich and poor people, but it's no coincidence that the gap between them coincided with the massive growth of the Feds balance sheet, or record low interest rates.

Bananamerican's picture

Yes.
So can we at least redistribute Dimon, Geithner and Blankfiend's money? Huh? Can we??

"First they came for Vikram Pandit's money and I said nothing...
Then they came for Moynihan's money and I said noth....Oh fuck this"

What I don't get is this .gov troika that 1st fattens the wealthy class in true fascist form then shears that same class after the wealth transfer...from the....formerly...Middle class!!? Muthafuckerz!!!!

Fiat Envy's picture

Stop giving them trillons and they will be broke in the blink of an eye.

NidStyles's picture

Schiff has been beating that particular drum for over 20 years, he doesn't need to actually come out and say it, it's implied.

Flakmeister's picture

That would explain why the US GINI ratio decreased from 1930 to ~1980 or so and started rapidly rising then...

Are you always so blind to what the data says?

Greenskeeper_Carl's picture

Wow really? Inequality starting rising once the US ended the gold standard and the fed started to blow bubbles, and central banks were able to freely print fiat money and inflate their debts away at the expense of the middle class saver? Color me shocked....isn't that exactly what I said?

eclectic syncretist's picture

Schiff's just another used car salesman who writes without research.  Wealth redistributions from the rich to the poor are, historically speaking, almost always extremely violent, and involve widespread death of the rich.

Flakmeister's picture

Nope...

The beginning of the end was US oil production peaking in 1970...

Supply side, aka voodoo economics, sealed the deal in the '80s...

The inflection point is obvious

GINI Data US

The first bubble didn't occur until 15 years later....

mraptor's picture

Remember that the hockey stick of inequality started at 1971 ...

Notsobadwlad's picture

Never heard of him ... I sure he will thank ZH for the plug.

Pig Circus's picture

Turns out Thomas NosePikery Stats are flawed. In other words he like all Marxists is a lying worthless piece of shit:

 

[W]hen writing an article on the distribution of wealth in the UK, I noticed a serious discrepancy between the contemporary concentration of wealth described in Capital in the 21st Century and that reported in the official UK statistics. Professor Piketty cited a figure showing the top 10 per cent of British people held 71 per cent of total national wealth. The Office for National Statistics latest Wealth and Assets Survey put the figure at only 44 per cent.

 

http://www.powerlineblog.com/archives/2014/05/is-thomas-piketty-a-fraud.php

BrosephStiglitz's picture

When we see stability in the developed regions of the world to parallel the end of the millenium era (Clinton era) I'll call Schiff out on BS.

He isn't always right, he's often wrong, but I don't think you can rule his entire scenario out until 2016 at the earliest.

People think he is a dumb guy, but his '06 interview was 100% spot on when it came to the sub-prime.

Flakmeister's picture

Even a blind nut finds a squirrel every now and then...

BrosephStiglitz's picture

For anyone informed on what actually happened during the Sub-Prime Crisis, and subsequent financial shock, people would be foolish to disregard Schiff.

He didn't just make general predictions.  He made accurate and detailed predictions which have been confirmed by a great deal of post-crisis study.

Yes, his timing is terrible (something he has personally admitted) as he misses intermediate steps.  But he has proven himself to be intelligent enough to pick apart some crises, some of the time.  Will he be right again?  Maybe not.  I doubt macroeconomic shocks are his forte (his education is in accounting and finance.)  The next crises will step out of the microeconomic sphere, which was where he was concentrating his focus in '06.

If Armstrong has not been compromised, he will probably provide far superior information.  Anyone with a focus on currencies will probably have the right tea-leaves to call this next one.  Though the next crisis will probably originate in Asia and propate West.  Japan and China are looking like two mighty big dominoes that are waiting to topple these days.

Flakmeister's picture

Everybody knew it was coming, except those that paid to lie in public....

I was modelling CDO^2 at the time for a mono-line....

Hongcha's picture

What?  What the hell is this.

maneco's picture

I prefer Frederic Bastiat's "The Law" as far as French economists go.

ParkAveFlasher's picture

Persnicketty can only be an apologist who aims to freshen up this easily-comprehensible, basically-malodorous concept: that interest rates imply controlled redistribution by their very existence.  Try to apply an interest rate to the lending of sound money. 

 

 

 

EXACTLY.

insanelysane's picture

I think the max salary thing is a great idea.  What could go wrong?

Say you are a musician and end up being a "one-hit wonder."  The government takes 80 to 90% of your earnings, your one big year and then you can play in subway tunnels the rest of your life.  Same for pro athletes that play for a couple years or actors that have one movie.

ParkAveFlasher's picture

How about a baker that makes one really awesome pie, just once.

Flakmeister's picture

Clearly the concept of how a progressive marginal tax rate works is beyond your grasp...

But hey, if I had my druthers, it would be a consumption tax (the fair flat tax) combined with progressive wealth taxes above $5 million or so that would really kick in above $200 million with income tax relegated to the trash bin...

Confused's picture

Flak, maybe you could clear up something for me.

 

With a consumption tax, it would appear that the low income individual would still bear the burden of most of the taxes being paid. Presumably, it is these individuals who would spend the entirety of their pay. And I would imagine the 'wealthy' (however the fuck this is actually defined now) would not. 

 

Not trying to be a dick. Just looking for an alternative thought on it, as I have not read much on the topic. 

Buckaroo Banzai's picture

Yes, exactly. "Progressive" taxation is evil. Do you not understand the definition of "poor"?? It means that EVERYTHING costs more, in relative terms. Trying to "even things out" with "progressive" taxes is not just evil, it's pointless as poor people are ALWAYS disproportionately affected.

Consumption taxes are avoidable taxes. Grow your own food and make your own clothes. Shit, virtually the entire human race did that up until quite recently.

Confused's picture

.. Do you not understand the definition of "poor"?? ...

 

Cool bro. You could have just responded with:

..Consumption taxes are avoidable taxes. Grow your own food and make your own clothes. Shit, virtually the entire human race did that up until quite recently.

 

I'm not advocating for 'progressive tax.'  But your response is much appreciated. 

Flakmeister's picture

Given the current level of sales tax, FICA etc.. it would be wash at the low end to have a 15% VAT or so....

Clearly, there has to be a lot of fine tuning, and it could well be that an Income tax (10%??) for incomes above $250,000 is required...

Confused's picture

As I said, its not something I can claim to have read alot about. Buckaroo seems to have hit on a key point. Consumption tax is avoidable, which could potentiall provide some relief from the affect of taxes. 

 

Thanks for the response. Its an interesting thought.