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.

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. 

Flakmeister's picture

BB is full of shit as usual...

As a rule, food is not taxed under a VAT unless it is prepared for you, i.e. a restuarant...

Confused's picture

Yes, this is true, but if a 'consumption tax' were to be implemented, it is possible that i might deviate slightly from a VAT tax as we see them now. So potentially groceries could be taxed. But I guess you are right, using VAT as an example, you would not be avoiding a tax by growing your own food. But rather avoiding paying for it as well as dependence on a system outside of your control. 

Again, all interesting. 

Charles Nelson Reilly's picture

so my wife and I who earn about $250k combined, live frugally within our means and save some (not a lot) & get our clocks cleaned because we live near an east coast city, where the cost of living is enormous. We would then have to pay more.  Do you collectivists ever give any thought to what you say?

That's a great plan, Flak. That's fuckin' ingenious, if I understand it correctly. It's a Swiss fuckin' watch.

mayhem_korner's picture

 

 

Collectivist liberals by nature are wired to want to infringe on others' individual sovereignty in the name of "fairness."  Taxes are a favorite implement of theirs, as tax policy at this stage of the cancer is strictly about wealth re-distribution.  Lost in the misdirection of VAT v. consumption v. income taxes is that ongoing government spending beyond the means (and will) of the people is so far past the point of recovery that no viable tax (or other) solution exists.

But people who earn less than I pay in taxes will get on their high horse and tell us all about what is fair.

Flakmeister's picture

    Pretty full of your self, eh?

But people who earn less than I pay in taxes will get on their high horse and tell us all about what is fair.

So you pulling down mid 7 figures?

de3de8's picture

The answer here is a sliding scale where food and staples little to no tax Clothing a bit more, so on and so forth with luxury items taxed highest.

Herd Redirection Committee's picture

We keep calling it a tax, when really, what is needed is a one-time wealth repatriation.  Everyone who has been affected by ZIRP, fiat currency and central bank bubble creation is entitled to wealth repatriation.  Tax money goes to the gov't.  Repatriated wealth should go to every LIVING, BREATHING non-criminal on the planet. 

So really, I think there should be a MASSIVE Truth & Reconciliation trial, banksters going to jail, and then wealth repatriation to end it.  We need enforcement of the law, not MORE laws!

Buckaroo Banzai's picture

Fallacious reasoning. "If only we could eliminate waste, fraud, and corruption...our socialist state would truly be nirvana!"

Hopeless. Only solution is to eliminate government-- it's the source of all waste fraud and corruption.

dirtbagger's picture

I guess BB was born after Enron.  Must be a gifted child

Buckaroo Banzai's picture

Who do you think enabled Enron in the first place? Enron was just gaming retarded california utility rate regulations. Government stupidity breeds private sector fraud.

insanelysane's picture

I'm all for a flat tax.  20% is one day of my work week and 40% is two days of my work week.  As long as the takers start working their 1 or 2 days of week for a better country, I'm in.  You want to see riots?  Ask the takers for 1 day of labor per week for their handouts and see what happens.

Lord Koos's picture

Ever heard of income averaging?

free_lunch's picture

This article contains faulty facts and wrong assumptions..

Wrong fact:  "Rich people not lending..blablabla..." It's not people's savings that are used for lending.. New money gets created out of thin air..

 

"We have a few things to say about the recent debunking of established monetary theories.

In case you missed it, the Bank of England issued a report in March explaining that standard textbooks get money and banking all wrong.

The authors point out that banks don’t wait for deposits before making loans, as often claimed by academics. It’s the other way around. Banks create new deposits when loans are made, for this is how loan proceeds are delivered to the ultimate recipients. The fact that deposits then slosh around from bank to bank has no bearing on future loan issuance, which is always matched with newly-created, not old, deposits."

From: http://www.zerohedge.com/news/2014-05-20/banking-buffoonery-modeling-mys...

 

Misconception: if you have 1000$ and you know of a good investment that can turn it into 2000$ in 3 months, but you have to pay 300$ taxes on it.
I think anybody that can do math would still make the investment. Who would let go of a 700$ profit?

Lord Koos's picture

Ever heard of income averaging?

Bro of the Sorrowful Figure's picture

hazlitt pointed out our problem perfectly. we will never be able to win this argument because people have been condition to have extremely short attention spans. understanding economics and the long term results of policies has been rendered impossible for your average, and even your intelligent american. the brain washing has been thorough and there's very little we can do. im really dreading the moment where the crash comes and people begin shouting: "look what capitalism and free markets have done". im either going to kill myself or everyone around me.

dontgoforit's picture

I remember my bro-in-law telling me one very hot day in February in Venezuela back in the early '80's - "The poor in America live better than most of the balance of the people in the world."  It was true then - it is still true, though maybe not as much.

Spitzer's picture

Has a seppo like you ventured out of seppo land in the last 10 years ?

NidStyles's picture

As a person whom grew up poor in the US, you'd be wrong.