Reading Piketty, but seeking systemic change

The not-so-little book that’s electrified the developed world.

I’m late to the party with Thomas Piketty’s Capital in the Twenty-First CenturyWhat can I say, I don’t read that quickly. The work is formidable in length and impressive in its breadth of research. If nothing else, every page is a shining example of social science that puts data first and doesn’t draw any broad, satisfying, unsubstantiated conclusions.

Since the English publication was released in April, Piketty has become a sort of academic rock star- it seems every publication I follow on Facebook has devoted at least a few stories to his conclusions, and the impact his analysis of inequality. It’s reached the point that some are just marveling at the media attention, in some sort of feedback loop that you often see with faux media controversies on an increasingly information-starved CNN.

There is a clear division between Piketty the social scientist and Piketty the public policy advocate. The conclusion establishes that these two selves should be linked- pure critique isn’t enough. If the research supports a conclusion, it should be advocated with conviction. His devotion to social science research methods is admirable; as a sociology student his example is a good one to follow. Waves have been made regarding his data and graphs, but even critics have dismissed potential errors as insubstantial. His decades of work on inequality shine. In 2013 I took a semester of economic history, focusing on the United States. From that, I have seen how the topic can be written in a dreadfully murky and technical manner. Piketty writes with confident clarity, and his use of French and British novels to illustrate the pre-industrial political economy is a welcome break from data-driven analysis.

That last quarter is the issue though. Some points Piketty makes are beyond dispute. Absolutely, countries need to share banking data to keep the rich from hiding their assets. But the global tax on capital raises the question: is that a systemic solution? His view of the 20th century is that the world wars radically changed the views on government and led to a more rigorous tax system. That’s self-evident. Yet much has been undone, in the United States the shift has been obvious. Taxing the rich by a few extra percent has paralyzed the federal government for most of Obama’s presidency, and those attempted increases are less than half of what it was in the 1940s and 50s.

Yes, a global tax on capital would solve serious economic issues. It could dig developed countries out of a ludicrous and unnecessary sovereign debt crisis, and reassert the social state that has done amazing things for hundreds of millions of people. But what’s to stop it from being undone by international conglomerates, especially in a system of otherwise free trade? And can the masses be mobilized once again for the same kind of solution?

Richard Wolff, a Marxist economist I mention from time to time, has a strong leftist critique of Capital in the Twenty-First Century. His monthly economics lecture in New York is available on YouTube, and he devotes quite a bit of time on Piketty (here’s the video, marked where he begins to talk about the book). Perhaps taxation and regulation are not the ultimate solution. The issue with modern capitalism isn’t its 21st century flavor of widespread inequality, the issue is with capitalism, period. Without a change in the class system today, inequalities of capital will always exist, and likely get worse immediately after policies are enacted to address that. A serious omission is the mass movement needed to get such changes implemented- without such discussion, the global tax on capital and movements against tax havens are simply commonsense, good ideas. They are not achievable ones simply by making sense.

Wolff joins other critiques (Jacobin did at least a half dozen pieces over the past two months) in pointing out a key issue, namely the power of the elite to block or roll back legislation that reduces their wealth and influence. Piketty points out that a robust democracy is needed, but ignores the many roadblocks that exist in the modern world. And even if democracy can elect a better government, it still needs to avoid the corrosive influence of money, and its own newfound power. As Bakunin said, “men do not make positions,;positions . . . make men.” To create change, the political system needs to go through a radical change, alongside capitalism. The huge success of what Thomas Piketty has to say indicates that people understand things are profoundly broken, but may be hesitant to speak of a deeper cause than modern policy changes.

Occupy sign. December, 2011.

Whatever your takeaway from the Occupy movement was (and is), the enduring legacy goes beyond the branding of 1% vs. 99%. It got people, many with no prior background in activism, talking about capitalism. Outside of universities, real discussions about capitalism are rare in the United States. I was born into a capitalist system, but that doesn’t mean it’s above critique. We emerge from old traditions constantly, casting aside religious and social customs constantly. If developed countries can ditch organized religion, they can ditch capitalism too. In the times of Roman Catholic supremacy, the idea that religion was an option, and not an obligation, merited execution. Now that view is accepted and even normal in some regions.

All and all, I am glad I overcame my slow reading and finished the book. One of his conclusion at the very end is dead on, that economics needs to realize it has more in common with sociology and political science than physics and mathematics. That being said, I think the leftist critique is valuable. Not to say everything I’ve read from that angle is correct, but that it puts the impetus on Piketty and his supporters to flesh out the policy side of the research. How does democracy save us, and what forms will it need to take? On what ground do the working and middle classes fight the elite for control of economic policy? Can these policy ideas form a systemic solution to inequality?

I don’t know the answers, and Piketty isn’t so sure either. That’s okay, and he often does state his research and conclusions have clear limits. But for his ideas to be picked up and carried to fruition through toil and struggle, they need to work in the long-term. There are a finite number of difficult paths regular people can go in order to create change. Money is scarce, so is time and will. To see inequality spike back up a few decades down the road would be devastating. And if the 99% gives up hope, the world is truly lost.

 

Turning the tide: the fight for a $15 minimum wage

Income growth distribution. Source: http://news.good.is/beg-borrow-steal/econographic#%21/2
Income growth distribution. Source: http://news.good.is/beg-borrow-steal/econographic#%21/2

There is a war going on in the Pacific Northwest. It has garnered some national attention, and cities across the country will be influenced by the result. Which side wins, and whether they get most of what they initially wanted, will ripple across the nation.

Seattle is debating a $15 minimum wage.

This is an extraordinary fight, because it was linked to an extraordinary campaign. Kshama Sawant, a member of Socialist Alternative, defeated a sixteen-year Democratic incumbent to win a seat on the Seattle City Council. I’ve written about Sawant several times (here was my pitch prior to the election), and her success is one of the biggest events in the American left since the McGovern campaign. The whole campaign was tightly bound around a single campaign promise- a $15/hr minimum wage.

Her victory, against the grain of traditional Seattle politics, indicated that popular sentiment was on the side of her campaign and the organization she helped found, 15 Now. Seattle is joined by San Francisco in pushing for a ballot initiative. The engine is Seattle though, with over a year of constant campaigning. Pressure has given the proposal wide political acceptance, even among business-friendly Democrats.

The split between worker productivity and worker wage increase
The split between worker productivity and worker wage increase

The argument is straightforward. Since the end of World War II-era price controls, worker productivity has increased substantially, but since the Nixon Administration is no longer matched by increases in wages. This era has also been one of sharply rising costs- education, healthcare, rent. I’ve drawn a grasp with permanent markers to give you the result. No, seriously:

A simplified graph of wages vs. costs since 1970
A simplified graph of wages vs. costs since 1970

The minimum wage isn’t tied to inflation, so it buys far less than in decades past. Increasingly, those that make minimum wage (or close to it) no longer have a living wage. They can’t afford to raise their kids, or live anywhere near where they work. Thus they rely on two things- credit and welfare. There are plenty of people working crazy hours yet still in the economic strata to require welfare to make basic ends meet. Without a strong wage, the taxpayers are footing the bill for underpaid workers.

There are two broad concerns at play in Seattle. The first is about the minimum wage as a whole- that it kills business, competitively, leads to unemployment. I tackled these broad issues last August here. I found there to be a lack of solid evidence that the minimum wage is a great harm to society- people often say that it is, but they’re relying on the standard (typically called ‘neoclassical’) model, which actually isn’t that accurate. We’ll return to that thought.

The second are the specifics of the wage increase. Basically, who has to increase to $15 and by when? Originally the idea was an increase from all businesses immediately. The version that’s being filed and will probably get voted on soon has a three-year lead-in for small businesses and nonprofits. $11, then $13, then $15.

In terms of a debate, the place I’ve found with the most content dedicated to the issue is The Stranger, Seattle’s sweary alternative newspaper. They strongly endorsed Sawant (dedicating an issue to making a case for her), but they’ve been releasing editorials in pairs- one advocating for an exception, one against. Currently, four pieces on the minimum wage are in the “most commented” section on the front page.

This is a bitter fight. Big businesses (especially those for which most of their staff make under $15) are fighting tooth and nail- and sometimes use small businesses as a front to advance their own interests. There is clear evidence in leaked documents. This is nothing new, but it’s important to pay attention.

While not anything close to an expert, I’ve taken enough college economics to have a decent grasp of minimum wage mechanics, as one of the basic aspects of the labor market. There has been quite a lot of misleading statements- and one would assume that if San Francisco and Seattle ultimately succeed, they will pop up again and again as the fight moves to other areas.

A number thrown out in the debate is 60%- the increase from the current state minimum wage of $9.19 to $15. Often the proposal is said to be a “60% increase in labor costs.” That’s not even close to true. What’s important to know is that essentially no business pays every worker minimum wage. If they did, it’d be 60%, but if people are making $10.50 or $12.75, it’s a lot less than that. Also there are plenty of workers who make over $15 in a given enterprise who won’t see any increase- at least directly.

$15/hr protestor in New York City. Peter Foley/EPA
$15/hr protestor in New York City. Peter Foley/EPA

Another issue is distorting costs. While labor costs are important, they sit alongside the cost of land, rent, licenses, legal and financial assistance, and of course whatever a business sells. The best read of The Stranger editorials is this one by bar owner Andrew Friedman. He got an overwhelming pushback by commenters, including several who work for a small business. As an accountant stated, if their firm raised all employees to $15 it would be a 4.33% increase in costs. There’s a big difference between 60% and 4.33%. While all cost hikes will affect total costs, labor is not all of a businesses’ costs.

A proposal has been made to include “total compensation”. A series of essays go back and forth starting here. What’s wrong with $15/hr total compensation? Well, a few things. It allows the employer to include (and overvalue) other non-wage benefits. Given the rapid rise in health care costs, this could easily eat into the actual wage earned until there is no rise at all. And it gives employers a great amount of power- they figure out the costs, they determine what total compensation is. You can’t make a good argument for wage theft because the wage has no solid meaning anymore. It’s just part of the total compensation soup.

The reality is simple. Large corporations, that employ a huge amount of minimum wage workers, are skating thanks to government subsidy of their business (sweetheart tax deals, plus tax loopholes) and government subsidy of their workers. The end result is incredible US corporate profits. A move towards a $15/hr minimum wage is recognizing that there is no disaster for American corporations if labor starts closing the gap between what it produces and what it is ultimately paid. It’ll throw a wrench into the economic idea that profits must constantly rise and increase- the system where shareholder concerns are much more pressing than labor concerns. But that sort of escalating system also causes destructive market bubbles, so maybe it needs a wake-up call.

Source: http://qz.com/192725/what-another-record-year-of-corporate-profits-means-for-the-us-economy/
Source: http://qz.com/192725/what-another-record-year-of-corporate-profits-means-for-the-us-economy/

I’m tired of people making hackneyed economic arguments that don’t have a solid foundation beneath them. The dangers of a high minimum wage are a meme, perhaps exacerbated by the fact that most introductory economics courses are strongly slanted to that conclusion. As I pointed out in a rebuke of Alex Berezow’s ill-suited attack on Sawant, many journalists and pundits don’t cite anything more complicated than N. Gregory Mankiw- often just leaving it at ‘common sense’.

Serious discussion is due for the minimum wage. Each month brings new depressing confirmations- income inequality is soaring, it’s reversing decades of gains by the middle class, people are getting wrecked by increased costs and don’t have the money to save, invest, and eventually retire. When a movement emerges that actually offers a potential solution, efforts must be made to understand it from their perspective. US journalism tends to start from the perspective of how a new policy will affect corporations.

Perhaps they should think of how the lack of a new policy current affects workers and families.

For sale, office space, never used

The long recession has led to a discussion on economic statistics. In particular, what is evidence of a recovery and what is not. The Dow Jones index isn’t a reflection of the national or international economy, just the health of thirty large companies. And employment statistics as usually reported in the media aren’t useful- the U3 rate doesn’t count “discouraged workers” who leave the labor force due to the economy being too bad to look for work. The rate can go down in a very good economy (more jobs), and a very bad economy (so few jobs people don’t bother to look). And in the event of the latter turning around, the rate spikes as people get back into the labor force. Oy.

When I went to see prominent socialist economist Richard D. Wolff speak two years ago, he recommended a metric reported by the Federal Reserve every month. Called “industrial production and capacity utilization,” it measures how much capital, land, office space, etc. is actually being used to create goods, and how much is standing idle.

Capacity utilization rates over time

The above graph shows the difference between what is being produced and what can be produced at that point in time. The production measurements are set at 100 during the highest level of production- right before the 2007-08 recession. At that time, actual capacity was about 125% of current output. The bottom graph shows the percentage of capacity being used. Historically it’s around 80% in America, but it fell to 66% after the economy cratered. It’s still weak- even a couple percentage points below average is a massive amount of capital and land- and thus a massive amount of jobs.

My anecdotal evidence to support this comes from office space in Silicon Valley. After the economy crashed and credit dried up, many companies based in the Bay Area either went under or contracted dramatically. That led to whole office buildings- big ones, often new- being vacant with large signs advertising bargain-basement space. In 2013, a lot of these buildings have tenets, but rarely are they full on all floors. It’s clear that there is still capacity available- you could expand your business quite a bit without having to actually build anything- but conditions are not what they were before the crash.

It seems that unemployment is more explainable though this than the often contradictory unemployment figures. If a large amount of space, land, tools, inventory is still sitting idle from five years ago, that leads to a corresponding gap in labor use versus capacity.

Now, there are good reasons that capacity utilization is never 100%. Businesses are failing all the time, even if the economic climate is good. Just because you have tools doesn’t mean they’re good enough to compete with. And running machines 24/7 causes wear and requires expensive replacement- which may not be ready. It’s also clear that putting people to work is not a question of physical stuff- it’s also about competition, and how a corporation works. Just because you could employ more people and fill up all that cheap office space doesn’t mean it’ll be more profitable. It’s why economists who advocate for infrastructure projects have a point- some useful employment doesn’t fit into a business model. Capital is sometimes used because of government incentives and subsidies, rather than a calculation by the finance department.

As time goes on, the unused machinery will become obsolete, and the buildings will become dilapidated. Getting little use out of them just makes the investment for the future all the more costly.