Saturday, 10 May 2014

Thomas Piketty, Income Inequality, and the Wealthy

Thomas Piketty, the new red-hot French economist, has taken the world by storm by writing his bestseller – Capital in the Twenty-First Century. He studied income inequality for many nations and summarized them in his book.

Thomas concluded family dynasties control the economy and not the new wealthy. Furthermore, the rate of return on capital exceeds the economy's growth rate. What does this mean? Everyone takes a slice of the economic pie by working and spending in the economy. A growing economy expands the economic pie, so, in theory, everyone in society can take a larger slice. However, the wealthy earn incomes from owning the capital. Thus, their share of the pie grows faster than everyone else. Thus, the rich are becoming richer while the poor are getting poorer. Dr. Piketty has recited Karl Marx with the same twist, which leads to Rule 1.

Rule 1: Every society has a wealthy or privileged class.

Name a society that eliminated their wealthy and made everyone equal? The Soviet Union! Although Vladimir Lenin and his gang seized all the capital – land, buildings, machines, and equipment, they created a new privileged class – the members of the communist party. They called them apparatchiks – the Russian root meaning apparatus. They became the devices of the state, cogs in the bureaucratic machinery, to carry out the communist philosophy. This system had failed.

As the Soviet Union was disintegrating, the top ranking communist party members grabbed the state's assets and became the new businessmen in Russia.

If countries adopting communism are so great, why do these countries imprison their citizens behind barb wire and walls? The military guards and patrols the borders, preventing its citizens from escaping. Communist governments also form large prison camps and incarcerate any dissident or citizen with the slightest inkling of dissent. Reading the wrong book at the library could trigger a life sentence in a political prison camp.

Communists held another tenant - everyone must work. Although the communists freed the workers from the capitalists, the workers became slaves to their new masters – the state via the communists. Societies can achieve great things with slave labor such as building the pyramids of Egypt or harvesting the cotton fields in the southern United States during the hot, humid summers.

That brings Rule 2. China, Cuba, Russia, North Korea, and Vietnam have tried Communism, and all of them had failed. All these countries except North Korea started incorporating market economics and capitalism into their systems. Communism in its pure form does not work and will never work.

Rule 2: No country has ever adopted and used Communism successfully.

As Deng Xiaoping regained power and became president in China, he said, "I have two choices. I can distribute poverty or I can distribute wealth." Then he gradually opened China to free markets. Starting in the late 1970s, he began deregulating the agricultural markets and allowed people to grow and sell their own food. Then he allowed entrepreneurs to start and manage small and medium size businesses. However, the communist party of China still controls the large-scale enterprises.

The communists claim these countries took shortcuts and never adapted Communism correctly. Experts are right. A communist government never adopted the ideas of Communism correctly. If countries cannot adopt it correctly, then why try it? On the other side, if we did adopt communism, whom do you think will be the new communist party members? The same politicians, we have elected into office.

I have read Karl Marx. He never said everyone should earn identical wages, and everyone should receive equal pay. He stated workers should earn the value they contribute to a good. For example, if a worker contributes $500 to a product, then he or she should receive $500 in wages for that work. However, the owners of capital siphon away the worker's contribution and pay the worker a fraction of his or her contribution. Marx never said all workers should earn the same wages.

Then Piketty added the rich inherit their wealth. Did he have to tell us that? Everyone already knew this. How many millionaires and billionaires donate all their wealth to charity after their death? Only a handful of the wealthy such as Bill Gates, Warren Buffet, and Mark Zuckerberg donate large sums to charity. Piketty is correct – the wealthy garner larger shares of the capital, which leads to Rule 3.
Rule 3: Wealthy can easily maintain, expand, and propagate their wealth.

For example, Bill Gates founded Microsoft that successfully copyrighted the software for an operating system. Since then, Microsoft has not developed innovated products. However, when the company sees something new, it buys and assimilates the company into Microsoft. This has been occurring in the U.S. economy during the 20th century. In the early 1900s, the industries for tobacco, cars, beer, soda, and so on had dozens or more companies operating in the market. One hundred years later, two or three large corporations dominate these markets.

Wealth carries a dangerous side effect. Most people do not realize a country with a good legal system and private property rights will protect owners of the property. The wealthy will use the state to help protect them. For instance, I start a new company and introduce a new operating system. People like it and people begin switching from Microsoft's Windows to my system. Subsequently, Bill Gates contacts his friends in Washington, D.C. – the politicians whom everyone hates. The politicians can sic the tax authorities and regulators on me. With the numerous laws and regulations, they will find severe violations and use them to close me down or bankrupt me with massive fines. That leads to Rule 4.

Rule 4: In capitalistic countries with free markets, the government establishes institutions to protect private property. Then the state protects the wealthy who hold and own the property.

Piketty and others clamor a wealth tax or want government to impose more taxes on businesses. He is from France, and France imposes high taxes on everyone. Moreover, it had passed a wealth tax in 2006. Some of the wealthy fled France and moved their wealth to other countries. Although the French government raised $2.6 billion per year in new taxes, France lost about $125 billion in capital as the wealthy fled the country. Thus, all countries must pass the same wealth tax to stop the wealthy from fleeing. Of course, several countries will hold back such as Hong Kong, Monaco, and Singapore, giving the wealthy a haven to flee to.

I have liberal friends who criticize our political leaders. Then they turn around and want the government to tax the rich. Thus, the liberals want the politicians whom they despise to determine how to spend the tax money, leading to Rule 5. Politicians controlling more money can control and manipulate more things in society. As an illustration, just examine President's Obama's Healthcare Plan and the mess it has created.

Rule 5: A tax only expands the state's power and gives the government more control over the economy.

Paul Krugman, an advocate of Thomas Piketty, won the noble prize in economics in 2008. Sometimes, he can be brilliant and raise a good point in his blog and writings while, other times, I wonder if this guy came from a different planet. Sometimes he goes off the deep end, and I wonder if anyone takes Paul Krugman seriously anymore? Hey, hold on. He did propose the U.S. government should use Keynesian economics to build a defense against a Martian invasion. This brings us to Rule 6. Economists isolate themselves from society, and sometimes, they develop policies and recommendations that deviate far from reality.

Rule 6: Most economists come from the upper middle class and higher. If they teach or do research in a university, then they isolate themselves from the world and its problems.

Although I am not a Keynesian and do not want the government to expand taxes, I am also not a Republican. The Republicans can be scarier than their democrat counterparts. After the 2008 Financial Crisis, they began calling the wealthy the job creators. They cleverly spun a new twist on an old word, which becomes easy to dispel. In the last 20 years, what kind of jobs has the wealthy created? The good-paying jobs continue disappearing and being replaced with part-time, low-wage jobs.

I know because I remember growing up in Michigan. When I was a boy, many people worked in the factories producing cars and products for the nation and the world. Factory workers joined unions and earned high wages with excellent benefits. When I entered the workforce, these union jobs had disappeared - the first causality of international trade.

I am not bitter at the wealthy. Who cares about the rich? People who cannot find good-paying jobs should be allowed to create their own jobs, which becomes Rule 7. True capitalism lets anyone become entrepreneurs to create income for themselves. During the last three economic expansions, small and medium size businesses created the most jobs while large corporations created few jobs. As the economy expands, local and state governments also create jobs, hiring regulators to control the economy – the state's apparatchiks. Unfortunately, governments at all levels in the United States must control and regulate businesses.

Rule 7: A society with a good legal system should encourage its citizens to become entrepreneurs. Successful entrepreneurs establish growing prosperous companies that hire workers.

For example, Thailand has a poor legal system, but the Thai government lets its citizen work and support themselves. I walked by a street corner several times with a space of 10 feet by 20 feet on the sidewalk along the curb. In the morning, the entrepreneurs sold t-shirts. Then they transformed this space into an outdoor restaurant in the afternoon and a bar at nighttime. Imagine how many rules and regulations this business would violate in the United States if an entrepreneur tried to do this on any street corner in any U.S. city.


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