Thomas Piketty’s Capital in the 21st Century shows us where society is going. Paul Krugman summarizes this future using Piketty’s term, Patrimonial Capitalism, where inherited wealth gains economic power and where hard work returns less money than inheritance.
The basic equation underlying patrimonial capitalism is… r – g.
r is the investment return to capital. g is economic growth. As David Cay Johnston points out…
“When investment returns exceed economic growth, the rich get richer, increasing inequality.”
“When an economy grows at 1 percent annually but investment returns are 5 percent, the already wealthy need to reinvest only a fifth of their gains for their fortunes to grow at the same rate as the overall economy. The rest can be spent on a sumptuous lifestyle.”
So any protestor from the middle and lower incomes should be yelling… Down with r!
As a society we should be fighting against this push into patrimonial capitalism by the rich. We should be calling for policy to reduce the returns to capital investment. We should be raising taxes on the wealthy. And we should be raising the cost of capital funds, which would mean a higher Fed funds rate.
Yet the Fed plans to keep the Fed rate low for a long time. Even when the Fed rate should be 4% at full employment, it seems as though the Fed projects a 2% Fed rate. Thus the Fed will keep the cost of capital funding artificially low for God knows how long. The middle and lower incomes in the US, Europe and elsewhere are doomed.
The more the Fed rate stays artificially low, the more patrimonial capitalism will grow. We are doomed.
And the worst thing is that economists like Paul Krugman are pushing to keep the Fed rate low. It is the greatest twist of economic logic into economic illogic. Progressive economists lack a vision of what their proposed policies are actually doing to the economy and society. They are not understanding the intricacies of their medicine. And things are getting worse.
The traditional doctors of Tibet said that every substance is either a poison or a medicine. Treating disease with any substance depends on how the substance is used and how much is used. In a narrow-minded perception, the low Fed rate should be a medicine for an economy with high unemployment and great spare capacity. But when that spare capacity is already limited by weak effective demand, the costs of the medicine will outweigh its already limited benefits. The medicine becomes not just ineffective, but poisonous in the midst of other policies that increase r (investment returns to capital). The imbalance of inequality grows. Labor’s economic power shrinks. Labor share falls. Patrimonial capitalism increases.
Just as Mr. Johnston points out above, capital need invest less of its returns to grow the economy, while they enjoy higher rents and higher rates of return. Let’s take a moment to remember that aggregate profit rates are very high by historical standards. Effective demand becomes weaker as labor share falls.
When will progressive economists wake up and realize that they are mis-prescribing a medicine when they call for long-term loose monetary policy? The medicine is a poison for society considering the differences in the nature of the current economic disease.
Capital has less incentive to value labor. Hard work does not pay. The transmission mechanisms of Fed policy to labor have broken down. As Mr Johnston wrote…
“Balzac, who famously wrote that “behind every fortune lies a great crime,” lived in a world the vast majority of us would not want to see recur, a world in which merit and hard work mattered little.
“Piketty argues that we are headed back in that direction, however, through misguided government policies that encourage dynastic wealth and favor returns to capital over income from labor. His dark vision is one in which even the strivers will have a tougher time, and more modest fortunes, than those whose primary basis for their riches is ancestry.”
Down with r!… and Up with the Fed rate!
Let’s get tough on these patrimonial capitalists.