The Economist Gets Sniffy

The Economist magazine must have been scratching its editorial head recently as it tried to summon up a good response to the Piketty book. Looking at its leader article in the May 3rd edition, I suspect the effort wasn’t worth it. The leader headline says it all: “A modern Marx”. The book, we are told, “… is a great piece of scholarship, but a poor guide to policy”. Well, yes, I agree. But not for the reasons that the Economist musters later in the article. The fact is that Piketty left us all to figure out what to do, and only tossed in one or two suggestions. Unfortunately those suggestions, in particular the idea of a global tax on capital, are enough to send Piketty to the corner. He must be a Marxist if he contemplates taxes on capital. And we all know about Marxists, don’t we?

Now I realize that the Economist considers itself both serious and sensible, but even its little sense of humor – it heads its paragraph on Piketty’s policy proposals “Nit-Piketty” – is laden with patronizing snark.

What is it about orthodox economists that they have to resort to huffy patronizing slap-downs whenever they are confronted with evidence that their wonderful market magic world is somewhat less than the perfection they imagine, or dream, it to be? And why the incessant superior tone?

Take this sentence as an example:

“Most economists, common sense, and a lot of French businesspeople would argue that higher taxes on income and wealth put off entrepreneurs and risk taking …”

Notice how most economists and common sense fit so nicely together. You see, orthodox economics, with its enormous bias towards capital and its utter contempt for market outcomes like wealth or income distributions, is so wonderfully common sensical. Surely everyone can see that? It may appear that the relentless emphasis on hyper rationality is a tad bizarre when no one, not even the most adept economist, behaves that way, but that’s only because those who see it as bizarre fail to understand it. And they certainly don’t see how grounded it is in reality and, well, common sense. It is just so obvious to those with the right sort of common sense that higher taxes will reduce the incentive to work for those poor dears with all that capital to invest. You don’t even have to delve into history to understand that cast iron, and so so common sensical, rule. It just is. And anyone who misses that point is just not a serious analyst. Worse, they may even be a closet Marxist.

Well. Umm. Ronald Reagan cut taxes heavily. That means investment must have soared. Right? I mean it just common sense. And then that foolish Bill Clinton raised taxes, so investment must have collapsed. It just stands to reason. Then came George W. Bush who’s slashed taxes causing investment to soar once more. Right? Well, no. Investment tended to run exactly the opposite way in all three instances.

I guess this means the empirical evidence doesn’t have any common sense.

Then there’s those pesky so-called Golden Years right after World War II. You know, the years when the US had its fastest ever growth. And its highest ever taxes. Yes, those years.

Not so much common sense there either.

Poor old Economist. It gets worse. In an effort to throw in some common sense like suggestions as alternatives to all that Marxist foolery, they can only come up with stuff like broadening the ownership of capital. That sounds great. Why didn’t Piketty think of that? We can stop the concentration of wealth by throwing a few capital-like crumbs to the middle class.

Except that Piketty devoted many pages to discussing exactly this. He calls it the emergence of the “patrimonial middle class”. He begins those pages with this:

“Make no mistake: the growth of a true “patrimonial (or propertied) middle class” was the principal structural reform of the distribution of wealth in the developed countries in the twentieth century.”

Later on he says:

“The emergence of a patrimonial middle class was an important, if fragile, historical innovation, and it would be a serious mistake to underestimate it.”

This aren’t the words of someone who has ignored the spreading of capital ownership. Indeed they indicate that he has given quite some thought to it as a historical phenomenon. But it is telling that he then doesn’t pick up broadening capital ownership as a solution. Why?

Because he, in many places in his book, illustrates that the relatively small capital a typical middle class person possesses, when subject to the vagaries of a capitalist business cycle coupled with the reversion to the longer term trend of lower growth, is, as he puts it, “fragile”. The middle class can never own enough capital to weather great storms, shifts in risk, and events like the Great Recession. Throwing a few crumbs down from the high table is insufficient to alter the arc of history. It is a dangerous illusion. Indeed, even with the its emergence, the patrimonial middle class cannot prevent the continuous accumulation at the upper end. Eventually it gets swamped, and the past devours the future. Inheritance of grand fortunes will crush the benefits of those more meager.

So Piketty didn’t include a plan to broaden capital ownership because he had already dismissed it as a viable long term solution.

The Great Recession did enormous damage to middle class capital. Most families in that range of wealth have their capital tied up either in their home or in their retirement account. We all know how real estate foundered after the crisis began, and the largest form of pension account – the infamous 401k plans offered by employers – are now almost universally regarded as failures. Impoverished old age has now re-emerged as a potential reality because of that failure. Yet governments everywhere follow the Economist’s common sense advice and divert ever more middle class capital into defined contribution savings plans, and thus open up those funds to market risks they are too insubstantial to weather. Defined benefit is common sense. Defined contribution is free market ideology.

It’s too easy to indulge in this snarky take down of the Economist. The simple fact is that it is trying to defend a debunked and far from common sense theory. Patronizing its opponents, repeating worn out failed solutions, and then getting huffy is all that it has left.

One last thing: it was Pascal who gave us the best insight into common sense. He told us that it is both the most abundant and the most rare of human sensibilities. It is abundant because we all claim to have common sense. It is rare because we all claim to be the only one who possesses any. Consequently there is no such thing. Just opinion. And right now the Economist’s opinion is looking a little dowdy. It needs new ideas.