Friday, October 17, 2014

Bill Gates on Piketty

As promised in an earlier post, here are some thoughts on Bill Gates' recent blog post on Piketty.

By the way, I would see no reason to take notice of this just because he's Bill Gates.  That does indeed in a way automatically make it of interest, because it's a famous multi-billionaire's response to a book about rising high-end inequality.  But I have too many conflicting demands on my time to bother noticing it here based on that fact alone.

Rather, the reason I comment on it here is that, in addition to that, the post actually is intelligent and interesting.

Early on, Gates says: "I very much agree with Piketty that:

o        High levels of inequality are a problem—messing up economic incentives, tilting democracies in favor of powerful interests, and undercutting the ideal that all people are created equal.

o        Capitalism does not self-correct toward greater equality—that is, excess wealth concentration can have a snowball effect if left unchecked.

o        Governments can play a constructive role in offsetting the snowballing tendencies if and when they choose to do so.

"To be clear, when I say that high levels of inequality are a problem, I don’t want to imply that the world is getting worse. In fact, thanks to the rise of the middle class in countries like China, Mexico, Colombia, Brazil, and Thailand, the world as a whole is actually becoming more egalitarian, and that positive global trend is likely to continue.

"But extreme inequality should not be ignored—or worse, celebrated as a sign that we have a high-performing economy and healthy society. Yes, some level of inequality is built in to capitalism. As Piketty argues, it is inherent to the system. The question is, what level of inequality is acceptable? And when does inequality start doing more harm than good? That’s something we should have a public discussion about, and it’s great that Piketty helped advance that discussion in such a serious way."

While I wholly agree with this, admittedly what it makes it especially noteworthy is that Gates is saying it.  How many others whose economic success approaches his would?

Gates then makes the following points, to each of which I respond after noting it:

1) Other economists have questioned the central importance that Piketty attaches to "r > g" in explaining rising high-end inequality.  That is certainly true.

2) Do "different types of capital" have "different social utility"?  For example, if A uses his capital to build his business, B gives all of her capital away to charity, and C uses his for high-end consumer goods, such as a yacht and a private plane, then the first two are delivering greater value to the society than the third.

No surprise that Gates should want to value charitable giving.  My understanding of his charitable activity is that it actually does, at least very frequently, have great social value.  But I wonder how widely applicable the conclusion he draws is.  Super-rich people who choose to add their money to Harvard's $36 billion endowment might as well throw it in the ocean instead, unless we see general merit to investing money in hedge funds. 

His distinction between saving and consuming could also be questioned.  The issue is really one of net positive externalities, if any, from the one choice as compared to the other.

3) Wealth accumulation decays as well as rises.  Half of the people on the Forbes 400 list of the wealthiest Americans made it to the top themselves.  We aren't dominated by people who bought huge land parcels and have been collecting rents ever since.  You get savers but also wastrels, and also wrenching economic change that creates new fortunes that outstrip old ones.

Here again I agree, but the topic raised requires more discussion than Piketty, Gates, or for that matter Bankman and I in our recent article have given it.  The question here, a subpart of what if anything is wrong with high-end inequality, concerns the relevance of turnover as to the particular families that are extremely rich.  In a simple optimal income tax model, it doesn't matter, but in the real world it might.  I think there is major room for work on how to think about the impact of high-end inequality under different circumstances.

4) Piketty has over-focused on wealth and income data relative to consumption.  Gates also notes that income data can be misleading for lifecycle reasons, e.g., if one is a medical student with low income and high loans but one expects a million-dollar surgeon in a few years.  Gates argues that "consumption data may be even more important [than wealth and income data] for understanding human welfare.  At a minimum it shows a different - and generally rosier - picture from the one Piketty paints."

Yes, I agree that income data can be misleading for lifecycle reasons.  Note that, for wealth data, the related problem is simply our inability to measure human capital and include it as wealth (which at least in many senses it is).  But the problem with consumption data is that it ignores unspent wealth that one can consume whenever one likes.  Suppose I have $1 billion but spend "only" $1 million on consumption this year.  I am better off than someone who spends $1 million and has nothing left.  In addition, given the choice I made, presumably reflecting my preferences, I am presumably better-off in a long-term sense than if I had consumed the entire $1 billion this year.  

A consumption measure misses this. By the way, that does NOT establish that a consumption tax fails to measure wellbeing on an appropriate basis.  After all, while it only taxes me this year on the $1 million that I actually spend, the present value of the deferred liability on the rest of the $1 billion is the same as if I had spent it this year (assuming constant perpetual consumption tax rates, etc.).  So the consumption tax doesn't get it wrong, at least in the trivial sense that seems indicated by looking just at current year liability, because one has to consider the deferred tax.  But if one is looking at current year consumption totals to judge how well off people are, it is not obvious how one could similarly be taking into account the deferred consumption.

5) Gates favors moving to a progressive consumption tax plus an estate tax.  Here I may be fairly substantially in accord with him.  I have written in the past about the case for progressive consumption taxation, and while I've increasingly grown concerned that it wouldn't in practice do enough about high-end wealth accumulation, I have been coming to think that, in principle - ignoring political economy problems! - taxing inter vivos donative transfers to other individuals plus bequests could take care of the rest.

6) Finally, Gates puts in a last word in favor of philanthropy, and notes that he and his wife are keen on its benefits while uneasy about the transmission of dynastic wealth.  Here I'd say that it depends on what sort of philanthropy is going on.  Private foundations in which the dynasts retain control probably are not adequate here, although admittedly this is not a subject that I know much about.  But also, when very rich people decide where the money should go, this is not always for the best.  You get, for example, charities for the rich (Harvard, the Metropolitan Opera, etc.) that may not be worth anything near the implicit budgetary cost of excusing application of the high tax rate on bequests that Gates suggests should otherwise be levied.

Overall, I'm quite impressed by this contribution to the debate even though I don't agree with all of it.

No comments: