Bill Gates has written an article about Thomas Piketty’s now-famous 2013 best seller Capital in the Twenty-First Century in which Piketty argues that the rich will get richer, and that’s a problem we should solve with a wealth tax.

I can’t think of a billionaire I admire more than Bill Gates. Self made man, built a world class company, has integrity, retired early to devote his remaining life to philanthropy.  Unlike many of his billionaire cohorts, his wealth is not going primarily to Stanford or to pet issues of little rank in the world order of major problems. He’s giving primarily to address global needs in poverty, healthcare, and education. And what he’s giving is carefully monitored and professionally managed.

But I regret that I have to disagree with much of what Bill had to say about Piketty’s work. Bill says he read the 700 page book. I did also.

Here are the main critical points from the article Gates wrote (referenced below):

• Piketty fails to differentiate between different types of wealthy people, whose behavior in the use of their wealth reflect different degrees of social utility.
• The Forbes 400 list shows that inherited wealth is not predominant.
• Piketty should have given equal treatment to inequality measured by consumption.
• Instead of a tax on wealth, a progressive tax on consumption would be better.
• Piketty should have given more credit to philanthropy.

But such a casual observation about the list of wealthy really proves nothing. This is not how good analysis is done–by leafing through the annual Forbes 400. For example, the 2013 cutoff for Fortune 400’s latest list of wealth is $1.55 billion. If someone on the list in 2004 with wealth of $2 billion, died and left his wealth to his 4 children, none of that family name would likely be on the 2014 list, but shouldn’t $500 million each, adjusted for taxes and wealth growth since 2004 still be considered monumental inheritance? See “Inside Wealth” by Robert Frank which breaks down the Forbes list to reflect who got a running start with family wealth. It seems to range between 30 and 50% of that list, depending on the type of business cycle we’re in. And, why limit the analysis to only those who have $1.55 billion? A good study of inherited wealth must go far deeper than that–it must be of the Piketty type, which took years to assemble.

Furthermore, Piketty devotes significant attention in his book to the big recent salaries and bonuses of corporate chieftans, entertainers, and athletes. He does not in any way argue that most wealth is inherited. But even if you only have time to look at that list, there are a lot of repeat names, like Gates, Walton, and Buffet. And the high salaries of some in 2013 turn into wealth if not fully consumed.

Gates, reportedly worth $64 billion in January 2013 (Bloomberg), assures us in his article that he does not intend leaving his own children a fortune, and his close friend Warren Buffet has said the same, as have some other billionaires. But, what about the Waltons and others who do not agree? And, I have not seen specificity from such minded billionaires as to exactly what they mean by “leaving little” to their children. The median net worth of the US, $87,000 in 2003, is now only $56,000. Regarding billionaires who proclaim they will leave “little” to their children, I would like to see their definition of “little.” I imagine a billionaire might feel $25 million is “little.” To the median American, $1 million is a fortune. What’s wrong with a high progressive tax on inheritance? Then we would be consistent about generational transfer, and not simply dependent on billionaire philanthropy to eliminate inheritance inequality. If Gates, Buffet, and others mean what they say about inheritance, let them advocate for high progressive inheritance taxes and/or disclose exactly what they are leaving to their children.

Finally, for more on the inequality of inheritance, please see my previous post, “Inherited Wealth, Is It a Problem?”

Consumption as a Measure of Inequality:

Experts in inequality write books on this subject. Inequality can be measured by surveys of household consumption, and the result shows how we differ in consumption. Because most wealthy do not consume as much as the poor, as a % of their income, the standard consumption measure will usually show lower inequality, and slower growth in inequality.

However, a recent study by Mark Aguiar and Mark Bils of Princeton and the University of Rochester, respectively, shows that when adjustment is made to estimate luxury purchases effectively, the rate of increase in inequality measured by consumption is approximately the same as when measured by income. There are other such studies. Even the conservative Economist acknowledges that the two measures really move in tandem.

What type of tax would result in the most effective redistribution? 

 

Philanthropy: 

Source: National Philanthropic Trust: http://www.nptrust.org/philanthropic-resources/charitable-giving-statistics/

Gates says Piketty pays too little attention to philanthropy. Unfortunately, the inference many will draw from this criticism is to think that the nature and degree of philanthropy from the ultra-wealthy makes up for the dramatic reductions in support for the poor by the government, beginning around 1980.

 Aggregate US household net worth, $12 trillion in 1983, $62 trillion in 2010, is now in the range of $81 trillion.  38% of the increase in wealth between 1983 and 2010 has gone to the top 1%. 

From the first chart in this section, it appears US philanthropy was about $60 billion in 1983, and was about $300 billion in 2010 (using current dollars). So, philanthropy increased by 5 fold during that time. Household wealth also increased 5 fold. But the top 1% increased its wealth by 19 trillion across that period, and in 2010 owned about 33% of all household net worth.  The top 1% of our approximately 117 million households earned an average of $717,000  last year, meaning their aggregate earnings were about $838 billion. 

Are the wealthy giving enough? It is not the case that philanthropy in general even remotely comes close to filling the gap created by government withdrawal. A recent Google/University of Indiana study found US philanthropy totals about 2% of US GDP.  No, it is not enough.

Are they giving to the most important needs? Much of philanthropy goes to universities or churches, and much more likely to go to Stanford than to Hayward State. In my neighborhood of San Francisco, private schools charge $35,000 annually for high school students, and wealthy young parents contribute generously beyond that for capital campaigns and annual operating expense campaigns. None of this philanthropy helps inequality, and little goes in scholarships to poor students. Only about 1/3 of US philanthropy is directed to the needs of the poor, so less than 1% of GDP. It is reasonable to assume that far less than that goes to the needs of foreign poor, with a few exceptions like Gates. No, it is not going to the right priority of needs.

Stated simply, the individual choices of the wealthy for charity are nice to see, help some, but they are just too personal, too disparate, too fragmented. What is needed for the major issues can only be met by more effective government programs, by society joining together to decide what is most important to the society, not by individuals doing their own thing. 

For more on this, see my previous post, “Is Philanthropy from the Wealthy Sufficient, or Would a Little More Government Help?” 

My Conservative friends tell me I put too much focus on the role of government, or on redistribution. With respect to my primary concern–inequality–they say let’s just focus on economic growth. They argue that we just need to increase economic growth.  And, they’re right–to a degree. It’s true that economic growth is necessary to enable improving the lot of the poor. They’re right that obstacles to growth hurt the chances of the poor. That’s easy to understand. Robust economic growth means more jobs, increasing wages, and more revenue for government to use in social welfare, education, and infrastructure, all of which benefits both the rich and the poor. They argue that enabling more growth requires reducing the restraining impact of government–rules, regulations, restrictions, costs. So, they argue for less government, not more.

I don’t concede the point that economic growth is sufficient. It’s necessary, but not sufficient. I argue in these pages that modest and gradual redistribution will help everyone in the long run. I argue that government needs to play a greater role in education, infrastructure, and social welfare. Those are also forms of redistribution. But, I constantly acknowledge the political reality of today–we are not likely to see much progress in these areas. And, I certainly agree there are rules and regulations we can do better without, and that government is often inefficient.

So, I am constantly looking for things we might agree on. Affordable housing should be one. The argument which should be persuasive with my Conservative friends is that providing more affordable housing will increase growth. Why would it? Because home prices in major cities have increased dramatically, resulting in many people finding they can’t afford to either buy or rent. A small studio of 400 square feet in my neighborhood of San Francisco rents for $2,500 per month. And, it’s very difficult to find a tiny home (a studio) in San Francisco for under $500,000, even condos or TICs (“tenants in common” properties).

This means capitalism is restrained in three ways: (1) It’s hard for local businesses to find employees because workers can’t afford to live in the city. If workers are forced to resort to the fringes of the urban area to find affordable housing, they may be exhausted with commuting and unproductive. And gentrification is creeping steadily out there as well. Commutes to affordable homes are extending farther and farther. Local support services needed for urban business success can’t survive because the lower wage workers (waiters, retail clerks, taxi drivers, dry cleaners, etc.), are not available, or are too expensive to hire.

(2) The homeless who can be rescued by housing for the very low income are a special case. Setting aside our moral obligations for a moment, Conservatives can understand that we can save a lot of government spending on drug programs, crime prevention, incarceration, street cleaning, etc., if we can rehabilitate these citizens,and getting them into shelter is a critical first step. Studies show an aggregate cost reduction to government.  Look at the fantastic work of Tenderloin Neighborhood Development Corporation (tndc.org) for an example.

(3) If home prices are rising beyond affordability at all levels, as here in San Francisco, potential homeowners are induced to save assiduously to try to catch up to the rising down payment requirement. This means consumers are saving instead of consuming, which means businesses experience less demand for their products. Business slows down.

This is all happening in a context of increasing urbanization. Lots of research shows more and more people now want to live in the city, not in the suburbs. It’s fun, exciting, convenient! The ICT (Information and Communications Technologies) businesses which are driving the robust growth of the San Francisco Bay Area and several other cities of the US, can do their business best in an urban environment, surrounded by services. Research also shows that raw materials cost less in cities–due to scale, transportation savings, and other factors. Salesforce, headquartered here, is hosting a conference of 140,000 people this week in San Francisco.

I am still a student of the very complex issue of affordable housing. I don’t yet have meaningful prescriptions, especially since the politics of significant change in current policies are so difficult to influence.  It is not clear that the history of government building and management of affordable housing has been effective. And, it’s now clear that the shift to the reliance on the private sector has not worked well either.

We have a dichotomy in San Francisco: One the one hand, we have more money dedicated to affordable housing than most other cities. Mayor Ed Lee promises 30,000 new units by 2020.  On the other hand, we have a bigger affordability gap than most other cities.

Writing in the immediate aftermath of an Urban IDEA forum in April of 2014, Tim Redmond reports on the forum’s views of the affordable housing crisis in San Francisco. I summarize some of his key points here:

• John Elberling, a local housing advocate, says, “The private market will totally gentrify our city’s housing stock. There is no way to stop it.”
• Some estimate that San Francisco’s process, reliant on private developers, will yield only about 10% affordable units, whereas 30% is needed to meet the needs. 30% is required of developers in some other cities.  But, land is expensive in San Francisco, and developers often refuse to proceed with a 30% requirement. They judge the project just too risky–that many low cost units just reduce projected profitability too much.
• Gov. Jerry Brown shut down Redevelopment Agencies in CA in 2011, costing San Francisco $50 million in annual funding. 
• San Francisco needs $4 billion annually in housing subsidies, and all sources included, only has $800 million to use.

Mayor Lee has done good work in San Francisco, but our city’s rapid growth is met with only higher home rents and prices, so the need is escalating while our ability to satisfy it is limited, sufficient proof for me that economic growth alone is not the sole answer to the problems of inequality and the poor, and certainly not to home affordability.

Our inability to close the widening gap in affordable housing will affect our future growth. I imagine Houston is looking pretty inviting to new tech businesses considering where to launch.

References:
Tim Redmond: http://48hillsonline.org/2014/04/14/private-market-can-never-solve-sfs-housing-crisis/

The Economist: http://www.economist.com/news/special-report/21621157-sky-high-house-prices-most-desirable-cities-are-holding-back-growth-and-jobs-home

SF mhttp://www.sfgate.com/business/networth/article/1-million-city-S-F-median-home-price-hits-7-5626591.phpedian home price: 

References:
http://www.economist.com/news/special-report/21621160-labour-steadily-losing-out-capital-those-have-shall-be-given

Carl Benedict Frey and Michael A Osborn, “The Future of Employment: How Susceptible are Jobs to Computerization?”, Sept 17, 2013, http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf

October 5, 2014

In these pages, I have joined economists and others in arguing that the government should intervene to restrain the growth of increasing inequality–through more progressive taxes and other measures. Some of my Conservative friends have replied that I am overlooking the key point: Growth is the answer. We don’t need to do anything other than do what is necessary to grow faster, they argue. That will take care of the problem. This argument says that if we simply have stronger growth, we will have less poverty, less inequality, and/or at the least we will have everyone enjoying a better living–everyone moving up the ladder. Prescriptions start with less regulation, more open borders, more freedom for the private market to do its work, and less government.

There is much to support this argument. One could cite China as an example–30 plus years of growth averaging about 10%, only recently declining to a still very healthy 7.5%, has resulted in poverty declining across this period from 65% of the Chinese population to less than 10%–1 billion people came out of poverty, defined as living below $1.25 per day.

But, there were other factors involved: education and infrastructure were among the accompanying governmental “interventions” that China invested in during the 30 plus years of phenomenal growth and poverty reduction. As to infrastructure, China viewed it as both necessary for growth and a good way to stimulate the economy, especially when there was any sign of slowdown or disruption, as with the 1997 East Asian Crisis, during which China did not experience a recession, while all its neighbors did. In fact, China has done so much infrastructure development that some say they have built cities in which no one lives, and roads and bridges to nowhere. China builds infrastructure ahead of the need, wherever possible.

It should not be necessary to cite studies to prove that infrastructure is critical to growth. One proof was found during the 90s, when developing debtor countries had IMF conditions imposed which were designed to stimulate growth in their economies. Mostly, growth did not happen and these policies failed. There were lots of reasons, some of which are outlined in an earlier post entitled “Basics of Global Trade.”  One of the reasons was lack of infrastructure. No amount of open borders and reduced regulation can stimulate commerce if the country has poor roads on which to transport its goods, poor railroads, or inadequate port facilities to load those goods onto ships. Good airports are needed. Electricity, telephone and internet services are required. Clean water and sanitation must exist.

Justin Yifu Lin, former Chief Economist of the World Bank, puts it this way in his paper “New Structural Economics: A Framework for Rethinking Development:” […], at each given level of development, the market is the basic mechanism for effective resource allocation. However, economic development as a dynamic process requires industrial upgrading and corresponding improvements in “hard” and “soft” infrastructure at each level. Such upgrading entails large externalities to firms’ transaction costs and returns to capital investment. Thus, in addition to an effective market mechanism, the government should play an active role in facilitating industrial upgrading and infrastructure improvements.”

Lin is arguing that there are stages of growth in the modern world, and government must work with industry to provide the critical infrastructure to best facilitate the continued advancement in development for each stage. For the primary and secondary sectors (raw materials and finished goods), still important to the US, roads, bridges, tunnels, and ports are critical. For  the tertiary sector (services), airports, telephone and internet are important. For the quaternary and quinary sectors (intellectual activities, governance, culture, media, research, home activities and others), internet, communication, and information storage are critical. 

It shouldn’t be necessary to cite sources to show that we are falling behind in all these areas of infrastructure, but here are just two: (1) The American Society of Civil Engineers reports that congestion on our roads is costing $101 billion annually in lost time and fuel, and that we would need to double our annual expenditure of some $91 billion to improve our roads, which are deteriorating at the current expenditure level. They grade our US infrastrucuture as only D+. And (2) Ookla Speedtest reports that the US ranks 26th in the efficiency of its internet service. We’re behind Estonia and Bulgaria now. Hong Kong is #1, and you can bet China is investing to get to the top.

I have two points to make about all this:

(1) Better growth cannot happen without investment in infrastructure on a continuing basis to enable the US to stay the leading economic power in the world. We all agree that economic growth is necessary for poverty reduction. One would think that we could agree on the criticality of infrastructure–Liberals and Conservatives. So, why doesn’t it get approved? The best guess is that the Conservative side of the debate does not want to spend the money. But why? Is it because they are so opposed to something which would increase debt, and certainly would not favor tax increases to fund it? Is it because they are so opposed to anything that looks like stimulus–even if it is designed to fix our infrastructure as opposed to just creating jobs? 

There are times when we should put away the Keynes/Hayek debates about demand or supply side economics and just do the right thing–get our infrastructure back on top!

(2) Also, let’s not forget that there is good growth and bad growth. Just plain unrestrained economic growth will not necessarily result in a societal outcome satisfactory to the people. Return to China for a moment. Yu Xie and Zhang Zhou of the University of Michigan believe China’s Gini coefficient, the common measure on inequality, may now be as high as .55, compared to the US also very high Gini of .45. China’s measure in 1980 was a low .30, reflecting a very egalitarian country. But at today’s level, China is among the most unequal countries in the world. So, while the economic growth has been consistently strong, inequality has risen sharply, and the World Bank now regards the still significant poverty in China as unresponsive to current growth, needing specific government intervention to deal with it. China, unlike the US, is not prejudiced against government vs. the private sector. Government intervenes a lot, so now we’ll see whether their government can fix inequality and other challenges China faces.

Recognizing there is heated debate about permitting any government intervention to restrain inequality, this posting is intended to simply ask that we set all that aside for now and agree that we MUST fix our infrastructure.  Having spent my career in the private sector, with great respect for the amazing power and contribution of that sector, I now fight for a greater recognition that government and industry work together. Just continuing to starve government is not going to benefit the people or even the private sector, in the long run. How about using our private sector prowess and learnings to make our public sector more efficient? I really don’t think that’s beyond the capacities of our talented Conservative leaders.  Other countries have managed to attract private industry leaders into government–why can’t we?


References:
American Society of Civil Engineers Report Card: http://www.infrastructurereportcard.org/roads/

Ookla Speedtest: http://www.netindex.com/download/allcountries/

http://www.worldbank.org/en/news/feature/2009/04/08/poor-areas-poor-people-chinas-evolving-poverty-reduction-agenda

October 3, 2014

If there was a part of the US government which could be re-engineered such as to save perhaps $1 Trillion, one would think the Right would be aggressively pursuing it. And, if such a different process had been proven over the years, elsewhere, shown to deliver such savings consistently, along with quality–wouldn’t that seem to be a no-brainer for all, but especially for Conservatives, at the top of whose list is reducing cost?

I’ve been wondering…if Conservatives hate the current health plan (“Obamacare”) so much, why (to my knowledge) has no one on that side of the table offered an alternative?

The November edition of “Consumer Reports” has an article on health care. They point out that our $3 trillion in health care spending costs the US economy about twice as much as in the rest of the world. I imagine every member of our Congress understands this undisputed fact. Of course, this taken alone, gives good reason to complain from both the Right and the Left. It’s outrageous.

There is a good alternative:  What is also widely known is that the substantially less expensive systems in other countries are single payer systems.  This is where the government pays for health care–as in England (9% of GDP), or in Singapore (5% of GDP). I lived in England recently for a year as a student and enjoyed their excellent health care system. Our system costs us 18% of GDP.  No need to go on about what could be done with the savings of 9% or 13% of our $17 Trillion US GDP….schools, infrastructure, debt reduction, and on.

But the Conservatives are caught in a trap. They hate government, arguing that the private sector is a better solution for most everything except defense. It used to be that they also accepted education as a public sector responsibility, but Paul Ryan’s recent document intended to deal with our growing inequality urges vouchers as the solution for education–another attempt to reduce government and let the free market meet most of our needs.

But, education is only one of the critical areas in which  the free market is not meeting our needs–areas which have historically been better served by government.  Another example is housing for the underprivileged. State and federal resources have been largely withdrawn, and we’re experiencing record shortages of affordable housing. Research and development of large opportunities too expensive and risky for the private sector, such as fusion, have not been funded.  Infrastructure in the US is falling far behind that of other countries–roads, bridges, airports are tired and worn. I believe these are the things we should all use our government to do well, and work together to make government effective in these areas, rather than simply forcing them onto a private sector, a private sector which serves many of our needs extremely well, but is not suited to meeting these particular fundamental and critical needs.

So, it must be painful for the Conservatives. If they really want to save the waste occurring in health care, they need to offer up a single payer system in health care. What a fantastic opportunity for the Republican party to support a clear and proven solution to our health care at perhaps half the cost. With the savings, we could significantly reduce the debt without raising taxes!

But…that would involve making effective use of government!  It would involve eliminating a costly private health care insurance industry.  What a quandry! Finding a way to substantially reduce cost in a private health care system leaves Conservatives unable to offer up anything compelling. I guess reducing government trumps saving money.

When I expressed puzzlement over how we evolved to this crisis in health care costs, a friend who is a health care professional explained it to me in simple terms. Coming out of WWII, European governments were not so opposed to anything seemingly of a socialist nature, desperately recognizing the need to use government to help repair destroyed economies. The US, by contrast, emerged from the War with a strong economy, a highly individualistic ethos, and an abhorrence to anything even remotely resembling socialism.

And, this costly obsession has only strengthened, particularly since 1980.

I argue that the current health care system is better than what we had. And I acknowledge, as has our President, that it most certainly can be improved, such as to better meet its objectives, including reducing costs to some degree–something which needs the ideas, engagement, and support of both sides of Congress to effect.

So, there may be other good alternatives not yet proposed by conservatives who are reluctant to have their proposals subjected to opposing scrutiny, but the big fix, the big savings, is in developing our own American single payer system.