Here’s Thomas Piketty on the US financial crisis (page 297):
In my view, there is absolutely no doubt that the increase of inequality in United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.
Where does one begin?
1. In my view there is plenty of doubt as to whether inequality contributed to the crisis, partly because Europe is much more equal, and had an even worse financial crisis. In fairness, he did say “contributed,” but my real complaints lie elsewhere.
2. Why would stable real wages lead to more debt? More specifically, why would it “inevitably” lead to more debt? If my wages were stagnant I certainly wouldn’t react by taking on more debt, rather I’d borrow more if I expected my income to rise. Is there a theory here?
3. Correct me if I am wrong, but I thought the extra saving injected into the US economy came from the poor Chinese, not “well-to-do” Americans. Why weren’t the Chinese “inevitably” forced to go into debt? They were much poorer than Americans. Yet they saved 50% of their incomes. Some of this was forced by the government, but nowhere near all of the savings was forced.
4. Experts say that the risks taken by the banks had little to do with deregulation, that subprime lending and mortgage-backed securities were legal well before “deregulation.” Lehman wasn’t even a commercial bank. And wasn’t US banking among the most heavily regulated industries in the world, even after the “deregulation” of the 1980s and 1990s?
5. Why would “unscrupulous banks” lend on “increasingly generous terms?” Why no discussion of how the government encouraged banks to lend money to low income people? In Piketty it’s almost always the evil capitalists, never the well-meaning government bureaucrats.
A few pages later:
The familiar mobility argument is powerful, so powerful that it is often impossible to verify. But in the US case, government data allow us to measure the evolution of wage inequality with mobility taken into account: we can compute average wages at the individual level over long periods of time (ten, twenty, or thirty years). And what we find is that the increase in wage inequality is identical in all cases no matter what reference we choose. In other words, workers at McDonald’s or in Detroit’s auto plants do not spend a year of their lives as top managers of the large US firms, any more than professors at the University of Chicago or middle managers from California do. One may have felt this intuitively, but it is always better to measure systematically wherever possible.
But at some point in their lives 73% of Americans do reach the top 20% of incomes. Piketty doesn’t mention that fact. Yes, most Americans don’t become corporate CEOs, is anyone surprised by that?
Piketty continues (p. 308):
We are free to imagine an ideal society in which all other tasks are almost totally automated and each individual has as much freedom as possible to pursue the goods of education, culture, and health for the benefit of herself and others. Everyone would be by turns teacher or student, writer or reader, actor or spectator, doctor or patient.
That might be ideal for a college professor, for most of the men that I have met during my life that sort of society would be a dystopia.
I love this comment on the very next page:
From 1980 to 1990, under the presidents Ronald Reagan and George H.W. Bush, the federal minimum wage remained stuck at $3.35, which led to a significant decrease in purchasing power when inflation is factored in. It then rose to $5.25 under Bill Clinton in the 1990s and was frozen at that level under George W. Bush before being increased several times by Barack Obama after 2008.
Oh, is that really what happened? Or is that a very artful attempt at disguising what really happened. The following statement is even truer; see which one more accurately conveys what happened:
President George H.W. Bush increased the minimum wage from $3.35 per hour to $4.25 per hour. Bill Clinton increased the minimum wage from $4.25 per hour to $5.15 per hour. George W. Bush increased the minimum wage in three steps from $5.15 per hour to $7.25 per hour. The first two increases occurred while he was president; the third while Obama was president. Pres. Obama tried and failed to increase the minimum wage.
I wonder if Piketty has something against the GOP? Of course the average reader of Piketty’s book knows nothing about these details, and takes his information at face value.
On the very next page Piketty discusses the minimum wage in Germany. But he forgets to point out that the 2004 labor reforms allowed for a large increase in low-wage German jobs, and that after these reforms the German unemployment rate plummeted while French unemployment increased. Isn’t that evidence important?
Three pages later Piketty provides a balanced discussion of the economic research on the effects of minimum wage laws. He cites the Card and Krueger study, but no other. I guess there haven’t been any empirical studies showing minimum wage laws reduce employment, or that they lead to discrimination, or that they reduce fringe benefits.
On pages 330-31 he points out that US corporate managers are now paid far higher salaries than Japanese corporate managers. He then claims it is “naive” to assert that the pay might reflect productivity. No mention of the fact that while the Nikkei is up 2 fold since 1982, the Dow is up 20 fold. I don’t know about you, but I’d rather be a shareholder in US firms getting ripped off by the outrageous pay packages of the American CEOs, rather than invest in Japanese firms with their low paid CEOs. You get what you pay for.
All that in 40 pages. And this is pretty much how things go throughout the entire book. In later posts I’ll pick up after page 331. Just remember if you read the book that the information is not reliable. Instead there is a constant left wing bias in facts, interpretation, evidence cited, etc. When he discusses outside sources like Kuznets he does not accurately convey their opinions. The book has lots of good research, but it is not something that can be completely trusted. Credulous readers are likely to get a very biased view of the US economy. Over at Econlog I soon do a post discussing Piketty’s views on size of government.