Capital in the 21st Century: The Question of the Public Debt (Chapter 16)

Funny story, many of the people who say we need to reduce our public debt, at least in the United States, are the same people with millions and billions of dollars lending money to the United States and earning some interest off of that money. While we think of the public debt as money spent on services for the poor, at least that’s how it seems to come off in the media, the reality is the rich are lending to the government to do a service and earning interest on that debt. You are welcome to disagree with that assessment, and I am paraphrasing from the book, but please don’t try to convince me that foreign governments own all $14 trillion of our national debt.

This was a wide ranging chapter, from the national debt of European countries and their repeated failures, or procrastination toward a central government for the Eurozone, to climate change, the Cyprus banking crash, and discussing central banks in general. In fact, I will just summarize this chapter by sub section.

Reducing Public Debt: Tax on Capital, Inflation, and Austerity

Basically, there are three ways Piketty suggests to reduce the public debt. And before I go any farther, since this book is being touted by the tax reducing crowd as communist and liberal, it is worth say Piketty seems against any national public debt, although the reality is some number, maybe 10% of GDP, maybe 50% of GDP (but certainly not 90% or 100+% of GDP) may be appropriate. He does say that the way to decide on the level is through democratic debate in a parliament or congress, which is how the USA has arrived at our enormous national debt. In short first is the tax on capital he previously suggested, although he suggests in this chapter a one time, or maybe annual for five or ten years, a large tax with top marginal tax rates of 10% or even 20% on those with many millions or billions of euros. This is a no brainer because in Europe there is roughly six or seven times the amount of private wealth as public wealth, which is about equal to the public debt. In other words, In other words, the public debt in Europe could be erased and for every $6 of private wealth there would now be $5. Of course this progressive tax on capital would affect billionaires a lot more than people like me who have a net worth closer to the value of a Ford Focus. The second way is through inflation, which is the most common method, and quite effective. Inflation helps people (or governments) who are in debt. However, runaway inflation can happen rather easily and that is why most central banks are focused on not letting it happen. In a high inflation environment people can suffer from “minor” setbacks like not getting a raise that keeps up with inflation. There are many other issues with inflation, most of which I have trouble relating to because they happened before my time. The third way is austerity, which is not pleasant either. Apparently England in the 1800s had a lot of austerity because after the Napeolinc wars in 1815 they had debt that was around 200% of GDP. In short, austerity hurts because all of the services we like, grind to a halt. 

Does Inflation Redistribute Wealth?

Inflation can be an issue because some people, usually those with the most money to invest have the ability to move their money around when inflation is happening and mitigate the effects of it. However, the person with only $1000 in the bank, in a saving account will be losing money each year earning a lower interest rate than the rate of inflation.

What Do Central Banks Do?

Good question, they lend money to governments and companies out of thin air. Now, the actual amount of wealth does not change. They loan another $100,000 to a company, who suddenly has $100,000 in cash, and a new $100,000 debt. The sum is zero. That’s essentially what central banks do. And they do it in a way that inflation will not increase more than 2% a year. This was a long section like eight pages, I’m not going to cover it all. A strange thing about central banks is that they are part of the government, but independent of the government. In other words, every time they have had an increased role in the world has been during a time of crisis where the solution and role of the central bank has not totally been thought through. When the government closed last year in the US for a couple weeks, the month before the Federal Reserve Bank (the Fed) had resorted to emergency measures, which people didn’t even know if they were legal or not. As an example of what the Fed or any central bank can or cannot do, when the US bailed out General Motors, it was the federal government who made the loans and terms, not the Fed, who simply processed the loan you could say.

This goes back to the rich lending to governments who pay interest and then provide services to the poor. In other words, Wal-Mart and McDonalds surely have some money in US Treasury Bonds and then encourage their workers to take advantage of US government programs like SNAP (food stamps). In other words, instead of paying each worker $100 more a year, they lend $100 to the US government who pays, maybe $1 or $2 in interest (at current rates) back to the company. For the record, I made up those examples, they may not be true, but I would expect both companies do own US bonds and pay workers minimum wage. Although it is a stretch to encourage workers to use governement services for the poor.

The Cyprus Crisis: When the Capital Tax and Banking Regulation Come Together

This section is about an off shore banking haven for Russian Oligarchs and a one time tax on capital that was challenging due to very little transparency in banking. In short, most of my readers are US Americans and for better or worse might not know that last year Cyprus had a banking crisis, but the point is transparency in banking is a good idea and a tax on capital has happened recently, without the world falling apart.

The Euro: A Stateless Currency for the Twenty-First Century?

Piketty is amazed at the Euro, that it was created, without any sort of central parliament or democratic government. Which leads into the next section...

The Question of European Unification

The author is French, so I must apologize that this is not centered wholly on Americans. I’m kind of joking, because we live in a global society and we all know that, right? But I’m also not joking because a large number of Americans, maybe 65%, do not have a passport and are somewhat ignorant of the global economic environment we inhabit. This is a four page section where he argues for a central Eurozone parliament and a collective national debt instead of debt being done by individual countries. This is due to Greece, Italy and Spain taking out loans at low rates because they were in the Eurozone, but then running into trouble because their taxation and spending were not in line with other more fiscally conservative countries in Europe (cough, Germany, cough). Piketty seems to think that greater European unification is coming, although it may take decades. Of course, he says that as a Frenchman, and from my point of view the French and Germans, more than any other two countries, want a common currency (and maybe even budgetary government, but I haven’t thought that out...) because they do not, absolutely do not, want to go to war again.

Government and Capital Accumulation in the Twenty-First Century

The rich are going to get richer. As long as the rate of return on capital (r) is greater than the growth rate (g) and I mean the compound growth rate of population and productivity together (which equates to the GDP growth rate), the rich will get richer. However, if a tax on capital can bring r=g, oh boy... now we’re into the “golden rule of capital accumulation”! Which leads into...

Law and Politics

This is a short section, despite the title, about how parliaments, and not judges, should decide on matters such as the public debt, through open democratic debate representing the will of the people. Matters like hundreds of billions of dollars of public debt, and new debt, are too important for one person to decide.

Climate Change and Public Capital

This is what everything usually seems to come back to, energy. For example, of all the oil and natural gas that comes out of the ground, how much should be owned by the citizens of the country (or county or city or state) that it comes from? Alternatively, assuming that there is a hurricane like Hurricane Sandy or Hurricane Katrina that happens again (and there will be, I will bet on it) and in the next 100 years many hurricanes, forest fires, floods, droughts, and other natural disasters related to climate change, what is the discount rate we give to those scenarios today? I love the concept of a discount rate! I’ve written about it before, the basis is, what do you expect the change to be per year on average over a long time, 1%, 3%, 5%? Because that figures into your planning. The point being even the economists agree with the climate change scientists that climate change will cause expensive damage to the world we know today, but they disagree about discount rate we should give ourselves when planning for that future (good thing economists don’t sell insurance). I mean, given a discount rate of 1%, we need to make major changes today to how we deal with climate change. Given a discount rate of 5%, we can expect that only a small effort is needed today to prevent the tragedies of the future. (So that this makes more sense, think of it like this, a discount rate of 100% would mean that it will not happen this year, but will definitely happen next year.)

Economic Transparency and Democratic Control of Capital

Again, I feel that the idea of transparency of capital is a critical feature of this book that most people are ignoring, maybe because very few people have finished reading it. My dad never wanted door locks within our house because he did not want us keeping secrets from each other. It made me mad at times, but now I openly blog about my life five days a week, and I understand that transparency and honesty are values I hold dear to me. It is the same with capital, wealth, money, etc. Once we know what exists we can decide as a group, as a country, or as a world, what we want and who might have the ability to pay a little more for such things, but of course the first hurdle is even knowing what exists.

Well, only a few pages for the conclusion left. I have to say, finishing all of the chapters I mostly agree with the author, financial transparency (honesty) and a global tax on capital both make sense to me.