NY Times columnist Paul Krugman writes to defend Thomas Picketty today. As you know, Picketty's work has been the subject of some rather major attacks which question the validity of the data and methods he used in his much ballyhooed work that claims that capitalism leads inevitably to the concentration of wealth. Even a leftist true believer like Krugman recognizes that the discussion of Picketty's work is so devastating that Krugman does not try to debate the issues. In Krugman's words, he "leaves it to Picketty" to defend his own work. Krugman, however, cannot sit by and let someone attack the idea that income inequality is not growing as a result of our economic system. Here is where the true Krugman comes through and also where the arguments are so silly that they get funny. Let me explain:
Krugman's main complaint against the attack on Picketty's work is that they conclude that there is no data showing an increasing concentration of wealth in Europe and the USA over the years. Krugman's response, in short, is that any analysis that reaches this conclusion cannot be correct. You really cannot make this stuff up. Krugman, an economics professor, claims that a factual analysis cannot be correct because it comes to a conclusion with which he disagrees. He does not dispute the basic data used. He does not dispute the analysis methods used. He does not dispute that those methods of analysis result in a particular result. No, Krugman just says that the result indicated by the data and analysis is one that he does not particularly like, so it must be wrong. In essence, what Krugman is saying is just about the same as if he announced that he did not like the number 4, so from now on, 2+2 will equal 5.
To show the supposed propriety of his own view, Krugman then talks about a CBO report that compares the distribution of income from capital other than capital gains across the US population in 1979 and 2007. In 2007, more of that sort of income was concentrated at the richest end of the population. This, of course, does not support the idea that there is a concentration of wealth; it only indicates the fact that interest rates in 2007 were much lower than they were in 1979. Remember, if one omits capital gains from the results, then income from capital is basically composed of two parts: a) interest and, b) income from investments like payouts from real estate as well as dividends. Both in 1979 and 2007, middle income groups had a much higher proportion of their capital invested in interest bearing accounts than in investments like real estate and dividend paying stock. This is not surprising. For example, seniors have traditionally put a large part of their capital into insured bank accounts or CD's or in treasury or municipal bonds. The wealthiest Americans are more likely to own large capital assets like office buildings or ownership of stock with a much smaller percentage of their assets in interest bearing instruments. The market rate of interest in 1979 was much higher than it was in 2007. For example, a ten year treasury bond paid more than twice as much in 1979 as it did in 2007. The lower interest rates of 2007 meant that income from capital derived from interest payments fell dramatically. That lower income from capital hit the middle income groups much harder than the upper income groups because of where each group had the majority of its capital invested. That is why income from capital became more concentrated in 2007; it was not the result of the concentration of wealth.
It is also worth noting that since 2007, interest rates have fallen to historic lows. Right now, for example, bank accounts in 1979 paid something like 50 times more in interest that they do currently. Bonds paid at least three times more in 1979 than they do now. The policies followed by the Obama administration (and strongly advocated by fools like Krugman) have basically wiped out all interest income for the average American. This has pushed essentially all income from capital other than capital gains to the richest folks among us.
One final note: it never fails to amaze me that a man who won the Nobel Prize in Economics (admittedly for work regarding international trade) can be so unable to do a simple bit of economic analysis. Of course, president Obama won the Nobel Peace Prize and he seems totally incapable of moving anyone towards peace; the world is rushing towards conflicts all over the globe while Obama plays golf.
Krugman's main complaint against the attack on Picketty's work is that they conclude that there is no data showing an increasing concentration of wealth in Europe and the USA over the years. Krugman's response, in short, is that any analysis that reaches this conclusion cannot be correct. You really cannot make this stuff up. Krugman, an economics professor, claims that a factual analysis cannot be correct because it comes to a conclusion with which he disagrees. He does not dispute the basic data used. He does not dispute the analysis methods used. He does not dispute that those methods of analysis result in a particular result. No, Krugman just says that the result indicated by the data and analysis is one that he does not particularly like, so it must be wrong. In essence, what Krugman is saying is just about the same as if he announced that he did not like the number 4, so from now on, 2+2 will equal 5.
To show the supposed propriety of his own view, Krugman then talks about a CBO report that compares the distribution of income from capital other than capital gains across the US population in 1979 and 2007. In 2007, more of that sort of income was concentrated at the richest end of the population. This, of course, does not support the idea that there is a concentration of wealth; it only indicates the fact that interest rates in 2007 were much lower than they were in 1979. Remember, if one omits capital gains from the results, then income from capital is basically composed of two parts: a) interest and, b) income from investments like payouts from real estate as well as dividends. Both in 1979 and 2007, middle income groups had a much higher proportion of their capital invested in interest bearing accounts than in investments like real estate and dividend paying stock. This is not surprising. For example, seniors have traditionally put a large part of their capital into insured bank accounts or CD's or in treasury or municipal bonds. The wealthiest Americans are more likely to own large capital assets like office buildings or ownership of stock with a much smaller percentage of their assets in interest bearing instruments. The market rate of interest in 1979 was much higher than it was in 2007. For example, a ten year treasury bond paid more than twice as much in 1979 as it did in 2007. The lower interest rates of 2007 meant that income from capital derived from interest payments fell dramatically. That lower income from capital hit the middle income groups much harder than the upper income groups because of where each group had the majority of its capital invested. That is why income from capital became more concentrated in 2007; it was not the result of the concentration of wealth.
It is also worth noting that since 2007, interest rates have fallen to historic lows. Right now, for example, bank accounts in 1979 paid something like 50 times more in interest that they do currently. Bonds paid at least three times more in 1979 than they do now. The policies followed by the Obama administration (and strongly advocated by fools like Krugman) have basically wiped out all interest income for the average American. This has pushed essentially all income from capital other than capital gains to the richest folks among us.
One final note: it never fails to amaze me that a man who won the Nobel Prize in Economics (admittedly for work regarding international trade) can be so unable to do a simple bit of economic analysis. Of course, president Obama won the Nobel Peace Prize and he seems totally incapable of moving anyone towards peace; the world is rushing towards conflicts all over the globe while Obama plays golf.
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