Boudreaux on Piketty
By David Henderson
Piketty reasonably assumes that if government finances its expenditures with taxes, then the rich would pay a disproportionately large share of those taxes. But he unreasonably assumes that debt financing of government expenditures not only allows the rich to escape higher taxes, but also gives them a lucrative stream of returns that adds to their net wealth. Unfortunately, alas, for the rich (and for everyone else), real wealth cannot be created in this rabbit-out-of-a-hat manner.
This is from Don Boudreaux, “Thomas Piketty’s Flawed Analyses of Government Debt and Executive Compensation,” the Econlib Feature Article for August.
In a book that is almost 700 pages, Piketty deals with many issues besides the main one of wealth inequality. Professor Boudreaux highlights two: government debt and executive compensation.
Piketty appears to be untroubled by this inconsistency between his theory of executive compensation and the reality of the great growth in corporations’ market values over the past few decades. Nevertheless, had he more carefully examined the empirical literature on executives’ compensation, he might have been more reluctant to assert that their pay is unrelated to managerial productivity. As the University of Chicago’s Steven Kaplan reported last year in Foreign Affairs, when he and co-author Joshua Rauh analyzed 1,700 firms, they “found that compensation was highly related to performance: the companies that paid their CEOs the most saw their stocks do the best, and those that paid the least saw their stocks do the worst.”
The whole piece, which is relatively short, is worth reading.