Henderson on Piketty, Part 6
By David Henderson
This is my final installment from “The Unintended Case for More Capitalism,” my review of Capital in the Twenty-First Century by Thomas Piketty.
Piketty, not to his credit, sometimes uses ad hominems in place of actual argument. I note two. Although Piketty does not name the targets outright, one ad hominem is targeted at my Hoover Institution colleague Kenneth Judd and economist Christophe Chamley. Judd and Chamley, in separate articles, found that under certain strong assumptions, the optimal tax rate on capital is zero. Under those assumptions, they concluded, taxing capital would, by reducing capital, make workers worse off than otherwise. How does Piketty deal with their finding? By challenging their motives. Piketty writes, “Some economists have an unfortunate tendency to defend their private interest while implausibly claiming to champion the general interest.” It might surprise Piketty that Judd is a dyed-in-the-wool registered Democrat with whom I argue about redistribution. (I’m the one who’s against it.)
Piketty’s second ad hominem is, surprisingly, against Yale University economist William Nordhaus. In discussing global warming, Piketty contrasts the views of Nordhaus and British economist Nicholas Stern. Stern wants governments to act quickly and massively to reduce global warming. Nordhaus wants a more gradual approach. Piketty claims that Nordhaus’s position is “opportunely consistent with the U.S. strategy of unrestricted carbon emissions.” Besides being an ad hominem, Piketty’s accusation of opportunism makes no sense. Why? Because Nordhaus is one of the leading U.S. economists who does want the U.S. government to use carbon taxes to restrict carbon emissions.
On this issue, Piketty is also badly misinformed in another way. He argues correctly that one main difference between Stern and Nordhaus is the interest rate they use to compute future benefits of reducing carbon, but he incorrectly claims that Stern uses a discount rate of about 1 percent per year. In fact, Stern uses a discount rate of 0.1 percent per year, a big difference when considering benefits out over 100 years.
Interestingly, Piketty does not completely understand the economic case for carbon taxes as a way to deal with global warming. He writes, “There is good reason to believe, however, that the price signal [that carbon taxes would lead to] has less of an impact on emissions than public investments and changes to building codes (requiring thermal insulation, for example).” Certainly some level of carbon taxes could have a greater effect on emissions. But that is not the point. The case for carbon taxes over government picking of winners and government regulation is that they lead to a given reduction of emissions at a lower cost.
Early in the book, Piketty writes about his frustration with mainstream economics: “My thesis consisted of several relatively abstract mathematical theorems.” I share that frustration. But there is a lot of very good economics, both within and outside the math. You do not need much math to show the superiority of carbon taxes over government spending and regulation.
I should not leave this review without mentioning a glaring historical error on tax rates. According to Piketty, the top income tax rate under President Herbert Hoover, Franklin D. Roosevelt’s predecessor, was 25 percent. In fact, it was Hoover, a president from the progressive wing of the Republican Party, who raised the top rate to a whopping 63 percent.
I end with a positive: In his chapter on global capital taxes, Piketty writes:
A seemingly more peaceful form of redistribution and regulation of global wealth inequality is immigration. Rather than move capital, which poses all sorts of difficulties, it is sometimes simpler to allow labor to move to places where wages are higher.
He calls immigration “the mortar that holds the United States together.” Unfortunately, he also sees immigration as something that “postpones the problem” of global wealth concentration. Let’s see: Deregulation of labor markets will allow hundreds of millions of poor immigrants to be substantially better off but will only postpone a problem that Piketty worries about and I don’t. I’ll take it.