The Tobin Q ratios for Germany and America tell us Elizabeth Warren and David Dayen are wrong

Louis Woodhill, here:

Put simply, a Tobin Q ratio higher than 100% means that a company is creating economic value, and a Tobin Q below 100% means that a company is destroying value.  The most fundamental social responsibility of a company is to add value to the capital it employs, so the most fundamental job responsibility of a corporate CEO is to keep the Tobin Q ratio of the company he or she leads above 100%. 

Writing for The New Republic, progressive David Dayen argues:

“There’s proven evidence that this model of corporate governance [Warren's] can work. “Co- determination,” the term for worker representation on corporate boards, has created a form of capitalism in Germany where workers are far more equitably compensated and decisions are made with an eye toward long-term goals.”

The problem with this argument is that Piketty’s data shows that, since 1995, America’s Tobin Q ratio has averaged more than 100%, while Germany’s Tobin Q ratio has averaged about 55%.  In other words, America’s evil, rapacious corporations are creating economic value, while Germany’s enlightened companies are doing the equivalent of burning 45% of the euros entrusted to them.

Updated: Global middle class hits one billion in 2014, but has actually declined since 2010

So reported the Times of India here in October:

Credit Suisse's Global Wealth Report 2014 released on Tuesday says that there are one billion adults at present who belong to the middle class - with wealth anywhere between $10,000-$100,000 range.

The Global Wealth Report 2014 itself may be viewed here, from which the pyramid at the left.

Notice the relatively small size of the global middle class, just 21.5% of the world's adults, with the vast majority of these coming first from China, and then second from the Asia-Pacific region, followed by Europe, Latin America and North America in that order, according to the details on pages 24ff.

Update: The inaugural Global Wealth Report in 2010 here actually showed a LARGER global middle class adult population of 1.045 billion then vs. the 1.01 billion today, a 3.3% decline. As a percentage of the world's adult population, the middle class share also has declined, from 23.5% of all adults in 2010 to 21.5% in 2014, a decline of 8.5%.

A little satire on French economist Thomas Piketty, by yours truly

Thomas Piketty has written a big book,

whose thesis is rickety says Bloomberg's Clive Crook,

mistaken about wages both minimum and higher,

for which Diana Furchtgott-Roth says he's a liar.

Entitled Capital in the Twenty-First Century,

its accumulators he'd put in a penitentiary,

while millions now equal (in the theory of this novel),

would no doubt end-up together in a hovel.

We petits rentiers are his "fairly disturbing" problem,

the progeny of capitalism (for Marxists the hobgoblin),

successfully multiplying left and right like rabbits,

Oui! because of our unequal work ethic and habits.

The rapid rise of income inequality in the US dates from the close of the gold window

From The New York Sun, here:

The top decile's share of income went from something like 33% in 1971 to above 47% by 2010.

Hmmm. What could account for that? ...

Before this date, unemployment was, by today’s standards, low. ... From 1947 to 1971, unemployment in America ran at the average rate of 4.7%; since 1971 the average unemployment rate has averaged 6.4%. Could this have been a factor in the soaring income inequality that also emerged in the age of fiat money? ...

It doesn’t take a Ph.D. from MIT or Princeton, however, to imagine that in an age of fiat money, the top decile would have an easier time making hay than would the denizens of the other nine deciles, who aren’t trained in the art of swaps and derivatives. ...

[H]onest money ... works out better for more people. And there is a moral dimension to the question of honest money. This was a matter that was understood — and keenly felt — by the Founders of America, who almost to a man (Benjamin Franklin, a printer of paper notes, was a holdout), cringed with humiliation at the thought of fiat paper money. They’d tried it in the revolution, and it had been the one embarrassment of the struggle. They eventually gave us a Constitution that they hoped would bar us from ever making the same mistake.

As for all good Marxists, Thomas Piketty's biggest problem is eliminating the middle class

From The Wall Street Journal here:

While America's corporate executives are his special bête noire, Mr. Piketty is also deeply troubled by the tens of millions of working people—a group he disparagingly calls "petits rentiers"—whose income puts them nowhere near the "one percent" but who still have savings, retirement accounts and other assets. That this very large demographic group will get larger, grow wealthier and pass on assets via inheritance is "a fairly disturbing form of inequality." He laments that it is difficult to "correct" because it involves a broad segment of the population, not a small elite that is easily demonized.

So what is to be done? Mr. Piketty urges an 80% tax rate on incomes starting at "$500,000 or $1 million." This is not to raise money for education or to increase unemployment benefits. Quite the contrary, he does not expect such a tax to bring in much revenue, because its purpose is simply "to put an end to such incomes." It will also be necessary to impose a 50%-60% tax rate on incomes as low as $200,000 to develop "the meager US social state." There must be an annual wealth tax as high as 10% on the largest fortunes and a one-time assessment as high as 20% on much lower levels of existing wealth. He breezily assures us that none of this would reduce economic growth, productivity, entrepreneurship or innovation.

-----------------------------------------------------------------------------------------

"[T]he lower middle class attitude — attachment to the idea of private property, more or less open striving to uphold credit, terror of every fundamental social disturbance — is in practice the greatest internal enemy of the proletariat and the proletarian revolution."

-- Bela Kun, 1918

And you thought I was kidding when I called Thomas Piketty's new book a novel

Diana Furchtgott-Roth for Real Clear Markets, here, eviscerates Thomas Piketty's presentation on the minimum wage:

One might overlook one isolated error as sloppiness to which we are all susceptible. But Professor Piketty's supposed history of changes in the minimum wage is not tarnished by a single error, but by a vast array of systematic errors.

His history is pure revisionist fiction, and revisionist fiction with a political purpose: making Democratic presidents look magnanimous and Republican presidents look uncaring. Yet, over the past quarter century, the period Piketty describes as showing a dramatic increase in inequality, Republican presidents signed into law larger percentage increases in the minimum wage than did Democratic presidents.

Quelle Surprise: Clive Crook Reads Thomas Piketty And Comes Out For Capital Accumulation

Here he is at Bloomberg View having read Thomas Piketty's new . . . um . . . novel, Capital in the 21st Century, and found it wanting:

There's a persistent tension between the limits of the data he presents and the grandiosity of the conclusions he draws. At times this borders on schizophrenia. ... Aside from its other flaws, "Capital in the 21st Century" invites readers to believe not just that inequality is important but that nothing else matters. This book wants you to worry about low growth in the coming decades not because that would mean a slower rise in living standards, but because it might cause the ratio of capital to output to rise, which would worsen inequality. ... In Piketty's view of the world, where inequality is all that counts, capital accumulation is almost a sin in its own right. ...

-----------------------------------------------

As much as I love the rest of what Clive Crook has to say on behalf of capital accumulation, I think that's it right there. More than anything else, Thomas Piketty is an anti-Calvinist of the French type, an heir of Jacobinism who is more interested in leveling society than in lifting it.

The One Chart Which Best Explains The Reason For The Growth Of Income Inequality In The US

The chart comes from The Motley Fool, here, and has nothing to do per se with the subject of the current debate about income inequality occasioned by the US tour of French economist Thomas Piketty promoting his new book Capital in English translation.

But the chart offers a little appreciated explanation for why income inequality has grown in the United States: the tax code of the United States itself treats income unequally, giving preference to long term capital gains. Key here isn't just that rates increase progressively and are unequal, but that capital gains income is at all levels taxed unequally compared to ordinary income, at lower rates. Is it a surprise then that one form of income would tend to grow more than the other in order to take advantage of the lower rates?

Ordinary income has been taxed at extraordinarily high rates off and on since the First World War while long term capital gains have been taxed at comparatively much lower rates off and on just about as long, as a favor to the few who have historically been able to play in that sandbox. It shouldn't surprise us though that the half of the nation which over time has joined the investor class has benefited disproportionately from this arrangement.

It has been a principle of conservative economics from the time of Reagan that if you want less of something, tax it. Well that's what has happened to ordinary income, where wages have been stagnating for some time while gains from investments have soared. You push here, it comes out there. Ordinary income tax rates have come down and stayed down since Reagan's revolution, it is true, but the differential between ordinary income tax rates and long term capital gains taxes has remained, favoring the returns from capital.

Cullen Roche here takes the view that we should raise taxes on long term capital gains, especially for the top 0.1% where he believes most of the inequality shows up:

The solution, in my opinion, is simple and based on a relatively widespread misunderstanding. We currently tax “investment income” favorably. The rationale for this is that we want to incentivize “investment”. That makes sense except for the fact that very few of the people transacting on secondary markets or obtaining dividend payments are actually promoting investment. In fact, one could argue that dividends disincentivize firms from using profits in a more innovative manner. And transactions on secondary exchanges only finance investment in the case of secondary offerings. Otherwise, buying stocks and bonds is a simple allocation of savings and does not remotely resemble the financing of investment. Why these forms of income are tax advantaged makes very little sense in my view. So a higher tax rate on dividends and secondary market transactions seems to make a lot of sense in my view.

I beg to differ. The tax code as it stands is doubly offensive in that it not only favors one form of income over another but that it also discriminates against income as it grows. To make the tax code "fair", it should treat all income the same way. If we equalized all tax rates to 10% irrespective of level or source or time, there would be so much opportunity to make money in this country that yours truly, Cullen Roche and Thomas Piketty would all have something far better to do than write about this, and you something far better to do than read about it.