Category: Uncategorized

Folks:

I am setting up a new office inside a house built in the 1960s. It is going to need a lot of electrical work including upgrading the service from 60-amp to 200-amp. I am thinking “Maybe this would be a good time to rip out all of the switches and outlets and replace them with the smart home standard.” But as I poke around I find that the smart home still exemplifies the old adage that “The wonderful thing about standards is that there are so many to choose from.” smarthome.com offers INSTEON, UPB, X10, Z-Wave, Zigbee, and WiFi, for example.

“The dumb state of the smart home”, a January 2014 article, is not encouraging:

not all ZigBee products can communicate with each other, and that’s a major problem for what’s intended to be a standard.

Can it really be that a country that figured out to cover itself in McMansions while making German investors pay for it all cannot figure out how a PC can turn on a light?

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Thomas Piketty’s Capital in the Twenty-First Century urges readers to take drastic action to prevent what he says is an inevitable explosion in the wealth of rich people worldwide. Piketty assumes the following: (1) rich people get a better return on their investments than regular investors, (2) governments will stop taxing dividend and capital gain income, (3) the world economy will grow at best slowly for the next 50-100 years, (4) the return on capital will be high, and (5) rich people won’t consume too much (which means most of their income gets plowed into additional investment). If one accepts these assumptions today’s disgustingly rich will become tomorrow’s ridiculously rich in a runaway process. This is why we need to take immediate action to tax wealth so that it doesn’t spiral upward out of control (and actually Piketty says that we need also to take immediate action on climate change for the same reason).

I have a feeling that this is a stupid question but I haven’t figured out a clear answer…. Why does it matter if today’s billionaires become tomorrow’s trillionaires?

As the Detroit realtor no doubt would have said 20 years ago, “they’re not making any more land.” I.e., once rich people own most of the world’s land all that can happen is that the nominal price of the land goes up, but the total amount of land owned doesn’t change. Similarly, there are only a certain number of factories in the world. If every rich person suddenly has 100X the wealth it will take a long time before more factories are built so the dominant effect will be bidding up the price of existing factories. General Electric is still the same company even if its shares in the aggregate become worth 10X as much as they are today.

How about personal lifestyle? Will the huge wealth increases allow rich people to live more lavishly? Not if they want to live around other rich people and show off. See the June 1, 2014 “Sky-High Demand for Luxury” in the New York Times: “multimillion-dollar apartments have been snatched up hours after they hit the market and buyers have shelled out $1 million over the asking price to secure a winning bid.” Sure the S&P 500 is up, but the price of a Manhattan duplex, a Range Rover, and a parking spot for that Range Rover, have gone up even more. A rich person could now buy all of Detroit, but why would he or she want to?

Will the super rich becoming super duper rich affect the lifestyles of the non-rich? Consider that millions of Americans have a lifestyle that is set by the government in absolute terms, i.e., they are provided with whatever housing, medical care, and food that a government official decides that they should have. Additional millions of Americans are employees of the government or government contractors. Once again, the government decides what to pay these employees, generally without reference to the market (example). How about the shrinking group of private industry workers who don’t work for government contractors? Can the uber rich force them into accepting minimum wage? It seems unlikely. The rich have to give the capable and hard-working some incentive to show up, so the wage of a good worker should be bid up until it is sufficient to support a comfortable lifestyle.

Natural resource consumption seems like the place where the rich could do some serious damage to the middle class. When people who don’t care about money travel, for example, they burn a lot of oil. The President of the United States, for example, will send out a couple of Air Force cargo planes a couple of days ahead. These are stuffed full of SUVs, helicopters, and other vehicles. Then the President shows up in his private Boeing 747. If there were another 10,000 people worldwide who traveled in the same style this would put a real dent in oil supplies and middle class people might be reduced to walk/biking/Guatemalan chicken bus. The middle class private car era will draw to a close.

But except for oil, what good will it do the rich to become uber rich? Won’t they just bid against each other and generate inflation in the prices of 20-carat diamonds, townhouses in Paris, used Gulfstream jets, etc.? Once the rich own all of the world’s land, all of the world’s factories, and all of the world’s gems and gold, how can they actually get richer from a functional point of view?

And finally why does it matter to the rest of us if a family holds onto a lot of wealth for a while? If they’re holding it aren’t they investing some of it in productive enterprises? And don’t they have to eventually spend a lot of it to get any value out?

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In addition to being an expert on economic history, Thomas Piketty turns out to be an expert on atmospheric physics. One would think that an advocate of greater wealth equality would welcome a sea level rise sufficient to wash away all of the Wall Streeters’ houses in the Hamptons. Apparently not.

climate change and, more generally, the possibility of deterioration of humanity’s natural capital in the century ahead. If we take a global view, then this is clearly the world’s principal long-term worry. The Stern Report, published in 2006, calculated that the potential damage to the environment by the end of the century could amount, in some scenarios, to dozens of points of global GDP per year.

Piketty never explains why growing wealth inequality was the world’s #1 problem in the preceding 600 pages but climate change takes over the #1 spot for a short portion of the book.

Should we attack the problem now, when America’s best engineers can’t figure out how to deliver working WiFi service at brand new billion dollar airport terminals (see SFO, for example!)?

Nicholas Stern, who is British, argued for a relatively low discount rate, approximately the same as the growth rate (1–1.5 percent a year). With that assumption, present generations weigh future damage very heavily in their own calculations. William Nordhaus, an American, argued that one ought to choose a discount rate closer to the average return on capital (4–4.5 percent a year), a choice that makes future disasters seem much less worrisome.

For Stern, the loss of global well-being is so great that it justifies spending at least 5 points of global GDP a year right now to attempt to mitigate climate change in the future. For Nordhaus, such a large expenditure would be entirely unreasonable, because future generations will be richer and more productive than we are. They will find a way to cope, even if it means consuming less, which will in any case be less costly from the standpoint of universal well-being than making the kind of effort Stern envisions.

Stern’s opinion seems more reasonable to me than Nordhaus’s, whose optimism is attractive, to be sure, as well as opportunely consistent with the US strategy of unrestricted carbon emissions, but ultimately not very convincing.

Piketty proposes spending vast sums, though he admits that nobody has any idea what would be worth funding:

The public debt (which is much smaller than total private wealth and perhaps not really that difficult to eliminate) is not our major worry. The more urgent need is to increase our educational capital and prevent the degradation of our natural capital. This is a far more serious and difficult challenge, because climate change cannot be eliminated at the stroke of a pen (or with a tax on capital, which comes to the same thing). The key practical issue is the following. Suppose that Stern is approximately correct that there is good reason to spend the equivalent of 5 percent of global GDP annually to ward off an environmental catastrophe. Do we really know what we ought to invest in and how we should organize our effort? If we are talking about public investments of this magnitude, it is important to realize that this would represent public spending on a vast scale, far vaster than any previous public spending by the rich countries.

Should we count on advanced research to make rapid progress in developing renewable energy sources, or should we immediately subject ourselves to strict limits on hydrocarbon consumption? It would probably be wise to choose a balanced strategy that would make use of all available tools.55 So much for common sense. But the fact remains that no one knows for now how these challenges will be met or what role governments will play in preventing the degradation of our natural capital in the years ahead.

More: read Capital in the Twenty-First Century.

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One of the cornerstones of Thomas Piketty’s Capital in the Twenty-First Century is that democracy is infallible. From the votes of the crowd will emerge the wisest course of action. This is exactly the opposite conclusion reached by Rory Carroll, the biographer of Hugo Chavez who concludes with “When is democracy not enough?” (see my review of the book).

Piketty points out that when government is huge it can be inefficient, but he never loses faith in democracy. Piketty describes the growth of government:

The possibility of greater state intervention in the economy raises very different issues today than it did in the 1930s, for a simple reason: the influence of the state is much greater now than it was then, indeed, in many ways greater than it has ever been.

The simplest way to measure the change in the government’s role in the economy and society is to look at the total amount of taxes relative to national income. Figure 13.1 shows the historical trajectory of four countries (the United States, Britain, France, and Sweden) that are fairly representative of what has happened in the rich countries.

Total tax revenues were less than 10 percent of national income in rich countries until 1900–1910; they represent between 30 percent and 55 percent of national income in 2000

The first similarity is that taxes consumed less than 10 percent of national income in all four countries during the nineteenth century and up to World War I. This reflects the fact that the state at that time had very little involvement in economic and social life. With 7–8 percent of national income, it is possible for a government to fulfill its central “regalian” functions (police, courts, army, foreign affairs, general administration, etc.) but not much more.

Between 1920 and 1980, the share of national income that the wealthy countries chose to devote to social spending increased considerably. In just half a century, the share of taxes in national income increased by a factor of at least 3 or 4 (and in the Nordic countries more than 5). Between 1980 and 2010, however, the tax share stabilized everywhere. This stabilization took place at different levels in each country, however: just over 30 percent of national income in the United States, around 40 percent in Britain, and between 45 and 55 percent on the European continent (45 percent in Germany, 50 percent in France, and nearly 55 percent in Sweden).

Nevertheless, in terms of tax receipts and government outlays, the state has never played as important an economic role as it has in recent decades.

The growing tax bite enabled governments to take on ever broader social functions, which now consume between a quarter and a third of national income, depending on the country. This can be broken down initially into two roughly equal halves: one half goes to health and education, the other to replacement incomes and transfer payments.

the very rapid expansion of the role of government in the three decades after World War II was greatly facilitated and accelerated by exceptionally rapid economic growth, at least in continental Europe.25 When incomes are increasing 5 percent a year, it is not too difficult to get people to agree to devote an increasing share of that growth to social spending

Piketty says that there may be a moral justification for allowing earners to keep something of what they earn:

it is by no means certain that social needs justify ongoing tax increases. To be sure, there are objectively growing needs in the educational and health spheres, which may well justify slight tax increases in the future. But the citizens of the wealthy countries also have a legitimate need for enough income to purchase all sorts of goods and services produced by the private sector—for instance, to travel, buy clothing, obtain housing, avail themselves of new cultural services, purchase the latest tablet, and so on.

But perhaps not more than 1/4 (see below), but on the other hand Piketty is concerned that the government needs some improved processes before it can efficiently spend the money that he thinks government should spend:

there remains the fact that once the public sector grows beyond a certain size, it must contend with serious problems of organization. Once again, it is hard to foresee what will happen in the very long run. It is perfectly possible to imagine that new decentralized and participatory forms of organization will be developed, along with innovative types of governance, so that a much larger public sector than exists today can be operated efficiently.

before we can learn to efficiently organize public financing equivalent to two-thirds to three-quarters of national income, it would be good to improve the organization and operation of the existing public sector, which represents only half of national income

Voters will figure out the fairest tax system and rates once they get enough information:

the ideal policy for avoiding an endless inegalitarian spiral and regaining control over the dynamics of accumulation would be a progressive global tax on capital. Such a tax would also have another virtue: it would expose wealth to democratic scrutiny, which is a necessary condition for effective regulation of the banking system and international capital flows. A tax on capital would promote the general interest over private interests while preserving economic openness and the forces of competition.

The benefit to democracy would be considerable: it is very difficult to have a rational debate about the great challenges facing the world today—the future of the social state, the cost of the transition to new sources of energy, state-building in the developing world, and so on—because the global distribution of wealth remains so opaque. … truly democratic debate cannot proceed without reliable statistics.

For the countries of Europe, the priority now should be to construct a continental political authority capable of reasserting control over patrimonial capitalism and private interests and of advancing the European social model in the twenty-first century.

In an ideal society, what level of public debt is desirable? Let me say at once that there is no certainty about the answer, and only democratic deliberation can decide, in keeping with the goals each society sets for itself and the particular challenges each country faces.

one of the most important issues in coming years will be the development of new forms of property and democratic control of capital. The dividing line between public capital and private capital is by no means as clear as some have believed since the fall of the Berlin Wall. As noted, there are already many areas, such as education, health, culture, and the media, in which the dominant forms of organization and ownership have little to do with the polar paradigms of purely private capital (modeled on the joint-stock company entirely owned by its shareholders) and purely public capital (based on a similar top-down logic in which the sovereign government decides on all investments). There are obviously many intermediate forms of organization capable of mobilizing the talent of different individuals and the information at their disposal. When it comes to organizing collective decisions, the market and the ballot box are merely two polar extremes. New forms of participation and governance remain to be invented.

if we are to regain control of capitalism, we must bet everything on democracy—and in Europe, democracy on a European scale.

only regional political integration can lead to effective regulation of the globalized patrimonial capitalism of the twenty-first century

The world of finance, and government finance in particular, is subject to periodic crises:

prospects for growth look gloomy for the foreseeable future, especially in Europe, which is mired in an endless sovereign debt crisis

The crisis of 2008 was the first crisis of the globalized patrimonial capitalism of the twenty-first century. It is unlikely to be the last.

However, a one-time tax on wealth will be sufficient to repair governments’ finances worldwide and they will never again indulge in deficit spending:

without an exceptional tax on capital and without additional inflation, it may take several decades to get out from under a burden of public debt as large as that which currently exists in Europe. To take an extreme case: suppose that inflation is zero and GDP grows at 2 percent a year (which is by no means assured in Europe today because of the obvious contractionary effect of budgetary rigor, at least in the short term), with a budget deficit limited to 1 percent of GDP (which in practice implies a substantial primary surplus, given the interest on the debt). Then by definition it would take 20 years to reduce the debt-to-GDP ratio by twenty points.

It takes decades to accumulate capital; it can also take a very long time to reduce a debt.

a progressive tax on capital is not only useful as a permanent tax but can also function well as an exceptional levy (with potentially high rates) in the resolution of major banking crises.

because growth has been fairly slow since 1970, we are in a period of history in which debt weighs very heavily on our public finances. This is the main reason why the debt must be reduced as quickly as possible, ideally by means of a progressive one-time tax on private capital or, failing that, by inflation. In any event, the decision should be made by a sovereign parliament after democratic debate.

Once Europe is debt-free, what should it do with all of the tax dollars still flowing in? Piketty implies that it should be spent on people just like himself, i.e., university professors:

It is reasonable to think that Europe might find better ways to prepare for the economic challenges of the twenty-first century than to spend several points of GDP a year servicing its debt, at a time when most European countries spend less than one point of GDP a year on their universities.

The nations of Europe have never been so rich. What is true and shameful, on the other hand, is that this vast national wealth is very unequally distributed. Private wealth rests on public poverty, and one particularly unfortunate consequence of this is that we currently spend far more in interest on the debt than we invest in higher education. [same information but many pages later in the book]

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Robert Fano emigrated from Italy in 1939, got his Sc.D. from MIT in 1947, and officially started Project MAC, the Project on Mathematics and Computation, on July 1, 1963. Daniela Rus, a young faculty star and director of the successor CSAIL organization, organized a fabulous celebration of Project MAC’s 50th anniversary last week, which turned out to be a good place to catch up with what is happening in computer science, as well as an occasion to present Professor Fano, always the nicest guy in the building and still reasonably spry at age 96, with a fancy plaque.

Project MAC was important in the development of time-sharing, the modern operating system, computer networking, computer algebra, personal computing, practical robotics, etc.(see this list). In some ways the celebration was bittersweet because computing research is now so widespread that there is no way for any current university to have the kind of impact that MIT had in the 1960s and 70s.

The most information-dense talk was given by Bill Dally, an academic who is also an accomplished practical hardware designer (he and I worked together 25 years ago on circuits to encode and decode digital information stored in analog video streams). Bill came in from his dual perch at Stanford and as Chief Scientist for NVIDIA, to scare us all with “The End of Moore’s Law and the Future of Computing”. It seems that the popular conception of Moore’s Law, i.e., that computers will double in speed every couple of years, stopped being true in 2000. The law as stated still applies, but that just gives us twice as many transistors on a chip every two years. A typical computer program cannot use those extra transistors and they don’t run much faster than transistors on older chips. So the latest and greatest multi-core computer system might compress video a little faster than a two-year-old machine, but a standard one-instruction-at-a-time program might not be speeded up significantly. Processors now spend more power pushing data around than computing. The answer is specialized hardware, according to Dally. This dovetails with what is happening over in the Bitcoin world where people are running custom hardware (ASICs) rather than standard computers or graphics cards.

The talk on the topic that has the most potential to change the world of academic computer science and far and away the best-presented talk was by Charles Isbell, a machine learning researcher at Georgia Tech who is running an online Master’s in CS program that covers the same material as Georgia Tech’s in-person program but for about $6600 instead of $42,000. There should be 2000 students enrolled by January 2015.

The other talk where I wanted to act as cheerleader was given by Dan Huttenlocher, who is running the new project-based graduate school in New York City: Cornell Tech. A lot of the ideas behind Cornell Tech are similar to those that I wrote about in “What’s wrong with the standard undergraduate computer science curriculum” and “Teaching Software Engineering at MIT”.

Tom Leighton, the theory professor who co-founded Akamai and is now the company’s CEO, reminded us that there isn’t nearly enough bandwidth at the core of the Internet for everyone on the world to stupefy themselves with streaming 4K video. About 25,000 Tbps would be required just to keep people in 1080p and capacity near the core is closer to 25 Tbps. There might be sufficient capacity, however, in the “last mile” to folks’ houses. So what the world needs is to park all of its content at servers near the edges of the Internet. And what company do you think might have thousands of such servers? …

Marc Raibert showed crowd-pleasing videos of Big Dog and other robots from the company that he founded, Boston Dynamics (acquired in December 2013 by Google). Rod Brooks and Matt Mason tried to explain why robots still weren’t useful around the house. Antonio Torralba gave the funniest talk per minute, with examples of the inadequate performance of current computer vision systems. We’re a long way from a computer system that can interpret a scene as well as some of the simplest animals.

One of my old students, Manolis Kellis, gave a great talk on computational biology. I take full credit for his success, though the course he took seemingly has no relation to biology…

Amidst the “future is so bright you’ll need to wear sunglasses” and the awesome technological achievements chronicled, the limits of every day personal computing were on display. The speakers who brought Apple Macintosh laptops for projecting slides had terrible difficulties getting their computers to work at all. The laptop would freeze or crash and/or could not be made to drive the video projector. The Windows laptops brought by lecturers functioned perfectly as slide projectors, but one speaker was reminded in the middle of her talk about a canceled lunch. There was a massive pop-up to the entire audience from Microsoft Outlook while she was in “presentation mode” in Microsoft PowerPoint. This was made more embarrassing by the fact that her employer is Microsoft Research. Why wasn’t the computer smart enough to note that it was in a different location than her office and therefore if she was in presentation mode it was very likely to give a real presentation. Given those conditions, did a notification about a canceled calendar event really need to take over the screen? A 4-year-old child is smart enough not to interrupt you when you’re taking a shower or sleeping to ask if you still want that leftover apple slice on the dining room table. Why aren’t computers?

I began using Project MAC/CSAIL computer systems in 1976 via the ARPAnet and then started using the MIT Lisp Machine on campus in 1980. Thus I have about 35 years of experience following a cohort of (top) computer scientists. Here are some observations:

• most of the people whom I can remember as tenured professors in 1980 are still occupying tenured faculty slots at MIT. I.e., if the field ever stops growing there will be almost no academic jobs for young PhDs
• weight = age. The fifty-something-year-olds who maintained their graduate school weight look remarkably younger than those who’ve expanded.
• the men who have had academic/research CS careers have experienced fairly standard lives as men, e.g., with wives and kids (and with divorce rates consistent with “These Boots are Made for Walking: Why Most Divorce Filers Are Women” (Margaret Brinig and Douglas Allen; 2000;the PDF version of the paper or New York Times article) and “Child Support Guidelines: The Good, the Bad, and the Ugly” (Family Law Quarterly, 45:2, Summer 2011; PDF is available for free … i.e., the men who’d had a successful startup and lived in a winner-take-all state were much more likely to have been sued by their wives)
• the women who have been successful in academic/research CS are much more likely to be single and childless than women in the general population (see also “Women in Science”). Given that mid-career research computer scientists generally earn between $150,000 and $200,000 per year pre-tax, this means that a PhD in CS was economically damaging to a lot of women (since it would have been more profitable to have a couple of children with, e.g., two different medical doctors, and collect child support). Of course, it is possible that they enjoy their jobs much more than they would have enjoyed having kids, but the single/childless/earning-less-than-a-child-support-plaintiff life trajectory doesn’t seem to be a universally appealing advertisement for STEM careers for women.
• the handful of folks who identified themselves as homosexual or bisexual back in the 1980s are today generally childless
• the best job of all seemed to be university support staff. The people who were doing admin jobs back in the 1980s and 1990s are still MIT employees. They are cheerful, well-rested, and don’t seem to be aging at all.

Ray Stata, the founder of Analog Devices and donor behind the fancy Frank Gehry-designed CS building at MIT, gave a talk about how entrepreneurship is important and how MIT had gone from barely supporting this activity to having dozens of institutionalized support programs for entrepreneurs. He didn’t justify the importance of small companies and startups, however. Why aren’t GE, 3M, and Boeing more important to the U.S. than the latest batch of social networking startups? In a world that is increasingly regulated, why wouldn’t it make more sense to tell young people to “go big or go home”? And if these MIT programs to teach entrepreneurship are so effective, how come Massachusetts was more prominent (relative to Silicon Valley) in the computing/IT startup world back before MIT made any attempt to assist people with starting companies? And finally, if entrepreneurship is so important and MIT has $billions in cash, why doesn’t MIT open a satellite campus in Silicon Valley where students can go for a semester and see what is happening first-hand?

Conclusion: It was an inspiring event and much of the self-congratulation seems earned. People who are still active today as researchers and teachers built machines that completely transformed the world, e.g, Bob Metcalfe and Tom Knight who delivered networked personal computers with bitmapped displays. At the same time, we have a long way to go. Computers have no common sense. Robots are not helpful around the house. The SABRE system that revolutionized database management systems and transaction processing cost $40 million in 1960 dollars, i.e., less than half as much as what should have been the banal healthcare.gov web site.

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The New York Times, in “Who Gets to Graduate” (May 15, 2014 Magazine), writes about University of Texas students who did poorly in a 500-person lectured-based chemistry class but were able to master the material when it was taught in a more collaborative manner. The article is ostensibly about race/class issues, but I think mostly what it shows is that 500-person lectures are useless and colleges haven’t noticed until now because (a) they don’t measure or care what students learn, and (b) the elite colleges admit a huge number of students who are so bright and motivated that they can teach themselves everything from textbooks, Wikipedia, and problem sets.

[Note that MIT has had a similar program for freshman, albeit self-selected, called Experimental Study Group, founded in 1969.]

Meanwhile, here in Massachusetts there is the Olin College of Engineering, which addresses a lot of the problems with standard approaches that I wrote about in “What’s wrong with the standard undergraduate computer science curriculum.” Olin has been enormously successful pedagogically, with one friend of mine saying “I’ll hire at least 95 percent of the Olin graduates whom I interview [for his software company], but only 5 percent of the MIT graduates.”

Yesterday, however, the Boston Globe poured some cold water on the Olin College torch with “Losses soar at acclaimed Olin College”. It seems that the traditional way of teaching (i.e., by giving “live videos” rather than actually teaching) is more profitable than working shoulder-to-shoulder with students. (See also: the response from Olin.)

I’m saddened by this, but based on my one business interaction with the Olin College administrators, I can’t say that I am completely surprised. Back in 1999 I ran an open-source software company that had a contract with the MIT Sloan School. We were delivering to Sloan a system for coordinating on-campus learning (see this document regarding an early version). Per the terms of the contract, the software developed for MIT would be rolled back into our open-source toolkit and, in fact, the system eventually grew into the .LRN system that currently supports hundreds of thousands of students worldwide.

As soon as I heard about Olin I contacted the president of the new school: “I’m a huge fan of project-based education. That’s how I try to do everything at MIT. We have a contract with MIT Sloan and they are paying for most of the learning management stuff. We want the software to work well for other colleges as well, so we’re willing to offer you a 100 percent free IT system to run your school. I will dedicate two MIT graduate programmers to build whatever extra features that you need beyond Sloan’s requirements. We’ll run it on our servers so that you don’t have to buy anything or hire sysadmins and dbadmins. Or you can run it on your servers and we have a good relationship with Oracle so we can probably get you a free license. Our existing customers are Siemens, Oracle, Hewlett-Packard, and the World Bank. We’ve delivered all of our projects to them in much less time than there is between now and when your first class of students shows up.”

How did this guy respond to having nearly his entire server-side IT budget eliminated? He bounced the offer over to his Chief Technology Officer who said “Thanks, but no thanks. We’re planning to spend millions of dollars on servers, software, and services from Microsoft.”

Presumably Microsoft did a great job for Olin, but I was surprised that what the (ridiculously rich) MIT Sloan school was gladly paying for these guys didn’t want to take for free.

To end on a hopeful note, the new Cornell Tech school in Manhattan uses a project-based approach to learning, though for graduate students only.

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Thomas Piketty, in Capital in the Twenty-First Century, offers a lot of ideas for new taxes, and suggests that coordination will be needed among EU nations to keep people from moving assets or themselves around to avoid those taxes. However, Piketty does not directly address the challenge presented by the existence of Switzerland.

Switzerland is a pleasant place to live (#3 in a world happiness ranking) and is a good central location for a multi-national company. According to heritage.org, the government spends about 34 percent of GDP. France, on the other hand, has a government that spends “more than half of the domestic economy” (source) while the U.S. is in between at “slightly over 40 percent of GDP” (source). Switzerland has a minimal debt-to-gdp ratio compared to France and the U.S. (article). Switzerland can thus afford to operate indefinitely with its existing tax rates. Nowhere in Capital in the Twenty-First Century does Piketty ask or answer the question “Why wouldn’t companies and people faced with these new taxes just move to Switzerland?”

Piketty makes the case that top executives at big companies are overpaid:

we find that the size of the decrease in the top marginal income tax rate between 1980 and the present is closely related to the size of the increase in the top centile’s share of national income over the same period. Concretely, the two phenomena are perfectly correlated: the countries with the largest decreases in their top tax rates are also the countries where the top earners’ share of national income has increased the most (especially when it comes to the remuneration of executives of large firms). Conversely, the countries that did not reduce their top tax rates very much saw much more moderate increases in the top earners’ share of national income.

It is always difficult for an executive to convince other parties involved in the firm (direct subordinates, workers lower down in the hierarchy, stockholders, and members of the compensation committee) that a large pay raise—say of a million dollars—is truly justified. In the 1950s and 1960s, executives in British and US firms had little reason to fight for such raises, and other interested parties were less inclined to accept them, because 80–90 percent of the increase would in any case go directly to the government. After 1980, the game was utterly transformed, however, and the evidence suggests that executives went to considerable lengths to persuade other interested parties to grant them substantial raises. Because it is objectively difficult to measure individual contributions to a firm’s output, top managers found it relatively easy to persuade boards and stockholders that they were worth the money, especially since the members of compensation committees were often chosen in a rather incestuous manner.

Furthermore, this “bargaining power” explanation is consistent with the fact that there is no statistically significant relationship between the decrease in top marginal tax rates and the rate of productivity growth in the developed countries since 1980. Concretely, the crucial fact is that the rate of per capita GDP growth has been almost exactly the same in all the rich countries since 1980.

In contrast to what many people in Britain and the United States believe, the true figures on growth (as best one can judge from official national accounts data) show that Britain and the United States have not grown any more rapidly since 1980 than Germany, France, Japan, Denmark, or Sweden.39 In other words, the reduction of top marginal income tax rates and the rise of top incomes do not seem to have stimulated productivity (contrary to the predictions of supply-side theory) or at any rate did not stimulate productivity enough to be statistically detectable at the macro level.

Considerable confusion exists around these issues because comparisons are often made over periods of just a few years (a procedure that can be used to justify virtually any conclusion).41 Or one forgets to correct for population growth (which is the primary reason for the structural difference in GDP growth between the United States and Europe). Sometimes the level of per capita output (which has always been about 20 percent higher in the United States, in 1970–1980 as well as 2000–2010) is confused with the growth rate (which has been about the same on both continents over the past three decades).

Our findings suggest that skyrocketing executive pay is fairly well explained by the bargaining model (lower marginal tax rates encourage executives to negotiate harder for higher pay) and does not have much to do with a hypothetical increase in managerial productivity.46 We again found that the elasticity of executive pay is greater with respect to “luck” (that is, variations in earnings that cannot have been due to executive talent, because, for instance, other firms in the same sector did equally well) than with respect to “talent” (variations not explained by sector variables).

Similarly, the idea that skyrocketing executive pay is due to lack of competition, and that more competitive markets and better corporate governance and control would put an end to it, seems unrealistic.

Our findings suggest that only dissuasive taxation of the sort applied in the United States and Britain before 1980 can do the job.

These findings have important implications for the desirable degree of fiscal progressivity. Indeed, they indicate that levying confiscatory rates on top incomes is not only possible but also the only way to stem the observed increase in very high salaries. According to our estimates, the optimal top tax rate in the developed countries is probably above 80 percent.

Do not be misled by the apparent precision of this estimate: no mathematical formula or econometric estimate can tell us exactly what tax rate ought to be applied to what level of income. Only collective deliberation and democratic experimentation can do that. What is certain, however, is that our estimates pertain to extremely high levels of income, those observed in the top 1 percent or 0.5 percent of the income hierarchy. The evidence suggests that a rate on the order of 80 percent on incomes over $500,000 or $1 million a year not only would not reduce the growth of the US economy but would in fact distribute the fruits of growth more widely while imposing reasonable limits on economically useless (or even harmful) behavior.

Obviously it would be easier to apply such a policy in a country the size of the United States than in a small European country where close fiscal coordination with neighboring countries is lacking.

here I will simply note that the United States is big enough to apply this type of fiscal policy effectively. The idea that all US executives would immediately flee to Canada and Mexico and no one with the competence or motivation to run the economy would remain is not only contradicted by historical experience and by all the firm-level data at our disposal; it is also devoid of common sense. A rate of 80 percent applied to incomes above $500,000 or $1 million a year would not bring the government much in the way of revenue, because it would quickly fulfill its objective: to drastically reduce remuneration at this level but without reducing the productivity of the US economy, so that pay would rise at lower levels. In order for the government to obtain the revenues it sorely needs to develop the meager US social state and invest more in health and education (while reducing the federal deficit), taxes would also have to be raised on incomes lower in the distribution (for example, by imposing rates of 50 or 60 percent on incomes above $200,000). Such a social and fiscal policy is well within the reach of the United States.

In other words, the top executives of a multi-national company currently headquartered in New York and getting paid (together) $100 million would just stay in New York and collect their $10 million after-tax salary (80 percent federal tax plus 10 percent for state and local). It would not occur to them that, since only 30 percent of their revenues came from the U.S., they might as well re-headquarter the company in Geneva and live there on about $60 million after taxes, flying back to New York, at shareholder expense, on the company Airbus A330 (executive configuration) whenever the mood struck. Plenty of Americans move in order to take better-paying jobs, even to places as culturally challenging as Saudi Arabia. Pregnant unmarried Americans will move 3000 miles so that their babies will be born in a jurisdiction where child support profits are higher (e.g., from New York to California, so that child support revenues in excess of $100,000 per year can be harvested). Piketty does not explain why business executives, whom he characterizes as manipulating their boards to enrich themselves at shareholder expense (a point that I have made as well!), would not be willing to move for a 6X after-tax pay raise.

In addition to a tax rate of at least 80 percent on higher incomes, Piketty proposes a “global tax on capital,” which he admits is unlikely to happen.

A global tax on capital is a utopian idea. It is hard to imagine the nations of the world agreeing on any such thing anytime soon. To achieve this goal, they would have to establish a tax schedule applicable to all wealth around the world and then decide how to apportion the revenues.

a global tax on capital would require a very high and no doubt unrealistic level of international cooperation. But countries wishing to move in this direction could very well do so incrementally, starting at the regional level (in Europe, for instance). Unless something like this happens, a defensive reaction of a nationalist stripe would very likely occur. For example, one might see a return to various forms of protectionism coupled with imposition of capital controls.

Protectionism and capital controls are actually unsatisfactory substitutes for the ideal form of regulation, which is a global tax on capital—a solution that has the merit of preserving economic openness while effectively regulating the global economy and justly distributing the benefits among and within nations. Many people will reject the global tax on capital as a dangerous illusion, just as the income tax was rejected in its time, a little more than a century ago. When looked at closely, however, this solution turns out to be far less dangerous than the alternatives.

To my mind, the objective ought to be a progressive annual tax on individual wealth—that is, on the net value of assets each person controls. For the wealthiest people on the planet, the tax would thus be based on individual net worth—the kinds of numbers published by Forbes and other magazines.

For the rest of us, taxable wealth would be determined by the market value of all financial assets (including bank deposits, stocks, bonds, partnerships, and other forms of participation in listed and unlisted firms) and nonfinancial assets (especially real estate), net of debt. So much for the basis of the tax. At what rate would it be levied? One might imagine a rate of 0 percent for net assets below 1 million euros, 1 percent between 1 and 5 million, and 2 percent above 5 million. Or one might prefer a much more steeply progressive tax on the largest fortunes (for example, a rate of 5 or 10 percent on assets above 1 billion euros). There might also be advantages to having a minimal rate on modest-to-average wealth (for example, 0.1 percent below 200,000 euros and 0.5 percent between 200,000 and 1 million).

The primary purpose of the capital tax is not to finance the social state but to regulate capitalism. The goal is first to stop the indefinite increase of inequality of wealth, and second to impose effective regulation on the financial and banking system in order to avoid crises. To achieve these two ends, the capital tax must first promote democratic and financial transparency:

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In order to prove that no event is safe from being ruined by old uncool people, I joined some young folks with whom I work at the Boston Calling Music Festival on Sunday.

How was it? The acoustics are pretty bad in the concrete canyon so it was hard to understand what all of the white male indie rockers were complaining about. Wikipedia says that most songs are about girlfriends who wander off after lovers’ quarrels, though most of the guys looked old and rich enough that being tapped for $millions in child support profits seemed like the more likely end to a relationship (see Liza Ghorbani and Liam Gallagher). The field seems ripe for an affirmative action campaign.

The consensus favorites from the Sunday line-up were Bastille (all of the fans who’d crowded towards the front of the stage during their performance were young women), The Box Tiger, and Tigerman Woah! Modest Mouse closed the festival weekend with a well-received set.

VIP tickets provided shelter from the sun but, being pretty far away from the stage meant that the music was balanced too far toward the bass. Hard Rock Cafe did the catering for the VIP crowd, and occasionally restocked a meager supply of pretzels, chips, celery and carrot sticks, and turkey/ham/chicken sandwiches on white bread (can they truly be this bad at making and serving food yet still operate a restaurant chain?). Water was available for $1 per bottle, but they ran out towards the end of the concert.

A few photos: on Google+

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Matt Guthmiller is planning to fly around the world in a 1991 Bonanza (Boston Globe; Guthmiller’s site), departing May 27. He’ll be around 19 years and seven months old when done, thus becoming the youngest person ever to fly solo around the world. It turns out that Guthmiller is a pilot/renter at East Coast Aero Club (where I am a helicopter/Cirrus instructor) and has flown about 80 hours with us.

Reading about this while halfway through Thomas Piketty’s Capital in the Twenty-First Centuryhas me wondering why a rich kid hasn’t crushed this record by more than two years. Here’s how it would work…

• age 14: build up about 300 hours flying with an instructor in Mom and Dad’s Cirrus SR22
• age 15: build up an additional 300 hours flying with an instructor in Mom and Dad’s single-engine turboprop, such as a TBM 900
• age 16: build up an additional 300 hours flying with an instructor in Mom and Dad’s Embraer Phenom 300 (single-pilot certified business jet); do some solo flying in the turboprop
• two weeks prior to 17th birthday: camp out at CAE in the Phenom 300 sim (at DFW Airport); call up Jeppesen and ask them to make all of the arrangements for a round-the-world trip (New Yorker says that they handle exotic destinations and projects with ease)
• 17th birthday: take Private airplane single-engine land checkride in the turboprop; take multi-engine land checkride and Phenom 300 type rating checkride in the Phenom 300 sim. Now the teenager has an FAA Private/multi/jet type certificate and can fly an N-registered airplane anywhere in the world.
• 17th birthday+1: depart on round-the-w0rld trip in Mom and Dad’s Phenom 300 (still air ferry range is about 2200 nautical miles, which means it could do all of the legs in Guthmiller’s planned trip given a west-to-east tailwind or, alternatively, cross the Pacific Ocean between Russian and Alaska).
• 17th birthday+5: arrive back at DFW reasonably well rested after about 65 hours of sitting in air-conditioned pressurized comfort watching the Garmin autopilot hold altitude and course

What’s wrong with this plan? We have a 900-hour pilot with 300 hours in type doing about 15 takeoffs and landings in a plane that practically flies itself and, more importantly, has an onboard restroom. If he or she gets lonely on the 4- or 5-hour legs and needs to keep in touch with Facebook friends, the Phenom 300 has built-in global Aircell Internet service. He or she can make calls to the Jeppesen dispatchers on the hard-wired Iridium phone and/or call Mom and Dad.

[I spoke with Matt Guthmiller by phone. He says that the organization keeping track of the “youngest circumnavigator” is Guinness Book and they require only that the distance be over 20,000 nautical miles, crossing every meridian. So the above plan with the Phenom 300 would qualify, in Guthmiller’s opinion, and the plane could be taken through Russia and Alaska so that the entire trip would be very comfortably within the plane’s normal range. The reason that Guthmiller is not going through Alaska is that 100LL gasoline is not available in Russia. Barrels would need to be shipped in ahead of time at a cost of about $50 per gallon.]

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Thomas Piketty, in Capital in the Twenty-First Century, is apparently an Apple fan-boy:

Note, too, that Steve Jobs, who even more than Bill Gates is the epitome of the admired and talented entrepreneur who fully deserves his fortune, was worth only about $8 billion in 2011, at the height of his glory and the peak of Apple’s stock price. That is just one-sixth as wealthy as Microsoft’s founder (even though many observers judge Gates to have been less innovative than Jobs)…

[As long as Piketty is deciding who deserves to be rich, why did he not set aside any $billions for the shareholders of Xerox who financed the development of the modern personal computer at PARC? Or for the researchers who programmed the Alto?]

This is part of a chapter where Piketty says that he has determined that extremely rich people earn a better return on investment than average schmoes (in the case of Steve Jobs, of course, he might be right due to Jobs’s ability to grant himself backdated stock options (nytimes)). Piketty did this by looking at the Forbes 400 and similar journalist-produced lists of rich people around the world.

it is perfectly possible that wealthier people obtain higher average returns than less wealthy people. There are several reasons why this might be the case. The most obvious one is that a person with 10 million euros rather than 100,000, or 1 billion euros rather than 10 million, has greater means to employ wealth management consultants and financial advisors. If such intermediaries make it possible to identify better investments, on average, there may be “economies of scale” in portfolio management that give rise to higher average returns on larger portfolios. A second reason is that it is easier for an investor to take risks, and to be patient, if she has substantial reserves than if she owns next to nothing. For both of these reasons—and all signs are that the first is more important in practice than the second—it is quite plausible to think that if the average return on capital is 4 percent, wealthier people might get as much as 6 or 7 percent, whereas less wealthy individuals might have to make do with as little as 2 or 3 percent.

This is a surprising hypothesis since generally the larger the fund the closer the results are to indices. Also, the main investment vehicle that is available to rich people but not to the rabble is the hedge fund. Yet hedge funds, on average, have underperformed the S&P 500 in recent years (see this Bloomberg article, which notes that “Hedge funds last beat U.S. stocks in 2008”) and, except for the high fees, may not differ from the S&P 500 in the long run (see “The 20-Year Performance Of Hedge Funds And The S&P 500 Are Almost Identical”).

Piketty cites one or two examples of tracking individuals, e.g.,

Take a particularly clear example at the very top of the global wealth hierarchy. Between 1990 and 2010, the fortune of Bill Gates—the founder of Microsoft, the world leader in operating systems, and the very incarnation of entrepreneurial wealth and number one in the Forbes rankings for more than ten years—increased from $4 billion to $50 billion.

This 13.5 percent annual growth (compared to 8.5 percent for the S&P 500 over the same period) is presented to support the proposition that rich people get high returns, with no discussion of whether or not it might have more to do with the worldwide growth of the PC, the explosion of the consumer Internet, and the substantial monopoly that Microsoft enjoyed until its corporate suicide with Windows 8.

Piketty does the rest of his analysis basically by looking at the enormously rich as a group in 1987 and then looking at the enormously rich in 2010. Thanks to vibrant economic growth worldwide, today’s super rich are indeed ridiculously richer than the super rich of 1987. From this Piketty concludes that super rich people get great returns on investment. A potential problem with his analysis is that he has made no attempt to track the extent to which these are the same rich people/families in 2010 as in 1987. Thus he has succumbed to sample bias (classic example of sample bias: interviewing people in baggage claim and asking “what percent full was your flight?” will result in an overestimate of load factor because there are more people on full planes than on half-full planes).

The sample bias in the case of the Forbes 400 is stated right at the top of the article: “these are the richest bastards in the world.” Anyone who had a big pile of cash in 1987 and invested it in underperforming assets will, by definition, not be on the Forbes 400 list in 2010. And someone who made big leveraged bets that went well (see John Paulson) is a likely candidate for the list.

For completeness, here is the rest of Piketty’s analysis:

Furthermore, today’s global growth rate includes a large demographic component, and wealthy people from emerging economies are rapidly joining the ranks of the wealthiest people in the world. This gives the impression that the ranks of the wealthiest are changing rapidly, while leading many people in the wealthy countries to feel an oppressive and growing sense that they are falling behind. The resulting anxiety sometimes outweighs all other concerns.

[Note the French academic focus on the anxiety being felt by rich people in rich countries. Did he actually interview rich people in Europe and North America to come to the conclusion that they worry 24/7 over whether a family in India has a bigger private jet or nicer house?]

Yet in the long run, if and when the poor countries have caught up with the rich ones and global growth slows, the inequality of returns on capital should be of far greater concern. In the long run, unequal wealth within nations is surely more worrisome than unequal wealth between nations.

[Why the focus on national borders? Because I do not have $70 billion in my Bank of America account, I feel like a pauper compared to Carlos Slim. Would I feel even worse if I moved to Guanajuato and had less than $70 billion in a Banamex account?]

The oldest and most systematic ranking of large fortunes is the global list of billionaires that Forbes has published since 1987. According to Forbes, the planet was home to just over 140 billionaires in 1987 but counts more than 1,400 today (2013), an increase by a factor of 10 (see Figure 12.1). In view of inflation and global economic growth since 1987, however, these spectacular numbers, repeated every year by media around the world, are difficult to interpret. If we look at the numbers in relation to the global population and total private wealth, we obtain the following results, which make somewhat more sense. The planet boasted barely 5 billionaires per 100 million adults in 1987 and 30 in 2013. Billionaires owned just 0.4 percent of global private wealth in 1987 but more than 1.5 percent in 2013, which is above the previous record attained in 2008, on the eve of the global financial crisis and the bankruptcy of Lehman Brothers (see Figure 12.2). This is an obscure way of presenting the data, however: there is nothing really surprising about the fact that a group containing 6 times as many people as a proportion of the population should own 4 times as great a proportion of the world’s wealth.

The only way to make sense of these wealth rankings is to examine the evolution of the amount of wealth owned by a fixed percentage of the world’s population, say the richest twenty-millionth of the adult population of the planet: roughly 150 people out of 3 billion adults in the late 1980s and 225 people out of 4.5 billion in the early 2010s. We then find that the average wealth of this group has increased from just over $1.5 billion in 1987 to nearly $15 billion in 2013, for an average growth rate of 6.4 percent above inflation.2 If we now consider the one-hundred-millionth wealthiest part of the world’s population, or about 30 people out of 3 billion in the late 1980s and 45 out of 4.5 billion in the early 2010s, we find that their average wealth increased from just over $3 billion to almost $35 billion, for an even higher growth rate of 6.8 percent above inflation. For the sake of comparison, average global wealth per capita increased by 2.1 percent a year, and average global income by 1.4 percent a year, …

To sum up: since the 1980s, global wealth has increased on average a little faster than income (this is the upward trend in the capital/income ratio examined in Part Two), and the largest fortunes grew much more rapidly than average wealth. This is the new fact that the Forbes rankings help us bring to light, assuming that they are reliable. Note that the precise conclusions depend quite heavily on the years chosen for consideration. For example, if we look at the period 1990–2010 instead of 1987–2013, the real rate of growth of the largest fortunes drops to 4 percent a year instead of 6 or 7.4 This is because 1990 marked a peak in global stock and real estate prices, while 2010 was a fairly low point for both (see Figure 12.2). Nevertheless, no matter what years we choose, the structural rate of growth of the largest fortunes seems always to be greater than the average growth of the average fortune (roughly at least twice as great). If we look at the evolution of the shares of the various millionths of large fortunes in global wealth, we find increases by more than a factor of 3 in less than thirty years (see Figure 12.3). To be sure, the amounts remain relatively small when expressed as a proportion of global wealth, but the rate of divergence is nevertheless spectacular. If such an evolution were to continue indefinitely, the share of these extremely tiny groups could reach quite substantial levels by the end of the twenty-first century.

For example, if the top thousandth enjoy a 6 percent rate of return on their wealth, while average global wealth grows at only 2 percent a year, then after thirty years the top thousandth’s share of global capital will have more than tripled. The top thousandth would then own 60 percent of global wealth, which is hard to imagine in the framework of existing political institutions unless there is a particularly effective system of repression or an extremely powerful apparatus of persuasion, or perhaps both. Even if the top thousandth’s capital returned only 4 percent a year, their share would still practically double in thirty years to nearly 40 percent. Once again, the force for divergence at the top of the wealth hierarchy would win out over the global forces of catch-up and convergence, so that the shares of the top decile and centile would increase significantly, with a large upward redistribution from the middle and upper-middle classes to the very rich. Such an impoverishment of the middle class would very likely trigger a violent political reaction.

As we will see, only a progressive tax on capital can effectively impede such a dynamic.

Piketty’s analysis has, I think, the same logical and mathematical merit as the following process:

1. look at People magazine’s World’s Most Beautiful List for 2013 and compute that the average age is 35
2. look back to find that Michelle Pfeiffer was top of the list in 1990 at age 32
3. conclude that therefore Michelle Pfeiffer and other 1990 winners are aging at only 3/23rds or 13% of the rate as the rest of us (comparatively ugly) people

[This process has the advantage that the researcher gets paid a comfortable university salary to spend time looking at pictures of Michelle Pfeiffer. Combining Piketty’s love

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