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A couple of weeks ago, I wrote about a talent management consultant helping companies recruit and retain employees, which is apparently a challenging problem. Thomas Piketty, in Capital in the Twenty-First Century, offers a different perspective. According to Piketty, employers can pay whatever they choose:

What is in fact the justification for minimum wages and rigid wage schedules? First, it is not always easy to measure the marginal productivity of a particular worker. In the public sector, this is obvious [why? because government workers don’t exhibit any productivity?], but it is also clear in the private sector: in an organization employing dozens or even thousands of workers, it is no simple task to judge each individual worker’s contribution to overall output. To be sure, one can estimate marginal productivity, at least for jobs that can be replicated, that is, performed in the same way by any number of employees. For an assembly-line worker or McDonald’s server, management can calculate how much additional revenue an additional worker or server would generate. Such an estimate would be approximate, however, yielding a range of productivities rather than an absolute number. In view of this uncertainty, how should the wage be set? There are many reasons to think that granting management absolute power to set the wage of each employee on a monthly or (why not?) daily basis would not only introduce an element of arbitrariness and injustice but would also be inefficient for the firm.

In particular, it may be efficient for the firm to ensure that wages remain relatively stable and do not vary constantly with fluctuations in sales. The owners and managers of the firm usually earn much more and are significantly wealthier than their workers and can therefore more easily absorb short-term shocks to their income.

This justification of setting wages in advance obviously has its limits. The other classic argument in favor of minimum wages and fixed wage schedules is the problem of “specific investments.” Concretely, the particular functions and tasks that a firm needs to be performed often require workers to make specific investments in the firm, in the sense that these investments are of no (or limited) value to other firms: for instance, workers might need to learn specific work methods, organizational methods, or skills linked to the firm’s production process. If wages can be set unilaterally and changed at any moment by the firm, so that workers do not know in advance how much they will be paid, then it is highly likely that they will not invest as much in the firm as they should.

[emphasis added]

Employers apparently are not constrained by the possibility of their workers choosing to work for someone else, choosing to stay home with family and/or collecting government-provided Welfare benefits, etc. Nor do employers have to pay about the same or a little more than other employers in a region if they want to attract workers.

It occurred to me that I actually do know employers who live in this world: elite universities. Harvard University can get bright hard-working well-educated people to come work as researchers and teachers at whatever wages it offers, even $0. Presumably that is true of the institutions where Piketty has studied and taught. Thus the employer’s world that he paints is the world of Academia that he knows. People get paid so much in prestige and the social fun of interacting with other smart people that they are happy to work basically for free.

Because all employers, as least as far as Piketty can tell, are able to get people to come work for whatever wage they choose, central planning is critical, with wise government officials setting wages:

In the United States, a federal minimum wage was introduced in 1933, nearly twenty years earlier than in France.5 As in France, changes in the minimum wage played an important role in the evolution of wage inequalities in the United States. It is striking to learn that in terms of purchasing power, the minimum wage reached its maximum level nearly half a century ago, in 1969, at $1.60 an hour (or $10.10 in 2013 dollars, taking account of inflation between 1968 and 2013), at a time when the unemployment rate was below 4 percent. From 1980 to 1990, under the presidents Ronald Reagan and George H. W. Bush, the federal minimum wage remained stuck at $3.35, which led to a significant decrease in purchasing power when inflation is factored in. It then rose to $5.25 under Bill Clinton in the 1990s and was frozen at that level under George W. Bush before being increased several times by Barack Obama after 2008. At the beginning of 2013 it stood at $7.25 an hour, or barely 6 euros, which is a third below the French minimum wage, the opposite of the situation that obtained in the early 1980s (see Figure 9.1). President Obama, in his State of the Union address in February 2013, announced his intention to raise the minimum wage to about $9 an hour…

Britain introduced a minimum wage in 1999, at a level between the United States and France: in 2013 it was £6.19 (or about 8.05 euros). Germany and Sweden have chosen to do without minimum wages at the national level, leaving it to trade unions to negotiate not only minimums but also complete wage schedules with employers in each branch of industry. In practice, the minimum wage in both countries was about 10 euros an hour in 2013 in many branches (and therefore higher than in countries with a national minimum wage). But minimum pay can be markedly lower in sectors that are relatively unregulated or underunionized. In order to set a common floor, Germany is contemplating the introduction of a minimum wage in 2013

it seems likely that the increase in the minimum wage of nearly 25 percent (from $7.25 to $9 an hour) currently envisaged by the Obama administration will have little or no effect on the number of jobs. Obviously, raising the minimum wage cannot continue indefinitely: as the minimum wage increases, the negative effects on the level of employment eventually win out. If the minimum wage were doubled or tripled, it would be surprising if the negative impact were not dominant.

the best way to increase wages and reduce wage inequalities in the long run is to invest in education and skills. Over the long run, minimum wages and wage schedules cannot multiply wages by factors of five or ten: to achieve that level of progress, education and technology are the decisive forces.

In other words, Piketty has no idea at what hourly number the minimum wage should be set, or why Germany and Sweden have lower-than-American-wage-inequality without any minimum wage at all, but he assumes that if the government is setting wages then the number is going to be optimal. How well have the central planners in France managed the minimum wage?

The substantial increase in French inequality between 1945 and 1967 was the result of sharp increases in both capital’s share of national income and wage inequality in a context of rapid economic growth. The political climate undoubtedly played a role: the country was entirely focused on reconstruction, and decreasing inequality was not a priority, especially since it was common knowledge that inequality had decreased enormously during the war. In the 1950s and 1960s, managers, engineers, and other skilled personnel saw their pay increase more rapidly than the pay of workers at the bottom and middle of the wage hierarchy, and at first no one seemed to care. A national minimum wage was created in 1950 but was seldom increased thereafter and fell farther and farther behind the average wage. Things changed suddenly in 1968. The events of May 1968 had roots in student grievances and cultural and social issues that had little to do with the question of wages (although many people had tired of the inegalitarian productivist growth model of the 1950s and 1960s, and this no doubt played a role in the crisis). But the most immediate political result of the movement was its effect on wages: to end the crisis, Charles de Gaulle’s government signed the Grenelle Accords, which provided, among other things, for a 20 percent increase in the minimum wage. In 1970, the minimum wage was officially (if partially) indexed to the mean wage, and governments from 1968 to 1983 felt obliged to “boost” the minimum significantly almost every year in a seething social and political climate. The purchasing power of the minimum wage accordingly increased by more than 130 percent between 1968 and 1983, while the mean wage increased by only about 50 percent, resulting in a very significant compression of wage inequalities. The break with the previous period was sharp and substantial: the purchasing power of the minimum wage had increased barely 25 percent between 1950 and 1968, while the average wage had more than doubled.20 Driven by the sharp rise of low wages, the total wage bill rose markedly more rapidly than output between 1968 and 1983, and this explains the sharp decrease in capital’s share of national income that I pointed out in Part Two, as well as the very substantial compression of income inequality. These movements reversed in 1982–1983. The new Socialist government elected in May 1981 surely would have preferred to continue the earlier trend, but it was not a simple matter to arrange for the minimum wage to increase twice as fast as the average wage (especially when the average wage itself was increasing faster than output). In 1982–1983, therefore, the government decided to “turn toward austerity”: wages were frozen, and the policy of annual boosts to the minimum wage was definitively abandoned. The results were soon apparent: the share of profits in national income skyrocketed during the remainder of the 1980s, while wage inequalities once again increased, and income inequalities even more so (see Figures 8.1 and 8.2). The break was as sharp as that of 1968, but in the other direction.

Piketty’s perspective on the supposedly absolute power of employers to set wages reminds me of conversations that I have had with American academics. They love their jobs, which to them are like daily cocktail parties stuffed with interesting people. This leads them to disagree with anyone who suggests that higher tax rates will result in people working fewer hours (despite a huge quantity of research by fellow academics showing precisely this correlation, e.g., this NBER paper, a Forbes summary of a 2006 paper). They’d go to work for free, so even a 100% tax rate wouldn’t discourage them!

An academic was fuming about income inequality on Facebook, passionately supporting Barack Obama’s proposals for new laws, taxes, and regulations. After reflecting on his wife’s millions of dollars of earnings from writing fiction, I emailed him privately:

This seems like a tricky idea when you look at people in different fields, e.g., what kind of income disparity should exist between myself (computer programmer/helicopter instructor) and Justin Bieber (singer?)? But it should be easier when comparing people who do the same thing, e.g., all programmers.

But then I thought about your peculiar situation. You are married and therefore your household income includes that of your wife (cc’d). Your wife is a fiction writer. The median income of a fiction writer is $0 (since more than half can’t get anything). It is hard to think of an occupation where there is a greater and crueler disparity of income as well as non-economic benefits (fame, readership, satisfaction). How far does your advocacy of greater equality go? Would you support a higher tax on Judy’s [name changed] income so that fiction authors currently earning $0 per year were able to receive something for their work? Will you say that Obama needs to take action to stop Judy from receiving a $1 million advance for a book when there are novelists who’ve been working full-time for 30 years who cannot get published at all? Or

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Greta and I visited Mirak Hyundai today and test-drove the redesigned 2015 Hyundai Genesis. Our salesman was a very pleasant and low-key John Waters, nowhere near as old or strange as his namesake.

The Genesis has cruise control with “lane keeping” that tries to keep the car a constant distance from the car in front and within the white lines. Can you truly live the American dream of smoking your medical marijuana, sipping on your 40 oz. malt liquor, and cruising hands-free at 65 mph on the Interstate? Not unless you want to be pulled over for driving erratically and/or operating a bang-bang control system. The car does not attempt to read the road and drive in the middle of the lane. It waits until the car is nearly out of the lane and then puts in a reasonably sharp correction, resulting in a disturbing weaving.

The car demonstrates a desperate need for a modular IT system in which the dashboard has a dock for an iPad or Android tablet that can be upgraded periodically. The hardware in the car is already too slow for the software, which takes 3-4 seconds to do voice recognition for a simple command such as “radio”. The hardware gets so far behind the software that it sometimes misses control inputs, e.g., moving the tuning knob to change the radio frequency. One could live with this defect if one knew that it would be possible to get a more powerful tablet six months from now and have everything run twice as fast. However, I don’t think that there is any upgrade path and therefore a person who takes delivery of this car today will have, five years from now, an expensive collection of computer software and hardware that was obsolete seven years earlier.

How does it look and drive? The grill, while big enough to cool a mining truck’s diesel engine, doesn’t look quite as huge/hideous in real life as in the photos. The car drives very nicely and the suspension is definitely more compliant than the one in my seven-year-old Infiniti M35x. The factory audio system sounds great. The handling and performance is more than adequate for any public road.

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I am still working my way through Thomas Piketty’s Capital in the Twenty-First Century. I’m discovering that the page count can be explained to some extent by repetition and redundancy…

I have not reached the end of the book, but most of Piketty’s advice seems to be targeted at politicians, e.g., implement additional taxes on wealth (i.e., beyond existing wealth taxes such as real and personal property taxes). Aside from general edification is there any potential benefit to average readers from slogging through 696 pages?

A critical assumption behind the “crisis of inequality” that Piketty expects to develop is that world economic growth will be sluggish for the next 100 years, partly due to reduced population growth and partly due to the fact that we’re not bouncing back from any wars such as World War II that destroyed a lot of factories:

The median scenario I will present here is based on a long-term per capita output growth rate of 1.2 percent in the wealthy countries, which is relatively optimistic compared with Robert Gordon’s predictions (which I think are a little too dark). This level of growth cannot be achieved, however, unless new sources of energy are developed to replace hydrocarbons, which are rapidly being depleted.

[Piketty is not a believer in fracking, apparently.]

Suppose that growth slows to a crawl because world societies spend all of their money on social networking startups such as WhatsApp? How can an individual prosper in a depressed economy? Piketty writes about the Great Depression in France:

Within “the 9 percent,” midlevel civil servants and teachers fared particularly well. They had only recently been the beneficiaries of civil service raises granted in the period 1927–1931. (Recall that government workers, particularly those at the top of the pay scale, had suffered greatly during World War I and had been hit hard by the inflation of the early 1920s.) These midlevel employees were immune, too, from the risk of unemployment, so that the public sector’s wage bill remained constant in nominal terms until 1933 (and decreased only slightly in 1934–1935, when Prime Minister Pierre Laval sought to cut civil service pay). Meanwhile, private sector wages decreased by more than 50 percent between 1929 and 1935. The severe deflation France suffered in this period (prices fell by 25 percent between 1929 and 1935, as both trade and production collapsed) played a key role in the process: individuals lucky enough to hold on to their jobs and their nominal compensation—typically civil servants—enjoyed increased purchasing power in the midst of the Depression as falling prices raised their real wages. Furthermore, such capital income as “the 9 percent” enjoyed—typically in the form of rents, which were extremely rigid in nominal terms—also increased on account of the deflation, so that the real value of this income stream rose significantly, while the dividends paid to “the 1 percent” evaporated

In other words, this French reincarnation of Karl Marx who is so feared by the wealthy actually offers the same advice as the CATO Institute: work for the government.

Piketty assumes that an average person won’t be satisfied with being a government employee and Top 10% earner/wealther (my new word that will be needed if more people read Piketty!). It is not sufficient to be comfortable and to enjoy a better lifestyle than one’s parents. One must look enviously at the Top 0.1% (in the U.S., at the time Piketty wrote, this was apparently an income of more than $1.5 million per year). How to get closer to this elite group? Piketty quotes a Balzac character from Pere Goriot explaining why working for wages isn’t a viable strategy:

“Would Baron de Rastignac like to be a lawyer? Very well then! You will need to suffer ten years of misery, spend a thousand francs a month, acquire a library and an office, frequent society, kiss the hem of a clerk to get cases, and lick the courthouse floor with your tongue. If the profession led anywhere, I wouldn’t advise you against it. But can you name five lawyers in Paris who earn more than 50,000 francs a year at the age of fifty?” By contrast, the strategy for social success that Vautrin proposes to Rastignac is quite a bit more efficient. By marrying Mademoiselle Victorine, a shy young woman who lives in the boardinghouse and has eyes only for the handsome Eugène, he will immediately lay hands on a fortune of a million francs. This will enable him to draw at age twenty an annual income of 50,000 francs (5 percent of the capital) and thus immediately achieve ten times the level of comfort to which he could hope to aspire only years later on a royal prosecutor’s salary (and as much as the most prosperous Parisian lawyers of the day earned at age fifty after years of effort and intrigue).

What is most frightening about Vautrin’s lecture is that his brisk portrait of Restoration society contains such precise figures. As I will soon show, the structure of the income and wealth hierarchies in nineteenth-century France was such that the standard of living the wealthiest French people could attain greatly exceeded that to which one could aspire on the basis of income from labor alone. Under such conditions, why work? And why behave morally at all? Since social inequality was in itself immoral and unjustified, why not be thoroughly immoral and appropriate capital by whatever means are available? The detailed income figures Vautrin gives are unimportant (although quite realistic): the key fact is that in nineteenth-century France and, for that matter, into the early twentieth century, work and study alone were not enough to achieve the same level of comfort afforded by inherited wealth and the income derived from it. This was so obvious to everyone that Balzac needed no statistics to prove it, no detailed figures concerning the deciles and centiles of the income hierarchy. Conditions were similar, moreover, in eighteenth- and nineteenth-century Britain. For Jane Austen’s heroes, the question of work did not arise: all that mattered was the size of one’s fortune, whether acquired through inheritance or marriage.

Young people might be led astray by listening to advice from old people, who grew up in a unique time:

During the decades that followed World War II, inherited wealth lost much of its importance, and for the first time in history, perhaps, work and study became the surest routes to the top.

Should politicians fail to find the world’s wealth in its various offshore hideouts and tax it down to something that won’t inspire burning envy 24/7, Piketty essentially advocates that young people should hunt for rich partners to marry.

[Piketty is from a Civil Law jurisdiction like Denmark, and due to French child support maximums that correspond roughly to the actual cost of a child it is difficult to profit substantially from a one-night encounter that produces a child. An American reader would have to decide if it made more sense financially to try to have two or three out-of-wedlock children with two or three different high-income partners and thereby achieve a diversified portfolio of income streams (potentially $1 million/year or more for each child, entirely tax-free and therefore not exposed to the new much higher tax rates that Piketty proposes).]

Piketty points out that it is possible for a statistically insignificant number of workers to make real money:

The final and perhaps most important point in need of clarification is that the increase in very high incomes and very high salaries primarily reflects the advent of “supermanagers,” that is, top executives of large firms who have managed to obtain extremely high, historically unprecedented compensation packages for their labor. If we look only at the five highest paid executives in each company listed on the stock exchange (which are generally the only compensation packages that must be made public in annual corporate reports), we come to the paradoxical conclusion that there are not enough top corporate managers to explain the increase in very high US incomes, and it therefore becomes difficult to explain the evolutions we observe in incomes stated on federal income tax returns.41 But the fact is that in many large US firms, there are far more than five executives whose pay places them in the top 1 percent (above $352,000 in 2010) or even the top 0.1 percent (above $1.5 million).

Recent research, based on matching declared income on tax returns with corporate compensation records, allows me to state that the vast majority (60 to 70 percent, depending on what definitions one chooses) of the top 0.1 percent of the income hierarchy in 2000–2010 consists of top managers. By comparison, athletes, actors, and artists of all kinds make up less than 5 percent of this group.42 In this sense, the new US inequality has much more to do with the advent of “supermanagers” than with that of “superstars.”43 It is also interesting to note that the financial professions (including both managers of banks and other financial institutions and traders operating on the financial markets) are about twice as common in the very high income groups as in the economy overall (roughly 20 percent of top 0.1 percent, whereas finance accounts for less than 10 percent of GDP). Nevertheless, 80 percent of the top income groups are not in finance, and the increase in the proportion of high-earning Americans is explained primarily by the skyrocketing pay packages of top managers of large firms in the nonfinancial as well as financial sectors.

to the extent that certain job functions, especially in the upper management of large firms, become more difficult to replicate, the margin of error in estimating the productivity of any given job becomes larger. The explanatory power of the skills-technology logic then diminishes, and that of social norms increases. Only a small minority of employees are affected, a few percent at most and probably less than 1 percent, depending on the country and period.

It is also possible that the explosion of top incomes can be explained as a form of “meritocratic extremism,” by which I mean the apparent need of modern societies, and especially US society, to designate certain individuals as “winners” and to reward them all the more generously if they seem to have been selected on the basis of their intrinsic merits rather than birth or background.

In any case, the extremely generous rewards meted out to top managers can be a powerful force for divergence of the wealth distribution: if the best paid individuals set their own salaries, (at least to some extent), the result may be greater and greater inequality. It is very difficult to say in advance where such a process might end. Consider again the case of the CFO of a large firm with gross revenue of 10 billion euros a year. It is hard to imagine that the corporate compensation committee would suddenly decide that the CFO’s marginal productivity is 1 billion or even 100 million euros (if only because it would then be difficult to find enough money to pay the rest of the management team). By contrast, some people might think that a pay package of 1 million, 10 million, or even 50 million euros a year would be justified (uncertainty about individual marginal productivity being so large that no obvious limit is apparent). It is perfectly possible to imagine that the top centile’s share of total wages could reach 15–20 percent in the United States, or 25–30 percent, or even higher.

If executive pay were determined by marginal productivity, one would expect its variance to have little to do with external variances and to depend solely or primarily on nonexternal variances. In fact, we observe just the opposite: it is when sales and profits increase for external reasons that executive pay rises most rapidly.

In other words, try to be Bob Nardelli (check out Google Finance and click on the 10-year chart to see what a great value the Home Depot shareholders achieved

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Blue Cross sent us a 4-page hardcopy document in the U.S. mail last week.

This document is the result of a routine vaccination visit for our 5-month-old. Presumably part of the reason that this isn’t sent via email is concern about privacy, though “preventive medicine” and “other med services” aren’t very revealing.

If we could have paid cash for these services at a competitive rate they presumably would have cost no more than the $362 that Blue Cross actually paid. Is there any other industry that can afford to have these back-end tails of paperwork following a $362 purchase?

Related: this May 2010 posting about a $15 hardcopy bill following an $83 annual checkup.

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Thomas Piketty’s Capital in the Twenty-First Century addresses the apparent paradox of why U.S. GDP is so high yet Americans don’t seem to be living commensurately larger than Europeans:

the most recent available survey shows that while some European prices (for energy, housing, hotels, and restaurants) are indeed higher than comparable American prices, others are sharply lower (for health and education, for instance)

if a private health insurance system costs more than a public system but does not yield truly superior quality (as a comparison of the United States with Europe suggests), then GDP will be artificially overvalued in countries that rely mainly on private insurance. Note, too, that the convention in national accounting is not to count any remuneration for public capital such as hospital buildings and equipment or schools and universities. The consequence of this is that a country that privatized its health and education services would see its GDP rise artificially, even if the services produced and the wages paid to employees remained exactly the same.

Related: a June 2013 posting on Denmark’s bicycle infrastructure (GDP discussion at the bottom). The U.S. also spends a huge amount on litigation compared to most European countries (see this posting on divorce in Denmark, which is pretty typical for Civil Law jurisdictions). Lawyers arguing over who gets to own what are a big component of our GDP but the arguments don’t make Americans as a group better off.

How about GDP growth? Americans are champions and the Japanese are laggards, right?

Piketty reminds us to look at population growth as well:

it is important to decompose the growth of output into two terms: population growth and per capita output growth. In other words, growth always includes a purely demographic component and a purely economic component, and only the latter allows for an improvement in the standard of living. In public debate this decomposition is too often forgotten, as many people seem to assume that population growth has ceased entirely, which is not yet the case—far from it, actually, although all signs indicate that we are headed slowly in that direction. In 2013–2014, for example, global economic growth will probably exceed 3 percent, thanks to very rapid progress in the emerging countries. But global population is still growing at an annual rate close to 1 percent, so that global output per capita is actually growing at a rate barely above 2 percent (as is global income per capita).

First, the takeoff in growth that began in the eighteenth century involved relatively modest annual growth rates. Second, the demographic and economic components of growth were roughly similar in magnitude. According to the best available estimates, global output grew at an average annual rate of 1.6 percent between 1700 and 2012, 0.8 percent of which reflects population growth, while another 0.8 percent came from growth in output per head.

Such growth rates may seem low compared to what one often hears in current debates, where annual growth rates below 1 percent are frequently dismissed as insignificant and it is commonly assumed that real growth doesn’t begin until one has achieved 3–4 percent a year or even more, as Europe did in the thirty years after World War II and as China is doing today. In fact, however, growth on the order of 1 percent a year in both population and per capita output, if continued over a very long period of time, as was the case after 1700, is extremely rapid, especially when compared with the virtually zero growth rate that we observe in the centuries prior to the Industrial Revolution.

Indeed, according to Maddison’s calculations, both demographic and economic growth rates between year 0 and 1700 were below 0.1 percent (more precisely, 0.06 percent for population growth and 0.02 percent for per capita output).

The most spectacular reversal no doubt involves Europe and America. In 1780, when the population of Western Europe was already greater than 100 million and that of North America barely 3 million, no one could have guessed the magnitude of the change that lay ahead. By 2010, the population of Western Europe was just above 410 million, while the North American population had increased to 350 million. According to UN projections, the catch-up process will be complete by 2050, at which time the Western European population will have grown to around 430 million, compared with 450 million for North America. What explains this reversal? Not just the flow of immigrants to the New World but also the markedly higher fertility rate there compared with old Europe. The gap persists to this day, even among groups that came originally from Europe, and the reasons for it remain largely a mystery to demographers. One thing is sure: the higher fertility rate in North America is not due to more generous family policies, since such policies are virtually nonexistent there.

Should the difference be interpreted as reflecting a greater North American faith in the future, a New World optimism, and a greater propensity to think of one’s own and one’s children’s futures in terms of a perpetually growing economy?

Related: a June 2004 posting about whether a large number of U.S. children born into poor families might actually be a sign of optimism; an August 2008 posting about Gregory Clark’s A Farewell to Alms.

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I was in Austin, Texas recently (part of being an expert witness in software patent cases is becoming familiar with Federal courthouses in Texas) and visited the Phil Crawshay Gallery where I was exposed to some interesting landscape work. Crawshay uses a Gigapan robotic camera head, a Canon Rebel, and then prints out the resulting 1 GB (stitched) image files with a Canon ink jet printer. He mounts the prints behind acrylic and they look fantastic, with a three-dimensional depth. Can this be done commercially? Crawshay suggested Bumblejax as one lab that can do it. (He also suggested bayphoto.com for making huge prints.)

Once on the acrylic, Crawshay sometimes puts the prints in a traditional frame, but I thought that they looked much better on the wall without a frame.

Have readers played around with this new (to me) photo display technology?

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If you’ve been wondering “What happened to Mark Zuckerberg’s big donation to the Newark schools?”, this week’s New Yorker magazine has the answer for you: “Schooled” by Dale Russakoff.

According to Russakoff, most of the money seems to have been spent on consultants:

The going rate for individual consultants in Newark was a thousand dollars a day. Vivian Cox Fraser, the president of the Urban League of Essex County, observed, “Everybody’s getting paid, but Raheem still can’t read.”

One goal was to attract young smart people to work as teachers, but it turned out that old not-necessarily-smart people were entitled to all of the money under union contracts that required teachers be paid according to seniority.

in return for union support, the legislature left seniority protections untouched….

Zuckerberg had hoped that promising new teachers would move quickly up the pay scale, but the district couldn’t afford that along with the salaries of veteran teachers, of whom five hundred and sixty earned more than ninety-two thousand dollars a year [i.e., more than $150,000 per year including pension commitments and other benefits]. A new teacher consistently rated effective would have to work nine years before making sixty thousand dollars.

Zuckerberg’s donation attracted another $100 million in matching funds, but it was nowhere near enough:

Improbably, a district with a billion dollars in revenue and two hundred million dollars in philanthropy was going broke. Anderson announced a fifty-seven-million-dollar budget gap in March, 2013, attributing it mostly to the charter exodus. She cut more than eighteen million dollars from school budgets and laid off more than two hundred attendance counsellors, clerical workers, and janitors, most of them Newark residents with few comparable job prospects. “We’re raising the poverty level in Newark in the name of school reform,” she lamented to a group of funders. “It’s a hard thing to wrestle with.”

Did having a charismatic political superstar as mayor help?

Meanwhile, [Cory Booker] was managing a busy speaking schedule, which frequently took him out of the city. Disclosure forms show $1,327,190 in revenue for ninety-six speeches given between 2008 and May, 2013. “There’s no such thing as a rock-star mayor,” the historian Clement Price, of Rutgers University, told me. “You can be a rock star or you can be a mayor. You can’t be both.”

More: read “Schooled”

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Thomas Piketty’s Capital in the Twenty-First Century contains a lot of historical data.

Piketty relies on the fact that there was tremendous stability in both prices and interest rates during the 18th and 19th centuries:

In the novels of Jane Austen and Honoré de Balzac, the fact that land (like government bonds) yields roughly 5 percent of the amount of capital invested (or, equivalently, that the value of capital corresponds to roughly twenty years of annual rent) is so taken for granted that it often goes unmentioned

the two measuring scales were used interchangeably, as if rent and capital were synonymous, or perfect equivalents in two different languages. Now, at the beginning of the twenty-first century, we find roughly the same return on real estate, 4–5 percent, sometimes a little less, especially where prices have risen rapidly without dragging rents upward at the same rate.

To back up a bit: the first crucial fact to bear in mind is that inflation is largely a twentieth-century phenomenon. Before that, up to World War I, inflation was zero or close to it. Prices sometimes rose or fell sharply for a period of several years or even decades, but these price movements generally balanced out in the end.

More precisely, if we look at average price increases over the periods 1700–1820 and 1820–1913, we find that inflation was insignificant in France, Britain, the United States, and Germany: at most 0.2–0.3 percent per year. We even find periods of slightly negative price movements: for example, Britain and the United States in the nineteenth century (−0.2 percent per year if we average the two cases between 1820 and 1913).

Piketty is therefore able to look at hard-coded numbers in novels for guidance as to what an average and comfortable standard of living would cost.

In Great Britain, the average income was on the order of 30 pounds a year in the early 1800s, when Jane Austen wrote her novels.30 The same average income could have been observed in 1720 or 1770. Hence these were very stable reference points, with which Austen had grown up. She knew that to live comfortably and elegantly, secure proper transportation and clothing, eat well, and find amusement and a necessary minimum of domestic servants, one needed—by her lights—at least twenty to thirty times that much. The characters in her novels consider themselves free from need only if they dispose of incomes of 500 to 1,000 pounds a year.

Balzac, like Austen, described a world in which it took twenty to thirty times that much to live decently

Let’s consider today’s numbers and see if things are more or less equal. The Census Bureau says that median household income is about $53,000 per year. What would it mean to live comfortably and elegantly today? A modern Hyundai is much more comfortable than a horse-drawn carriage. A JetBlue Airbus with extra room seats is certainly better than enduring a sea voyage by sail. Amusement in our major cities could cost $500 to $1000 per week for people who want to go to professional sporting events, live theater, etc. Domestic servants have mostly been replaced by contractors, e.g., the housecleaners who come once per week or the people who deliver food from restaurants for those who don’t want to cook. Could we say that a family with two medical doctors earning a total of $400,000 per year was “comfortable and elegant”? If so, that’s a pre-tax ratio of 8:1 and a post-tax ratio of perhaps 6:1? Thus income inequality today is less than it was in Austen/Balzac’s time.

[Separately, of course, Austen’s upper class characters did not work so they had a lot more time to spend money and maybe that’s why they needed 20-30X the average income.]

[The preface might make you wonder why we have inflation today if we didn’t have it for most of human history. Piketty explains:

This world collapsed for good with World War I. To pay for this war of extraordinary violence and intensity, to pay for soldiers and for the ever more costly and sophisticated weapons they used, governments went deeply into debt. As early as August 1914, the principal belligerents ended the convertibility of their currency into gold. After the war, all countries resorted to one degree or another to the printing press to deal with their enormous public debts.

Between 1913 and 1950, inflation in France exceeded 13 percent per year (so that prices rose by a factor of 100), and inflation in Germany was 17 percent per year (so that prices rose by a factor of more than 300). In Britain and the United States, which suffered less damage and less political destabilization from the two wars, the rate of inflation was significantly lower: barely 3 percent per year in the period 1913–1950. Yet this still means that prices were multiplied by three, following two centuries in which prices had barely moved at all.

In addition to the question of relative prices, I will show that inflation per se—that is, a generalized increase of all prices—can also play a fundamental role in the dynamics of the wealth distribution. Indeed, it was essentially inflation that allowed the wealthy countries to get rid of the public debt they owed at the end of World War II. Inflation also led to various redistributions among social groups over the course of the twentieth century, often in a chaotic, uncontrolled manner. Conversely, the wealth-based society that flourished in the eighteenth and nineteenth centuries was inextricably linked to the very stable monetary conditions that persisted over this very long period.

]

What do readers think? Does a family today still need 20-30X the median income of $53,000 per year in order to be “comfortable and elegant”?

 

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I’ve started to read Capital in the Twenty-First Century, by Thomas Piketty. My iPad already feels heavier…

There is too much in this book to cover in one blog entry so I am going to save my readers the trouble of reading this massive tome with multiple postings.

Piketty says that Europeans and Americans have differing views on state ownership of industry and a planned economy because they had different growth rates during the heyday of government involvement in the economy:

Continental Europe and especially France have entertained considerable nostalgia for what the French call the Trente Glorieuses, the thirty years from the late 1940s to the late 1970s during which economic growth was unusually rapid.

In fact, when viewed in historical perspective, the thirty postwar years were the exceptional period, quite simply because Europe had fallen far behind the United States over the period 1914–1945 but rapidly caught up during the Trente Glorieuses. Once this catch-up was complete, Europe and the United States both stood at the global technological frontier and began to grow at the same relatively slow pace, …

In North America, there is no nostalgia for the postwar period, quite simply because the Trente Glorieuses never existed there: per capita output grew at roughly the same rate of 1.5–2 percent per year throughout the period 1820-2012.

These very different collective experiences of growth in the twentieth century largely explain why public opinion in different countries varies so widely in regard to commercial and financial globalization and indeed to capitalism in general. In continental Europe and especially France, people quite naturally continue to look on the first three postwar decades—a period of strong state intervention in the economy—as a period blessed with rapid growth, and many regard the liberalization of the economy that began around 1980 as the cause of a slowdown.

Do these political beliefs make sense? Piketty adopts the conventional attitude of a French academic, i.e., “most people are idiots”:

neither the economic liberalization that began around 1980 nor the state interventionism that began in 1945 deserves such praise or blame. France, Germany, and Japan would very likely have caught up with Britain and the United States following their collapse of 1914–1945 regardless of what policies they had adopted (I say this with only slight exaggeration). The most one can say is that state intervention did no harm.

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I just finished The Great Texas Wind Rush: How George Bush, Ann Richards, and a Bunch of Tinkerers Helped the Oil and Gas State Win the Race to Wind Power. The book is interesting because it shows what has to happen for wind power to work at all, e.g., someone needs to spend billions of dollars on transmission lines from where it is windy and people will tolerate noisy ugly windmills to where electricity consumers are most likely to live.

The author has a “nothing can happen without the government” attitude, which is substantially justified by the challenges of implementing wind power, e.g., forcing property owners to accept transmission lines across their land. The ability of consumers to respond to price signals is zero, in the author’s mind:

Americans, the most energy-guzzling people on earth, had finally figured out how to cut back. They bought more-fuel-efficient cars, under the government’s exhortations, and drove more slowly. They learned to turn off unnecessary lights. Some began buying more-energy-saving refrigerators, thanks to national appliance-efficiency requirements that came into effect in the 1980s.

The author suggests that the federal government is almost as useless as an individual American:

“The Department of Energy has a multibillion-dollar budget, in excess of $10 billion,” Reagan said in a debate with Carter in late October 1980. “It hasn’t produced a quart of oil or a lump of coal or anything else in the line of energy.” It certainly hadn’t produced much by way of wind energy, either. One of the oddities of the wind business is that the modern turbines of today are not descendants of the enormous experimental turbines that heavyweights like General Electric and Boeing and Alcoa and Westinghouse produced in the late 1970s, using millions of federal dollars. Those had experienced major technical problems and flopped.

Boeing struggled with dirt getting into hydraulic fluid. Alcoa, the aluminum giant, pulled out of the wind business soon after its solitary 500-kilowatt test turbine, shaped like a kitchen beater and erected in California’s San Gorgonio Pass, slung a blade at one of the wires holding it in place just a few hours after being turned on. Making matters worse, this occurred just before a high-profile wind conference featuring California governor Jerry Brown was due to convene. “I have some good news and some bad news,” Paul Vogsburgh of Alcoa announced to those assembled. “The bad news is that our wind turbine destroyed itself. The good news is that we did not have to evacuate Los Angeles.”

“It’s kind of strange,” says Vaughn Nelson, the retired director of the Alternative Energy Institute in Canyon. “The tract of development that led to the large megawatt machines today came from what we’d call the ground up of the small machines getting bigger [with] economies of scale, rather than starting with great big machines funded by government.

State governments, on the other hand, especially Texas, have managed to make things happen. Offshore wind in Texas has a much better chance of succeeding than in other states: “In a convenient quirk, Texas waters extend up to ten miles offshore, considerably farther than most states, due to historical reasons relating to how Texas joined the union. This means that developers like Schellstede had plenty of room to plant turbines without hitting federal waters and triggering a cascade of new rules. ”

Investment in wind power has been extremely risky. The author chronicles the IPO of Kenetech, a California wind turbine company: “Merrill Lynch foretold a hundredfold rise in Kenetech’s sales over three years.” They went bust a few years later. T. Boone Pickens plans the world’s largest wind farm:

A woman asked whether the giant windmills would make noise. “I’ve been a quail hunter since I was twelve, so my hearing isn’t worth a hoot,” Pickens told her. “If you’re getting royalties from it, it might have a real pleasant sound.” But the turbines have made no sound at all. Despite Pickens’s grand pronouncements, the Pampa wind project never got built, and in the corridors of wind conferences the mention of Pickens’s name soon brought snorts of irritation. A few months after his appearance at the Pampa auditorium, the price of natural gas began to plunge as the extent of the enormous new shale supplies became clear. As the price of gas fell it pulled the price of all forms of electricity down with it, and wind became less competitive. “When natural gas is $4.50 [per thousand cubic feet], it’s hard to finance a wind deal,” Pickens told the Texas Tribune in 2010, the same year he gave up the last of the leases on the Pampa land. “Natural gas has got to be $6.”

Do we really want this?

“Never in the history of the world have we put up 400-foot-tall blinking behemoths everywhere,” West Texas landowner Dale Rankin, who sued to stop the march of wind turbines over hillsides near his Abilene-area home, told the Austin-American Statesman in 2007. Living close to hundreds of turbines, Rankin said, is like being “next to an airport where the jets are running their engines all he time.” But in a state that welcomes development, Rankin’s lawsuit, the first significant one of its kind in Texas, failed in 2006.

And once we get it, will it free us from digging up fossil fuels and setting them on fire?

Indeed, on some windy nights when the blades are turning but electricity use is low, or when the grid is congested with lots of different plants offering power, parts of West Texas see “negative pricing,” in which wind plants pay a modest amount to offload their power (the federal production tax credit ensures it’s still worthwhile for them to do this).

When the wind does blow, it’s not necessarily at the most useful times, which makes Texas grid operators, even armed with constantly improving forecasting tools, wonder how much more wind they can handle without unbalancing their system. Sometimes things work out. In February 2011 wind farms all across Texas got praise for pumping large amounts of power into the electric grid during a deep freeze that managed to knock out a quarter of the state’s coal and gas power-plant units and caused rolling blackouts throughout the grid, even though a few turbines did go offline due to dangerously high winds and hydraulic-equipment freezes. But three years earlier, when a cold front moved through Texas and the winds died, the Texas grid operator, ERCOT, barely averted blackouts. (The wind industry says the cold front was predicted and the grid should have been prepared for it.) And on at least one scorching August afternoon in 2011, wind farms produced only about 1.3 percent of the grid’s electricty, prompting the National Review to run a piece headlined “Texas Wind Energy Fails Again,”

I recommend this book for software engineers. It shows just how much money and patience you need to achieve an impact in the world of energy.

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