That Time that Thomas Piketty was Right

Alexandra F. Baldwin

I am, in some senses, completely nuts.

It’s not obvious, but if you hung around me long enough you’d realize that, beneath the seemingly normal surface, I have some really weird interests and habits. I have demonstrably outstanding social skills, I can find something to talk about with just about anyone, people generally like me, I’m a pretty good dresser, highly-educated, well-paid and find myself to be utterly adorable. Other than my diminutive stature, you wouldn’t notice a whole lot about me that is terribly unusual. But make no mistake, I have my quirks.

Evidence of my insanity?  I read every word of Thomas Piketty’s “Capital in the 21st Century". According to Amazon, it is possibly the least read book in history, but yours truly got through the entire thing (incidentally, I only got about 2/3 of the way through “A Brief History of Time,” finished “Flash Boys,” “The Great Gatsby,” “Catching Fire” and “The Goldfinch.” I never bothered with any of the Fifty Shades or the other books on that list.)

Generally speaking, the book is packed full of incredibly interesting data and much less interesting analysis of that data. Leaving aside the questions over the quality of that data, his major findings are based on a couple of obviously flawed assumptions (that all wealth from capital is reinvested and not consumed, that capital is never destroyed outside of war, and that future returns will match historical returns despite basic laws of supply and demand).

There is, however, one section of the book that I found to be a remarkably cogent and simple explanation to a substantial problem. And, for a book that was wholeheartedly embraced by the left, largely ignored by the people who should have been shouting its message loudest. The section dealt with national debt, specifically debt accrued as a result of structural deficits, not capital improvements.

Every nation has a public balance sheet. The nation has public assets, which include government land and buildings, sovereign wealth funds, military bases and equipment, national parks and any holdings of financial assets. Most nations also have public liabilities in the form of debts issued by the treasury and promises made by the government. After subtracting the latter from the former, we are left with Net Public Wealth.

When a government issues debt, it increases its liabilities. It also increases its assets in the form of the cash received for that debt. When it then spends that cash on things that do not go onto the public balance sheet – like salaries to government employees, interest on previously issued debt or transfer payments – then public assets have fallen, and along with it, Net Public Wealth.

Meanwhile, who has been the purchaser of that debt? That varies by country, but the short version is pretty simple: rich people. In the US, for example, the largest chunk is bought by other departments of government (social security and the Federal Reserve are the biggest buyers), and the rest is sold to foreign governments and institutions (about 1/3) and to Domestic individuals and institutions.

I’ll ignore, for the moment, the impact of other agencies and departments holding debt (because it mostly doesn’t matter) and focus on the public debt. Some pretty basic common sense tells us the underlying beneficiaries of most of those institutions are disproportionately wealthy citizens. The wealthy own the biggest pension benefits, they’re the shareholders in banks and insurance companies that own large amounts of debt, and they are the ones directly buying bonds from the Treasury as well. Even indirectly, they disproportionately attend the schools with massive endowments that own large chunks, and they collect the largest portion of social security benefits for the longest time. As the largest owners of the debt, they are collecting the most interest on that debt.

{Kind of a logical leap here, but I would add to what Piketty says that a government borrows because it does not ask its citizens to pay the full cost of the government that it provides. If we assume that, in the US, those taxes would have been levied in the same proportion as our current income tax, the wealthy (who pay almost all of that tax) are predominantly the ones being absolved of their tax burden. This certainly fits in with the progressive narrative that the wealthy are “not paying their fair share.” They are, in essence, lending money to the government rather than simply giving it to the government.}

To summarize, then, when the Federal government issues debt on an ongoing operating basis, it is indebting all taxpayers and decreasing the Net Public Wealth. The beneficiaries of that are the new owners of public debt, who have added an interest-bearing asset to their own balance sheet. Those new owners are disproportionately wealthy, meaning that we have shifted wealth from the public as a whole into the hands of a select group of wealthy citizens.

All of which makes the current progressive love of government debt quite mysterious.