The Piketty Plan

With his book, Capital in the 21st Century, Thomas Piketty has engendered a series of dueling op-eds in The New York Times (The Piketty Panic and The Piketty Phenomenon), the Wall Street Journal, Forbes, The National Review, and so on.

The basic thrust of the book is that capital grows faster than the economy: examining historical data, Piketty found that return on capital is historically about 5%, while economies grow at less than half that rate. That means that the rich will get richer much faster than people who actually have to work for a living, because salaries are limited to the growth of the economy. It also means that, in today's global economy, middle-class and poor Americans will get poorer.

I haven't read the book, but I understood its core message back in the 1980s with two simple calculations: 50,000 x 20 = 1,000,000 and 1,000,000 x 0.05 = 50,000.

That is, if you saved $50,000 a year you could have a million bucks in 20 years -- not even counting compounded returns. If you get a modest return on a million bucks -- I picked 5% back then, which happens to be Piketty's historical average -- you could make enough to live on through investment returns alone: you can retire in 20 years. In reality you wind up with $2 or $3 million because you're earning returns on your investments the whole time, even considering the ups and downs in the markets.

Let's call this "The Piketty Plan."

I made this calculation during the Reagan administration when IRA accounts were being debated. Later, laws were passed to allow companies to set up 401Ks. I was wondering whether these accounts were a good deal, because they had three serious limitations: you weren't taxed when you put the money in, but when you took it out; you were limited to contributing a few thousand a year; and you couldn't get at that money until you were old (unless you paid the taxes, plus a stiff penalty).

Since I planned on being rich when I took the money out, the tax rate "feature" was just a dumb gimmick -- returns on some investments are taxed at a lower rate (zero for tax-free bonds). Also, during the Bush II administration taxes on capital gains were drastically lowered, but money withdrawn from IRAs is still taxed as regular income, at the much higher rate. Which means that since we avoided IRAs and 401Ks, investing like rich people, we pay much lower taxes on our investment income than if we had socked all our cash in those programs, which we still wouldn't be able to get at yet. Thank you, George Bush!

All these "investment" vehicles for the common man were pushed by the finance industry, who wanted to get their hands on more of our money. Company pensions disappeared almost overnight. Instead of investing in their employees' retirements, companies outsourced the management of retirement funds to Wall Street, which took hefty fees for "managing" everyone's retirement accounts.

Companies like Enron put their employees' 401Ks into their own company stock, with disastrous results.  Other companies raided employee 401K funds, or played tricks with employee contributions, hanging on to the money for months before transferring it, "legally" stealing millions of dollars of interest from their employees. Over time, companies have cut back or stopped contributing to employee 401Ks, leaving most Americans up to their own devices -- and Social Security -- for retirement.

IRAs and 401Ks were sucker bets. Rich people would almost never use them: they diversified, put their money in T bills, stock, tax-free bonds, real estate, and so on. And it only got better for rich people during the Bush years, when taxes on capital gains were reduced to less than half the tax rate of people who do real work.

Because my wife and I both worked and had no kids, we were able to follow the Piketty Plan. We invested the way rich people do. We eschewed debt and all the trappings of wealth -- no boat, no vacation home, no ostentatious jewelry or fancy clothes. After the house we didn't buy anything we couldn't pay for outright. Then we paid off our mortgage years early. We never paid a nickel of interest on our credit cards. Still, we regularly bought new (never used) cars, took regular vacations, bought TVs and VCRs and computers and horses, and other Stuff. But we always saved one of our salaries (the "two can live as cheaply as one" trope). We were therefore able to retire in our forties, after putting up with corporate BS for 20 years.

The vast majority of middle-class Americans simply cannot do this, mostly because they have kids. They have to house and feed and clothe them, and pay for their daycare. They have to pay back student loans. They have to save for their kids' college. They bow to  nattering children, social pressures and advertising, buying houses that are too big for them and too far from their jobs, and expensive cars that waste gas, and cell phones and cars for all the kids. They waste hours a day idling their cars in long lines waiting to drop off and pick up their kids from school and shuttling them to soccer practice and music lessons and the mall. They eat fattening fast-food and pizza instead of cooking their own food, because they have no time.

I mean no insult to these people: that's just the way life is here. Most people cannot do what my wife and I did, because the country needs people to have kids. And the fact is, our economy depends on that mass consumption. If everyone followed the Piketty Plan, the American economy would collapse. The problem is, that lifestyle never leaves any money for the future: it's all going into the pockets of the rich heirs who are selling us Stuff at Walmart, or the rich heirs who drill the oil that fills our gas tanks, or the rich Wall Street bankers who mortgage our houses and fondle the money in 401Ks and IRAs.

Six of the ten richest Americans got their wealth from daddy (the Waltons and Kochs). Most of the richest Americans are elderly and will be leaving their money to their heirs any day now. A lot of them are in the oil and pipeline business (I can't imagine why they're denying climate change...). 

I don't have it in for rich people in general, because I'm one of them. But the kids of today deserve the same shot that I had. Fighting against them are the Kochs and Waltons and Adelsons, who are using their vast fortunes to buy laws and regulations that entrench inherited wealth, enhance capital formation and denigrate labor.

Everyone should have a shot at the Piketty Plan. Every kid in America should be able to start at the same point: a good education, college if they can hack it, and clear of debt, regardless of how rich their parents are. We should be working to secure the economic futures of all American kids, not just the heirs of the wealthy few.