The Role of Law in Thomas Piketty's Capital in the 21st Century

There is not a lot of law discussed in Thomas Piketty's book Capital in the Twenty-first Century. Piketty drops a few hints here and there about what laws he thinks likely contributes to widening wealth inequality (the advent of dynastic trusts, the lowering of marginal rates for the highest personal income tax brackets, which contribute to executive "super-salaries"), but his basic policy prescription is a small global wealth tax.

I would not oppose such a tax. There is something elegant about such a tax, if the international tax haven problem can be solved. But in my review of the book, I suggest that some examination of the legal order is in order. Legal rules and institutions contribute to wealth inequality indirectly. In Piketty's world, wealth inequality increases when the rate of return on private capital is greater than the rate of economic growth, or r > g in his vernacular. My review examines several areas of law in which legal rules and institutions drive up rates of return on private capital (r in Piketty-speak) without doing much to increase overall economic growth. These areas are financial regulation, antitrust law, oil and gas tax policy, electric utilities regulation, and the generic practice of grandfathering. In my view, a rather simplistic faith in trickle-down economics has caused policy-makers to support any policy in which Δg > 0, however speculatively, and if Δr >> 0, well then, God Bless. Of course, Δg is very often not greater than zero.

Regulating Greenhouse Gases Under the Clean Air Act, Version 0.0

There has been so much clamor about the Environmental Protection Agency's introduction of a proposed rule for regulating greenhouse gas emissions from power plants, it's hard to shout above it all. And yet, not much has really been added to the conversation from a policy point of view, and not much can be said. The rule sets an emissions reduction target for each state, but is very vague (or, in EPA's words, "flexible") about how states can achieve those targets. There has been so much sky-is-falling nonsense that one loses sight of the fact that the rule doesn't actually do all that much. The rule provides neither much guidance nor much admonition. Under this part of the Clean Air Act, states will be required to submit for EPA approval State Implementation Plans that set out a regulatory scheme by which they intend to carry out the broader mandates set out by EPA. The required emissions reductions are the product of complicated formulas, but have their ultimate root in emissions rate standards for coal-fired power plants, which were then adjusted for a number of political factors, like individual state efforts to reduce emissions before this rule. The vagueness is intentional. Former EPA general counsel Roger Martella characterizes EPA's posture towards states as "any way you want to reduce greenhouse gas emissions, we'll find a way to make it work." EPA is bending over backwards to let states do whatever they want to do, at the price of perhaps accomplishing too little. Charles Komanoff of the Carbon Tax Center estimates that the implicit price of emitting carbon dioxide under these targets is about $2.15 a ton. That's trivial.

My friends at Element IV, a consulting group founded by a former oil executive and a former Sierra Club lobbyist (!), are not optimistic about the survival about this much-ado-about-not-much rule. They cite legal challenges that were filed within moments of the publication of the rule. 

Despite the disappointment with the ambition of the rule, this rule is important for several reasons. Although Bailey and Bookbinder minimize the significance of what this rule can accomplish -- "give the President something concrete to say at the Paris climate talks next year," and "claim a political legacy beyond that" -- there is real game-theoretic significance to being able to say something "concrete." I noted a few years ago that international climate negotiations are extremely fragile, and that signals of cooperation were very important in preventing the unraveling of agreements. This greenhouse gas rule does allow leaders from other countries, if they are so inclined, to be able to say to skeptical constituents that the United States has done something. Not much, but something. So the facile dismissal that we should do nothing because anything we do will be canceled out by the fact that "China" -- whatever they mean about a nation of 1.3 billion people -- will do nothing, is far too simplistic. Like it or not, the nature of climate negotiations is going to have to be the taking of unilateral steps that are necessary, but not sufficient conditions for international agreement to take place. 

I would like to see a carbon tax, too, but little steps will have to do for now.