There's such a thing as rich enough
The news that Michael Bloomberg is considering a run for the Democratic nomination for the presidency means that there may soon be two billionaires in the contest: a race in which several candidates propose to tax large fortunes, a policy position which has earned the ire of a number of other billionaires, none of whom are currently running for office. (The winner of the nomination will face another billionaire.) The effect of this confluence of moneybags has been to energize a running debate about the role of great wealth in society. You may have heard the slogan that “every billionaire is a policy failure”. They often are. But billionaires represent another sort of failure, as well, and that’s the one that bothers me.
Before continuing, let’s insert a little context. Wealth in America is highly concentrated. About a fifth of Americans have no wealth at all or negative wealth. In total, the bottom 80% of American households controls just a bit over 10% of total wealth, most of it held in the form of owner-occupied housing. And the super-rich? Estimating their wealth isn’t easy, but the share controlled by the top 0.01% of Americans is probably roughly the same as that of the bottom 80%: which is to say that the Americans who have fortunes of at least $120m or so control as much wealth as do American households representing about 250m people. The share of total wealth controlled by the very rich has risen substantially since the late 1970s.
Big fortunes are persistent. The rich save more than others do: not so much because they’re particularly prudent, though some are, but because it’s *hard* to spend enough to keep a big fortune from growing. That, in turn, is because the wealthy tend to earn higher returns on their money than others. Higher returns are partly about the composition of assets (financial assets usually yield more than housing), partly about access to different investment classes (like venture funds), partly about lower fees for an amount invested, and partly about greater levels of sophistication when it comes to paying tax (or not, as the case may be).
However you slice it, the money piles up. Suppose you have a fortune of $1bn. Over the past 30 years or so, you’ve probably earned a real annual return on that of at least 3%. Now, 3% of a billion is $30m. That’s a lot. And 3% of that is $900,000. Which is still a lot. In fact, that number—which is the annual return on the annual return on $1bn—is about twice the annual income you need to qualify as a member of the top 1% of earners. And 3% of that is $27,000, which is roughly the annual salary of someone working full time on twice the federal minimum wage. Which is to say: whatever incredible things a person has to do to obtain a big fortune, once they’ve got it they have to work really hard *not* to accumulate additional wealth in amounts that vastly outstrip the earning capacity of virtually everyone else in the economy.
Indeed, it would take a pretty hefty wealth tax to actually reduce billionaire wealth, rather than just reduce the rate at which it grows. (Elizabeth Warren’s initial wealth tax proposal—which would have taxed fortunes above $50m in size at 2% and those above $1bn at 3%—would have been the latter sort. Her updated proposal, which proposes to raise the tax rate on fortunes above $1bn to 6%, would cause some fortunes to shrink over time—though only until their value drops back under a cool billion, at which point the 2% rate would once again allow for accumulation. And even had Warren’s updated wealth tax been in effect throughout Jeff Bezos’ career, he would still be worth an estimated $49bn, which is enough to get by on if you’re careful.)
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Suppose you wanted to make the case that it is acceptable, or even good, for some people to have vastly, vastly more than others: for Jeff Bezos, for example, to have a fortune that is roughly 70,000 times the size of the lifetime earnings of the typical American. What would you say? Most likely, you would argue that money is a powerful incentive, and the pursuit of wealth motivates people to take big risks, make significant sacrifices and expend enormous amounts of energy at tasks that create benefits for the rest of society. Prospective financial rewards provide motivation to innovators and entrepreneurs, who create technologies that make our lives better, and build industries that create opportunities for millions of others.
But for those prospective riches, the brilliant and talented might while their days away in some other corner of the economy. There are lots of relatively low-risk ways for clever people to earn a hefty amount of money in America: by becoming a banker or corporate lawyer or doctor, for instance. If the returns to entrepreneurial activity aren’t sufficiently high, then maybe Bezos never leaves Wall Street to found Amazon. Or maybe he founds Amazon and decides after a few years that the money he’s made selling books is enough for him, and he’d rather retire in comfort than turn Amazon into the world-straddling retail behemoth it is now. You might cite any number of economics papers (here’s one) which conclude that higher tax rates reduce innovation. Furthermore, you might suggest that however desirable higher taxes on the rich may be, their effect, in practical terms, is simply to chase money and talent away to more accommodating jurisdictions.
How convincing are these arguments? I am perfectly happy to accept that money is a powerful incentive and lots of money is even more powerful. I am perfectly happy to declare that the profit motive can help channel individuals’ efforts in socially useful directions—that but for a system which rewards certain accomplishments with large incomes and wealth, we would all be poorer.
But it is one thing to admit that inequality can be socially useful, and another to defend very large fortunes. On the other side of the argument, one could point to a large and growing economic literature identifying the ways in which high levels of inequality are in fact kind of bad for everyone. Heather Boushey’s new book, Unbound: How Inequality Constricts Our Economy and What We Can Do about It, is a useful starting point for those interested in the subject. You might argue that while there are economic costs to taxing the rich, there are also economic costs to not taxing the rich: namely, the foregone revenue, which could be used to fund critical public goods like education, infrastructure, and healthcare. You could also point out that the government has been an accomplice in large-scale tax avoidance among the rich, and that it knows how to crack down on evasion when it wants to. The rich could leave America and drop their citizenship in response to high taxes, but America is actually a pretty valuable place to be, and still retains enough hegemonic power to rein in tax havens—the respectable ones, anyway.
You could go farther still. It must be the case that there are diminishing returns to wealth: both in terms of the satisfaction the rich derive from a marginal dollar and in the benefit society receives from the effort elicited by marginal wealth. It is hard to imagine someone drawing a meaningful distinction between the incentive provided by $30bn and that provided by $40bn. And for an entrepreneur just starting out, particularly one from a non-wealthy background, a prospective fortune of $100m or $200m represents an extraordinary level of success, far beyond what the overwhelming majority of people well-positioned to be successful entrepreneurs could expect to earn. If you can expend the effort to make that kind of money, you do it; you don’t say, well it’s not a billion so I suppose I’ll become a lawyer instead. Bill Gates stepped down as CEO of Microsoft in 2000 and left his role as chairman in 2014. And yet last year his fortune rose in value by $16bn. What share of the work Gates undertook to build his company was motivated by the expectation of that addition to his wealth?
As far as incentives go, large fortunes are a blunt instrument. They encourage all sorts of money-making activity, good as well as bad. So yes, you get entrepreneurs developing technologies and businesses which make lots of people better off. You also get elaborate scams, parasitic financial schemes, gross irresponsibility, anti-competitive ruthlessness, and corruption. The drive to earn billions motivates people to cook their books, wipe out unions and destroy worker bargaining power, buy up competitors, and develop socially destructive products and strategies: like toxic mortgage securities, mass-marketed opioids, and poorly managed social-networking platforms which accidentally abet genocide and undermine democracy.
Of course, bad business behavior can be reined in by vigilant regulators and by strong social norms. But enormous fortunes undermine these guardrails. The very rich spend vast amounts of money to influence politicians and public opinion; it seems reasonable to conclude that they would not do so without expecting something in return. Private-sector lucre makes it difficult for governments to retain skilled regulators. The prospect of huge private-sector earnings not only drains regulatory bodies of talent, but also ensures that many of those who work in regulatory agencies see things the way billionaires and rich corporates want them to, so as not to endanger the prospect of a future private-sector payday.
Billionaire defenders could retort that even when the very rich obtain their money through dubious means, they often use it for good. How many lives has Bill Gates saved through the Bill and Melinda Gates Foundation? Surely enough to cancel out the harm done by Microsoft’s anticompetitive behavior, crash-prone operating systems, and Clippy. And yet. It is true that some billionaires commit themselves to philanthropic work. But the highly visible generosity of a Bill Gates conveys a misleading impression of what is the norm among the very rich. Many don’t engage in large-scale philanthropy, or they give their money to dubious causes: like elite universities which don’t need the cash, or political organizations which work tirelessly to lobby for reduced taxes on the rich and reduced government spending on public goods.
But come now, the pro-Bills respond, it’s their money after all, they’ve earned it.
But wait. Have they?
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It’s telling, I think, that critics of extreme wealth inequality feel the need to frame their critiques in policy terms. Don’t get me wrong, that’s a perfectly legitimate thing to do. If you want empirical evidence that high levels of inequality have economically ambiguous or negative effects on net, you can find it. But why stop there? The very rich are (mostly) happy to argue that they deserve their wealth. That’s a values-based argument. Have we lost the ability to defend egalitarian societies on moral terms?
It’s doable, I think. I’ll give it a try. No one deserves great wealth. Note, I am not saying that everyone with great wealth deserves to have it taken away. But no one can really claim to have earned their fortunes.
There are a few ways to think about this. Warren Buffett might be a lovely person—I can’t say, I’ve never met him—but he is not on the whole a vastly better person than the rest of us. I’m sure he’s worked hard, but then so do subsistence farmers grinding out a living in poorer parts of the world. He’s taken risks, but so do people who trek through extremely dangerous areas in North Africa or Central America in hopes of finding work in rich countries so they can send a little money home each month to support their families. He’s achieved more than most people—he’s built one of the largest fortunes ever, after all—but so much of what went into that achievement was simply good luck: from where and when he was born, to the genetic endowment he received, to the opportunities he came across in his life. The same is true of all of us. I’m proud of the work I’ve done and the risks I’ve taken to get where I am (sadly just short of billionaire status). But I didn’t choose to be born in America, to my parents, with my skills, such as they are. When I think about the wild twists of fate that enabled me to have the job I have: well, I’m more grateful than proud.
We should all take responsibility for our actions, of course. But so much of where we end up is pure luck. And to reward good luck with such outrageous extravagance is wrong. I think we ought to be able to accept that it’s wrong, however we feel about taxing great fortunes.
Or take another perspective: it is not the case that Buffett or Bezos or whomever built their fortunes in a vacuum. They did so, rather, within an enabling social framework: one which provided infrastructure, the rule of law, secure property rights, a deep pool of mostly publicly educated workers, the internet, a vast library of accumulated knowledge, and so on. Society made these riches possible, and it is for society to determine how those riches ought to be distributed. One might argue that it is unfair for society to adjust the rules of the game on the fly, now that there are large fortunes to grab. But society has to be able to change the rules in response to changing conditions and new information—and indeed, were it not for rule changes made over the past few decades these large fortunes would not be as large as they are. As a billionaire, I’m sure it’s frustrating to have society deciding that it’s uncomfortable with concentrated wealth and will be taking a share of it back. But we all deal with social frustrations; they are the price of living in society and well worth paying. (As a side note, it takes particular chutzpah to earn a vast fortune within society and then attempt to use that wealth to escape: to an isolated estate in New Zealand or outer space. Guys, if you want to take your leave of us that’s fine, but have the decency to make your money in blissful isolation as well, if that’s where you want to be.)
And how about this: the more a society leans on money as an incentive, the less it can rely on other forms of motivation. Advanced economies are as prosperous as they are because of the sinews of social norms and ethics which hold everything together. But when the potential gains to flouting an ethical principle run in the billions rather than the millions, that places pressure on those norms which they cannot withstand. Over time, we become, to an increasing extent, a society powered by the pursuit of naked self-interest. The character of the elite begins to shift. Our actions, all of us, are shaped by an array of motivations: self-interest, yes, but also a desire to please others, a desire to improve the world, a passion for work, and so on. An excessive reliance on the desire for massive fortunes selects for those most driven by a hunger for wealth and power, unencumbered by other considerations. These winners then receive as their reward great wealth and, as part of the bargain, extraordinary influence and power.
I’ve met, briefly, a couple of billionaires. I’ve spent more time with people who work closely with, or are close to, billionaires. Entering their orbit is a strange experience. It’s as if they are surrounded by a field of sorts, which distorts others’ perceptions and behavior. The field is powered by possibility. With the same emotional investment with which you and I discard a nail clipping, a billionaire can transform a life and a career, or many of them, hundreds or thousands of them, for better or for worse. I was reflecting on this not long ago and I realized what it was that accounted for this effect. It’s power! Just power. It’s a power in our society which bends the world around it, pulling people into its orbit. The obscenely rich inspire the creation of industries dedicated to meeting their needs and profiting off their largesse. They create, intentionally or not, a large and growing economic niche consisting of people willing to say what the billionaires want them to say and do what the billionaires want them to do. They distort the operation of everything they touch, with one simple, stark reality: the possibility that if you play your cards right, you can win favor and obtain for yourself a chunk of wealth and power.
It would be nice to be able to say that the values we depend upon in our society are strong enough to resist the corrupting effects of concentrated wealth. That we will absolutely hold the rich to account when necessary, and not find ways to apologize for their misdeeds. But can we? I mean looking around at recent history, at the Enrons and the Theranoses, the Countrywides and the Purdue Pharmas, the Jeffrey Epsteins and Donald Trumps, can we really?
There is more to the making of a prosperous society than the pursuit of self-interest. Prosperity is also built on trust, honesty, the duty to treat others fairly, and a thousand other verities. It’s built on a civic principle that one person is just as good as the next: just as important, just as deserving of a voice in society. The glare of concentrated wealth washes out those other considerations, even when it is in the hands of good people who use it for good things. It changes who we are as a society and puts prosperity at risk—in ways the economic papers describing the costs of taxing the rich do not consider. Yes, inequality has its uses, and it would be wrong to try to eliminate it entirely. But while we acknowledge the practical benefits of unevenly distributed wealth we should also retain the ability to make moral judgments about those distributions and identify the ones that cannot be justified. It’s ok to say that the existence of mega-billionaires is not just a policy failure but a moral failure: even when the billionaires are super great guys who give to all the right causes. It’s uncomfortable to do so, I know, we’re out of the habit. That’s why it’s so important.
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My most recent column asks how we ought to interpret an uptick in labor-union belligerence. I feel like I should add that all opinions expressed here are mine alone and in no way reflect the views of my employer.