November 23, 2019
(This post originally appeared on my Patreon page.)
The Democratic presidential campaign has taken a strange twist in recent days, with candidates being asked whether we should have billionaires. While there may be some grand philosophical questions at stake here, I will stick to more mundane economic ones. The real question is; how do you want the economy to work?
The basic story is that if we have a market economy, some people can get very rich. If we buy the right-wing story, the super-rich got their money from their great contribution to society. If we look at it with clearer eyes, the super-rich got their money because we structured the economy in a way that allowed them to get super-rich.
This is a point which seems very obvious, but for some reason is largely ignored in policy debates. Most typically these debates take the market distribution of income as a given, and then ask the extent to which we might want to redistribute to have less inequality. The right of course wants little if any redistribution, while people on the center and left argue for varying degrees of distribution.
But it is completely absurd to treat the market distribution of income as given. The market is incredibly flexible and it can literally be structured in an infinite number of different ways. (Yeah, I know I make this point all the time, but I can’t help repeating myself.)
My favorite here is patent and copyright monopolies, both because it should be obvious that these features are structured by the government, and there is an enormous amount of money at stake. Patents and related protections raise the price of prescription drugs alone by close to $400 billion a year over the free market price, or 1.8 percent of GDP. If we add in the impact of patents and copyrights on medical equipment, software, movies, fertilizers and pesticides, and other areas, the cost could easily exceed $1 trillion annually or close to 5.0 percent of GDP.
Many of the country’s billionaires, starting with Bill Gates, owe their vast fortunes to these government-granted monopolies. As I, and others, have argued these can be extremely inefficient mechanisms for supporting innovation and creative work. Not only are they redistributing income upward, they also slow economic growth, and in the case of prescription drugs and medical equipment, impair people’s ability to get health care.
The industry with the largest share of the super-rich is finance. There are many ways this sector can be organized differently in ways that are likely to be both more efficient and produce fewer huge fortunes.
One of the ways people get very wealthy is finance is by buying or selling stocks or commodities a short time ahead of the market, thereby pocketing large profits. It’s pretty hard to see the contribution to society in this story.
Their actions mean, for example, that GE’s stock price may adjust to new information about its profits five or ten minutes earlier than might otherwise have been the case. The benefit to the economy from this faster adjustment is essentially zero. These high rollers’ profits come at the expense of ordinary traders who are less informed.
As I have argued frequently, a modest financial transactions tax would have a huge impact on this sort of trading. It would have the effect of eliminating a large amount of trading that serves no economic purpose.
When talking about the financial industry, Michael Bloomberg deserves special mention. In addition to ranking among the top ten billionaires, with more than $50 billion in assets, he now seems poised to enter the race for the Democratic nomination.
Bloomberg’s great genius was to develop an important service for large traders. It provided them with terminals that give them information relevant to the economy and particular stocks and commodities faster than anyone else. This allows them to profit at the expense of less well-informed investors. If society is better-off from this innovation, it is hard to see how.
Other financial industry billionaires got their money through private equity (PE) funds, whose main advantage seems to be carrying through activities that publicly traded companies would be too embarrassed to do. Their latest cash cow is surprise medical billing, where a variety of businesses owned by PE funds interject themselves into the medical process and hand patients huge bills.
It is not hard to envision structuring the financial industry in a way that didn’t provide much room for PE. It’s not obvious that we would risk much, if any, loss of efficiency from having a considerably smaller PE industry.
Beyond finance, we find many billionaires in the tech sector. These are people who would be considerably poorer with shorter and weaker patent and copyright enforcement. There is virtually no public debate on the shape of these government-granted monopolies, even though the amount of money at stake each year dwarfs spending on any government program, even Social Security.
Apart from the fact that a different structure of intellectual property rules could substantially reduce their income, they are other issues with our tech billionaires. Some, like Bill Gates, would have much less money if anti-trust laws were still enforced. Mark Zuckerberg would have much less money if Facebook were subject to the same libel laws as print and broadcast media.
The Walton family collectively has close to $200 billion in assets. They would have considerably less if minimum wage laws had kept pace with productivity growth, as had been the case from 1937, when the first federal minimum wage law was passed, until 1968. The Waltons would also have considerably less wealth if the Federal Reserve Board had done a better job of keeping the economy close to full employment so that workers had more bargaining power.
Many of the super-rich would have less money if labor laws had not been turned so much against workers beginning in the 1980s. Canada, which is not all that different in its economy and culture than the United States, has seen relatively little fall in unionization rates over this period. In the U.S. the private sector unionization rate fell from roughly 20 percent at the end of the seventies to less than 7.0 percent today.
We can go down the list and find major policy failings that allowed many, if not most, of the billionaires to make their billions. While these billionaires may all have been smart and hard-working, what allowed them to get such vast fortunes was a failure of public policy to organize the market efficiently. (This is essentially the point I make in Rigged [it’s free], and just about everything else I write.)
But, there are some cases that more or less fit the billionaire as great innovator story. While many of us have complaints about how Steve Jobs ran his business (e.g., exploitative labor practices in China and anti-poaching agreements with competitors for workers in the US), he did produce products that people really wanted to buy. People really like iPhones, so in that sense, Jobs did contribute to making society better-off.
While it is easy to identify many of the failures that have allowed for extreme wealth, there is still the question of whether a Steve Jobs-type may still get incredibly rich in a context where we have structured the economy efficiently rather than to redistribute income upward. In my view, it is certainly a possibility and not one that we need to spend a lot of time worrying about.
There is no doubt that we want progressive taxation, but this does have its limits. A very high tax rate is an invitation to avoidance and evasion. If we have a 90 percent marginal tax rate, we are effectively paying rich people 90 cents to hide a dollar of income. Or, to make the numbers more realistic, we are paying them $90 million to hide $100 million of income.
That is virtually guaranteed to get us a huge tax avoidance industry. That is a complete waste from an economic standpoint.
The point of taxation is to reduce consumption, thereby freeing resources for public uses, like health care and education. The super-rich spend a relatively small share of their income, which means that increasing taxes by $1 billion on the super-rich creates less room for government spending than increasing taxes on middle class people by $1 billion. (This is the flip side of the argument that if we want to boost demand in the economy we should give tax cuts to the poor and middle class, rather than the rich. If you believe this argument, then you have to believe that taxing the super-rich has less impact in reducing consumption.)
This makes the tax avoidance/evasion story very bad, since the impact of higher taxes on the consumption of the super-rich will be limited. On the other hand, the money they spend hiring tax lawyers, accountants, and others engaged in hiding their income involves a real use of resources. That means we may actually be increasing demand in the economy with very high tax rates on the rich.
Also, insofar as the rich succeed, it undermines respect for the income tax more generally. That is a bad story since we still count to a substantial extent on voluntary compliance.
I realize that proponents of much higher taxes on the rich want to ramp up I.R.S. enforcement. This is a good thing in any case, but this is yet a further use of resources. And, while plenty of very competent people work at the I.R.S., I question the extent they will be successful going after billionaires who are spending $90 million to hide $100 million of income. There is no way the I.R.S. can commit anywhere near as much resources to fighting avoidance/evasion as the rich will spend pursuing this route. For these reasons, there is a limit to how high we should make our tax rates.
There is the argument that the rich are able to use their wealth to buy political power. This is a real concern, but it is unlikely to be addressed by the various progressive taxes currently on the table. Even people with hundreds of millions can use their wealth to exercise inordinate political power.
Rather than focusing on trying to prevent the super-rich from influencing public opinion (the issue goes way beyond campaign contributions, it is also owning media outlets, think tanks, and funding university programs), a more practical focus would be to ensure that the rest of us can have a voice. This would mean some sort of individual tax credit (e.g., $200 per person) to be used to support the newspaper, think tank, or whatever form of expression, intellectual, or political work the person wants.
A version of this is already in place in Seattle where they give every voter a voucher for $75 to support the local candidate(s) of their choice. It would be great to see this sort of system expanded and implemented on a national scale, but state and local governments are a great place to start.
That won’t guarantee that there will be enough money to support whatever venture some of us might like, but it will ensure that the non-rich collectively have plenty of money to support progressive politics. Our energies are likely to be better spent ensuring that the non-rich have an effective voice than playing a whack-a-mole game to limit the voice of the super-rich.
Long and short, I have no opinion on whether there should be billionaires. My opinion is that we have more important things to worry about.
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