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 superrich got their money from their great contribution to society. If we look at it with clearer eyes, the superrich got their money because we structured the economy in a way that allowed them to get super rich.
In some cases, that can mean that they had important innovations that made large numbers of people better off. While many of us have complaints about how Steve Jobs ran Apple (e.g., exploitative labor practices in China and anti-poaching agreements with competitors for workers in the U.S.), 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.
By contrast, it is very hard to see the contributions that many of the superrich have made to improve society. The largest share of the superrich are in finance. Some of these wealthy financial types specialize in 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 10 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.
Michael Bloomberg — who ranks among the top 10 billionaires, with more than $50 billion — had the genius to provide these traders with servers that give them necessary information faster than anyone else. If society is better off from this innovation, it is hard to see how.
Other financial industry billionaires got their money through private equity 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 private equity funds interject themselves into the medical process and hand patients huge bills.
Beyond finance, we find many billionaires in the tech sector. These are people who would have considerably less money with shorter and weaker patent and copyright enforcement. Some, like Bill Gates, would have much less money if antitrust 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 of the Walmart empire collectively has close to $200 billion in assets. They would have considerably less if minimum-wage laws had kept pace with productivity growth, and the Federal Reserve had done a better job of keeping the economy close to full employment so that workers had more bargaining power.
We can go down the list and find major policy failings that allowed many, if not most, of these 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 of my book, Rigged.)
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. 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. Also, insofar as the rich succeed (and they will often succeed, in spite of our super-sleuth IRS agents), it undermines respect for the income tax more generally. 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 various progressive taxes. Even people with hundreds of millions can use their wealth to exercise inordinate political power.
Rather than focusing on trying to prevent the superrich 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.
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 superrich.
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.