Today’s mountains of wealth
throttle the very engine of wealth creation itself.
By Steve Roth
Remember Smaug the dragon,
in The Hobbit? He hoarded up a vast pile of wealth, and then he just hung
out in his cave, sitting on it (with occasional forays to further pillage and
immolate the local populace).
That’s what you should think
of when you consider the mind-boggling hoards of wealth that the very rich have
amassed in America over the last forty years. The picture at right only shows
the very tippy-top of the scale. In 1976 the richest people had $35
million each (in 2014 dollars). In 2014 they had $420 million each — a
twelvefold increase. You can be sure it’s gotten even more extreme since then.
Bottom (visible) pink line is
the top 10%.
These people could spend $20
million every year and they’d still just keep getting richer, forever,
even if they did absolutely nothing except choose
some index funds, watch their balances grow, and shop for a new yacht for
their eight-year-old.
If you’re thinking that they
“deserve” all that wealth, and all that income just for owning stuff, because
they’re “makers,” think again: between 50% and 70% of U.S. household wealth is
“earned” the old-fashioned way (cue John Houseman voice): it’s inherited.
The bottom 90% of Americans
aren’t even visible on this chart — and it’s a very tall chart. The scale of
wealth inequality in America today makes our crazy levels of income inequality
(which have also expanded vastly) look like a Marxist utopia.
American households’ total
wealth is about $95
trillion. That’s more than three-quarters of a million dollars for every
American household. But roughly 50% of households have zero or negative wealth.
Now of course you don’t expect
20-year-olds to have much or any wealth; there will always be households with
none. But still, the environment for young households trying to build a comfortable
and secure nest egg — the American dream? — has gotten wildly
competitive and hostile over recent decades. (If we had a sovereign
wealth fund,
everyone would have a wealth share from birth.)
But here’s what’s even more
egregious: that concentrated wealth is strangling our economy, our economic
growth, our national prosperity. Wealth concentration drives a vicious,
downward cycle, throttling the very engine of wealth creation itself.
Because: people with lots of
money don’t spend it. They just sit on it, like Smaug in his cave. The
more money you have, the less of it you spend every year. If you have $10,000,
you might spend it this year. If you have $10 million, you’re not gonna. If you
have $1,000, you’re at least somewhat likely to spend it this month.
Here’s one picture of what that
looks like (data
sources):
These broad quintile averages
obviously don’t put across the realities of the very poor and the very rich;
each quintile spans 25 million households. But the picture is clear. The bottom
quintiles turn over 40% or 50% of their wealth every year. The richest quintile
turns over 5%. For a given amount of wealth, wider wealth dispersion means more
spending. It’s arithmetic.
Now go back to those top-.01%
households. They have about $5 trillion between them. Imagine that they had
half that much instead (the suffering), and the rest was spread out among all
American households — about $20,000 each.
Assume that all those
lower-quintile households spend about 40% of their wealth every year. They each
get to spend an extra $8,000, and enjoy the results. Sounds nice. And it’s
spending that simply won’t happen with concentrated wealth. The money will just
sit there.
Now obviously just
transferring $2.5 trillion dollars, one time, is not going to achieve this
imagined nirvana. Nor is it bloody well likely to happen. That example is just
to illustrate the arithmetic. Absent some serious changes in our wildly skewed
income distribution (plus capital gains, the overwhelmingly dominant mechanism
of wealth accumulation, which don’t
count as “income”), that wealth would just get sucked back up to the very
rich, like it has, increasingly, for the past forty years — and really, the
past several thousand years.
If wealth is consistently more
widely dispersed — like it was after WW II — the extra spending that results
causes more production. (Why, exactly, do you think producers produce things?)
And production produces a surplus — value in, more value out. It’s the ultimate
engine of wealth creation. In this little example, we’re talking a trillion
dollars a year in additional spending and production. GDP would be 5.5% higher.
If you want to claim that the
extra spending would just raise prices, consider the last 20 years. Or the last three decades, in
Japan. And if you think concentrated wealth causes better investment and
greater wealth accumulation, ask yourself: what economic theory says that $95
trillion in concentrated wealth will result in more or better investment than
$95 trillion in broadly dispersed wealth? Our financial system is supposed to intermediate
all that, right?
Or ask yourself: would Apple
be as successful as it is if its business model was based on selling eight-million-dollar
diamond-encrusted iPhones? Broad prosperity is what made Apple, Apple.
Concentrated wealth distorts producers’ incentives, so they produce, for
instance, a million-dollar Maserati instead of forty (40) $25,000 Toyotas —
because that’s what the people with the money are buying. Which delivers more
prosperity and well-being?
This little envelope calc is
describing a far more prosperous, comfortable, and secure society — far richer
and one hopes far more peaceful than the one we’re facing under wildly
concentrated wealth. With the possible exception of a few very rich
multi-generational dynasties, everyone’s grandchildren will be far better
off 50 years from now if wealth is more widely dispersed. And over that half
century, hundreds of millions, even billions of people will live far richer,
better lives.
Why wouldn’t we want that? Why
wouldn’t we do that? (We know the answer: rich people hate the idea —
even those who aren’t all that rich but foolishly buy into the whole
trickle-down fantasy. And the rich people…have the power.)
By contrast to that
possibility, here’s what things look like over the last seven decades:
Here are the results — growth
in inflation-adjusted GDP per capita:
The last time economic growth
broke 5% was in 1984. And the decline continues.
So how do we get there, given
that we’ve mostly failed to do so for millennia? Start with a tax system that actually
is progressive, like we
had, briefly, during the postwar heyday of rampant and widespread American
growth and prosperity. And greatly expand the social platform and springboard
that gives tens of millions more Americans a place to stand, where they can
move the world.
All of this dweebish
arithmetic, of course, doesn’t put across the real crux of the thing: power.
Money is power. So it is, so it has been, and so it shall be in our lifetimes
and our children’s lifetimes (world without end, amen). This is especially true
for minorities, who have been so thoroughly
screwed by our recent Great Whatever. Money is the power to walk away from
a shitty job. To hire fancy lawyers and lobbyists, maybe even buy yourself a
politician or two. If we want minorities to have power, they need to have
money.
Add to that dignity, and
respect, which is deserved by every child born: sadly but truly, they are
delivered to those who have money. You can bemoan that reality, but in the meantime,
let’s concentrate on the money.
If you want to create a
workers’ utopia, a better world for all, seize the wealth and income.
2017 September 18
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