As part of the simmering war on the rich that is a central component of the progressive left’s campaign for 2020, Robert Reich recently wrote a blog post in which he argued that there were “basically only five ways to accumulate a billion dollars, and none of them has to do with being successful in free market capitalism.”
I’ll go through the substantive problems with Reich’s analysis in a moment, but first let’s just remark on how the progressive left’s rhetoric — at least in US politics — has changed over the years. When I was growing up, the argument was that we needed higher taxes on the rich so that they would “pay their fair share,” and the purpose of those higher taxes was to raise revenue to spend on important social programs.
Yet nowadays, the more honest among the Left don’t pretend that this is about raising tax revenue. Indeed, just about the only thing I liked in Thomas Piketty’s bestselling Capital in the Twenty-First Century is that he openly said the purpose of confiscatory (his actual term) income tax rates on top brackets, was to prevent such high salaries being paid in the first place. At this link, I provide more quotations, but here are three good samples, all taken from Piketty’s Capital in the Twenty-First Century:
When a government taxes a certain level of income or inheritance at a rate of 70 or 80 percent, the primary goal is obviously not to raise additional revenue (because these very high brackets never yield much). It is rather to put an end to such incomes and large estates, which lawmakers have for one reason or another come to regard as socially unacceptable and economically unproductive … (p. 505)
A rate of 80 percent applied to incomes above $500,000 or $1 million a year would not bring the government much in the way of revenue, because it would quickly fulfill its objective: to drastically reduce remuneration at this level but without reducing the productivity of the US economy, so that pay would rise at lower levels. … (p. 513)
The primary purpose of the capital tax is not to finance the social state but to regulate capitalism. The goal is first to stop the indefinite increase in inequality of wealth, and second to impose effective regulation on the financial and banking system in order to avoid crises. (p. 518)
Likewise, Bernie Sanders recently declared on Twitter:
Billionaires should not exist. https://t.co/hgR6CeFvLa
— Bernie Sanders (@BernieSanders) September 24, 2019
Again, note the change in rhetoric here. This isn’t simply about adjusting the tax code to make sure the rich pay their fair share — this is declaring an entire group of people to be off-limits. (Note: after some critics accused Bernie of advocating pogroms, his defenders — and perhaps Bernie himself, though I can’t find it now — clarified that he meant people shouldn’t be allowed to have that much wealth. He didn’t mean “Let’s murder all of today’s billionaires.”)
This is the context in which I am placing Robert Reich’s blog post. Reich is pushing back against the notion that billionaires are simply productive people who generated a lot of wealth in the market. Reich’s commentary is designed to bolster the calls from some quarters to get rid of billionaires altogether.
Robert Reich: Five Ways to Become a Billionaire
In the remainder of this post, I’ll quickly go through Reich’s putative “five ways” to become a billionaire.
Way No. 1: Exploit a Monopoly
Here’s Reich:
The first way is to exploit a monopoly.
Jamie Dimon is worth $1.6 billion. That’s not because he succeeded in the free market. In 2008 the government bailed out JPMorgan and four other giant Wall Street banks because it considered them “too big to fail.” …
What about America’s much-vaulted entrepreneurs, such as Jeff Bezos, now worth $110 billion? You might say Bezos deserves this because he founded and built Amazon.
But Amazon is a monopolist with nearly 50 percent of all e-commerce retail sales in America, and e-commerce is one of the biggest sectors of retail sales. In addition, Amazon’s business is protected by a slew of patents granted by the U.S. government.
If the government enforced anti-monopoly laws, and didn’t give Amazon such broad patents, Bezos would be worth far less than $110 billion. [Bold added.]
In the above, Reich has conflated two very different things. If a retailer (such as Amazon) has nearly 50 percent of the sales in an industry, that isn’t a monopoly by any definition. But even if Amazon had 100 percent of the sales, that in itself wouldn’t necessarily be a bad thing.
As Rothbard argued in Man, Economy, and State, just about every seller has a “monopoly” in the sense of “single seller” if we define the product or service narrowly enough. For example, I have a monopoly on economics lectures provided by the Austrian school economist Robert P. Murphy. Yet that’s not what people have in mind when they wring their hands over “monopoly power” in big business.
So long as the transactions are all voluntary, then a seller can only “capture” an entire industry by providing a superior product and/or a lower price. For readers who’ve never heard the story, I strongly recommend you check out Burt Folsom’s Myth of the Robber Barons to see how genuine entrepreneurs cut costs and gained market share through serving consumers. (Here’s a short clip of Tom DiLorenzo on C-SPAN correcting the historical record.)
So, returning to Reich’s passage above, he is right to complain about government privileges given to the big banks that were bailed out, and — since I have been persuaded by the work of Stephan Kinsella on “intellectual property” (IP) — I also agree that government patents and other forms of IP enforcement are also illegitimate.
Yet the solution of course isn’t to enact large taxes on the wealthy. The solution, instead, is to get rid of the illegitimate privileges given to some of the wealthy.
Way No. 2: Get Insider Information
Reich goes on to the second method:
A second way to make a billion is to get insider information unavailable to other investors.
Hedge-fund maven Steven A. Cohen, worth $12.8 billion, headed up a hedge fund firm in which, according to a criminal complaint filed by the Justice Department, insider trading was “substantial, pervasive, and on a scale without known precedent in the hedge fund industry.” Nine of Cohen’s present or former employees pleaded guilty or were convicted. Cohen got off with a fine, changed the name of his firm, and apparently is back at the game.
Insider trading is endemic in C-suites, too. SEC researchers have found that corporate executives are twice as likely to sell their stock on the days following their own stock buyback announcements as they are in the days leading up to the announcements.
If government cracked down on insider-trading, hedge-fund mavens top corporate executives wouldn’t be raking in so much money.
I always love it when progressives point to how awfully the government currently enforces existing laws in order to prove that we just need more government to achieve a just society. Even if we stipulate Reich’s narrative for the sake of argument, the feds let criminal masterminds walk even when they’re caught red-handed. So maybe the system is corrupt and we should try something other than trusting political officials to ensure honesty and integrity on Wall Street?
But the deeper flaw here is that “insider trading,” generally speaking, should not be a crime at all. If individual firms have confidentiality agreements that key employees sign, then of course violation of such clauses would be a breach of contract and subject to penalty. But in general, we want people to trade on “inside” information, because it helps reduce the volatility in stock market prices.
The average investor is actually helped when experts are maintaining vigilant watch on asset prices and minimizing the impact that a sudden announcement has on the markets. I go into more detail at this link, but suffice it to say that, if you actually think through a typical example of “insider trading,” you’ll see that the “victims” aren’t the general public — instead they are a small group of investors who otherwise would have benefited from dumb luck, but instead are having that “unearned” windfall accrue to someone else with superior knowledge of the asset.
Way No. 3: Bribe Politicians to Change the Tax Code
The next method is special because it is the goofiest of Reich’s five:
A third way to make a billion is to buy off politicians.
The Trump tax cut is estimated to save Charles and the late David Koch and their Koch Industries an estimated $1 to $1.4 billion a year …
If we had tough anti-corruption laws preventing political payoffs, the Kochs and other high-rollers wouldn’t get the special tax breaks and other subsidies that have enlarged their fortunes.
Everyone get that? Here Reich is telling us that the way to get a billion dollars is to first, get $50 billion. Then, pay politicians to reduce your tax bill by a billion. Boom! You just made a billion dollars. It’s just that simple.
Reich’s approach here reminds me of the old Steve Martin routine, where he says (I’m condensing), “You wanna become a millionaire and never pay taxes? First, get a million dollars. Then, when the IRS says you owe them money, just say, ‘I forgot!’”
According to Reich, the problem is politicians taking bribes to reform the tax code, and so you’d think the solution would be to punish those politicians for taking bribes. But that’s never what guys like Reich advocate. Instead, the private citizens offering the bribes are the ones who need to be punished, not the politicians for accepting those bribes.
Way No. 4: Defraud Investors
On this one, I have to be honest. I don’t even get how this works:
The fourth way to make a billion is to extort big investors.
Adam Neumann conned JP Morgan, SoftBank, and other investors to sink hundreds of millions into WeWork, an office-sharing startup. Neumann used some of the money to buy buildings he leased back to WeWork and to enjoy a lifestyle that included a $60 million private jet. WeWork never made a nickel of profit.
A few months ago, after Neumann was forced to disclose his personal conflicts of interest, WeWork’s initial public offering fell apart and the company’s estimated value plummeted. To salvage what they could, investors paid him over $1 billion to exit the board and give up his voting rights.
On Reich’s telling, investors put “hundreds of millions” into a company that never produced a nickel of profit, and then were still willing to pay an additional billion dollars to get Neumann to walk away from the wreckage. If Reich’s narrative was the only relevant factor, these big investors are incredibly stupid, paying a billion dollars for something only worth a fraction of that, at most. Or, we can surmise that there’s more to the story than Reich is letting on. In any event, notice that one of the big investors was JP Morgan — which was the subject of Reich’s “first way” to become a billionaire — so at least these illegitimate billionaires seem to be canceling each other out.
Way No. 5: Inheritance
Finally we come to the last method:
The fifth way to be a billionaire is to get the money from rich parents or relatives.
About 60 percent of all the wealth in America today is inherited, according to estimates by economist Thomas Piketty and his colleagues. That’s because, under U.S. tax law — which is itself largely a product of lobbying by the wealthy — the capital gains of one generation are wiped out when those assets are transferred to the next, and the estate tax is so tiny that fewer than 0.2 percent of estates were subject to it last year.
If unearned income were treated the same as earned income under the tax code, America’s non-working rich wouldn’t be billionaires. And if capital gains weren’t eliminated at death, many heirs wouldn’t be, either.
I understand the fun in denigrating the idle rich born with silver spoons in their mouths, but if we’re trying to base government policy decisions on intuitive notions of fairness, then how in the world do we justify taking a huge chunk out of someone’s wealth just to make sure he can’t give it to his kids? To paraphrase a line I heard once from Arthur Laffer (referring to the estate or “death tax” in the late 2000s), “If you’re rich, once you’ve paid your taxes on your income, you’re free to spend it on booze and gambling in Vegas. But if you have the audacity to give it to your kids, that’s a threat to society and we’re going to tax the hell out of it.”
The Billionaires No One Talks About
What’s funny is that when Bernie Sanders or Robert Reich complain about billionaires per se, they never seem to list these ones: Oprah Winfrey ($2.7 billion), Michael Jordan ($1.9 billion), and J.K. Rowling ($1 billion by this estimate, though she had earlier been on and off the billionaire list because of Britain’s taxes and her large donations). Whatever you think of the merits of these individuals, it would be harder for Bernie to vilify the self-made Oprah, or to criticize the market for paying a boatload of money to the greatest basketball player of all time, and to the author of some of the most beloved books in a generation.
More generally, as the global market continues to grow, we are going to see more billionaires. Quick: how many billionaires does the reader think there are, right now? The answer, according to Forbes, is 2,057.
Conclusion
There are plenty of billionaires who have benefited from special government privileges, or who have engaged in other forms of nefarious behavior. To the extent that we want the government to “do something” about this, the obvious answer is for government to stop giving such privileges to the super rich.
However, to the extent that people accumulate wealth through voluntary means, then they should be able to retain it. Whipping up the public to hate billionaires is a very destructive turn in US politics. Progressive leftists always warn about the “harmful rhetoric” on the Right, and of course point to Nazi Germany to end all arguments. Well, we can look at the Reign of Terror in Revolutionary France to see what happens when the masses get fired up against the rich.
