Wednesday, September 2, 2020

Wealth Disparity and the Billionaire Lottery

The disparity in income and wealth in the USA has been increasing steadily for the last 40 years. Today, the top 1% has 33% of the wealth in the country. The top 10% has 70% and the bottom 50% has only 1.5%! 

In 1948 the top 10% had ‘only’ 30-35%, half of what they have today. The depression and the war years, with very large increases in tax rates for the wealthy, had the effect of dramatically reducing the disparity that had built up from the Gilded Age (end of the 19th century) to the Roaring Twenties. The current level of wealth disparity is quite similar to that of 1929. 

High tax rates continued to keep the disparity somewhat in check from the 50’s to the 70’s. During this period the highest tax rate never went under 70% and peaked at 90%! But beginning with Reagan’s presidency, tax rates decreased steadily, going as low as 35% during the Bush presidency. The highest tax rate today is 40.8%, though no wealthy person pays anywhere near that percentage of tax. 

It is a given that the more wealth you have, the faster it grows. Wealthy people have investment opportunities that ordinary mortals cannot access. The top 10% own 84% of the stock market. Also, both the appreciation of the wealth itself and the income generated from it are either not taxed at all or taxed at a lower level than ordinary income. For example, stocks or other investments are not taxed until there is a sale. And capital gains from stock sales are taxed at a much lower rate. Shockingly, wealthy people are also very adept at evading taxes. 

Who are these very wealthy people and how do they get so absurdly wealthy? That is a complex question with a long answer. But let’s look at one group of absurdly wealthy people – software application businesspeople, the so-called tech giants. A software development business requires a very low capital investment compared to a manufacturing business. Also, the number of workers employed in software development is initially very small, and even once the company grows it is a fraction of the people employed in a manufacturing business of equivalent revenue. 

A software or network-based business can provide services for a vast number of people for very little cost in terms of employees and infrastructure. But here is an even more important factor: Because of the ubiquity and infinite reach of the Internet, a single application business can attain monopoly status without even having to really compete. In many situations, and particularly in social media and consumer goods (a la Amazon), people tend to flock to the same application because the people they know are using it. There is a definite herd instinct. 

Facebook didn’t establish a monopoly on social media because it was better or had ingenious software. People came to FB initially because of its cache as the Ivy League place to be. Once a critical mass of college students and alumni were on board, the rest of the US and then the world followed like so many lemmings. Who is going to use another social media site when all one’s friends are on FB? 

The entrepreneurs who create software and network applications are often participating in the equivalent of a lottery. The great majority of them don’t have unique ideas or capabilities. I have seen this firsthand. Any accomplished software developer is perfectly capable of developing most of the existing billion-dollar applications. But if they manage to hit the jackpot with the right timing, market demand, investors, connections and marketing (and of course it doesn’t hurt to have some backers or angel investors who are well-known in the industry to promote your application), then the rocket ship of growth can take off and propel a typically very small cadre of founders, investors and initial workers into stratospheric wealth. 

Unlike the Gilded Age, where monopolies such as railroads, steel, oil and banking were established by thuggery, conniving and political machinations, the modern era monopolies are to a great extent self-generating. The Internet delivers all potential customers to their door, and search engines, along with a combination of human nature and herd instinct, will quickly create a dominant site that dooms competitors to obscurity. 

And the large ‘knowledge’ corporations of today don’t have to exploit their workers and pay Pinkerton agents to break up strikes to amass wealth for themselves and their cronies, because there are damn few workers and the profits and stock valuations pile up without the need for any dirty work! 

Solidifying and preserving those monopolies does take some effort, for example gobbling up trendy new variations on the theme before they can really cause any damage, or using their vast size to undersell everyone else. Bezos, Zuckerberg et al have certainly channeled Carnegie, Rockefeller, Vanderbilt and other robber barons in this regard. 

There is a long history of the gilded class arguing that having massive wealth in the hands of a few is the best way for civilization to progress. I will address this self-serving trope in a future essay. However, the fact that our current wealth disparity and stock market ‘irrational exuberance’ is so similar to conditions just before the Great Depression might make us all pause and reflect on where our society is headed. 

And then there’s COVID-19 and global warming . . .

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