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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