MICHAEL R. STRAIN
“Billionaires should not exist,” argues Vermont Senator Bernie Sanders, who has long described himself as a democratic socialist. Indeed, “every billionaire is a policy failure” is a relatively common slogan among American progressives.
Unsurprisingly, the economic populists and nationalists on the political right find themselves in agreement with the progressive left. A few months ago, Steve Bannon, former US President Donald Trump’s former chief strategist, called for “massive tax increases on billionaires” because too few of them are “MAGA.”
These nationalists and progressives have it backwards: we should want more billionaires, not fewer.
Billionaire innovators create enormous value for society. In a 2004 paper, the Nobel laureate economist William D. Nordhaus found “that only a minuscule fraction” – about 2.2% – “of the social returns from technological advances” accrued to innovators themselves. The rest of the benefits (which is to say, almost all of them) went to consumers.
According to the Bloomberg Billionaires Index, Amazon founder Jeff Bezos is worth $170 billion. Extrapolating from Nordhaus’s findings, one could conclude that Bezos has created over $8 trillion – more than one-third of the United States’ annual GDP – in value for society. For example, Amazon has reduced the price of many consumer goods and freed up an enormous amount of time for millions of Americans by eliminating the need to visit brick-and-mortar retailers. Bezos, meanwhile, has received only a tiny slice of those social benefits.
Of course, not all billionaires are innovators. But the same logic can be applied to billionaires from any professional background. For example, Wall Street titans create value by efficiently allocating capital throughout the economy. Over time, this lowers costs and spurs productivity and innovation, all of which benefit millions of households and businesses.
Entrepreneurship and hard work, not dynastic inheritance, is the primary path to a nine- or ten-figure net worth. Around three-quarters of the wealthiest 1% of American families own privately held businesses (compared to 5% of families in the bottom half of the wealth distribution), with business assets accounting for more than one-third of their balance sheets. A 2013 paper found that around seven in ten of the wealthiest 400 Americans were self-made, and that two-thirds did not grow up in wealthy families.
Overall, America’s system of democratic capitalism is working. In a democracy, unequal market outcomes are accepted by society if they reflect differences in work effort, risk tolerance, or skill. The evidence shows that the primary determinant of worker compensation is productivity.
To be sure, there is room for improvement. But rather than tearing down billionaires, the focus should be on providing the poor and the working class with on-ramps to economic opportunity. Opportunity abounds in the US. For example, consider America’s many excellent two- and four-year colleges and low structural unemployment.
Similarly, the furor over billionaires is misplaced in the debate about income inequality, which assumes that income is distributed to households and questions the share going to the top. But in a market economy, income is earned, not distributed. Moreover, when measured using the income of all households – not just billionaires – inequality has been stagnant or declining for well over a decade.
More fundamentally, billionaire-bashing sends young people the terrible and perverse message that success is bad. This could lead them to lower their aspirations, put in less effort, and become less tolerant of risk. Precisely because hard work pays off – productivity drives compensation – such a message could exacerbate inequality, the problem that anti-billionaire advocates purportedly want to fix.
Ironically, many of the loudest voices promoting this message are from upper-income households. Their children are the least likely to be affected by it (they will be enrolled in high-quality schools and colleges, often with expensive tuition, regardless), whereas many children from lower-income households who listen attend relatively lower-quality schools and are less likely to go to college.
It is morally appalling to treat any group of Americans the way populists and nationalists treat billionaires. Authoritarians on the right want to use the state’s power to punish them for being insufficiently loyal to Trump. And many on the left want to impose special taxes on them as well. Senator Elizabeth Warren’s “ultra-millionaire tax,” for example, would apply to only 0.05% of households. Rather than treating billionaires as full participants in a shared social enterprise, such proposals reduce them to revenue generators who need to be taken down a few pegs. The tax system should not be weaponized to penalize any group of Americans, including the rich.
Take a look at the top ten billionaires on Bloomberg’s index. They are largely self-made innovators who have changed the way we live: Bill Gates and Steve Ballmer revolutionized personal computing; Jeff Bezos upended retail; Larry Page, Sergey Brin, and Larry Ellison elevated web search and database software; and Elon Musk disrupted the automotive industry and space commerce. Mark Zuckerberg is a social-media pioneer, Bernard Arnault a skilled CEO, and Warren Buffett a legendary investor.
None of them are “policy failures.” Rather than wishing they did not exist, we should be thrilled that they do. The value they have created for millions of people around the world dwarfs their net worth. Some will be in the history books long after today’s blustering politicians are forgotten.
Children should see these people’s careers as worthy of emulation, stirring their imaginations and fueling their aspirations. This would benefit not only those children when they reach adulthood – but all members of society, who would reap the fruits of their ideas, skills, and efforts.
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