Wealth: earned or inherited?

by John Quiggin on May 6, 2014

The efforts of the right to discredit Piketty’s Capital have so far ranged from unconvincing to risible (Chris picked up a particularly amusing one from Max Hastings in the Daily Mail, to which I won’t bother linking). One point raised in this four-para summary by the Economist is that ” today’s super-rich mostly come by their wealth through work, rather than via inheritance.” Piketty does a good job of rebutting this, but for those who haven’t acquired the book or got around to reading it, I thought I’d repost my own response, from 2012.

The coming boom in inherited wealth (repost)

As everyone who has been paying attention knows, the news on inequality is nearly all bad. Not only has inequality increased dramatically in the US, but intergenerational economic mobility is declining[1]. And, where the US leads, the rest of the world looks likely to follow. The top 1 per cent lost more than most during the crisis of 2008-09 but, as Stephen Rattner reports here (drawing on work by Piketty and Saez), that was just a blip. A stunning 93 percent of the additional income created in the US in 2010, compared to 2009, went to the top 1 per cent, and there’s no reason to think things were much better in 2011 – average real earnings have fallen yet again, and employment growth, though positive, was still modest. Wealth inequality is also high, though it has not increased as much as income inequality.

The one bright spot mentioned by Rattner is that ” those at the top were more likely to earn than inherit their riches”. Since I’m already noticing that point popping up in the places you might expect to see it (can’t find a link right now), let me point out that Rattner’s explanation, that “the rapid growth of new American industries — from technology to financial services — has increased the need for highly educated and skilled workers” is wrong, and that there is every reason to expect a boom in inherited wealth.

The fact that currently wealthy Americans have not, in general, inherited their wealth follows logically from the fact that, in their parents’ generation, there weren’t comparable accumulations of wealth to be bequeathed.  More generally, starting from the position of relatively (to earlier periods and to the current one) equal income and wealth that prevailed between about 1950 and 1980, growing inequality of income must precede growing inequality of wealth, since wealth is simply the cumulative excess of income over consumption (and US high-income earners have not been notable for restraint as regards consumption). 

So, given highly unequal incomes, and social immobility, we can expect inheritance to play a much bigger role in explaining inequality for the generations now entering adulthood than for the current recipients of high incomes. That will include direct transfers of wealth as well as the effects of increasingly unequal access to education, early job opportunities and home ownership.

 

fn1. More precisely, since intertemporal comparisons are difficult, the chance that a person with parents at the top (or bottom) of the income distribution will end up in the same or a similar position is now higher in the US than in Europe, whereas, until at least the  late 20th century there was good reason to think that the oppositewas true.

{ 67 comments }

1

Main Street Muse 05.06.14 at 11:12 pm

“…those at the top were more likely to earn than inherit their riches”…

I really really really wish those with bully pulpits would explore the rampant fraud that is inherent in this “earning” of their riches.

First of all, there is this article in the NY Times, that suggests Steve Jobs would be on trial right now for price fixing, threats to sue people who poached “his” talent, etc. http://nyti.ms/1kJPQfx

The financial crash of 2008 bled the US economy of funds as it enriched the bankers. Here’s a group of teachers in Kenosha, WI who were royally screwed out their retirement funds by fraudulent bankers… http://bit.ly/1aBPZgS

Please tell me how the CEO of Abbott was “worth” $17.7 million in 2012 (he earned $120 million over six years.)

What did Jamie Dimon do in 2013 to earn a 74% raise, bringing his compensation up to $20 million for that 12 month period? #AskJPM

Meanwhile, minimum wage, when adjusted for inflation, is set at a level lower than when Reagan was president – and in fact is lower than when LBJ was president. Rising tide has swamped most of the boats…

2

Bruce Wilder 05.06.14 at 11:46 pm

I’m glad to see Main Street Muse fighting the good fight.

That wealth is inherited seems like a pale, incidental detail next to the fact that so much of the burgeoning wealth of the 1/10th of 1% is funded from looting the middle classes and privatizing the state.

The staccato of daily reports on Naked Capitalism heralds a counter-revolution well-advanced. Talk of a neo-feudal future does not seem like a fanciful hyperbole.

3

Tabasco 05.06.14 at 11:50 pm

“…those at the top were more likely to earn than inherit their riches”…

Earn obviously means, in this context, “income from their job”. It doesn’t mean “deserve”.

There’s one way for inequality not to become inter-generational. The hyper-rich might
give it all away like Bill Gates is doing, and Warren Buffett is planning to do.

4

floopmeister 05.07.14 at 12:02 am

Here;’s the list of the 10 richest people in the UK:

http://www.ibtimes.co.uk/britains-10-richest-people-revealed-1438579

By my count 4 of the 10 are ‘self-made’ (regardless of how that occured – hello Roman Abramovitch!) and 6 are inherited wealth (in that Lakshmi Mittal started out the son of a steel magnate and Srichand Hinduja also comes from wealth). Leonard Blavatnik, John Fredriksen and the Branson are the other three ”self-mades’ on the list

Not sure how many of the ‘self-made’ have kids but you can bet that if they do they’ll be knocking on the ’10 richest’ list next year (hello Hans Rausing!)

Over time the numbers of the ‘self made’ will fall – which is of course Piketty’s point…

5

floopmeister 05.07.14 at 12:06 am

Whoops – meant ‘in year’s to come’ rather than ‘next year’ – unless the uber-wealthy have found a way to fast track their offspring to maturity…

6

Tabasco 05.07.14 at 12:21 am

I thought the Queen would be in the top 10.

7

Sandwichman 05.07.14 at 12:24 am

I hope the Max Hastings piece was dictated in a Turkish bath.

8

roy belmont 05.07.14 at 12:31 am

Given a definition of “work” that is essentially “having to do stuff that is not immediately gratifying and requires expenditure of energy”:
It’s work to import heroin. Hard work. The more heroin the harder the work, so justifying greater profit from that work. Plus illegality means enormous risk, so why shouldn’t risk-takers be rewarded for their bravery?
It’s work to oversee slaves, and the more slaves there are the harder the work to oversee them. Overseeing overseers is meta-hard. Foxconn/Jobs/Apple.
It’s work to scam people out of their resources, getting them to sign binding contracts that are against their interests and well-being is serious work.
Lying to and tricking people is very hard work, fraught with the risk of discovery.

“…like Bill Gates is doing, and Warren Buffett is planning to do…”
On your screen they are.
In the real world, not exactly.

9

floopmeister 05.07.14 at 12:34 am

Tabasco – apparently the Queen doesn’t ‘own’ her wealth in the same absolute sense of personal ownership (ie she’s not free to put Windsor castle up for sale or rent out Buckingham palace as a B&B). However I’m sure things like her racehorses are true ‘personal property’ in this absolute sense, however.

Not sure on the details TBH but there are constitutional considerations connected to much of her wealth.

10

John Quiggin 05.07.14 at 12:35 am

Agree with everyone, of course, in using “earned” to mean “derived from work”, not “merited”

11

Collin Street 05.07.14 at 12:40 am

But if “investment manager” is regarded as “work”, how do you not earn money from “work”?

What sort of incomes are unearned, exactly?

12

Tabasco 05.07.14 at 12:42 am

floopmeister – I thought she actually does own one of her castles (Balmoral? Sandringham?) in the sense that is the property of her family, not the Crown (or State).

13

Jerry Vinokurov 05.07.14 at 12:44 am

I guess you could consider Blavatnik “self-made” in the sense that he himself undertook the looting of a broken state. Something tells me that this is probably not the kind of “self-making” we as a society would like to encourage.

14

Tabasco 05.07.14 at 12:46 am

Collin Street – unearned income is usually taken to mean rent, interest, dividends and capita gains.

The fee that an investment manager gets from providing advice is income from her labor, so is earned.

15

Tabasco 05.07.14 at 12:49 am

There is now a Blavatnik School of Government at Oxford, possibly not coincidentally after he gave them 85 million pounds.

I say, why not? If you can have a Carnegie-Mellon University, you can have anything.

16

floopmeister 05.07.14 at 1:07 am

Tabasco I thought she actually does own one of her castles (Balmoral? Sandringham?) in the sense that is the property of her family, not the Crown (or State).

Yeah, that’s probably right – like I said I don’t know the exact details but the fact that she’s not in the top ten would imply that a large amount of her money falls into the ‘not strictly personal’ wealth (at least as defined by the people who compiled the list).

I guess that this is like the old Roman concept of wealth in that it’s whatever you are free to either use or abuse – it’s completely alien to the concept of wealth being ‘held in trust’ for some greater good or social value (either noblesse oblige or Christian concepts of social justice etc).

17

floopmeister 05.07.14 at 1:09 am

I guess you could consider Blavatnik “self-made” in the sense that he himself undertook the looting of a broken state. Something tells me that this is probably not the kind of “self-making” we as a society would like to encourage.

Sure – I’m under the understanding Abramovitch falls into that category as well. ‘Self-made’ was not meant to imply a judgement of morality (or lack thereof!).

Simply that it was not inherited wealth/capital.

18

awy 05.07.14 at 1:41 am

asset appreciation that is not cashed out is not counted as income, no? it’s a bit misleading to say wealth inequality is preceded by income inequality when what you do with the income (as well as existing wealth) also matter.

19

Collin Street 05.07.14 at 2:20 am

it’s a bit misleading to say wealth inequality is preceded by income inequality when what you do with the income (as well as existing wealth) also matter.

Not if “what you do with the income” closely correlates with how much the income actually is, if there’s little diversity in “what you do with the income” at any particular income level. In that case the variability from different outgoings would be more-or-less subsumed into the variability from different incomings and the independent effect would be negligible.

Ignoring it might or might not be false, but — in this situation — it wouldn’t be misleading.

20

awy 05.07.14 at 2:56 am

yea misleading wasn’t the right word when it comes to income inequality leading to wealth inequality. there’s an obvious effect there. but i do think it’s misleading with the causal reduction.

21

Belle Waring 05.07.14 at 5:27 am

“There is now a Blavatnik School of Government at Oxford [!?–Belle]…I say, why not? If you can have a Carnegie-Mellon University, you can have anything.”

See? All modern-day robber-barons need to do is donate money to vaguely educational/cultural causes and their good names are assured. I favor the decriminalization of all drugs. After that, when the big-time dealers come out of the shadows on their one-time-only get out of being a sketch-ass heroin dealer/become the owner of a National Football League team free card, then they donate a fuckton of money to the Betty Ford Clinic and all is well. No, they should donate it to Eric Clapton’s “Promises,” an unbelievably expensive rehab in…ne, St Baart’s or something. Nevis? So expensive. (I checked one time, for someone whose family was considering. Betty Ford, though spartan for its attendees, is also crazy ex). Wow high quality of sobriety. Much dollars. The “Weaselface Sketch Heroindealer wing of the Promises rehabilitation center” is no stupider than the Frick museum. (In case you guys were wondering if I have a bee in my bonnet or something I happen to really hate a certain Ms. thingFrick. Seriously, fuck her.)

22

bad Jim 05.07.14 at 5:28 am

Fuck the wealth tax. Let’s just get rid of preferential treatment of capital gains, or even tax them higher than other sorts of income, with perhaps limited exemptions for the sorts of capital gains the 99% might see. Or just index each sort of unearned income according to the difference between its trend and that of median income.

I’m a wealthy layabout. All my income is unearned, and each income stream is differently taxed; only a portion of my interest income is subject to the same level of taxation as salaries. There’s no good reason why dividend income should be privileged; maybe dividend payments ought to be as deductible from corporate income as interest payments, but that’s a separate issue.

Ta-Nihisi Coates and others need to keep reminding us that there are already enormous disparities in wealth in America, because it’s not part of daily experience for most of us. A surprising number of fellow citizens are one or two missed paychecks or an emergency room visit away from homelessness. The fact that income inequality exceeds wealth inequality doesn’t mean that the latter isn’t a deadly problem, it means that the former has reached ridiculous levels.

23

Jim Harrison 05.07.14 at 5:56 am

It’s not just that capital gains are taxed at a low rate. In the absence of effective inheritance taxes, they are often not taxed at all. The basis is reset when assets go from parent to child.

24

Art 05.07.14 at 7:13 am

I don’t understand why smart, progressive economists like JQ don’t plug the benefits of a land value tax at every opportunity, especially when talking about inheritance.

25

bad Jim 05.07.14 at 7:54 am

We need a reasonable estate tax, no question. Right now the exemption in the U.S. is a bit above five million, which is arguably in the right ballpark; more than what my mother left us, less than what I have right now.

There are problems with any sort of property tax. My next-door neighbors have nearly as desirable a property as I do, but a very limited income and no other assets. They, like us, bought their home when it wasn’t insanely valuable. Numbers? My parents paid $36,500 back in 1961. Now it’s worth around $1,600,000, which is kind of hard to handle. In California, a notoriously high-tax state, my taxes are of course horrendous … no of course not, they’re negligible; thanks to Proposition 13, the assessed value of my house is less than $90,000. It’s utterly ridiculous. I could easily pay my fair share, but my neighbors couldn’t, and when they die their kids couldn’t unless they sold the house, which they might be as loath to do as my siblings lately proved.

Maybe we need sharp breakpoints. Pillory anyone with a salary over a million dollars, but someone with only $500k gets gently teased.

26

notsneaky 05.07.14 at 8:01 am

And, where the US leads, the rest of the world looks likely to follow.

I think this is wrong, though it’s a claim I’m willing to be corrected on. I believe it’s only right if by “rest of the world” you mean “developed countries”. My understanding is that inequality has actually decreased in the past decade in the places where it has traditionally been the highest, Latin America and Sub Saharan Africa (I’m fairly certain in regard to the former, less certain as to the latter).

In a strange way, the fact that the large increase in inequality in rich countries, particularly US, is finally getting some broad attention has overshadowed and pushed out of the spot light the fact that inequality has been falling in these other, “less noticed”, places. Which muddies the picture.

And along those lines, it’s not clear if one can make any grand sweeping political conclusions based on these trends. It’s not obvious that the decline in inequality in Latin America and Sub-Saharan Africa can be attributed to re-distributive or left wing policies. There is/was some of that, with the abandonment of the “Washington Consensus”. But at the same time, a lot of the countries which have been experiencing it retained fairly pro-market policies while nominally ruled by leftist parties or , in the case of Sub-Saharan Africa (and like I said, I’m a bit less convinced or sure here) have been doing the whole IMF style structural adjustment thing.

27

Tim Worstall 05.07.14 at 8:23 am

Re the Queen’s money. Balmoral and Sandringham are personally owned. So are the race horses etc. Last time I saw her personal wealth was put at around £50 million.

Buck House, Windsor Castle, the royal art collection, the stamp collection (surprisingly valuable), Duchy of Lancaster (which owns chunks of Regent Street I think) and so on belong to “the Monarch” and so are not “personal” wealth. The Crown Estate (hugely valuable) is one remove further out. Revenues go to the government in return for the Civil List (old system, just been changed to percentage goes to cover costs of Buck House, Windsor Castle etc).

Same with Charles and the Duchy of Cornwall. Belongs to the Duke of Cornwall who will be William when Brenda pops her clogs.

Vast wealth yes, all of them. But associated mostly with the office, not the person.

28

shah8 05.07.14 at 8:24 am

I think the picture will change soon enough, and I do not believe that *wealth*, per se, will be transmitted. Perhaps *social position* will be…

I say this because I think a big part of the story is the global synchronization of housing as a way to park cash–very much in the sense of Charles Stross’ concept of slow money. It’s not truly medium money because without timing luck, you’ll almost always lose money without substantial coordination of others who “cosigns” the validity of the worth of your consumption and person. The purpose of this social coordination is about insuring indexed returns, and it’s easy to press governments to make the nonflashy laws that assist such absentee handling.

I think that this setup is quite fragile in reality. I don’t think in terms of property market crashes, as all the internet blogs for disgruntled cynics attempts to prophesize. It wouldn’t take a real crash. It would only take acquiescence to ever stronger pressure for locally appropriate housing regulations in enough of the major cities of the world. Housing regulations that have to happen sooner rather than later, given the kind of crisis building in many places, from Singapore to San Francisco. No more or less than the ECB can refuse to address deflation for all that much longer.

If housing can’t provide one of the primary means to coordinate surplus gdp back to the .01% (politically, through control of other people’s need of housing, not necessarily pecuniary compensation) , for example as how Israel’s economic and political mix supports social stratification and settler policy goals, then the political regime must change. I think that this largely means bad news for oligarch families, because I think that the credibility of the new state will almost certainly depend on eating the rich. This is because of how well gattopardo maneuvers have worked to make previous changes rather stillborn–Orange Revolution 2004 vs. today’s Ukraine. Same path South Africa is headed now.

I really, really, think that worrying about the long term inheritance issue is a moot point. Modern society is not remotely capable of handling any sort of neofeudalism. It takes an utter ahistorical perspective that lacks any comprehension of how under-capitalized and inefficient feudalism is, and then imagine that any technological society can function in a political milieu anything like what agrarian societies were like. No matter how much robots can do for us, every single piece of human created devices are made of people. Are ultimately serviced of people. And when you look at the Ukraine (or Greece), it is not an unreasonable example of what modern technofeudalism is truly about–systematic underinvestment until collapse and violent default proceedings occurs. All this stuff happens inside of a span of a generation. How many inheritances are going to happen? One way or another, not much.

Other aspects of socio-economic import deserves more attention.

29

Hix 05.07.14 at 8:37 am

Self made is relative when all new tech billionaires have an upper1% background. Sometimes they dont swim in lots of parents money, but they at least swim in social capital. E.g. one of the google founders parents were both academics.

30

John Quiggin 05.07.14 at 10:29 am

Art@24 If I repeated all such things at every opportunity, my posts would be, well, very repetitious. But I do talk about land tax a fair bit eg

http://johnquiggin.com/2012/08/06/must-try-harder-part-2/

31

Ronan(rf) 05.07.14 at 10:46 am

“It’s not obvious that the decline in inequality in Latin America and Sub-Saharan Africa can be attributed to re-distributive or left wing policies. There is/was some of that, with the abandonment of the “Washington Consensus”. But at the same time, a lot of the countries which have been experiencing it retained fairly pro-market policies while nominally ruled by leftist parties”

Well there have been plenty of developing countries that have implemented ‘fairly pro market policies’ which have seen inequality increase, so the reasons are probably specific to the political economies of whichever latin american/sub saharan economies you’re talking about specifically. I’d imagine that strenghtening of democracy is the primary factor, and by extension a more egalitarian set of policies – greater redistribution/public spending/space for workers to organise etc.

32

david 05.07.14 at 12:36 pm

Why is there a dichotomy between earning and inheritance? Are lottery winnings earned or inherited?

33

notsneaky 05.07.14 at 12:56 pm

@31 That may be and probably is a part of it. On the other hand, in the past, in Latin America inequality rose, even during democratic periods. So strengthening of democracy by itself cannot be the only reason.

34

Ronan(rf) 05.07.14 at 1:08 pm

No strengthening democracy by itself isn’t (look at India) but strengthening democracy under certain distributional contexts (ie more responsive to the poor – so by extension strengthening unions, developing a functioning judicial system etc) is more what I was getting at.

35

Ogden Wernstrom 05.07.14 at 1:13 pm

bad Jim 05.07.14 at 7:54 am

We need a reasonable estate tax, no question.

Agreed. Too bad about 2010 in the USofA, though. That was the year that there was no federal estate tax.

I expected a rise in Do-Not-Recuscitate orders for the well-to-do that year, but I did not suspect this other ploy: In 2010, many multimillion-dollar estates in the US were transferred to trusts.

It’s not certain to work, but the tactic will be to claim that the laws of 2010 should apply for the purposes of estate taxes when the grantors have passed.

36

John Glover 05.07.14 at 1:50 pm

” “[T]oday’s super-rich mostly come by their wealth through work, rather than via inheritance.” “

It seems to me that the income earned by these super-rich – and the highest “earnings” Rattner refers to – shouldn’t properly be categorized as income from labor, but instead should be categorized as income from capital. The people who “earn” these high incomes do so through control of the uses to which capital is put. An essential element of the ownership of something is its possession and control, and it seems to me that if you derive income from the possession and control of capital, that is capital income.

When someone invests in a hedge fund, the general partner isn’t managing the investment. It effectively owns it, subject to an obligation under the partnership agreement to pay the money back to the investor with an agreed return. It’s little different from him buying the investment on margin. Only the legal obligations to his investors have changed. But in no sense is the income earned by the general partner “labor income.” Certainly it’s not tied in any sense to the quantity or quality of the effort made by the general partner. It’s income goes up based on the size of the investments that are made – the amount of capital it controls – rather than the amount or quality of the labor. What it earns is capital income.

I think a lot of what people categorize as labor income is really capital income. And I think that the ratio of capital income to labor income is probably significantly higher than most people would recognize.

37

Dryly 41 05.07.14 at 3:22 pm

I think this post is right and that we can expect a wave of inherited wealth.

However, Paul Krugman point out that six of the Forbes top ten in wealth have inherited their wealth including the Koch brothers and the Walton family.

Finally, none other than Andrew W. Mellon advocated taxing earned income more lightly than investment or unearned income. True conservatives in the 1920’s favored a progressive income tax.

38

TM 05.07.14 at 3:41 pm

The Russian oligarchs are all “self-made entrepreneurs”, i. e. they looted their billions on their own, with their own hands, with no help from daddy (except most were well-connected with the old apparatchiks but that’s a detail). So nothing wrong with that.

Really, our American super-rich are not so different from the Russians. They “earned” their fortunes the honest way, by stealing. They deserve our admiration.

39

this pea 05.07.14 at 6:36 pm

Could somebody pretty please summarise the Max Hastings loveliness? Would hate to click-feed the Daily Mail monster.

40

aidian holder 05.07.14 at 6:56 pm

“Why is there a dichotomy between earning and inheritance?”

Because untaxed inherited wealth ultimately leads you to Uday Hussein.

41

Plume 05.07.14 at 7:45 pm

No one “earns” millions of dollars, much less billions, if they’re a capitalist. Since the super-rich set the “value” of our wages, without our consent or input, the super-rich just play the game better than anyone else. So, one could say, with a h/t for all the PoMod transformations of words into verbs, they “clevered” it. They exploited their workers and the system to make massive amounts of money, and none of it has one iota to do with “merit” or “virtue” or “earning” anything.

People should be paid for what they do, not for what dozens or hundreds or thousands or hundreds of thousands of people do for them. If all of those people are being paid for what they do, then the person in charge, the owner of the whole deal, can’t possibly make millions or billions. There isn’t enough surplus leftover for that. So, in our system, the folks who set up the game and maintain it have decided that the owners make obscenely more than they “earn,” and their workers make obscenely less than they earn. That creates inequality, and it’s immoral, at the very least.

It should be illegal, too.

M-C-M . . . instead of C-M-C. No capitalist ever, ever can possibly “earn” their fortune. It is mathematically, ethically and morally impossible.

42

roger gathman 05.07.14 at 8:50 pm

This is why we need a ceiling beyond which an individual cannot ‘earn’ money. It would free them up to do other things, if they want. If one couldn’t earn beyond a hundred times the median income – 5 million I think that comes to – then they could slack a bit, not maneuver companies into profitable disaster, or maybe even take to the arts, or fishing, or literary criticism.

43

someofparts 05.08.14 at 1:27 am

I can’t speak for Sub-Saharan Africa as a whole, but where South Africa is concerned, there is some interesting information about their circumstances in Naomi Klein’s book Shock Doctrine. Apparently, after they won political independence, parallel financial negotiations took place which placed them under permanent economic peonage to their former colonizers despite their new freedom to self-govern.

44

Plume 05.08.14 at 4:17 am

Roger,

The median income for a single person is roughly 27K. It’s a bit over 50K for a household. The household measurement is misleading in a way. Many people conflate that with an individual’s income, but a household can include more than one income.

Orwell thought a 10 – 1 ratio fair. I think 4 to 1 is better. Ironically, that’s roughly the top to the middle scale for public sector work — give or take. It might be a tad more than that, perhaps 5 – 1, but it’s close.

Again, I have no problem with people being compensated well for their own work. But A CEO or a business owner, if she or he has employees, is paid for their work and their employees’ as well — and that comes out of the pocket of those employees. That is immoral and should be illegal.

There is also the distinction between the small shop owner who is both capitalist and worker at the same time. They deserve more leeway, as they generally work side by side with their employees, and put in the sweat on the proverbial shop room floor. But someone who is strictly a capitalist does not engage in labor with their employees. He or she pays them to produce a commodity in order to make more money, with their labor being a commodity as well, which he or she has bought. When they make 300 times or 1000 times or 10,000 times as much as their employees, they cheat them — the greater the ratio the more they have cheated them.

Again, this should be illegal. It is immoral and unethical. But in our day, too many don’t see this, just as they don’t see the insanity of worshiping a god who would slaughter every man, women, child, animal and insect, etc. etc. save for a few, out of a sudden fit (Noah’s Ark). If they take the bible literally. It makes sense that those who see their god as having “the right” to do this would also see their boss or another’s boss as having “the right” to pay themselves hundreds or thousands of times more than their employees. It’s all basically coming from the same mentality . . .

45

bad Jim 05.08.14 at 6:17 am

Ogden Wernstrom, there was a “Law & Order” episode about that circumstance, but not much else. It’s as though estate taxes didn’t much matter. I can’t explain, since I don’t know much about it; everybody nags me about putting my money in a trust, but I don’t know why. I get the impression that it’s considered a sin to expose one’s heirs to taxation.

My parents’ estate planning was an exercise in futility, sizable sums paid to a lawyer which led to further fees when the instrument they chose matured, and the end result is that we’re saddled with a 1987 basis for a property which has greatly appreciated meanwhile; if they’d done nothing it would have passed through tax-free.

In the process of sorting out the estate, and the somewhat asymmetrical distribution we chose, the lawyer suggested creating a limited partnership to own the house. This, she said, would protect me from my evil brothers and sister. There is a certain baroque appeal to such an arrangement, and it could continue the property’s indefensible assessment in perpetuity, just like every piece of commercial property in California, but it probably doesn’t justify the fees to create it or the annual tax.

46

Ed Herdman 05.08.14 at 6:33 am

roger gathman’s argument is an interesting one, though I wonder what’s actually desirable about forcing all highly-motivated earners to “slack a bit.” So somebody screwing around with hedge funds might look like a good target, but what about somebody else who uses their fortune as a counterbalancing force? It’s not at all obvious that Bill Gates’ connections and money are going to waste.

Note that this is, at worst, just a lifetime’s worth of potential horribleness, as it’s not about inheritance yet. Somebody who uses their wealth perversely, rather than wisely, would still provoke attempts to clip their wings, but the issue seems to be more about what they actually try to do with their money. The reason that inheritances are such a big deal is that they lead to all kinds of terrible behaviors like rent-seeking. But surely there are kinds of political activism + money that don’t qualify as rent-seeking and are even positive.

47

Plume 05.08.14 at 7:25 am

Bill Gates and the Steve Jobs of this world accrued their fortunes by screwing over tens of thousands of workers, stealing ideas, crushing smaller competitors, and so on. There is nothing they’ve done via charities that couldn’t have been done by truly democratic public sectors, and without the initial exploitation used to amass those fortunes.

And if the people in China (and elsewhere) at places like Foxconn made fair wages, instead of 70 cents an hour, under conditions that drive all too many to suicide, perhaps far less “charity” would be necessary in the first place. Ideally, we’d have societies, even with capitalism still in place, in which the lowest wages are fair and living wages, with healthy and safe working conditions and good benefits guaranteed, by law, for everyone. And anyone who wanted to work would have a guarantee of a job — public or private — with those minimum standards as the lowest they could sink.

Ruling class “charity” isn’t necessary if we end the privileges of the ruling class and fully democratize the economy. Their charity is only helpful because they’ve created massive inequality in the first place. Praising them after the fact is like praising a wealthy arsonist for paying for firefighters to put out the fires he or she started.

Bottom line: Capital formation happens in the public sector, too, obviously, and on a much bigger scale. Private sector capital formation in the rare service of the public good can easily be replaced by actual, living, democratic public sector spending on behalf of the public. etc. etc.

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Ed Herdman 05.08.14 at 7:58 am

I agree with your statement that other organizational structures could possibly achieve similar ends – but as usual I’m not sold on the plausibility of it happening.

(Didn’t say anything about Steve Jobs, who strove to appear allergic to charitable thoughts – although soon after he died the whispers of his secret philanthropic tendencies quickly emerged. His company has, at least recently, followed that public example strictly.)

The point is that by cutting down on inheritance you make a sizable dent in the problem, which is a promising start. We don’t need a razor-thin margin here, just a win. Some of the other obvious solutions seem unable to discriminate between preventing abuses, and punishing people with drive and genuine instincts to do good. I don’t think that forcing everybody with charitable impulses directly into democratic politics is necessary or desirable, for instance, even with the example of the Koch brothers.

49

bad Jim 05.08.14 at 8:26 am

Plume: bullshit. We made millions because there was a market for the product and our competitors were less competent than we were. In fact, we prospered by treating our employees and our customers better than they did. We didn’t have to lie, cheat or steal. Because we were an S corporation the rapacious federal and state governments took about 55% off the top, but somehow we managed to do okay, kept growing and hiring more interesting people. We paid generous bonuses in every quarter that showed a profit.

Manufacturing was kind of fun. I’ve been out of the game for fifteen years, but I still dream about it.

50

Cian 05.08.14 at 12:39 pm

#48 Some of the other obvious solutions seem unable to discriminate between preventing abuses, and punishing people with drive and genuine instincts to do good.

But if only the rich can do ‘good’, then what we get are the acts that the rich think are ‘good’. Which is going to represent the views of a narrow and insulated elite.

Incidentally I’ve seen the results in both the US and the social democratic countries in W. Europe. The latter have better outcomes in all areas for most people. We do actually have alternatives in the real world. I realize the US is ridiculously parochial, but still.

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John Garrett 05.08.14 at 2:40 pm

BadJim@49 – thanks for a dose of reality here. To add to it, I’ve been starting companies for 20 years, some successful some not, and have lots of friends who as a result have lots of money. Most of them, like Jim, support larger taxes for the rich (as of course do Gates and Buffett). I don’t know bankers etc., but the entrepreneurs I know, like BadJim, have little or no interest in the money: it’s the adrenalin game of creation, replication and success that keeps them going no matter how much money they already have.

JG

52

Plume 05.08.14 at 5:06 pm

BadJim,

Sorry, but it’s not bullshit. It is mathematically impossible for you to make millions if you also pay fair wages to your employees. It. Is. Impossible.

As in, if you paid them their share of what they produce for you, there could never be enough left over for one or two people — or a few more beyond that — to accrue millions. And I’m factoring in a return on your capital investment as well. No single human being, if they have employees, can account for enough input, enough hours worked, enough time on the job, etc. etc. on their own, to warrant millions in compensation, unless their employees are making nearly that much, which, of course, never happens. (Currently, the average CEO makes 300 times more than his or her rank and file. That number was 20 to 1 in the 1950s, and 25 to 1 in the 1960s . . . . And in Fortune 100 companies today, the ratio is 1000 to 1. Larry Ellison recently made more than 10,000 times his rank and file, etc. etc.)

If, OTOH, you are a sole proprietor, and you manage to make millions by doing the work yourself? That’s an entirely different matter. But even there, the massive gap between what you make for your time at work, and what a nurse or a teacher or an EMT worker makes is obscene***.

***The next great “civil rights” movement should be about class and vocation discrimination. Along with protections against race, ethnicity, gender and sexual orientation discrimination, a sane, humane, just society will have laws making it illegal to wildly privilege certain occupations over others . . .

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Plume 05.08.14 at 5:16 pm

John Garrett @51,

If it’s true that they do it just for the rush, then they should be paying their employees enough so they (ownership) can’t accrue those millions. They should be paying their employees a much, much greater share of total production.

The vast majority of Americans will never make more than five figures in one year. It’s nearly 90% currently (for individuals), and the median income is 27K for individuals. But all of these people still go to work, day after day, year after year. They work despite knowing they will never, ever be “rich.” Why should business owners be privileged above them? Why should their chosen occupation be privileged above the vast majority’s?

The ruling class sets wages and prices to benefit the ruling class, which is primarily made up of business owners and Finance. It’s not that much different from, say, people with blue eyes setting things up so people with blue eyes make massively more than people with brown eyes, etc. etc. It’s no less irrational and arbitrary. Time to end ruling class privileges entirely. Time to make equitable pay and conditions for all on par with other civil rights issues . . .

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John Garrett 05.08.14 at 5:47 pm

Plume, in your world how and why does innovation and risk happen? Or doesn’t it matter? My main problem with the Wall Street and big company rich is that they have neither innovated Nor risked for their money. That doesn’t change that big money should, can and will be taxed.

JG

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Plume 05.08.14 at 6:10 pm

John Garrett @54,

Most real innovations — at least the kind that benefit the public — occur in the public sector. The private sector latches on much later, after the public sector has done the heavy lifting, and its “innovation” primarily revolves around marketing and maximizing profits, which does not benefit the public.

In recent times, computers, satellite tech, touch screen tech, the Internet, GPS tech and well over 75% of the pharma brought to market originated in the public sector . . . with the vast majority of people working on those things making less than 100K a year. Will try to hunt down key books on this subject (and link to them), but this has been spelled out in detail recently. The vast majority of tech and medical innovation has come out of the public sector, not the private. And if you read Leo Panitch and Sam Gindin’s The Making of Global Capitalism, you’ll see how tightly integrated and permanently interventionist our government has been — on behalf of Capital — almost from Day One. As in, trillions and trillions spent to promote, launch, save, defend, extend and bail out industry and capitalism more generally. We the people have paid in trillions in tax dollars to externalize costs for business without gaining much in return for our investments . . . . and the infrastructure needed to do business? Close to 100% of that is public space, built by public sectors, with public dollars.

The myth of the great business owner, doing everything on his/her own, after pulling themselves up by their own bootstraps, without help from anyone . . . . is, well, just that. A myth.

56

Plume 05.08.14 at 6:19 pm

Here’s a review by Jeff Madrick of one of those recent books. From the NYROB:

The Entrepreneurial State

Mariana Mazzucato is the author.

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Sarkis Shmavonian 05.08.14 at 6:59 pm

Now we wait for the class traitors to emerge from the ranks of patrimonial capitalists; It will happen and there will be many such—treason is perennially a good way to make a mark and to benefit the larger society besides. (Bear in mind both T. and R. Roosevelt in this regard.)

58

MPAVictoria 05.08.14 at 7:43 pm

You know I have missed you Plume. Glad to see you commenting again.

59

roger gathman 05.08.14 at 8:15 pm

Plume, I’d be happy to see some discussion of the allowable ratio between median household and top household – the inequality space. In fact, I’d like to turn the sickening discourse about “reform” – usually applied to breaking down the social welfare system because we “can’t afford it” and breaking labor power to raise wages – and talk about reforming inequality. That, of course, would require other parameters – instead of talking about “efficiency” – efficiently siphoning money to the superrich, who then graciously are willing to have taxes raised on income (not wealth) by some pittance – we would be talking about what to do in rich societies with enormous surpluses going almost exclusively to the top 20 percent.
I think your ratio – 1 to 4 – is too low – I think that there are reasons to recommend a larger inequality space – but it does provide a base. The discussion will inevitably be skewed towards why some people have provided social benefits (which will be disguised under the bogus term markets – by which is meant, of course, monopolies and speculation) tacitly conceding that wealth is a measure of social benefit. As soon as this is clear, we can revamp our discourse accordingly.

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Plume 05.08.14 at 8:29 pm

Thanks, MPAV . . .

Roger,

4-1 may be too low. But I’d say greater than 10-1, which was Orwell’s ratio, is too high. So we’re talking somewhere in between. As mentioned, however, that 4 to 1 isn’t as radically low as it may sound. The federal government, for instance, is pretty close to that, give or take. Major department heads make in the 200 – 250K range, and rank and file are in the 50-80K range. So 4-1 or 5-1 is pretty much the norm. Local and state gov have a lower top end and rank and file, but fall roughly within that range as well. And most private sector non-profits aren’t greatly above that ratio. Executives are making in the low six figures, with rank and file in the 50 – 80K range — depending upon region. You occasionally have large non-profits with seven figure execs, but that’s not the norm.

Anyway . . . the key, really, is shifting the decision-making from the ruling class to all of us. There is just no way that if we decided wages and prices democratically, that we’d see a hedge fund manager, for instance, making billions while teachers average 50K. There simply isn’t any logical justification for such a grotesque gap . . . . especially not if we look at compensation through a “social good” lens. The teacher, the nurse, the EMT worker, etc . . . would, in that case, make more than the hedge fund manager.

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John Garrett 05.08.14 at 9:33 pm

As Plato said, if I remember correctly, the health of a society can be determined by how it rewards its most important citizens, teachers and the police. Not so sure about the police but he is definitely right on about teachers.

JG

62

reason 05.09.14 at 9:24 am

Plume @60

” The teacher, the nurse, the EMT worker, etc . . . would, in that case, make more than the hedge fund manager.”

For that to happen all you need is redistribution – all the before mentioned serve the general population, the latter the plutocrat. This is quite simple really, the market serves not those with needs, but those who pay. If you want to reorient the market, reorient the ability to pay.

63

anon 05.09.14 at 7:58 pm

Interesting.

The average person in Europe earns 13 times that of the average person in Africa.

Good thing you guys all merit it. I wouldn’t want you to feel that such inequality is bad.

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nick s 05.10.14 at 5:17 am

Obvious troll is obvious.

I’m interesting in one aspect of Plume’s comments, which is the ceiling of “earned income”: if you like, the Chris Rock threshold between “rich” and “wealthy”. If the rumours are true, Dr Dre will become the first billionaire rapper from selling a shareholding in a business, not from making or producing music. Whatever David Beckham earned per week — and it’s quaint that the British press still treats footballers like people who receive weekly wage slips, while American sports more appropriately talk about multi-year multi-condition contracts — it’s nothing compared to the money that becomes available if he takes ownership of a sporting franchise, or the net worth of the Glazers.

65

Nathanael 05.10.14 at 4:31 pm

CEOs write their own paychecks out of company funds. Funds which are supposedly the property of the stockholders, but the CEOs don’t give a damn about that.

This isn’t income from work. The CEOs get this money even if they run the company into bankruptcy while lying on a beach in Bermuda, because the CEOs *write their own paychecks*.

Technically speaking, this is income from *theft*.

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Plume 05.10.14 at 5:38 pm

Nathanael,

Good points. I see it as “theft” as well. That said, I think another problem with the system is the idea that stockholders are the owners. Generally speaking, people who hold stock do so for very short time periods. They’re short-timers, and the deck chairs are changed endlessly.

To me, it makes far more sense that the workers and locale own the company, and decisions are made via true, participatory democracy, horizontally, rather than a few making the decisions from the top down.

Ideally, at least for me, towns and localities would “own” all businesses, with workers in those various companies having operational control, while following guidelines set by localities, then regions, then nationally . . . . The further out you go, the broader the guidelines. As in, specifics and particulars are left up to workers and localities, and we go from the particular to the general as we move outward, with a constitutional framework and democratic discussion/decision-making as umbrella, etc.

Given the above, I can’t see the possibility of massive inequality ever taking hold. With socialism from below, rather than socialism from above, as Hal Draper divided the two in his Two Souls of Socialism . . .

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Richard York 05.12.14 at 1:39 am

The most awful irony in all of this is that the United States is the only first world nation in which a very large portion of the 99% vote consistently against their own self-interest .

Even if Picketty is right (I just ordered the book), it is highly improbable that a majority of the voting public will vote for people who would vote to increase taxes on the wealthy. To the contrary, most Americans have bought the Kool-Aid of reducing so-called “death taxes”.

The pro-1%, pro-corporate, anti-tax Right in this country long ago captured the propaganda war. They have dictated the terms of the political dialogue since the arrival of Ronald Reagan.

Nothing good can happen until we find the correct message and a charismatic spokesman. Most of us believed we had that spokesman in 2008. His immediate appointment of Larry Summers – one of the principal architects of the deregulation which destroyed our economy – put paid to even that small glimmer of hope.

So,we must keep making our point and soldier on.

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