Don’t tax you; don’t tax me; tax that fellow behind the tree.
–Russell B. Long, U.S. Senator from Louisiana
Don’t tax you; do tax me; and tax the folks that disagree with me.
–David R. Henderson, interpreting the thoughts of 18 wealthy Americans.
A recent open letter from 17 wealthy Americans willing to identify themselves and one American who was unwilling to do so has gotten a lot of attention.
In it, they make a case for higher taxes on very wealthy Americans like themselves and, apparently, on Americans who are wealthy, but much less wealthy than some of the signers. Abigail Disney, for example, one of the signers, has a net worth of about $500 million. Chris Hughes, another signer, has a net worth of about $500 million. George Soros, another signer, has a net worth of $8 billion. (I could have done a more-thorough listing, but time constraints got in the way. The net worths for some of them were actually difficult to find.)
They write:
We are writing to call on all candidates for President, whether they are Republicans or Democrats, to support a moderate wealth tax on the fortunes of the richest 1/10 of the richest 1% of Americans — on us.
The cutoff for the richest 1/10 of 1%, they claim, is a net worth of $50 million and they appear to endorse Senator Elizabeth Warren’s proposal for a 2% tax on wealth above $50 million and an additional 1% tax on wealth over $1 billion.
In short, some of them are advocating that people with substantially lower net worths than they have be taxed more. More generally, they advocate that everyone with a net worth of more than $50 million should be taxed more.
That’s why the title of their letter is so misleading and why I have interpreted their letter to say what they really mean.
Interestingly, one of them, Molly Munger, actually spent money on a campaign to tax middle-class people more.
If they really wished to impose taxes only on themselves, they could do the equivalent–give more money to the feds–without any new legislation.
Here’s the form. You’re welcome, rich people. And you’re welcome, other rich people who think they will spend their money more wisely than the feds do.
READER COMMENTS
Benjamin Cole
Jun 25 2019 at 7:04pm
Oh, one of my favorite quotes bungled!
https://quoteinvestigator.com/tag/russell-b-long/
The version I like best is,
“Don’t tax you
Don’t tax me
Tax that man behind that tree”
—30—
David Henderson
Jun 25 2019 at 9:27pm
So you see a big difference between “that man” and “that fellow?”
nobody.really
Jun 26 2019 at 9:34am
I don’t see much of a difference between those two versions–but I hear it.
has a cadence that “Tax that fellow behind the tree” doesn’t. It’s an aesthetic thing.
Kinda like one of the objections to adding “under God” to the Pledge of Allegiance. Sure, people can debate Cold War politics and Establishment Clause mumbo-jumbo. But no one can dispute the classic three-part cadence of the original:
Injecting another phrase, regardless of its content, ruins the flow. Now it reads like a laundry list.
nobody.really
Jun 26 2019 at 9:53am
While I’m on this erudite tangent, I’m reminded of the inspired quote from that classic of the cinema:
The SpongeBob SquarePants Movie (2004). Here was truly a man, or fellow, or sponge, who understood poetry.
Mark Z
Jun 26 2019 at 2:26am
While I won’t question that these extraordinarily wealthy people have reached the point where they get no more utility out of their increasing wealth at the margin than would the government, I do doubt that the ‘social surplus’ of what the government would do with it is greater than the ‘social surplus’ of them investing it in the market. In other words, I think investing their wealth in profitable businesses is likely more altruistic toward society than handing it over to the IRS, however much more generous the latter feels to them for some reason.
nobody.really
Jun 26 2019 at 9:42am
Agreed. But why limit that rationale to the wealthy? I suspect most people would be able to do useful things if they had more disposable wealth. Ergo, reduce taxes to zero! Obviously there is no merit to progressive taxation if there’s not merit to taxation.
What’s not to like?
Mark Z
Jun 27 2019 at 5:07pm
Given that almost half of the country already pays no income tax, we’re already ‘doing this’ in some measure. We could also replace payroll taxes with private savings I suppose. That’s an idea.
In any case, you’re confused in your general point. I could just as easily ask you, ‘if the government can spend money more usefully than individual taxpayers can, why don’t we raise the tax rate to 100%?’ And it would be just as nonsensical. My position here is pretty simple: at the margin, increased government spending is unlikely to be more productive than the private production it would reduce because of taxation. Nothing about that implies the optimal level of taxation/spending – the point at which the next government program to fund is equally productive with the private project that won’t get funded because of taxation – is 0%. There is some point between 0% (for anarchists) and 100% (for communists) where marginal taxation and spending generally stops being worth it. I think we’re past that point. I don’t think whatever public projects remain to be done with the next $100 billion or so in taxes is worth the cost of removing it from the market. That doesn’t make me an anarchist.
nobody.really
Jun 27 2019 at 8:50pm
Uh … I agree that someone here is confused—but I don’t think it’s me. At least *I* have not been talking about increased government spending. Have you?
I can’t tell whether you’re hypothesizing that there’s some relationship between taxes and government spending, or that there isn’t.
In the short run, there don’t seem to be much of a relationship. We’re deficit spending like crazy. Now, if you’re a Keynesian, it makes sense to deficit spend when the economy is slumping. But we’re in the OPPOSITE of a slump. Still, I guess there’s no harm if, as Cheney said, deficits don’t matter.
On the other hand, if deficits DO matter, then this Republican policy of cutting taxes without cutting spending is suicidal. That’s why I ask if there’s any harm in simply eliminating all revenues. If you answer yes, then that suggests that there are more factors to consider than simply comparative short-term returns on investment. As some point, we might want to consider the soundness of the currency.
This argument is certainly bolstered by all the current concerns about “crowd-out” we hear in the press—with the soaring interest rates, surging inflation, and investors refusal to consider any proposition with the slightest risk.
Oh, wait—THAT’S ALL NONSENSE. Interest rates are low and may be headed for another cut; meanwhile, the European Central Bank and other nations are actually going negative. The Fed hasn’t been able to boost inflation to its target level in years. And investors are so desperate for some place to park their money, they’re willing to invest in Theranos. Even new incarnations of Pets.com have emerged.
In short, I see little evidence that ANYONE with a viable business model—or even a fraudulent one–is hurting for capital. Firms may be reluctant to lend, but it’s not because they don’t have the cash.
Meanwhile, the rich have never been richer.
Query: If we can’t muster the will to pay down our debts now–then when? During the next recession? the next war? the next plague?
Mark Z
Jun 27 2019 at 11:02pm
1) If you actually read the letter, you would’ve known that the signers are indeed calling for an increase in government spending, not paying off any of the national debt. And if one has paid any attention to what the 2020 candidates have said thus far, one would be a fool to imagine they would use the new revenue to pay down the debt. Here’s a summary paragraph from the letter on what they want done with the tax revenue:
“This revenue could substantially fund the cost of smart investments in our future, like clean energy innovation to mitigate climate change, universal child care, student loan debt relief, infrastructure modernization, tax credits for low-income families, public health solutions, and other vital needs.”
2) A low inflation rate does not mean there’s no crowding out. Additionally, inasmuch there are few new opportunities for productive capital use and so little demand for new capital, why exactly is public investment magically exempt from this? Why, as the marginal rate of return to capital declines, are prospective investments by the state supposed to not also see such a decline? This seems to me a serious flaw in the “interest rates are low, ergo the government should spend more” argument. Why invest more in education and other forms of capital the returns to which low interest rates are supposed to indicate are so low? I would also add that the net returns for many government activities is close to 0 (some are surely negative), so the cost of taxing and spending being lower at one time than another does not mean that it’s worth it even in the comparatively low-cost time.
3) If the goal were to reduce the debt, a confiscatory wealth tax is plainly a bad way to do that. There are much better ways to levy a tax that don’t so heavily deter investment.
Mark Z
Jun 27 2019 at 11:04pm
I was going to mention: the open letter does not mention the word ‘deficit’ once, and only mentions the word ‘debt’ in the context of debt forgiveness. It is entirely clear the idea is to spend more. I’m guessing you’re not of the opinion that where we are in the business cycle does not call for fiscal stimulus.
nobody.really
Jun 28 2019 at 12:13am
A fair rebuttal—in part. Yup, it appears the people seeking more progressive taxation also favor more spending.
BUT I see little evidence that either Republicans and Democrats limit the pursuit of their agendas based on fiscal consequences. If you accept that premise, then the choice to tax people more would have NO bearing on the level of government expenditures—and thus 100% of the added revenues would go to reduce the deficit (relative to what the deficit would have been in the absence of the additional revenues).
Well, at least THAT’s not new expenditures; that’s just a way to make the tax code more progressive.
Also, we might quibble about whether to regard transfer programs as spending….
What WOULD provide evidence that public expenditures were crowding out private ones? Alternatively, what would be evidence that crowd-out is not a problem? Or are you saying that 100% of public expenditures result in crowd-out, with more government expenditures resulting in more crowd-out—and the point at which you regard crowd-out as a problem is arbitrary?
It was not I who called for more government expenditures (here).
That said, public expenditures might be exempt, or might not. Data on the return to MARKET transactions may have little bearing on the returns to NON-MARKET transactions. A police force or light house or malaria eradication campaign or Federal Deposit Insurance Corporation might generate 30% returns for society. But if there’s no way for a private firm to capture those returns, there would be no cause for the market for private investments to reflect them. Capital markets would reflect only what lenders/investors can capture.
Such as?
Fair enough. But if the spending matches the taxing, then there’s be no net stimulus.
In contrast, the tax cuts resulted in a stimulus even in the face of a functioning economy. Would I be correct in guessing you’re not of the opinion that the business cycle justified that stimulus?
Mark
Jun 26 2019 at 10:36am
Yes, and I’d bet they’d also do more good, on average, spending the money on charitable activities of their choosing rather than giving it to the government.
nobody.really
Jun 26 2019 at 2:43am
That’s fine. Similarly, if Henderson want to impose taxes only on himself, he can do likewise.
That said, I see no basis to conclude that Henderson DOES want to impose taxes only on himself–or that the authors wanted to impose taxes only on themselves. So Henderson’s remark, though accurate, seems curiously unrelated to the current topic.
Instead, the 18 wealth folks seem to be advancing a policy argument about public finance and progressivity–while Henderson seems to be engaging in obscurantism.
Philo
Jun 26 2019 at 8:11am
The heading says “tax us more,” but the principal burden of their proposed tax would weigh on other people; so, as Henderson says, the heading is misleading. He is not obscuring anything.
David Henderson
Jun 26 2019 at 8:42am
Exactly. I thought the point would be obvious but apparently it wasn’t obvious to nobody.really.
nobody.really
Jun 26 2019 at 10:06am
And I would have thought that the essay’s point about progressive taxation would be obvious, too–especially people schooled in economic public policy discussions. So I guess we could conclude that this point was just too complicated for Henderson to grasp.
Alternatively, we could conclude that the point was NOT too complicated for Henderson to grasp–but rather, Henderson simply prefers not to grasp it.
David Henderson
Jun 26 2019 at 10:58am
I certainly grasp it. I’ve written about it elsewhere, as you probably know if you read EconLog a lot.
My point is a separate one and is about what I said it’s about: their really misleading use of language. When 18 people advocate taxing 75,000 families more, they shouldn’t have a headline that says tax “us” more.
Andre
Jun 26 2019 at 12:45pm
Agree. The issue here is that they are including in their target group folks that have 10 to 100 times less wealth than they do.
I’m also not sure how easy it would be for folks with $50m-$100m in assets to pony up $1-$2m each year – particularly if most of their wealth is tied up in a business.
Thaomas
Jun 26 2019 at 6:18am
From the hostility (not just disagreement) to this proposal I’ve seen, pretty close to ad hominem I conclude that opponents of the idea think it may be effective.
David Henderson
Jun 26 2019 at 8:43am
Of course, it would be effective. But the effects would be largely bad.
Mark Z
Jun 26 2019 at 9:07am
Effective at what?
john hare
Jun 26 2019 at 5:34pm
Discouraging investment in this country. If owning is penalized here, a vacation home or factory elsewhere might be incentivised. Just a little more reason to hide wealth.
MG
Jun 26 2019 at 7:06am
Let’s stipulate the technical accuracy of your characterizing some of the criticism as “ad hominen” (because it is focused on the individuals making the proposal, not because the criticism merits the other, colloquial derogatory connotations). It is difficult to avoid responding to this proposal without referring to the proponents, when so much of it is so clearly “all about themselves.”
nobody.really
Jun 26 2019 at 8:33am
How so?
The essay concludes:
“It is not in our interest to advocate for this tax, if our interests are quite narrowly understood. But the wealth tax is in our interest as Americans.
That’s why we’re joining the majority of Americans already supporting a moderate wealth tax. We ask that you recognize its strong merit and popular support, and advance the idea to tax us a little more.”
Some people dismissed the 99% Movement as all about envy. Now people are dismissing the current proposal because it’s NOT about envy. What these two views have in common is a dogged desire to avoid addressing the merits of the POLICY in order to focus on the PROPONENTS. That’s ad hominum attack, plain and simple.
BC
Jun 26 2019 at 10:17am
“If they really wished to impose taxes only on themselves, they could do the equivalent–give more money to the feds–without any new legislation.”
I had similar thoughts about Mark Zuckerberg’s call for more regulation from Congress. Facebook can already impose any regulation on itself without Congress’s help. (For example, my understanding is that Facebook has extended compliance with GDPR beyond its European users.) So, Facebook is actually calling on Congress to regulate all of its competitors, not itself. Furthermore, Facebook wants to participate in crafting those regulations. As COO Sheryl Sandberg said, “New rules need to be written for the internet and we want to help make that happen.” So, Facebook would like to impose certain regulations on its competitors and would like to use Congress’s powers to make that happen.
We really shouldn’t allow private entities to appropriate Congress’s powers for their own private purposes, whether it’s Facebook imposing regulations on competitors or wealthy billionaires imposing taxes on their not-quite-as-wealthy peers.
Robert EV
Jun 27 2019 at 9:47am
But can Facebook impose more regulation on themselves when the principals have a fiduciary duty to the other stockholders, and such self-imposed regulations (which would likely have opportunity costs) are not in the corporate charter?
nobody.really
Jun 26 2019 at 11:24am
…so you are calling for a repeal of the tax CUTS that rich people persuaded Congress to impose, to the detriment of our collective interest in national solvency?
robc
Jun 26 2019 at 2:08pm
I am calling for a repeal of the 16th amendment and a cut in spending until we are running a small surplus.
WalterCO
Jun 26 2019 at 2:21pm
Tax cuts don’t push us to insolvency. Spending more than we take in does.
Vivian Darkbloom
Jun 26 2019 at 11:40am
That’s 18 out of an estimated 83,620! The “us” signing that letter a very small minority of those potentially affected:
https://dqydj.com/how-many-millionaires-decamillionaires-america/
Those 18 folks get to feel good about themselves no matter what happens with this proposal which has a very slim chance of getting adopted. This type of public virtue signalling has a big bang for the buck!
I like Henderson’s suggestion of voluntarily making a donation to the US Treasury. It’s a charitable contribution that, unlike federal taxes, is tax deductible for federal income tax purposes! Besides, there is more actual virtue in giving something voluntarily than handing something over that is mandatory.
TMC
Jun 26 2019 at 3:12pm
Here’s Bill Gates’ call for the same, and his response to the same : ) https://pjmedia.com/trending/video-reporter-asks-bill-gates-if-he-will-donate-to-treasury-in-absence-of-tax-hikes/
David Seltzer
Jun 26 2019 at 5:08pm
The top 1% pay about 30% of total income tax. That 30% pays for public goods and services. I doubt they used anywhere near 30 % of public goods. I guess that’s not enough for those 18 who think they can legislate more money from the wealthy. The issue is more basic. That rate will assuredly increase over time, look at the SS fund as an example. The real rub as I see it, that wealth is the result of talent, discipline, assumption of risk and innovation. As that 1 % has complete sovereignty and dominion over their person, they have dominion over what they produce. If I’m a 1 percenter, my answer to those 18, is NO. It’s MY wealth and you can not take it from me. This is just crazy.
Vincent C. Hunter
Jun 26 2019 at 5:50pm
Help me with this now…I think I understand. You folks see that there are problems that could be ameliorated with financial resources. So, you want to give your resources to the government to tackle these problems…and force others to do the same. Is that about it? Maybe it’s just me but wouldn’t it be better to have you folks do it without the government as middle man? After all, haven’t you demonstrated how efficient you are at managing resources? …better than the Government?
nobody.really
Jun 27 2019 at 12:40am
That’s the Ayn Rand theory, anyway. Why is there so much more wealth in the world today than at any time in history? Obviously no one ever had talent, discipline, a propensity to innovate, or a willingness to accept risk before. Why has Justin Bieber achieved greater wealth than J.S. Bach? He’s obviously more talented, disciplined, innovative and willing to assume risk. Why has there been so much poverty among black people in the US–especially before 1860? No talent, discipline, capacity for innovation, or willingness to take risks. Why did so many of the soldiers who charged the shores of Omaha Beach die? They obviously lacked talent, discipline, innovation, and a willingness to assume risk.
Consider billionaires. The world never saw one before John Rockefeller in 1916. Why not? Because before then, no one had talent, discipline, a capacity for innovation, or a willingness to take risks. Why is it that women represent less than 12% of the world’s billionaires? ‘Cuz women generally lack talent, discipline, a capacity for innovation, and a willingness to take risks. Why does Africa have so few billionaires? No talent, discipline, capacity for innovation, or willingness to take risks.
How is it that Trump has achieved such wealth? Inheritance can’t have anything to do with it. Nor political connections. Nor evasion of taxes, or of the draft. It could only be because he is so darned talented, disciplined, innovated, and willing to assume risk. No other possible reason could explain it.
“[The] disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition [is] the great and most universal cause of the corruption of our moral sentiments.” Adam Smith. Then again, was he a billionaire? So why listen to a no-talent loser like him?
David Seltzer
Jun 27 2019 at 9:56am
“Obviously no one ever had talent, discipline, a propensity to innovate, or a willingness to accept risk before.” No one? Logically incorrect. “Obviously” the industrial revolution didn’t happen. As for Smith’s “Moral Sentiments”, He advocated voluntary charitable behavior, for therein lay morality and virtue. To use force, as those 18 suggest and with which you seem to agree, in your misguided moral purpose, loses the moral standing about which Smith wrote. As for the poor and disadvantaged, I am not the cause of their plight. I won’t be forced to subsidize them. Again immoral use of force. But…here’s what you miss when you vilify those billionaires and people like me. We are generous and charitable. Those who bash us rely on our success. So in the end, It’s my wealth and I’ll choose how I will dispose of it.
nobody.really
Jun 27 2019 at 1:02pm
What a powerful argument; you have persuaded me. Clearly people in prior eras DID have talent, discipline, a propensity to innovate, and a willingness to accept risk.
But then how can we explain the fact that we observe no billionaires before 1916–and thousands of them thereafter? That’s quite a skewed distribution to occur at random. Given this distribution, it’s hard not to conclude that there might be explanatory variables BEYOND mere talent, discipline, propensity to innovate, and willingness to accept risk.
Adam Smith opposed taxation? Or insisted that all taxation be voluntary? Citation, please.
I vilify billionaires and people like you? Citation, please.
(In fairness, I have vilified billionaires; I’ve had some unkind words for Putin, for example. But I don’t recall having vilified any billionaires on account of their status as billionaires.
Likewise, I may have even vilified people like you. I don’t know anything about you–so I’m in no position to know if you share attributes with anyone I’ve vilified. If you acknowledge being Putin, I’ll concede the point.)
To clarify, are you saying that you pay no (property) taxes? Or that you do pay them, but only because you “choose” to do so?
Jon Murphy
Jun 27 2019 at 12:24pm
You’re making an apples to oranges comparison. You need to adjust for inflation. To say that Beiber makes more than Bach may or may not be true; you need to adjust the incomes of both for inflation (not to mention other factors).
But there is a larger point here: take two individuals who are identical in every way, shape, and form: they have the same upbringing, they live in the same time period and location, etc. However, one person has more talent, discipline, and is willing to take calculated chances compared to the other. Whom do you think is more likely to be wealthy?
nobody.really
Jun 27 2019 at 2:50pm
Yes, I expect that talent, discipline, innovation, and risk-taking correlate with wealth. That said,
Why should we expect risk-taking to correlate with wealth? Should we not expect risk-taking to correlate with both wealth AND poverty? If you’re really taking risks, that means that you’re bearing some chance of losing as well as winning. Can you have risk without chance? And if not, then we have identified one more variable to be associate with wealth: CHANCE (a/k/a luck).
Can we identify any other variables that correlate with wealth? And can we hazard a guess about the strength of the correlations?
Conceptually, we’d gather data regarding everyone who has ever lived and run it through a giant regression analysis to see which variables correlate most strongly with wealth. If we did that, I expect we’d find that, yes, talent, discipline, capacity for innovation, and willingness to risk correlate with wealth.
But how strongly?
Again, focusing on billionaires provides a simplified framework for considering the analysis. Wikipedia reports that no one in history achieved the status of a billionaire before 1916—REGARDLESS OF HIS OR HER LEVEL OF TALENT, DISCIPLINE, CAPACITY FOR INNOVATION, or WILLINGNESS TO RISK. “Living during the 20th or 21st centuries” proves to be a variable that utterly swamps all these other variables.
Now consider a variety of other variables: What percentage of human beings have contracted Bubonic Plague or Yellow Fever—and how many of them became billionaires? What percentage of people born with Downs Syndrome have become billionaires? What percentage of people born into slavery have become billionaires? What percentage of Cubans have become billionaires? (Forbes estimates Fidel Castro’s wealth at $500 million.) What percentage of women in Saudi Arabia have become billionaires? I’d guess that all of these variables utterly swamp the variables of talent, discipline, capacity for innovation, and willingness to risk.
In short, I expect that an objective study of the matter would demonstrate that talent, etc., while crucial, pales in comparison to CULTURAL/SOCIAL ATTRIBUTES. Certain social contexts facilitate wealth creation. Bach never had a chance to achieve Bieber’s wealth—almost no one in the 1740s did; they didn’t live in the kind of context that would enable that kind of wealth. Likewise, if you required Mr. Bieber to live in isolation from all human contact (say, stranded in the Amazon rainforest), his wealth production would plummet. He would still have all his talent, discipline, capacity for innovation, and willingness to risk—but in the absence of a CULTURAL/SOCIAL CONTEXT in which he could exploit those attributes, he’d be less productive.
Here’s another way to weigh the relative importance of individual attributes and cultural/social attributes: Consider Joseph Henrich’s <I>The Secret of Our Success</i>. He documents various occasions when Europeans gathered talented, disciplined, innovative, risk-loving men to explore some brave new land in the Arctic or the jungle—and met with disaster. These explorers confronted starvation or death from exposure, <Ii>although they were passing though environments that natives survive quite easily.</i> How can the Inuit survive where the best and brightest Europeans fail? Are the Inuit all vastly more talented, disciplined, innovative, and risk-loving? Or have the Inuit—ever the most ordinary—simply acquired the cultural/social resources that enable them to thrive in their contexts?
The author then document dozens of examples of adaptive behavior—arrow-making, etc.—that no one individual, no matter how talented, etc., could possibly have developed. That doesn’t mean that innovation isn’t important; far from it. But it means that innovators succeed only because they live in a cultural/social context that provides the background for additional innovation. Those innovators did not create their background—and equally talented, etc. people would be unable to develop the same innovations if they lacked the necessary background.
In short, I don’t denigrate anyone’s talents, discipline, capacity for innovation, or willingness to take risk (in the abstract. I’m actually quite grumpy about Trump’s innovations and risk-taking in foreign policy, but that’s another topic). But if you think these attributes are the sole basis for your success, I suspect you’re kidding yourself.
Jon Murphy
Jun 27 2019 at 5:00pm
Obviously not given you’ve spent your entire first point, and subsequent part of the follow-up comments, denying it.
Extremely strongly. They appear to be the main driving factors. Luck has very little to do with it (indeed, luck seems to correlate with these same factors. We tend to build our own luck, as they say). There’s a vast empirical literature on entrepreneurship out there dating back to Adam Smith.
Finally, no one is saying institutions do not matter, but institutions are not magical. Beiber and you are under the same set of institutions and yet your relative incomes are vastly different, and I’d hazard a guess that it is because Justin Beiber is vastly more talented in teen-pop singing than you are. The institutions are there for Beiber (or whomever’s) talents to manifest, but those institutions do not in and of themselves create wealth. Thus why we see, in the case of the Middle East and development economics in general, it is not a case of simply “add institutions and stir.”
nobody.really
Jun 27 2019 at 5:44pm
Great. So I proceed:
You claim that talent, discipline, capacity for innovation, and willingness to risk are the main driving factors, yet the variable “Living during the 20th or 21st centuries” proves to be infinitely more predictive. I don’t know how to reconcile your claim with the evidence.
Jon Murphy
Jun 27 2019 at 5:56pm
I’ve already answered that in my first reply to you. You need to adjust for inflation. And, even then, you highlight the other factor: innovation.
nobody.really
Jun 27 2019 at 6:58pm
And I’ve replied, hours ago–but the answer is hung up in moderation.
Suffice it to say, I don’t think any conventional measure of inflation accounts for the difference. The world truly is richer today than in the past; it’s not just our imaginations.
However, there is an unconventional inflation-type concept related to status. You may be arguing that Bach enjoyed a similar status in his day as Bieber enjoys today. I find that a more plausible thesis.
Here’s the inflation/status distinction: The world grows ever richer–not merely in dollars, but in goods and services. If we each get a raise, we can each consume more–but that’s not necessarily inflationary if there are more goods and services for each of us to consume. In contrast, status relies on public attention and consciousness, and it’s arguable whether the public is acquiring more of that. If not, then any increase in the attention that you draw to yourself DOES reduce the amount of attention available for me. In this sense, status may have inflation-like qualities.
And, for what it’s worth, when Adam Smith discussed how people look upon the wealthy, I suspect he may have been conflating wealth with status (because, in his day, those two things were strongly correlated?). Yes, Americans mourned the death of Kennedy, who had some wealth. But plenty of richer people died without triggering the same public grief. Conversely, Americans also grieved the death of the Challenger astronauts and Mother Teresa–people who were not especially wealthy, but had high status. Status seems to be the more predictive variable than wealth.
Jon Murphy
Jun 27 2019 at 7:28pm
Fine, but you must realize that the distinction is why your initial comments about “no billionaires before the 1900’s” is irrelevant.
But notice all the caveats you’re placing around now; you seem to have come around to the original thesis: “wealth is the result of talent, discipline, assumption of risk and innovation.”
I don’t think there’s anything left to say on that point.
Regarding Smith, if you want to make a distinction between wealth and status, that’s fine but irrelevant to the point. It’s not a rabbit hole I am going to go down.
nobody.really
Jun 27 2019 at 9:41pm
Uh … I think you missed the distinction. Someone born into the Pleistocene Epoch might employer her talents, discipline, etc. to achieve a measure of prestige among her peers. But she’d be unlikely to achieve much wealth. For example, wealthy people today can afford cardiac bypass surgery; the richest person in the Pleistocene Epoch could not. And no, that’s not because of inflation.
(Indeed, there’s a theory that hunter-gatherers simply COULDN’T achieve much wealth disparities, ‘cuz they lived in a nomadic material culture—meaning they valued OBJECTS, not intellectual property, and there was no point in accruing more objects than they could carry. Wealth disparities and complicated hierarchies arose only with the rise of grain agriculture, when people became stationary and wealth could finally be stored. Tuber agriculture did not produce the same hierarchies, arguably because the crops did not lend themselves to long-term storage.)
Mark Z
Jun 27 2019 at 11:48pm
Nobody, the Bach-Bieber comparison is pointless. First of all, in general, people in the modern era tend to be vastly more productive than people in the past, period. Who is more productive, a 17th century mathematician, or an average person today with access to a computer? The latter, of course: he can do math far more sophisticated than his 17th century counterpart could dream of. Now, the productivity difference may be entirely due to luck, but it is still a productivity difference. Capital has made the average modern person enormously more productive than almost everyone who has ever lived.
I would also change David Seltzer’s remark to: it’s the demand for a person’s talents, willingness to assume risk etc. that matters. Not some objective measure of talent, which would be pretty meaningless economically speaking, but how much other people are willing to pay for what someone can do. Modern musicians may make more money without being better (I think Jon is wrong here: even adjusted for inflation, I think almost everyone alive today is wealthier than Bach). This is because everyone else today is so much wealthier and therefore more people can afford to shower Bieber with money today than people in Bach’s time could do for him. In essence, Baumol’s cost disease explains the difference, imo. The problem is this whole example is irrelevant. Markets allocate resources via voluntary exchange. There is no market between people who are alive today and people who have been dead for centuries. I value Bach’s music far more than Bieber’s, but I can’t pay Bach to write me a fugue. The analogy thus doesn’t translate to comparing contemporaries, because contemporaries’ relative wealth is the product of market exchanges among people who are alive today. The failure of Bach to make as much as Bieber isn’t a market failure; it isn’t evidence that Bach was undervalued, because dead people can’t trade with living people. Your issue here isn’t with the merits of market allocation of resources, but with the unidirectional nature of time and mortality of human beings.
nobody.really
Jun 28 2019 at 1:44am
YES. EXACTLY.
Now take the next step: What determines which era you are born into? Is it your talent? Your discipline? Your propensity to innovate? Your willingness to take risks?
Or is it L U C K ? ? ? ?
In short, there are MANY variables that correlate with how wealthy/productive a person will be. And by far, the most important variables will be things over which the individual exercises NO CONTROL WHATSOEVER. I characterize these as CULTURAL/SOCIAL variables—and the era into which a person is born is an archetypical example.
Again, I do not intend this as a statement about morality. I intend this as a description of fact. If you think I have made a factual error—if you want to argue that there’s no reason to think that a person who is born into slavery cannot accrue as much wealth as a person who isn’t, for example—please say so.
That said…
I don’t sense that Mark Z disputes these remarks. Rather, I sense he want to say (as libertarians are wont to say) that certain variables are the most important drivers of wealth ASSUMING ALL ELSE IS EQUAL. And that’s a perfectly useful assumption for many analytical purposes. But it’s not a very useful description of a reality wherein ALL ELSE IS MANIFESTLY NOT EQUAL.
Again, I don’t mean that as a statement of morality; I mean it as a description of fact. Again, if someone would like to make the factual claim that everyone’s circumstances in the world ARE equal except with respect to talent, discipline, propensity to innovate, and willingness to take risks, we could have that discussion. It shouldn’t take long. (Indeed, I wouldn’t have thought this discussion would last as long as it has. So obviously I’m mistaken about many things; perhaps you could persuade me I’m mistaken about the lack of equality in this world. But I kinda doubt it.)
I sense Mark Z wants to argue that, regardless of which variables correlate most closely with wealth, or how much control any individual wields over those variables, we should design social policy to make optimal use of these talents to maximize productivity, and free markets provide a pretty good mechanism for doing that.
I share enthusiasm for this perspective. I do, however, value some things in addition to productivity, and those values lead me to favor policies that sometimes compromise productivity. In this regard, Mark Z and I may agree on facts, yet differ on values.
So, having reached the threshold of Mark Z’s arguments … I propose we defer those discussions to another thread. Honestly, this one is getting kinda long.
Mark Z
Jun 27 2019 at 5:34pm
You make a false distinction between social/cultural attributes and ‘talents.’ Indeed, social and colutral attributes are very important in determining one’s productivity. Growing up in a subculture that encourages self-discipline, punctuality, and frugality will tend to make one more productive than growing up in a subculture encourages the opposite of these things. So, why does that change anything? Perhaps you’re making a moral argument that what is earned through traits instilled in one from birth (or before, if genetic) isn’t really earned, it’s just luck. If that’s so, surely if you ever need surgery, you’ll go to the super diligent, hard-working, aspiring surgeon of underpivileged birth who has an IQ of 90 rather than the one from a well-off family who’s always had everything goig for him with an IQ 150, right? From an economic standpoint (which we should favor if our goal is to maximize human well-being), we should want people to use their assets optimally, regardless of how they came into those assets.
And to your point about luck: sure, luck is a huge factor. But 1) it’s not that big of a factor in separating the poor from the working/middle/upper classes (behavioral characteristics are far more important), and 2) even though luck is surely a big deal in determining who is merely a millionaire and who is a billionaire, that doesn’t justify your position.
Consider a game of black jack, in which there are two players. One player always takes when the sum of his first two cards is below 17. The second player always takes a hit below 19. In any given game, who wins may be primarily determined by luck, but that doesn’t mean one strategy isn’t superior to the other. Likewise, even if luck happened to be the main determinant of wealth, as long as the expected outcome of an investment isn’t purely random but can be assessed in some measure by a savvy investor, then rewarding investments according to their revealed worth ex post will still tend to coordinate investment toward where it has the highest expected productivity. Per my analogy, if staying on 17 or above is more productive than only staying on 19 or above, then even if we cycle through players after each game, as long as all potential players are allowed to observe, then players will tend toward the 17-strategy even if the probability of a particular player winning a particular game isn’t primarily determined by which strategy he uses. The presence of luck, even a lot of luck, does not necessitate that the reward system is leads to a suboptimal allocation of resources.
nobody.really
Jun 27 2019 at 7:26pm
I am making that argument—but not on a moral basis; on a FACTUAL one.
Let’s make this simple: Some people were born into the Pleistocene Epoch and spend their hunter-gatherer lives in a feast-or-famine dynamic (‘cuz they have basically no storage capacity), fleeing saber-toothed tigers and dying of yellow fever. Other people were born into the local maternity ward and spend the rest of their lives on welfare—yet still consume more calories, have greater access to aspirin, and enjoy a longer lifespan than the people of the Pleistocene Epoch. This arbitrary fact of birth utterly dominates the rest of their lives, and no amount of talent, discipline, etc., will enable the person from the Pleistocene Epoch to achieve the lifestyle of a person of very modest means today.
Honestly, I can’t see how this is a controversial proposition.
Yes, where you have a regular monimodal (especially a normal) distribution, chance will play a larger role in predicting the outcome of one game than in predicting the aggregate outcome of repeated games.
But let’s consider those two players at the $10 table. They each pick their strategies. They stick with their strategies. And by the end of the night Player A ends up with more money than Player B, who actually went bust. What can you conclude about which player had the better strategy?
Let’s say that both Player A and Player B lost their first hand. At that point, Player B was broke. But Player A started with an enormous pile of cash, so could keep playing—and even keep losing—without going broke.
I hope we can continue to distinguish between moral arguments (“morality plays”) and factual ones. The outcomes we observe may have NOTHING to do with the relative merits of their strategies, and everything to do with their relative wealth at the beginning of the game. We can like that result; we can dislike that result. But we shouldn’t confuse it with optimization.
Mark Z
Jun 27 2019 at 11:32pm
“I am making that argument—but not on a moral basis; on a FACTUAL one.”
Any argument about what is or isn’t earned or deserved is a moral one. These are moral terms, with assumed theories of justice. Perhaps you believe compulsory redistribution from the lucky to the unlucky is just self-evident, in which case, why does someone lucky enough to have two kidneys have a right to keep his spare when so many people have only one to no fault of their own? So no, it is not self-evident that fairness demands or even permits use of force to make people more equally well-off who are disparately well-off only due to a difference in luck.
My point was that, whatever one’s theory of justice, interfering in market allocation of resources tends, even to correct for putative unfairness, to make people worse off in net. I return to my example of the two surgeons. Making each surgeon’s compensation (or career paths in general) unmoored from their productivity because their productivity difference is entirely due to luck (genetics, parentage, etc.), induces the more skilled surgeon to be less productive. So, what do we want? Do we want people’s income or wealth to reflect how hard they work? The quality of their character? Or do we want it to reflect how useful their labor is, regardless of its etiology? The first two standards seem to appeal to some people, but the third one leaves people in general wealthier and better off.
“The outcomes we observe may have NOTHING to do with the relative merits of their strategies, and everything to do with their relative wealth at the beginning of the game.”
Given enough data, it’s not hard to determine whether different strategies have differing probabilities of success. I’ll save you the suspense regarding the real world economy: it’s not all luck. The long list of variables, from IQ, to conscientiousness, to savings rate, that independently predict income is pretty inconsistent with the luck-based model.
Here’s an example, by the way, that illustrates why redistributing luck-based gains is likely bad for everyone. Consider a village full of farmers, all equally skilled with equal quality land, living at subsistence. One day, by chance, silt from an overflowing river floods a fallow plot owned by one farmer, drastically increasing the quality of the soil for when he plants on it next. He has an extraordinary good season and ends up with a big surplus, purely by luck. No longer stuck at subsistence, he can afford to reinvest some of the surplus in better quality tools, or experimenting with different type of seed, etc., some kind of productivity-increasing investment (or he could pay some other farmer to spend his time coming up with a way to increase productivity instead of farming). His increase in productivity increases the supply of food and reduces its price, increasing the real income of the village overall.
Now, if someone had confiscated the farmer’s surplus on the basis that it wasn’t earned and redistributed equally among the other farmers, the amount saved and reinvested would’ve been much less, and the productivity-increasing investment never would’ve happened. This is why, even if all the great fortunes in the world were originally the product of luck, this doesn’t mean that if societies had redistributed that luck-borne wealth wouldn’t have made people worse off on average, simply because rich people tend to have higher savings rates than poorer people.
nobody.really
Jun 27 2019 at 10:22pm
According to a Bach FAQ website, “In general we can say that Bach was definitely not rich, nor wealthy. He had a good living as he received the payment from his job plus more income from performing at weddings, anniversaries and funerals. So he had enough money for a good living and he was able to feed his family. This is what is true as for the average person.”
It appears that Bach was well paid by the standards of composers and musicians of his day. But Bach wrote letters complaining about the cost of living in Leipzig. When Bach died, his family couldn’t afford a gravestone and his widow had to petition the Leipzig city council for money.
If you wanted to get a quick-and-dirty assessment of Bach’s inflation-adjusted wealth, you could compile a list of Bach’s assets (house, musical instruments, livestock, etc.) and establish what it would cost to buy comparable things today. (“Comparable” meaning “objects that do not achieve their value by virtue of their association with Bach.”) I suspect you’ll find that Bieber, with his $265 million net worth, would be able to buy all of Bach’s worldly assets multiple times over.
Of course, Bieber’s net worth is heavily influenced by the value of his intellectual property. Bach’s net worth should reflect this, too (and not discounted by the fact that it’s now all in the public domain). But the simple fact is that composition was not the lucrative business then that it is now. Bieber distributes his principle work–recordings–primarily in electronic format. He makes some additional funds by distributing sheet music and doing performances. Bach never had the opportunity to distribute recordings via ANY technology.
Note that none of these facts were in any way influenced by the talent, discipline, propensity for innovation, or risk-taking by either men. Yet these facts drive a huge disparity in their respective wealth.
So no, there’s simply no comparison between Bach’s and Bieber’s wealth—and the disparity can’t be explained away by inflation.
Jon Murphy
Jun 27 2019 at 2:35pm
Nobody-
Be wary of taking Smith’s quote out of context. See my latest at Adam Smith Works.
nobody.really
Jun 27 2019 at 2:55pm
I look forward to you providing a citation in context demonstrating that Adam Smith opposed taxation, or insisted that all taxation be voluntary.
Jon Murphy
Jun 27 2019 at 5:07pm
Huh? What are you talking about? I’ve said nothing about Adam Smith and taxation. No one else did, either. You’re the only one who brought that up. Do not bring it up again.
If you read your quote or my link, you’d see I am referring to your claim that Smith thinks people’s morals are corrupted by admiration of the wealthy. That is a source of moral corruption, indeed, but as he explains, it is also beneficial. The relevant passages are TMS: 50-61, and 181-187 of the Liberty Fund edition.
nobody.really
Jun 27 2019 at 9:54pm
David Seltzer said, “As for Smith’s ‘Moral Sentiments’, He advocated voluntary charitable behavior, for therein lay morality and virtue. To use force, as those 18 suggest and with which you seem to agree, in your misguided moral purpose, loses the moral standing about which Smith wrote.”
“Those 18” wrote in favor of progressive taxation. And, last I checked, governments use force (or at least the threat of force) in collecting taxes. I am not aware that Smith opposed this practice or regarded it as resulting in loss of “moral standing.” If you know otherwise, please advise.
I read your link but didn’t see where Smith called admiration of the wealthy beneficial. Rather, I understood him to argue that admiration of the wealthy is natural–and corrupting. I interpret this as Smith encouraging us to resist this tendency.
Jon Murphy
Jun 28 2019 at 9:49am
I know what Seltzer said. It’s quite the leap in logic to go from his comment to claiming he says Smith wanted completely voluntary taxation. Nothing in David’s comment, either explicitly or implicitly, supports your conclusion.
I suggest you reread the section; you can find the relevant page numbers in my comment above.
nobody.really
Jun 28 2019 at 1:33pm
Vox has a story on meritocracy in the music industry:
“As economist Alan Krueger explained in a speech at the Rock & Roll Hall of Fame in 2013, ‘in addition to talent, arbitrary factors can lead to success or failure, like whether another band happens to release a more popular song than your band at the same time. The difference between a Sugar Man, a Dylan, and a Post Break Tragedy depends a lot more on luck than is commonly acknowledged.’
Talent still does matter [too], according to economist Robert H. Frank, author of Success and Luck: Good Fortune and the Myth of Meritocracy. ‘When you make the point that chance events matter, people insist on hearing you as having said that those are the only things that matter,’ Frank told me. ‘That’s not the message. The people who win generally are very good. If you’re not very good, you generally don’t win. What’s true is that being very good isn’t by itself enough to win.’
Consider Buddy Holly, an enormously skilled songwriter who was poised to redefine pop and rock music but never reached the upper echelons of music stardom. …Holly died in a plane crash in 1959, cutting his career short before he could parlay his early success into Buddymania.
R.D. Burman was one of the most important composers of Bollywood pop…. But due to factors including Bollywood’s Indian origins, widespread racism in the West, and language barriers, Bollywood soundtracks didn’t have access to massive Western markets the way that white, British musicians like the Beatles did. That left Burman relegated to a niche outside Southeast Asia….
[Racism and sexism meant that i]nfluential African American singers and girl groups like the Shirelles didn’t have much opportunity to turn their Billboard hits into widespread celebrity and lasting cultural recognition….
[T]he Beach Boys were not, like the Beatles, the most successful rock band in history — even as the [Beatles] credited albums like 1966’s Pet Sounds with influencing one of their biggest albums, Sgt. Pepper’s Lonely Hearts Club Band. Factors like mental health issues, mismanagement, and unflattering comparisons to the Beatles’ looks and fashion sense kept the Beach Boys from becoming a phenomenon on the level of their most direct contemporary….
[P]eople often don’t see the myth of meritocracy as a myth; they really believe in it. And when they do, it can have some unfortunate effects. The myth of meritocracy, according to Frank, can make us less willing to invest in the collective good. If you think that all it takes to gain renown is skill and effort, ‘you have a sense of entitlement to whatever comes your way,’ he says.
If we convince ourselves that talented artists like the Beatles will be successful no matter what, we can also convince ourselves that we don’t really need to provide people with safety nets or resources.”
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