Them that’s got shall have, them that’s not shall lose
So the Bible says, and it still is news
— Billie Holiday
Not long ago, a French economist published a book that sent shock waves through the worlds of politics and economics. Capital in the Twenty-First Century, by Thomas Piketty, argues that today’s wealthy investors will keep getting richer until they pile up such a huge chunk of the world’s money for themselves that disruptions and calamities will ensue. The Left has taken this book and waved it in the faces of fiscal conservatives, declaring it proves capitalism is evil.
How does Piketty arrive at his conclusion? He points out that the rate of return on “capital” (mainly, stocks and bonds) is often higher than the rate of growth of a nation’s economy. Investments might gain five percent while business overall grows at only three percent. Those with large investments will benefit faster than the economy as a whole (mainly, the workers), and soon more and more money ends up in investors’ pockets, with less and less for the rest of us.
It’s easy to paint a grim picture where a struggling worker gets a three percent raise and wealthy fat cats gain five percent just for sitting around smoking smelly cigars and drinking expensive cognac while their money does all the work. These investors, benefitting from the higher rate of return, pull away from their poorer fellows to become even more filthy, stinking rich while the rest of us toil in ever-worsening penury.
Piketty’s point is interesting, in that returns on capital can get out of whack with economic growth, so that sometimes money will flow toward the rich. To prevent this, Piketty would have nations impose a two-percent tax on big wealth and up to an 80-percent tax on big incomes, just to make sure nobody gets too far ahead in the game. Presumably world governments would distribute these funds to the less fortunate.
Historically, big taxes stifle growth, whereas low taxes release the brakes while sometimes providing even larger revenues to government. With lower taxes, economies boom … but this also generates more super-rich people, which rankles the Left, who believe the wealthy live to ramp through the world committing rapine and pillage.
Let’s get grainy and look at a particular example. Say that Joey Blowy works in middle management and earns about $70,000 a year. His buddy, Tommie Pickett, just published a book that made a cool million, and he retires. A year goes by. Joey earns his 70K, pays his taxes, and socks away ten grand into a Keogh account. Meanwhile, Tommie lives off the interest on his million-dollar payday — it turns out his money grew by about seven percent, so he made $70,000, same as his friend Joey — and he spends most of the interest on rent and food and so forth. But he, too, salts away about ten thou, plowing it back into his investment portfolio.
Years later, Joey has a nice little nest egg that grows at about the same rate as Tommie’s, except Tommie is always ahead of the game, having started with a million bucks while Joey began with nothing. In fact, Tommie is pulling away from Joey, getting rich faster. (They’re still friends and have a weekly Poker Night, so they’re cool.) Of course, there are tons more Joeys out there than Tommies, and relatively more money is accruing to the IRAs and 401Ks and Keoghs of the middle class—
Hey, wait a minute!! This isn’t going right. Something’s screwy. The middle class is prospering and ruining the story.
Hmm. Well, maybe things won’t turn out like Piketty fears because most of us are investors, too. Workers in the Western world tend to have pensions and tax-savings plans and the like, which means the odd little quirk about capital accrual will benefit the middle class just as it does the rich.
But wait, there’s more! The wealthier a fat cat gets, the harder it is for him to earn money from his investments. Let’s say Fatty Fatbuckle has some loose moolah hanging around among his billions, and he decides to put it to work, so he calls up his broker and says, “I hear Super-Dot-Com Corporation is a good investment. Get me three million shares.” The broker’s Adam’s apple bobs up and down spasmodically as he contemplates the chaos that will erupt when he tries to pour that much money into one stock. After all, at this particular moment there may not even be three million such shares available — most stock is held for months or years, and usually only a small fraction is for sale at any one time — and when all the other brokers hear that he wants to buy that much stock, they’ll call up their clients and tell them a Big Fish wants Super-Dot-Com shares, and everybody will offer theirs at a big price increase, and Fatty will have to pay a huge premium. Which pretty much squelches his rate of return for several years.
Later, Fatty wants to sell stock, and the same fiasco happens, except backwards. Now there aren’t enough buyers to absorb his huge sale, so Fatty’s broker must keep lowering the asking price until the shares finally unload at a discount.
This is why big players must swim slowly through the investment ocean, as their sheer size causes the seas to slosh wildly when they enter and leave. For the small fish, moving around is easy, but to the behemoths the investment waters feel like molassas.
Let’s review: basically most modern workers participate in the same investment run-up that Piketty fears will make the rich even richer, and meanwhile mega-investors have a harder time getting as good a rate of return as smaller investors.
But what if the Left’s worst nightmare comes true anyway, and somehow fewer and fewer fat cats corral more and more of everyone’s money until finally just three Super-Fatties obtain every last penny of stocks and bonds and real estate and private businesses and housing and everything? Then what?
They own it all — every can of food on the grocery shelves, all the copyrights to books and movies, every last car for sale, all the weekend getaway vacation packages. But nobody can buy anything from them! After all, the Super-Fatties have all the money. And nobody can hire anyone to make new stuff because no one has any money to hire with. (The Super-Fatties can hire, of course, but then they wouldn’t have all the money.) Machines stand idle in factories; crops rot in the fields; people starve and die in the streets. And the three guys who own everything, including all the money? Their cash is worthless, because they can’t use it. The richest men in history are broke.
In the real world, there’ll always be people like us who muddle along, with here and there a super-rich person whose mere existence many will find highly annoying. But the number of super-rich is, logically, self limiting. Still, many people want to tax them down from their high perch. This might reduce the one-percenter population a bit, but it will also make things worse for the rest of us.
So you’ve gotta ask yourself a question: Would you rather live well in a world with a galling population of the super-affluent, or live poorly in a world where everyone is about the same? Because that’s the fiscal dividing line between Left and Right. Your answer will put you somewhere on that scale.
Meanwhile, if Piketty gets rich selling his anti-wealth book, I may never stop laughing.