Thursday, April 22, 2021

More inequality

Paul Graham adds interesting thoughts on inequality, looking at the Forbes 100. Maybe we don't have enough inequality, and maybe the rise in inequality (especially of wealth) since the 1970s represents too little inequality then, not too much now. Contra the usual in politics, a change is not always a problem, but sometimes for the better. How? Read on. 

Contra the mantra of inherited wealth, the super-rich in America today largely earned their way there from middle class, by starting new companies. They did not inherit wealth. The rich did not get richer. They were superseded by the (fabulously) nouveau-riche. 

In 1982 the most common source of wealth was inheritance. Of the 100 richest people, 60 inherited from an ancestor. There were 10 du Pont heirs alone. By 2020 the number of heirs had been cut in half, accounting for only 27 of the biggest 100 fortunes.

Why would the percentage of heirs decrease? Not because inheritance taxes increased. In fact, they decreased significantly during this period. The reason the percentage of heirs has decreased is not that fewer people are inheriting great fortunes, but that more people are making them.

How are people making these new fortunes? Roughly 3/4 by starting companies and 1/4 by investing. Of the 73 new fortunes in 2020, 56 derive from founders' or early employees' equity (52 founders, 2 early employees, and 2 wives of founders), and 17 from managing investment funds.

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 the main source of new fortunes now is starting companies, and when you look at the data, you see big changes there too. ....

 In 1982, there were two dominant sources of new wealth: oil and real estate. Of the 40 new fortunes in 1982, at least 24 were due primarily to oil or real estate. Now only a small number are: of the 73 new fortunes in 2020, 4 were due to real estate and only 2 to oil.

By 2020 the biggest source of new wealth was what are sometimes called "tech" companies. Of the 73 new fortunes, about 30 derive from such companies. These are particularly common among the richest of the rich: 8 of the top 10 fortunes in 2020 were new fortunes of this type.

...

The tech companies behind the top 100 fortunes also form a well-differentiated group... these are mostly companies that win by having better technology, rather than just a CEO who's really driven and good at making deals.

... the rise of the tech companies represents a qualitative change. The oil and real estate magnates of the 1982 Forbes 400 didn't win by making better technology. They won by being really driven and good at making deals... And indeed, that way of getting rich is so old that it predates the Industrial Revolution. The courtiers who got rich in the (nominal) service of European royal houses in the 16th and 17th centuries were also, as a rule, really driven and good at making deals.

People who don't look any deeper than the Gini coefficient look back on the world of 1982 as the good old days, because those who got rich then didn't get as rich. But if you dig into how they got rich, the old days don't look so good. In 1982, 84% of the richest 100 people got rich by inheritance, extracting natural resources, or doing real estate deals. Is that really better than a world in which the richest people get rich by starting tech companies?

The lower (badly measured, reported) inequality of the 1950-1970 period, and the less-well remembered predominance of inherited wealth in that halcyon era (not)  is actually a historical aberration, 

In 1892, the New York Herald Tribune compiled a list of all the millionaires in America. They found 4047 of them. How many had inherited their wealth then? Only about 20% — less than the proportion of heirs today. And when you investigate the sources of the new fortunes, 1892 looks even more like today. Hugh Rockoff found that "many of the richest ... gained their initial edge from the new technology of mass production." 

So it's not 2020 that's the anomaly here, but 1982...

By the end of World War II, as Michael Lind writes, "the major sectors of the economy were either organized as government-backed cartels or dominated by a few oligopolistic corporations." 

In 1960, most of the people who start startups today would have gone to work for one of them. You could get rich from starting your own company in 1890 and in 2020, but in 1960 it was not really a viable option. You couldn't break through the oligopolies to get at the markets. So the prestigious route in 1960 was not to start your own company, but to work your way up the corporate ladder at an existing one. 

I hope the wonderful days of joyous equality in 1980 are starting not to look so great. The post goes on, which I encourage you to read. Bottom line, tech broke through the big-3 style oligopoly, needs less capital, financing is easier to get, and companies can grow a lot faster. 

IBM, founded in 1896, took 45 years to reach a billion 2020 dollars in revenue. Hewlett-Packard, founded in 1939, took 25 years. Microsoft, founded in 1975, took 13 years. Now the norm for fast-growing companies is 7 or 8 years.

His bottom line

It's easier now to start and grow a company than it has ever been. That means more people start them, that those who do get better terms from investors, and that the resulting companies become more valuable. Once you understand how these mechanisms work, and that startups were suppressed for most of the 20th century, you don't have to resort to some vague right turn the country took under Reagan to explain why America's Gini coefficient is increasing. Of course the Gini coefficient is increasing. With more people starting more valuable companies, how could it not be?

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Thoughts. We should not think about more or less inequality, we should think about the right amount of inequality, or productive vs. rent-seeking sources of inequality. Or, better, whether inequality is a symptom of health or sickness in the economy. Take Paul's picture of the US economy at face value. What's a better economy and society? One in which a few oligopolies big companies, deeply involved with government, run everything -- think GM, Ford, IBM, AT&T, defense contractors -- and it's hard to start new innovative fast growing companies? Or the world in which the Bill Gates and Steve Jobs of the world can start new companies, deliver fabulous products and get insanely rich in the process? 

Let us acknowledge the counterargument. Russia has a lot of inequality, if you measure oligarchic wealth stashed abroad. Likewise Cuba. There's a French fable about inequality coming from centuries old inherited wealth that grows faster than labor income, so the descendants of 1700s aristocrats own everything today. Perhaps the contemporary American fable might be the notion that descendants of southern plantation owners have all the wealth today. One might complain that inequality, never a problem per se, nonetheless is a symptom of problems if this were the case. 

But a look at just who is fabulously wealthy in the US and how they got there simply says these are fables. 

It frustrates me that to the left the answer, as in so many issues, is always "less" inequality and "more" redistribution. What is enough inequality and when do we know when we have gotten there? Surely not zero. On income inequality, just the fact that people earn more as they get older, and then retire and earn little means there will be wage inequality. And surely there must be some reward for those who take risks, start new companies, and serve the rest of us well. Their other goals are similarly frustratingly unquantified and unmeasured. It's always more. 

Meanwhile, courtesy Alec Stapp on  twitter, here is how people respond (at least in 2014) to the survey question "Most people are better off in a free market economy, even though some people are rich and some are poor." 

I am gratified it still polls 70/25 in the US. It is interesting that Vietnam (96/3) China (76/16) and Nigeria (74/17) beat us on this question! Now, they are not asking about democracy, just about free markets. Still, gratifying that the lessons of history are resistant to ideology.  



  

 


26 comments:

  1. "BM, founded in 1896"

    What company is this. I tried to use Google to find it but no luck.

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    1. It is impolite to mention the full name of "BM." But think septic tanks.

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    2. IBM, the quote snipped off an I.

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    3. IBM, it's a typo. Just go to the source blog.

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    4. Most likely IBM - one of its predecessors, Tabulating Machines Company, was founded in 1896 (see https://en.wikipedia.org/wiki/History_of_IBM).

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    5. It should be IBM.

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  2. The means of production are far more egalitarian (more equal access?) than they used to be and this is a positive consequence! Should the goal of public policy be to ensure people have equal access to the means of production (high-speed internet, smartphone, education in math and science, etc.) instead of focusing so heavily on outcomes? And might policymakers discover that they best way to ensure equal opportunity is to get out of the way?

    Thank you for your work and I miss the podcast!

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  3. It's interesting to see the 60s to 80s painted as an oligopoly and cartelized. You would then expect GDP growth to suffer as compared to today. In fact you get the opposite. How do we reconcile these facts?

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    1. During the period 1960 to 1980 the economy had two big tailwinds: there was still a back log of technological progress since 1930 to be exploited and you had boomers and women joining the workforce.

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  4. The comment fewer startups in 1960 has some truth but also points out another difference today. There were startups around 1960 (I started working for one of them around 1978 when it was an established company). But a major difference today is that you can start a tech company with a very low physical investment. When the product is digital there's no need to invest in inventory and manufacturing.

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  5. Read my article"
    Workers income correlation with economic results"on Banking White paper by Michael Zilbering

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  6. This is the type of analysis that gives statistics and name. The sample size of 100 is too small to draw any of conclusions. Looking at the tail of an elephant to conclude it's size. Do this analysis on the composition of top 10% of world or US. As for self-made riches, the post 70s development of computers and internet gave raise to today top 10 companies (based on stock mkt cap). What the next 20 years will do depends the new tech breakthroughs: they may be more capital intensive ones, in which case today's richest folks will be the ones to take advantage of those breakthroughs.

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  7. The richest man I know owns a factory he inherited from his father decades ago. He has managed the business prudently. He provides employment to hundreds of people. His workers collectively get far more practical benefit from his wealth than he does.

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  8. The problem is not inequality per se. As this column shows.

    The real problem is poverty, inadequate income. Which I believe is almost independent (in a statistical sense) of inequality. Why some people go on and on about inequality I don't understand at all.

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    1. I think the answer is simple. Envy of the rich, "off with their heads" sells politically. Fixing, say, atrocious public schools or zoning laws does not.

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    2. Many people, it seems, would like to have equality of outcomes, or a flattening of incomes, but this us a capitalist system, rewards go to successful risk takers. Those who don't take the right kinds of risk ( never start their own business, never invest in stocks, etc...) have no business telling the risk takers they have unfairly thumbed the scale. So many are trapped by inadequate financial knowledge and just want to blame others for their lack of education. Which I might add isn't covered by the educational system. It's street smarts.

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    3. This comment has been removed by the author.

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    4. This comment has been removed by the author.

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    5. Fractalshift,

      Yeah, I used to believe that too, until Bernanke / Paulson / Geithner decided to swap government debt for financial service firm debt. Then capitalism morphs into - heads I win, tails the taxpayer loses.

      See:
      https://fred.stlouisfed.org/series/TOTDTEUSQ163N

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  9. Yale Brozen's research demonstrated high rates of return in industry concentrations declined to industry means. I was his research assistant in 1971 at GSB when he started the study as a rebuttal to George Stigler and Joe Bains. As for innovate automotive technology in the 60's, back yard mechanics came up with chrome reverse wheels, candy apple paint and innovate methods for getting more horsepower from underpowered production engines. The creations of Mickey Thompson and George Barris, to name two of many, were adopted by the big 3.

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  10. productive vs. rent-seeking sources of inequality
    The above to me is the substantive issue, but sadly too many do not understand the distortions caused by the regulatory framework and the vote getting needs of politicians.
    Hopefully all will remember that back in their High School days or if still in HS that not all will get the same grades. Most likely a Bell Curve distribution, but clearly by time the all graduate HS their will be a ranking with some at top, many in the middle and some at the bottom of the class. Such is life

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  11. The development of the so-called Pfizer-BioNTech vaccine is an example of an innovation that benefited millions of people but also contributed to an increase in inequality. The vaccine was developed by the BioNTech startup founded by a couple whose families migrated to Germany from Turkey.Their families were not wealthy, but their innovation and their partnership with Pfizer contributed to them becoming some of the wealthiest people in Germany.

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  12. "In 1960, most of the people who start startups today would have gone to work for one of them. You could get rich from starting your own company in 1890 and in 2020, but in 1960 it was not really a viable option."

    Just not good history. In 1960 the game was just starting. Here is a snippet of the career of Arthur Rock:

    In 1957, when Rock was working as an investment banker at Hayden Stone, a New York firm, he heard from a group of eight scientists at Shockley Semiconductor Laboratories who wanted to start their own company. He helped the scientists, known as the “Traitorous Eight,” start Fairchild Semiconductor within Fairchild Camera and Instrument. ...

    In 1961, Rock moved to Silicon Valley and created Davis & Rock, an early venture capital firm, with Tommy Davis. They invested in Teledyne and Scientific Data Systems, which Xerox acquired in 1969 for $920 million*. In 1968, Mr. Rock formed Arthur Rock & Company, another investment firm through which he helped Robert Noyce and Gordon Moore — two of the “Traitorous Eight” — form Intel, an investment that made Mr. Rock a billionaire. Later, Mr. Rock invested in Apple when it was still in its infancy.

    * About $6 billion in 2021 money. It made a wealthy man out of Max Palevsky, whose father was an immigrant house painter, and who joined Rock in launching Intel.

    https://bits.blogs.nytimes.com/2009/02/05/arthur-rock-legendary-vc-invested-with-bernard-madoff/

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  13. Oh dear, ¿is this discussion starting again?

    I'm tired of hearing economists discussing if inequality is right or wrong by becoming ideological crusaders, i even cringe when i saw the ¨right ammount of inequality¨

    Inequality is a problem for a strategical reason, not for a ideological or moral reason, people behaves in their self interest, and if you have a country in which most people that pays taxes, tthe middle class struggles by mantaining the rich and the poor alike, then you have a perfect ccombination for chaos, the risk possed by just attacking and expropiating the wealth of the rich goes bellow the potential reward, other countries will use that to found extremist groups of any flavour and ideology.

    Is a bit of a regulating cycle, large wealth generation produces inequality, most people becomes wealthier, but some become more wealthier than others, as the elites get rich and have the power to turn the world in their benefit, and the plebs struggle the system becomes more unstable because people wants to kill the rich, after that everything becomes relatively level and the system becomes stable again, allowing new wealther generation, and so on and so for.

    The only exceptions are Japan and South Korea, mainly because they are both dominated by giant feudal like industrial conglomerates, Mitsubishi, Sanwa, Fuyo, DKB, Mitsui, Sumitomo, Hyundai, Samsung, Doosan, LG, the Keiretsu and Chaebols, is a very stable, rigid, and equal system, that while makes socialist and liberal economists angry alike

    The other reason why inequality has become more normal, may well be due to the large masses of inmigration, globalization, and the rather dysfunctional financial system that we had since the last, IDK, 70 years, Jeff bezos didnt made himself rich by retalining, he made himself rich by selling or owning amazon, the same with Elon Musk, he isn't rich because tesla makes profits, he is rich because tesla shares are sky high, because money printer go brrrr, cause trillion dollar bailouts

    Inmigration reduces labor costs because simple economics, if you import large ammounts of people the labour price goes down because there is a higher supply of labour relative to demand, which in turns increases profits, because at the end of the day the total demand of goods and services created by the large inmigration masses and globalization stays the same

    Is eventually a self destructing system, because if you have a large ammount of unemployed unhappy people like in spain, some country that may want a geopolitical advantadge will finance a group in order to take over the country and re-impose a system to replace the status quo, is hard to argue in favour of inmigration where there is many advantadges of just expeling them

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    1. You accuse of being an ideological crusader? The argument that the rich do not pay their share of taxes and it's all on the middle class is old and worn out factually and politically perpetuated by those that have nothing else to sell.

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  14. "There's a French fable about inequality coming from centuries old inherited wealth that grows faster than labor income, so the descendants of 1700s aristocrats own everything today"

    this is the best review of Thomas Piketty's book i've ever read.

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