Quick Thoughts on Wealth

Neo-Nazis with trillions is a huge problem, but we have to think carefully about how best to overcome it

Elon Musk’s trillion-dollar payday from the IPO of SpaceX has hugely amplified the public’s focus on extreme wealth inequality. Musk’s economic and political power is certainly something to be concerned about, but wealth can be a misleading focus.

I have raised this point before; wealth can be a misleading measure on both ends. As far as bringing down the wealth at the top, I welcome taxes, if they can be made effective, but the most likely way that the wealth of folks like Musk will be brought closer to earth is with a collapse of the AI bubble.

I look forward to the collapse, and the sooner the better, but I’m not sure everyone will be celebrating the loss of trillions of dollars of wealth by America’s billionaires and trillionaires when it happens. Just speaking from experience, very few celebrated the elimination, or at least downsizing, of many great fortunes when the tech or housing bubbles collapsed.

Of course, many non-rich families will also be hit. In the 1990s tech bubble, this meant a huge whack to people’s retirement accounts. In the collapse of the housing bubble, millions lost their homes. In both cases, we got recessions and a big rise in unemployment. It is understandable that people may not have been celebrating, even though there was a huge reduction in wealth inequality.

Individual Wealth and the Welfare State are Alternatives

On the other side, while it might be nice to see most households with a stash of tens or even hundreds of thousands of dollars in the bank, it strikes me as better to ensure that they have access to the necessities of life. Some people have been wrongly led to believe that these necessities require wealth. That is not true.

People might feel they need to own a home to have decent and secure housing. They need wealth to pay for their retirement or their kids’ education, and to cover their medical bills. But wealth is only necessary insofar as we don’t have an institutional structure to meet these needs without wealth.

In the case of housing, other countries and New York City have laws that provide for strong tenants’ rights. These laws typically limit rent increases and provide security of tenure so that landlords can’t just throw out a tenant arbitrarily. As a result, many middle-class people, or even upper-middle-class people, rent rather than own. It’s only necessary to have homeownership as a route to secure housing in places where tenant protections are weak or non-existent.

It’s a similar story with the other uses of wealth. If a country has a strong Social Security system and/or a strong system of employment-based pensions, people don’t need to accumulate substantial wealth to have a secure retirement. Wealth is only needed where these institutions fail or do not exist.

In most wealthy countries, most of the cost of healthcare is borne by the government. This means that people do not need to have substantial funds in reserve to cover unexpected expenses. The same is true of college and professional education. In other countries, the expense is mostly covered by the government. For this reason, people don’t have to save to pay for their kids’ education.

The Pursuit of Wealth for the Masses Has a Real Economic and Political Cost

If the question is just whether we would be a better country if everyone had $100k sitting in the bank, the answer is yes. But the world doesn’t work like that.

For people to accumulate their $100k or $500k or whatever we consider a reasonable sum for a typical family, they have to invest in stocks, mutual funds, or other assets. This costs money. An average fund would have administrative costs in the neighborhood of 1.0%. By contrast, Social Security has administrative costs of 0.4% of annual payouts.

But that comparison hugely understates the superiority of Social Security. The 1.0% fee applies to a stock of money. The 0.4% administrative cost refers to the annual flow of benefits. If an average dollar sits in a mutual fund for 20 years, the cost would be 20% of the accumulation, or 50 times the cost of Social Security.

From an economic standpoint, this is pure waste. We can provide the service, whether it be a pension, paying for healthcare, or whatever, without handing hundreds of billions of dollars a year to the financial industry. It’s also worth noting that the financial industry itself is a major source of big fortunes and inequality, so downsizing it is one step toward reducing inequality.

The political side of this equation is straightforward. Wealth accumulation is an individual activity, where some will do better than others. To some extent, that could be skill, where people get wealth by choosing smart investments. It also will inevitably involve a large element of luck, where some people get on the right end of a trend or event, and others end up on the wrong side.

Regardless of the cause, the winners in the wealth contest will be more likely to side with the millionaires, billionaires, and trillionaires in demanding low taxes on the rich and subsidies for their businesses. They will also be less likely to support public programs like Social Security, Medicare, and public education.

For these reasons, the pursuit of mass wealth should never be a priority for progressives. We need to focus on having a high level of public services. If we have ensured everyone decent healthcare, pensions, education, and housing, and we still have $100k left over to send to every family, that would be great. But until we get to that point, the focus on mass wealth is misguided.

Wealth and the Political Power of Billionaires

People are entirely right to complain that ridiculously wealthy buffoons like Elon Musk have enormous political power. However, reducing their wealth through various tax schemes is not likely to address the problem.

To see this point, take your most optimistic scenario. Suppose we manage to tax away 30%,40%, or even 50% of their wealth. Elon Musk, with $500 billon, still has way too much money to affect elections, as do Larry Ellison, Jeff Bezos, and Mark Zuckerberg with over $100 billion each. There simply is not a plausible story where we can take away enough of the wealth of the very rich to neutralize their outsized power in politics. (We should restructure the economy so it doesn’t make these people so rich in the first place. That would be the best way to address the problem.)

Also, it is silly to imagine that we will correct the power imbalance with campaign finance reform. Political ads do not have a unique ability to affect votes. If right-wing rich people can buy the media, as in Fox News and now CBS, and possibly CNN, they will control what we see between the political ads. They also own X and TikTok. This is likely to have more influence than whatever they could hope to buy with their ads.

The more plausible route is to take measures that ensure the non-rich have a voice. These measures include policies like the super-match (8 to 1) for small contributions that New York City has for its elections or the democracy vouchers to finance local campaigns in Seattle.

We also need to democratize the media. A system of media vouchers, giving each person a sum to support the news outlets of their choice, would go far in this direction. Also, it is still possible to prevent some of the consolidation of media in the hands of the far-right with antitrust law. And we need to revise Section 230 along the lines that the European Union has done, to prevent Elon Musk and Mark Zuckerberg from wholesaling lies with impunity.

The Rich Do Have Too Much Political Power, but We Won’t Fix That with a Wealth Tax

As a friend long ago cautioned, we don’t have many bites at the apple; make sure they are good ones. It is important to approach policy with clear eyes, so we can ensure our actions are directed in a way that makes a difference. I would argue that much of the focus on wealth inequality has been misdirected. The rich do have far too much political power, but we will have to go far beyond a wealth tax to correct this problem.

Most importantly, we need to focus on mechanisms for increasing the power of the masses. They do exist.