Yet just as ideas about inequality have completed their march from the academy to the frontlines of politics, researchers have begun to look again. And some are wondering whether inequality has in fact risen as much as claimed—or, by some measures, at all. It is fiendishly complicated to calculate how much people earn in a year or the value of the assets under their control, and thus a country’s level of income or wealth inequality.
The conventional wisdom to have emerged from [recent wealth and income research] revolves around four main points. First, over a period of four to five decades the incomes of the top 1% have soared. Second, the incomes of middle-earners have stagnated. Third, wages have barely risen even though productivity has done so, meaning that an increasing share of GDP has gone to investors in the form of interest, dividends and capital gains, rather than to labour in the form of wages. Fourth, the rich have reinvested the fruits of their success, such that inequality of wealth (ie, the stock of assets less liabilities such as mortgage debt) has risen, too.
Each argument has always had its doubters. But they have grown in number as a series of new papers have called the existing estimates of inequality into question.
Few dispute that wealth shares at the top have risen in America, nor that the increase is driven by fortunes at the very top, among people who really can be considered an elite. The question, instead, is by just how much. … Proposals for much heavier taxes on high earners, or a tax on net wealth, or the far more radical plans outlined in Mr Piketty’s latest book, are responses to a problem that is only partially understood.
The socioeconomic divide that will determine the future of politics, particularly in the United States, is not between the top 30 percent or 10 percent and the rest, nor even between the 1 percent and the 99 percent. The real class war is between the 0.1 percent and (at most) the 10 percent—or, more precisely, between elites primarily dependent on capital gains and those primarily dependent on professional labor.
While the top 5 or 10 percent may not deserve public sympathy, their underperformance relative to the top 0.1 percent will be more politically significant than the hollowing out of the working or lower-middle classes. Unlike the working class, the professional managerial class is still capable of, and required for, wielding political power.
Members of the top 5 or 10 percent have done better than the middle and working classes in recent decades, but this masks their dramatic underperformance relative to the top 1 percent (and especially the top 0.1 percent).
the costs of maintaining elite status—and passing it on to one’s children—have risen disproportionately for the top 5 or 10 percent. The ongoing decline of the middle and working classes may have reinforced the top 10 percent’s sense of elite status, but it also means that any backsliding would be catastrophic. These pressures have converged in two key areas in particular: real estate and education.
This underappreciated reality at least partially explains one of the apparent puzzles of American politics in recent years: namely, that members of the elite often seem far more radical than the working class, both in their candidate choices and overall outlook. … Many of the most aggressive proposals associated with the Left—such as student loan forgiveness and “free college”—are targeted at the top 30 percent, if not higher. Even Medicare for All could potentially benefit households earning between $100,000 and $200,000 the most; cohorts below that are already subsidized.
The purposelessness of many professional careers in the capital accumulation economy starkly contrasts with the growing number of unaddressed needs in the public sector. The legions of finance drones making utterly pointless discounted cash flow models could be far better employed designing a serious industrial policy. The engineers currently laboring over algorithms to make social media more addictive should be funded to focus on more productive technological advances. All the effort now devoted to coming up with new pricing strategies for old drugs could be directed at real medical problems, like increasing resistance to antibiotics. The vast resources invested in unprofitable ride-hailing apps and real estate arbitrage could have been used to solve America’s ever-increasing public infrastructure and housing challenges.
One of the themes of this newsletter has turned out to be the breakdown of integrity in American business, and the consequences in terms of our increasingly inability to produce the vital systems we need to sustain our civilization. … Today I’m going to continue on this theme, and discuss the increasingly common tendency of capital markets to finance loss-making companies, which is an important trend I call “Counterfeit Capitalism.”
Now, Neumann himself isn’t very important, foolish charlatans are common in society. The question is why he became so powerful despite being so obviously unfit for a role stewarding billions in capital and managing thousands of people. And that’s where we get to the real power centers behind this fiasco, the financiers who lent WeWork large sums of money. … WeWork then used this cash to underprice competitors in the co-working space market, hoping to be able to profit later once it had a strong market position in real estate subletting or ancillary businesses.
Engaging in such a strategy used to be illegal, and was known as predatory pricing. There are laws, like Robinson-Patman and the Clayton Act, which, if read properly and enforced, prohibit such conduct. The reason is very basic to capitalism. Capitalism works because companies that thrive take a bunch of inputs and create a product that is more valuable than the sum of its parts. That creates additional value, and in such a model companies have to compete by making better goods and services. What predatory pricing does is to enable competition purely based on access to capital.
Endless money-losing is a variant of counterfeiting, and counterfeiting has dangerous economic consequences. … [Honest] Competitors have to copy their fraudulent competitors. It’s a variant of Gresham’s Law, which says that “bad money drives out good.” If you can counterfeit something for cheap, the counterfeit will eventually take over the entire market and drive out the real commodity. That is what is happening in our economy writ large, a kind of counterfeit capitalism … eventually these companies become Soviet-style generators of white elephants and self-dealing. The men and women who run them have to be charlatans, because they are storytellers justifying losses.
As it turns out, the S-1 was correct; [Neumann] *was* pivotal to WeWork, because WeWork only exists due to his ability to get money from investors. … if we restore laws against predatory pricing and centralized financial control, the entire counterfeit capitalism model will go away. We can then get back to the business of making and selling things to each other without engaging in celebrated cases of fraud and abuse under the guise of ‘quirkiness.’
Negative interest rates are a signal something is very wrong with finance, and the broader economy. … a bank account is essentially a bank borrowing your money and using it to finance other loans that go into productive purposes like building factories. … A government bond works the same way as a bank account, but it finances government … Like a bank account, buying government bonds is a safe way to store assets, and get a little bit of a return.
Very low or negative interest rates mean that investors can’t find any place to place their savings. Investors perceive there are no more factories to build, no distribution centers to create, no new energy systems to research, no more products to create. You can only stuff money under a mattress, and the price of mattresses is going up. Our financial system, in other words, is acting like we have no more social problems to profitably solve.
Maybe what’s happening is that we can’t invest profitably, because there are monopolies everywhere you try to put money to work in the real economy.
Economist Simcha Barkai got to this dynamic in a paper he wrote in 2017. Barkai was interested in the decline in the amount of corporate output going to labor. He concluded this decline is not occurring because capital is getting a large share of income. Capital investment is going down even faster than labor share. There’s less spent on workers, and less than that spent on robots. So if labor share is down and capital share is down, what is up? Profits. The driver, Barkai found, is firm concentration is up across the American economy since 1985. This trend is more pronounced in higher concentration sectors, and less pronounced in lower concentration sectors.
But this works from the other side as well. It’s not just that there’s no place to put money. Even though rates are low or negative, it’s very hard to actually borrow money and put it to work. … who doesn’t have access to low or negative interest rates? Normal people and ordinary businesses. While powerful firms and individuals can borrow at record low interest rates, most firms and individuals cannot.
“Why can people be so much better at doing a thing for fun, or to help their friends and family, than they are at doing the exact same thing as a job?” … I think it has a very mundane explanation; it’s always more expensive to have to meet a specific commitment than merely to do something valuable.
The costs of reliability are often invisible, but they can be very important. The cost (in time and in office supplies and software tools) of tracking and documenting your work so that you can deliver it on time. The cost (in labor and equipment) of quality assurance testing. The opportunity cost of creating simpler and less ambitious things so that you can deliver them on time and free of defects.