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Billionaires Aren’t Dangerous; Those Who Would Prevent the Innovation that Creates Most Billionaires Are Dangerous
Raymond Richman, 1/19/2015

The Democrats and their loving media are bent on making the distribution of wealth and income the principal issue in the 2016 campaign. President Obama in his so-called state-of-the-union message (1/20/15) proposed to raise taxes on the very wealthy, saying “let’s close the loopholes that lead to inequality by allowing the top one percent to avoid paying taxes on their accumulated wealth.” One trouble with that statement is that it suggests the rich don’t pay their fair share of taxes. In 2008, the top one percent of personal income taxpayers according to the IRS paid 38.02 % of the federal personal income tax paid, the top 10% which includes all the really rich paid 69.94%, the top 25% paid 86.34%, the top 50% paid 97.3%, and the bottom 50% paid only 2.7%.

We are all for closing loopholes but it is hard to identify a loophole? Are charitable deductions loopholes? Some believe they are. Besides the president was telling an untruth when he implied that loopholes created wealth inequality. The inequality of wealth is largely due to inventions and innovations. Steve Jobs and Bill Gates, to name only two of the thousands who became millionaires and billionaires, did so by creating the products produced by Apple and Microsoft.

The anti-poverty charity Oxfam reported  ahead of the World Economic Forum in Davos that the share of the world’s wealth owned by the best-off 1% has increased from 44% in 2009 to 48% in 2014 (while Obama was President incidentally) while the least well-off 80% own just 5.5%. At the most recent meeting of the American Economic Association, economists took issue with some foolish writings about inequality written by French economist Thomas Piketty .

An Oxfam spokesman said it would use its high-profile role at the Davos gathering to demand urgent action to narrow the gap between rich and poor. How? They do not say. One would think that it would be more important to reduce the number of poor than narrow inequality. That is what American inventors and innovators have done historically.

The US which has the highest number of billionaires and millionaires (13 million) has no one starving of famine and has the highest standard of living of any major country in the world.  A table taken from a recent work by published by the Levy Institute of Economics at Bard College show a much different picture of the inequality of wealth than the President and the Democratic Left portray. It shows that in 2010 the top 1 percent owned 35% of stocks and mutual funds, the next 9% (representing 27 million Americans) owned 45.8% and the bottom 90% owned 19.2%. It also showed that the top 10 percent owned 40.2 percent of residences while the bottom 90 percent owned 59.8% of residences, 34.5% of pension accounts, and 49.2% of assets other than investment assets.

The stock market boomed from 2010-2014 but unemployment remained as high as it was in 2010, 23 % of the labor force if one counts as unemployed those working less than 30 hours a week involuntarily and those who have given up looking for work. That these facts indicate that income inequality has been increasing cannot be denied but the solution is to get back to full employment as soon as possible. Income after taxes will still be unequal. But everyone willing and able to work would be earning a decent income. And the degree of income inequality would not be nearly as great.  

2 million millionaires. Rising stock markets and a broader increase in asset values have fueled the surge.

What is fueling the rise in the stock market and the rise in housing prices? The answer is the FED’s quantitative easing monetary policy. The value of any asset is the capitalized value of the income (broadly defined) expected from it in the future. Stock prices are established based on the expectations that prospective investors have of the future earnings power of the firm and stock prices adjust as these expectations change or are proven wrong. But whether on the average stocks in large corporations rise or fall is also determined by interest rates. The Federal Reserve Board (FEB) controls interest rates. When interest rates are low as they are at present stocks sell at a large multiple, say 14 to 20 times average expected earnings. When interest rates are high, the multiple is much smaller, six to 10 times expected annual earnings. (Economists used the following formula to estimate asset values: Asset value = y0 + y1 / (1 + r) + . . . + yn (1 + rn ), where y equals the expected income in the current and future periods and r = the appropriate discount rate.)

Since 2009, the FED has pursued a policy of quantitative easing. Its principal effect was to inflate asset prices especially corporate shares of stock and real estate. So it is not surprising that Oxfam found that millionaires and billionaires have become wealthier and more numerous. If, as, and when, the FED reverses course and allows interest rates to rise, millionaires and billionaires will become less wealthy and fewer. The reduction in interest rates was intended to stimulate investment and consequently the economy, but it has had little effect on investment and little effect on employment. Wages have stagnated and the inequality of income grew. So indeed the years 2009 to 2014 witnessed a widening of differences in wealth and income.  

A spokeswoman for Oxfam described the worsening distribution of wealth as dangerous. To whom? Where have all the billionaires of yesteryear gone, dead everyone. Billionaires Henry Ford, Andrew Carnegie, Vanderbilt, are gone and hardly remembered except for the wonderful libraries, schools, museums, etc. they created with their wealth. Who did they endanger? Today Bill Gates and Warren Buffett and many other billionaires are giving billions away to charities and social institutions. Who has Oxfam benefitted?

How does one become a millionaire or billionaire? By innovation and invention mostly by mass-producing goods for the masses, the other 90 percent. A few may get rich by speculating successfully in the markets for securities and real estate, some by criminal activity. Many have gotten rich by their friends in governments. Most Congressmen,  Senators, and Presidents retire as millionaires. How many millionaires were created by foolish government programs such as the highly subsidized owners of wind and solar energy plants who cannot compete without government price guarantees and manufacturers of highly subsidized hybrid and electric vehicles, etc.

No, millionaires and billionaires are not dangerous. Those who would prevent anyone from becoming a millionaire or billionaire by innovating and producing goods and services in a competitive private market system are dangerous.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]