We often think about inequality in terms of supply of wealth to the wealthy. Interest rate declines contribute to inequality because they cause the real estate and financial assets held by the rich to appreciate. Monopoly contributes to inequality because it enables the owners of dominant firms to extract rents from the rest of us, increasing their already large hordes. To reduce inequality, we could break up monopolies, or stop enabling them with ever expanding “intellectual property rights”. We could get rid of the carried interest loophole that lets hedge fund plutocrats pay very low tax rates on their labor earnings, or get rid of the tax-preference for capital income entirely.

Trying to suppress inequality by identifying wealth flows to the already rich and blunting their supply is God’s work. But it risks a certain whack-a-mole quality. You fix this tax loophole, the accountants come up with that one. The rich are clever, or at least they hire clever people, and they have lots of resources. Also, the rich create hostage situations to protect their wealth flows. For example, by preventing the enactment of generous automatic stabilizers by which the state would stimulate the economy through downturns, the rich ensure that the only way to prevent welfare-catastrophic employment losses is for the central bank to collapse interest rates and bid up the price of the financial assets and real estate, which the rich very disproportionately own. If you try to stop the rich getting richer, the story goes, you will just hurt the poor and marginalized. And the story is often true! Because the rich organize our institutions so that it will be true!

Staunching flows of wealth that the rich “entrepreneurially” invent, then assiduously protect, is like fixing a leaky roof by putting your hands on the cracks. You run out of hands pretty fast. We should think a lot more in terms of suppressing inequality from the demand side. What would it take for the very rich not to want to get richer?

I have no intention to address deep questions about human nature here. Are we in fact homo economicus, innately and insatiably greedy? Who knows. Even if we are not, I think we can presume that there exist people, whether they are most of us or just a few sociopaths, who will behave as if they are insatiably greedy. And once there are such humans, if they succeed, it sets off arms races. We have to compete, for essential positional goods, for zero-sum insurance against systematic risk.

I don’t know whether, in some deep sense, we can make people want money less or not. But we can change the legal environment so that the things people do to augment their hordes come with lower payoffs and higher risks. The rich then come to behave as if they want money less.

The classic example is the 90%+ top tax rates that prevailed for much of the period between FDR and JFK. The most common critique of that policy is it didn’t raise a lot of money, as very few people ever paid those rates. Why did no one pay those rates? Because it was dumb to earn incomes into a tax bracket from which funds would just be confiscated. So the rich, so good at gaming to pay themselves more money, also proved adept at gaming to pay themselves less. They behaved as if they were less greedy, regardless of whether in some deeper sense they were or were not.

During this period, the wealthy left funds in firms rather than realizing incomes. With the funds that accumulated, managers bought perquisites and prestige research labs rather than endowing for shareholders huge personal balances at BlackRock. Workers find it easier to bargain for better wages and conditions when their firms are flush, rather than when they are kept “lean” or even leveraged by whisking cash flows to investors as soon as they are earned. Indeed, during the barbarism of the “shareholder-value revolution”, firms were advised to stay leveraged in order to discipline managers against the temptation they might be generous to workers rather than funders. With the knife of hard interest obligations at their throats, managers behave as if they are greedier than when they have a great deal of financial slack. Conversely, when investors let firms accumulate cash, managers behave as if they are less greedy, whatever generosity is or is not in their unobservable hearts.

So, one way to suppress inequality from the demand-side is just to have high top marginal tax rates. Similarly, high corporate tax rates can reduce firms’ demand for accounting profits, rendering shareholders more open to “expenses” that might build off-balance-sheet, long-time-horizon assets. Like resiliency. Or a capable and loyal workforce. Do shareholders and managers in their hearts become more generous, or do they just pretend to be, because devoted and experienced workers are necessary to preserve wealth that they can no longer quickly extract? Does it matter?

One way the rich demand wealth flows is by accumulating market power, escaping or restraining competition, whether as sellers of outputs or buyers of inputs. The extent to which our economy is now controlled by monopoly is extraordinary. The rich have demanded, and we have accommodated, an era of “chokepoint capitalism“, as Rebecca Giblin and Cory Doctorow put it.

But we can make them want to do that less, if we make the costs and risks of engendering chokepoints higher. In the previous post, I suggested nationalizing the freight rail industry. (I’m not alone!) But won’t that turn us into Soviet Russia or something, if private assets can be force-purchased arbitrarily by the overweening state? Well, not if it isn’t arbitrary.

The legitimacy of private sector economic power is based on the claim that competition will discipline it in the public interest. When that claim holds, then the state generally should leave firms in the private sector. But as soon as competition becomes perhaps less than vigorous, municipalization or nationalization should be on the table, front and center. We need to flip the incentives surrounding “antitrust”. Under the status quo, firms seek to limit competition as much as they can get away with, while regulators play whack-a-mole with very proportionate (usually much less than proportionate) remedies. Instead, what we want is for industries themselves to ostentatiously ensure they are open and competitive, because the threat of eminent domain hangs above dominant firms if it seems like they are not.

Would Bill Gates, in his heart, have been less of a rapacious monopolist if market domination carried the real, proximate threat of nationalization? I have no idea, but I bet that Windows’ “openness” in the 1990s would have been less of a marketing sop and more of a fact, regardless. Do network effects mean that, really, there can be only one dominant search engine? I bet Google would figure out how to share some of the benefits its users create for it with other firms, if failure to do so risked making Google (reasonably enough!) a public utility. Etc.

High top marginal tax rates, or perhaps even a wealth cap. Taxes on firm payouts, higher corporate profits taxes, an excess profit margins tax. Normalizing the nationalization of monopolies. All of these interventions might lead wealthy investors and managers to behave as if they are less greedy.

Alternatively, we might say the status quo — under which the already rich can endlessly extract ever more funds via ever less competitive firms with little cost or penalty, while as individuals we are locked in competition with one another for essential positional goods — encourages people to behave as if we are more greedy than we in some sense truly are. The fact of inequality, and a legal environment that permits and promotes it, can be understood as a tax on virtue. Let’s tax money instead. Let’s reshape our laws so that endlessly extractive behavior just makes less sense.

Whether the humans in our heart of hearts are generous or greedy, naughty or nice, I leave to you dear reader. Regardless, we can build a world in which people just want to do the things that divide and impoverish us a great deal less. Let’s.

This entry was posted on Wednesday, December 7th, 2022 at 8:15 am PST.
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