A new report by Dider Jacobs at the Center for Popular Economics offers a breathtaking estimate of how the rich have gotten richer in recent years. According to Jacobs’analysis, 74% of billionaire wealth in America was gained through rent-seeking, or socially useless activity.
There has always been a tension between America’s meritocratic mythology and the blatant evidence of a thoroughly rigged economy. After the 2008 financial crisis where bankers brought the economy to its knees through reckless and criminal behavior only to end up richer after a taxpayer funded bailout, the contradictions between the myth and the reality became harder to ignore.
Even mainstream establishment publications like The New Yorker started asking, “What Good Is Wall Street?” Why is a sector of the economy that creates nothing running the real economy and taking home such a large portion of national income?
What Jacobs reveals is that most of the wealth that has propelled people into the top 1% and beyond was gained not through the creation economic benefit, but through rent-seeking. Economic rents are obtained when someone is able to extract wealth or excessive returns despite no additional contribution to productivity, or what could be called socially useless activity.
Jacobs then identifies the industries in which rent-seeking is most significant: those heavily reliant on the state, like oil, gas and mining, gambling, or forestry, and industries that involve a lot of imperfect information and market failures, like finance, IT, and the music and fashion industry.
And, of course, much billionaire wealth is inherited, making it hard to argue meritocracy plays much of a role at all. Taking all of this data into account, Jacobs concludes:
The bottom-line is that extreme wealth is not broad-based: it is disproportionately generated by a small portion of the economy. Economic theory predicts that activities that are prone to rent-seeking or market failures will concentrate wealth, and that is what we observe.
This finding has important moral, economic, and policy implications. To the extent that it is driven by rents as opposed to productive activities, the extreme concentration of wealth we observe is not fair according to a meritocratic conception of social justice. Moreover, because rents do not compensate productive activities, redistributing them through taxes or regulation does not harm the economy, and could even boost economic growth. As wealth inequality has become so extreme, even modest redistribution could have significant positive impact for the poor and the middle class.
That last part is a big deal. Because the rich are getting extremely rich from socially useless activity, taxing them does not threaten economic productivity. The traditional trade-offs between production and taxes on wealth and income is that high taxes hurt productivity and, therefore, ultimately hurt the people redistributive programs are supposed to help. That claim has always been dubious, but based on Jacob’s analysis, the opposite might be true: taxing the 1% will provide revenue for social programs while also leveling out problematic sectors of the economy that provide no real value anyway.
We all learned in 2008 that, contrary to corporate claims, Wall Street could not “self-regulate.” Now it seems regulating and taxing Wall Street and other economic parasites can both create stability and fund programs to make America a more equal society. Call it a win-win.