We know that we have the widest gap between the rich and poor in our history.
This has transformed a robust middle-class driven economy into a fragile, weak, wealth-driven one.
Still Republicans, who helped create this income gap through government policies dating back to the Reagan administration, continue to claim that this 1% is the economic engine that drives our economy. According to them, the 1% are the best, brightest members of our society who have earned their reward through hard work. If we tax these folks, we are told, we are not only punishing them for their success, but also creating a disincentive for others who might aspire to their wealth. Speaker of the House John Boehner says, “”The top 1 percent pay 38 percent of the income taxes in America. How much more do you want them to pay?” In other words, a progressive tax system (where the rich pay more than the poor) is like socialist graffiti on the capitalist Mona Lisa.
The reality, however, is far removed from this fantasy.
Successful people are lucky
Malcom Gladwell studied the phenomena of success in his book Outliers. In quick summary, what he discovered is that success is the combination of good fortune and preparation. For example, the billionaires created by the PC revolution (Gates, Ballmer, Jobs, McNeally, etc.) were all born within approximately five years of each other. Those who were older were already working for Mini and Mainframe computer companies when the window of opportunity opened for a disruptive change to the computing industry. Those who were younger ended up working for these seminal start-ups rather than founding them. So it didn’t matter how talented, resourceful, and hard working you were. If you weren’t born at the right time and in the right place, this particular opportunity passed you by.
The other component that these successful individuals had was early access to resources which allowed them to become experts in software and hardware technology at a young age. Expertise met opportunity and a small number became some of the wealthiest people in the world. The tax rate that they or their parents paid did not make it easier or more difficult for them to be successful. In other words, the window opened for a fortunate few and the first ones through that window with the appropriate skill set took advantage of the opportunity that was available.
Bill Gates’ fortune was built on the Windows “tax” that virtually every PC manufacturer from 1995 on has had to pay. Though Microsoft made many millionaires, their flaws have also been well documented. The original DOS operating system that IBM purchased from Microsoft, was virtually stolen from a local Seattle developer who was unaware of the IBM deal that Gates had on the table. The only reason IBM was talking with Gates was that they couldn’t come to terms with Gary Kildall for an x86 version of CP/M. Windows was developed on the side by a skunk works group while IBM and Microsoft supposedly were working together to develop OS/2. Microsoft was able to establish their Windows 95 monopoly in part by sabotaging their OS/2 partnership with IBM. Did Microsoft do anything illegal? No. Did they lie, cheat, and steal? Yes. Were they in the right place at the right time? Yes.
Successful people don’t create opportunities, they take advantage of them
The same thing applied to those who became wealthy through the growth in the financial industry over the last decade. While they may claim that skill was involved, Nobel Prize winning psychologist Daniel Kahneman has proven that their only skill was capturing a certain job. That capture was not the result of talent or intelligence, but rather the combination of the accident of birth and ruthless exploitation of others. When you actually look at their performance, someone far less educated could have been just as successful making the same bets using a random roll of the dice. Those who got the biggest bonuses were simply lucky.
In his book The Haves and the Have Nots, Branko Milanovic tried to discover the richest person who has ever lived. Beginning with the loaded Roman triumvir Marcus Crassus, he measured wealth according to the quantity of his compatriots’ labor a rich man could buy. It appears that the richest man in the past 2,000 years is alive today. It’s Mexican telecommunications robber baron Carlos Slim. Carlos could buy the labor of 440,000 average Mexicans. This makes him 14 times as rich as Crassus, nine times as rich as Carnegie and four times as rich as Rockefeller.
This begs the real question of economic value Carlos Slim brings to the vast empire he built. His critics claim that his wealth depends in part on his focus on developing countries with weak government oversight and a culture of political corruption. His Telemex Company, for example, has 90% of the landline business in Mexico and charges some of the highest usage fees in the world. Do greed, bribery, and worker exploitation count as valuable contributions to society? If not, how can you justify the fact that an hour of Carlos Slim’s time is 440,000 times more valuable than an hour of work from the guy stringing the telephone lines that supports Telemex?
I’m not advocating class warfare or socialism
What I am advocating is the free market in its most idealized form. In that form every worker (rich or poor) would be paid EXACTLY based on what they contribute to the economy by choosing to work – no more and no less. That means that the contributions of those making $30M a year deserve no more special treatment than the worker making $30K.
In this system, there is still the opportunity to become super rich. Just produce an innovation that the world needs. When you look at who really make up the 1% these days, most are wildly overpaid for their contributions because they are not innovators. For every Steve Jobs, you have limousines full of corporate bigwigs, financial wheeler-dealers, lawyers, and real estate speculators. In a study published by the journal Psychology, Crime and Law, Belinda Board and Katarina Fritzon tested 39 top paid British execs and found that they shared many traits with psychopaths. Those who have these traits often possess great skill in flattering and manipulating powerful people. Psychopathic traits like egocentricity, a strong sense of entitlement, a readiness to exploit others, and a lack of empathy and conscience are also characteristics that companies look for. The only difference is that poor children with these traits likely end up in jail. Rich children with the same traits end up in the board room.
In current team-based corporate structures, paradoxically it’s the psychopathic competitive risk takers who are more likely to get promoted and rewarded. These people make their money by getting lucky with big bets. Companies let them take highly leveraged positions because they have also positioned the taxpayer to cover big loses. The self-centered risk taker isn’t deterred by the potential impact that their actions have on others, so it is a perfect marriage for boards who are looking for a fall guy if the big bet fails. As the Bank of England’s director for financial stability put it, “If risk-making were a value-adding activity, Russian roulette players would contribute disproportionately to global welfare.”
Wealth has weakened democracy
The challenge is that our democracy is warping under the influence of super-wealthy liars, cheats, and thieves. The wealthy have created an extensive infrastructure of junk economics and pseudo academic studies. They pay for a tide of media and legislation supporting the unprecedented concentration of capital occurring today as well as the wide safety net we’ve been convinced to fund to catch big companies when they fail.
The media, think tanks, academia, and even government are all telling us that we shouldn’t reign in the wealthy because it will limit our opportunity to become wealthy. The truth is that the only people who will become wealthy in this economy are the ones who are ALREADY wealthy. That’s why we have an income gap. The door has firmly closed on upward mobility for children of middle class and poor families.
The scope of this wealth exceeds any that we have seen in human history. They have been able to accumulate this wealth because we have allowed them to take it. They were able to steal it from us because they convinced us that there was wisdom in their luck. We trusted their delusional claims of superiority and believed them more trustworthy stewards of our wealth than we are. This is what is behind the “wisdom of the free market” claims, when actually the market has been transformed into little more than a game of three card monte the wealthy play with the rest of us. The truth is that these con artists have just bullied and bribed their way to the front of the line. Their only success is that they have convinced everyone else that they deserve to be there.
It is past time to start rebalancing the economic scale