Ray Dalio, self-made CEO of the Bridgewater hedge fund group, the largest such operation in the country, says capitalism is broken. His solution, unsurprisingly, is a mix of higher taxes and more public spending – just the mix that will pull up the drawbridge up behind him and prevent younger people replicating his success. From Warren Buffett through Mark Zuckerberg down, there is a sameness to all the billionaires’ prescriptions. This column will explain why and suggest a few reforms billionaires won’t tell you about.
By hedge fund standards, Dalio is fairly benign – he is, incidentally, a Harvard Business School classmate, though I have not known him personally since those days. He is however an extreme control freak; at Bridgewater “everybody is monitoring everybody else all the time.” However, if you’re a billionaire who makes your employees’ lives a misery, don’t worry. Like Dalio, you can come up with some pappy social democrat ideas for raising taxes on the rich and redistributionist rhetoric in general, and CBS’s leftist “60 minutes” will say you are “more like a quirky professor” than a Wall Street shark. As I’m sure Dalio’s publicist told him: you can’t BUY that kind of coverage!
One can understand, therefore why billionaires decry inequality and produce the usual rubbishy social democrat capitalism-sapping remedies to cure it. It assures them favorable coverage from the leftist media, even those portions of it such as “60 Minutes” that are thoroughly anti-business in general. It probably does not hurt that the remedies proposed by the billionaires would sap the dynamism of the U.S. economy and make it very difficult to accumulate capital. That would reduce the chances of new entrepreneurs arising that could provide additional competition to the current billionaires, and possibly endanger their fortunes. With the appearances on “60 Minutes,” advocating mild socialism to the public is thus a win-win.
Equally the disease the billionaires identify is real: U.S. inequality has increased considerably in the last 40 years, and especially in the last 20 years, while working class living standards have remained stagnant.
The stagnation of working-class incomes is a much bigger problem than the rising inequality. Inequality had declined, mostly through forced action by the government, from 1929 to the late 1970s, so a moderate rebound was inevitable if a capitalist system was to be maintained. Only in the last decade or so has increasing inequality become pathological, as ultra-low interest rates have inordinately benefited the rich and leveraged, who have the best access to very cheap debt. Conversely, the stagnation of real working-class incomes is a problem by any standards, representing lost opportunity for the younger generation and unhappy decline for those whose life chances are below average.
Except for interest rate policy, the most important non-billionaire recommendation we can make is the importance of pluralism. Dalio and other billionaires postulate reforms that would be implemented by a benign all-knowing government or possibly by a benign all-knowing billionaire like themselves. Centralization was the key mistake of the Soviet Union, with its “Gosplan” system.
When I was in former Yugoslavia in the 1990s, it was notable that industry in that ex-country was more efficient and knowledgeable, and living standards higher, than in the Soviet Union or Bulgaria, further east. The reason was not any great intellectual or moral superiority among the Yugoslav people, nor was it a significantly greater degree of private enterprise there; it was that Yugoslav communism worked on a different system, by which the enterprises were self-managed rather than controlled from a central planning authority. As a result, many of the enterprises, even without private ownership or proper incentives, had a decent grasp of what it took to export to the West. As Jeremy Clarkson and his colleagues said back in their “Top Gear” days, the Yugo was a much better car than the Lada, the Trabant or the Moskvich.
Billionaires won’t recommend pluralism, because it involves smaller companies, smaller units of government, more confusion and more competition to their entrenched positions. Above it, all would mean more true entrepreneurship. The tech sector’s dangerous entrenched monopolies like Google and Facebook are dangerous because they are monopolies; if there were true small-company competition in those sectors there would be no danger to free speech, because competitors would arise for all the possible varieties of human opinion, and censorship would be impossible.
Similarly, the United States works best when regulation is left to the individual states, because that produces 50 different approaches to each problem, and prevents Gosplan-type paralysis. Attempts to form any kind of world government or world regulatory organizations, even in limited sectors, should be fought tooth and nail for the same reason. Whether under socialism or under capitalism, in the public sector or the private sector, pluralism woks far better than centralization – but billionaires won’t tell you this.
As a corollary to pluralism, medium-sized and small towns work much better than cities as places to work and do business. They have much lower costs, in terms of real estate, wages and all the inefficiencies that come with urban life, which allows entrepreneurs with limited capital to start new businesses, and businesses to lower their labor and occupancy costs. Low interest rates make the big cities’ problem even worse, because they cause the price of urban real estate in prime locations to skyrocket. Billionaires won’t tell you this; they own massive amounts of big city real estate and in many cases built their fortunes on it.
Amazon’s choice, when looking for a second headquarters, to select the most expensive location in the country, with the highest labor and real estate costs and some of the highest taxes, and then hope to get the local government to rebate some of the taxes, shows the billionaire mind at work. Rather than New York, a sensible Amazon would have placed its second headquarters somewhere like Binghamton, NY, a city artificially blighted by Governor Andrew Cuomo’s refusal to allow fracking, which consequently has ample supplies of surplus labor and low-cost real estate. A second Amazon headquarters in Binghamton would have saved the company untold amounts of money, revitalized that entire region and would have been able to draw on the highly skilled graduates of nearby Cornell University.
Another policy that billionaires won’t recommend is the abolition of the charitable tax deduction. This more than any other tax loophole allows billionaires to pay far lower rates of tax than the rest of us. Thus, we are heavily subsidizing their philanthropy through our own tax payments.
Dalio got brownie points on “60 minutes” by boasting of a $100 million gift to Connecticut’s education system, and that he expects to give away half his wealth before he dies. In reality, Dalio’s $100 million will do no more good for Connecticut’s education system than the much-ballyhooed $100 million from Mark Zuckerberg did for that of Newark, N.J. a few years ago. While the leftist teachers’ unions continue to control those school systems, any additional funding will be swallowed up in administration, teacher pension benefits and gender awareness classes, without advancing the cause of education one iota.
As for giving away half his wealth to charitable causes before he dies, this will merely ensure that Dalio pays essentially no tax for the next quarter-century, while the rest of us struggle to fund the ever-increasing burden of the Federal government. Far from finding admiration for his charitable donations, Dalio may find himself stoned in the public square. I do not condone such violence, but I do insist on abolishing or capping at a low level the charitable tax deduction. No billionaire will ever recommend this, but it would do wonders to close the Federal deficit. What’s more, we could then genuinely admire billionaires’ charitable donations, knowing they were paid for out of their own pockets and not out of ours.
Finally, and inevitably for readers of this column, the most important policy that billionaires will never recommend is a change in monetary policy to push interest rates securely above the rate of inflation, ideally anchored by a Gold Standard. Billionaires, especially those in the financial sector such as Dalio, will never recommend this, because most of their wealth is built from artificially cheap leverage, to which they have much better access than the rest of us. If real interest rates were reliably positive, asset prices would be much lower, billionaires would be poorer, housing in big cities would be affordable, bubbles would be much less frequent, inequality would be much lower and well-paid blue-collar jobs would be much more plentiful, because with high interest rates (and higher capital cost differentials between rich and poor countries) it would be less attractive for manufacturing industry to outsource to the Third World.
A world with high government and private sector pluralism, dispersion from the big cities, no tax-deductibility of charitable contributions and a Gold Standard would have much lower inequality, much better social conditions, infinitely more small businesses and entrepreneurs, much more innovation and much greater wealth and happiness for ordinary people. However, you will never find a billionaire to recommend it. For one thing, recommending such a program would get them thrown off “60 minutes.”
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)