The Bear’s Lair: Treason of the billionaires

This summer has seen a rush of billionaires and their companies donating to left-wing causes, or even giving extraordinary amounts of money to the Joe Biden campaign to defeat President Donald Trump. That is their right, of course. But I find it extraordinary that a majority of the world’s ultra-rich are supporting people whose policies would destroy the system by which they rose. It is worth thinking about why they do it.

It must be remembered that wealth, even self-made wealth, does not directly imply intelligence, especially in societies where social connections, for example through attendance at elite colleges, provide an important boost to those who have them. The plethora of private equity companies since 2000, for example, has made it possible for even quite stupid people to get funding for their start-ups, and thereby become billionaires if they get lucky, provided they have the right “old-school-tie” and express the appropriate “woke” political opinions.

There has always been a certain segment of new wealth whose political opinions diverged from those one would have expected. The new industrialists in Lord Liverpool’s Britain around 1820, for example, tended to be politically Radical – as if they were still the factory workers some (but not all) of them had started as. That led them to ally with the Whigs, whose main policy initiative was a Parliamentary Reform that actually narrowed the franchise, disfranchising many working-class voters (to be fair, the rich industrialists would have had the vote under both old and new franchises, once they became rich enough).

The result was to vote out the followers of Liverpool, who had given the country policies that led to a literally unprecedented prosperity through industrialization, and cement control in a collection of economically illiterate aristocratic Whigs. There were far more Peers in Earl Grey’s Whig Cabinet of 1830 than there had been in Liverpool’s Cabinets, and absolutely no industrialists or even bankers – Alexander Baring, the most able member of that 200-year banking dynasty, had been promised office by the Whigs, but was frozen out by the hyper-snobbish Grey, whereupon he joined the Tory opposition.

Economically, the result of Whig economic mismanagement from 1831 on was an “Engels Pause” that stopped economic expansion in its tracks through the entire 1830s and froze the living standards of working men until the middle 1840s. For working men, matters were made worse by the 1834 Poor Law, passed by the Whigs, that ended cash payments to the indigent and instituted the notorious “workhouses” designed on the principle of “less eligibility” to be less attractive to the poor than everything except starving in the gutter, an alternative which many of them chose.

Only one major industrialist had been Tory in Liverpool’s time – Sir Robert Peel, father of the prime minister and the richest man in Britain at his death in 1830. But then, there are exceptions to everything.

Coming closer to 2020, until the present generation, the self-made very wealthy have tended to lean to the right. The U.S. robber barons were mostly Republicans, certainly Rockefeller, Carnegie and J.P. Morgan were. In my own youth if a businessman was more than marginally to the left, you could be sure he was a crook and you should not do business with him. The classic example of this was Robert Maxwell, the Czech-born billionaire publisher and Labour MP, who drowned himself off his yacht and was found to have embezzled the contents of the Daily Mirror pension fund. When as an executive committee member of the London branch of a European bank I suggested we should reduce or eliminate our exposure to Maxwell, I was mocked – to the extent they took my views into account, it was the best thing I ever did for them!

The rule of thumb that any self-made billionaire leftist in a reasonably functioning capitalist economy must be a crook was based on two philosophical theorems. First, an honest billionaire would value the society and economic system under which he had risen, and so be generally in favor of capitalism, a system that would allow others to repeat his success. (In theory, he might be a very unpleasant individual who wanted to keep everyone else down, but in that case, he was short on moral fiber and might well be fiddling the accounts, too.) Second, an honest billionaire would want to keep taxes on his earnings and capital at reasonable levels, and hence would oppose anything to the left of moderate liberalism (in the American sense.)

There are three reasons why this equation does not work any more. First, the capitalist system no longer appears to work as well as it did; billionaires who have enriched themselves under today’s version of capitalism may have no clear idea of why they have become rich. Second, tax loopholes, havens and shelters have proliferated, to the extent that the very rich believe that higher taxes can be imposed only upon the “little people” and that they can avoid most of them. Third, the social returns from “virtue signaling” have become immense, and the social exclusion from failing to do so has become inexorable – nobody wants to be President Trump.

Since 1995, the Fed has set U.S. interest rates by fiat, far from the level a free market would dictate. Since 2008, the world’s other central banks have followed suit. This has caused a massive rise in asset prices, and the creation of an overwhelming volume of spurious private equity funds and hedge funds seeking to take advantage of those rising asset prices. In the real economy, it has brought declining productivity growth, new business formation and innovation in general. An additional factor has been globalization and the Internet, which have allowed billionaires to make spurious additional profits, sheltered from tax in havens, by outsourcing good American and European jobs to filthy sweatshops in the Third World.

Since today’s billionaires have benefited from the current system, they naturally favor it. However, that no longer drives them to favor capitalism, since the system is no longer truly capitalist. Instead, they favor low interest rates, “funny money” rising asset prices, outsourcing, massive imports of artificially cheap labor and ‘woke socialism.’ By such means, they hope to avoid serious competition from the next generation, who could in principle equally build a ziggurat of wealth on borrowed ultra-cheap money. Rectifying economic policy by stopping “indentured servitude” H1B and H2B visas and by “Volckerizing” the Fed or imposing a zero inflation target (which is actually in the Humphrey-Hawkins Act – the Fed just ignores the legislation) would impoverish billionaires – and open the roads to wealth for everybody else.

The tax problem can also be solved fairly easily. Billionaires suddenly go conservative when their own tax bills rise, as evidenced by the huge squawking from New York and California billionaires when the Trump administration rightly limited the deductibility of state and local taxes. Other loopholes include the taxation of private equity “carried interest” payments, ridiculously taxed as capital gains. However, the most egregious and expensive tax deduction for billionaires is that for charitable donations. As the Clinton family have demonstrated, that can be used to shelter vast amounts of income, licit or illicit, without any significant connection to genuine charity at all. Closing that loophole would make a huge number of billionaires “fly right” as well as closing down a plethora of spurious and tacky “charitable” events and fundraisers.

As for the social returns for virtue signaling, they are huge. They can be reduced by abolishing the charitable tax deduction, which would make much “virtue signaling” very expensive, and by raising interest rates, which would introduce a cadre of new uncouth billionaires who actually believed in capitalism. However, there are organizational changes to be made here, too – for example de-funding the ridiculous Business Roundtable, which pushes companies to devote their businesses to virtue signaling rather than profit maximization.

By defunding the most leveraged and spurious billionaires, closing their tax loopholes and reducing opportunities for virtue signaling, we can slowly return the moral outlook of the very rich to a proper respect for free markets and capitalism. Because of their wealth and power, that will make life better for all of us.

(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.)