Great Wealth is Bad Only When It Comes from Cronyism Instead of Creating Consumer Value

I book marked this long ago when I was in Europe and forgot to blog it.  From the Washington Post

You might be used to hearing criticisms of inequality, but economists actually debate this point. Some argue that inequality can propel growth: They say that since the rich are able to save the most, they can actually afford to finance more business activity, or that the kinds of taxes and redistributive programs that are typically used to spread out wealth are inefficient.

Other economists argue that inequality is a drag on growth. They say it prevents the poor from acquiring the collateral necessary to take out loans to start businesses, or get the education and training necessary for a dynamic economy. Others say inequality leads to political instability that can be economically damaging.

A new study that has been accepted by the Journal of Comparative Economics helps resolve this debate. Using an inventive new way to measure billionaire wealth, Sutirtha Bagchi of Villanova University and Jan Svejnar of Columbia University find that it’s not the level of inequality that matters for growth so much as the reason that inequality happened in the first place.

Specifically, when billionaires get their wealth because of political connections, that wealth inequality tends to drag on the broader economy, the study finds. But when billionaires get their wealth through the market — through business activities that are not related to the government — it does not.


  1. Onlooker from Troy:

    Quote: “One of the things that shocked us is that once the billionaires had a
    significant amount of wealth, they would often take steps to try to
    limit the amount of competition,” Bagchi said.

    Yes, quite shocking - to only the most naive' of economists. Good grief, really?

  2. Onlooker from Troy:

    And this only accounts for the most gross manifestations of cronyism. The more subtle and hidden cronyism (and that beyond just billionaires; e.g. multimillionaires like the Clintons, Pelosi, et al) that exists in the U.S. is not well represented, and as the article states, has no doubt expanded quite a lot since 2002.

  3. Solomon Foster:

    I dunno, if you think about it, once you have a billion dollars, what's the point of going out of your way to make more money? I mean, invest it in some minimally producing account that gets you 1% a year and you have $10 million annual income perpetually without ever touching your principal. If I had that kind of money, the last thing I'd consider doing would be trying to wrangle some politicians to make it easier for me to make *more* money.

  4. vikingvista:

    Gee. A 20th century study supports the wisdom of Adam Smith. Such progress.

  5. MNHawk:

    $65,000 per year and how many years of school did it take for these two to figure out the obvious?

  6. vikingvista:

    Billionaire's assets are usually almost entirely due to the market value of their shares of the businesses they started. Such a portfolio is anything but diversified, low risk, or liquid. Even if they were willing to divest themselves of control of their businesses to invest as you suggest, dumping such a quantity of shares on the market would sink the value of those shares. And even if it were desired by the business owner, even if it happened to be legal, the board and other shareholders would likely have something to say about it, if only choice profanities.

    Most people think of a billionaire as someone with a billion dollars worth of the kind of liquid assets that most of us paupers are accustomed to. That is not usually the case.

  7. morganovich:


    which is precisely why you are never going ot have that kind of money. multi billion dollar empires are not created by folks that settle for "enough" seek "life balance" and do not have an irrepressible drive to win.

    guys like that stop way before a billion. to push that far takes a pretty extreme personality type. at that point, you're like a NFL quarterback. you just wanna win because winning is what you do.

    we ought to be grateful for that. how many of the awesome things that we use every day would never exist if all CEO's and scientists had balanced personalities?

  8. brandonberg:

    This suggests, of course, that inequality doesn't necessarily play a causal role at all, i.e. that the harm is done by cronyism, which has high income inequality as a side effect.

  9. bigmaq1980:

    "multi billion dollar empires are not created by folks that settle for "enough" seek "life balance" and do not have an irrepressible drive to win"

    Very true. McArdle makes a similar point, not necessarily about the richest either, as other motivations exist...

    Without such people we would not have Silicon Valley, as one example, where huge gambles are made, the funds all come from wealthy Venture Capitalists looking to diversify and grow their wealth. Only the richest can afford to play the early investor game enough times to come out an eventual winner.

  10. bigmaq1980:

    And this is probably why we see charts like this one looking the way they do...

    Would be interesting to see how these countries line up on relative corruption (a proxy for cronyism, perhaps?)?

  11. Me too:

    This is why Buffet says go ahead tax the hell out of my income. He doesn't pay himself much. Almost all of his wealth is in stocks that he doesn't sell.

  12. vikingvista:

    I think for Buffet it is crony deals with tax-lusting politicians that would more than make up for the tax increases. For ordinary businessmen without his political pull, the money that defines his standard of living (wages and dividends and capital gains) is already all taxed even before getting hit with the business asset savings and redundant ax known as the corporate income tax.

  13. mesocyclone:

    There is another, modern way that great wealth seems to be bad: when it is attained by Silicon Valley entrepreneurs who get rich so fast that they have no experience with ordinary business. These titans of industry tend to be statists, not only out of self interest, but sadly also because they thing that progressive policies are the right thing to do. Hence Google's "Do no evil" really means "Do what progressives think is right."

  14. NSemaj:

    Because at that level of wealth money isn't about purchasing things, it is about power and status. Both of which are zero sum games.