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00:07 Trevor Burrus: Welcome to Free Thoughts. I’m Trevor Burrus.

00:10 Aaron Powell: And I’m Aaron Powell.

00:10 Trevor Burrus: Joining us today is Chris Edwards, Director of Tax Policy studies at Cato and editor of down​siz​ing​gov​ern​ment​.org. And Ryan Bourne, who occupies the R. Evan Scharf Chair for the Public Understanding of Economics at Cato. Welcome to Free Thoughts, gentlemen.

00:23 Chris Edwards: Thank you.

00:24 Ryan Bourne: Good to be here.

00:25 Trevor Burrus: How do we measure inequality?

00:27 Chris Edwards: Well, I think the first thing we should look at is that both income inequality and wealth inequality are discussed in popular discussions, the politicians often conflate the two, but they’re actually very different thing. Income inequality, of course has to do with the distribution of incomes at any point in time. And incomes depend both upon what people earn in the market and the government benefits they get. Wealth inequality is quite distinct. Wealth inequality has to do just with the private wealth you own. And traditionally, when you think about it, because we have these giant entitlement programs these days like Social Security and Medicare, that’s sort of wealth that people think they have when they retire, but it’s not taken into the government accounts. So wealth inequality has to do with the distribution of privately owned wealth and income inequality, there’s a lot of complexities about, is it just market income, or are you including government benefits as well?

01:28 Trevor Burrus: So what would… Wealth includes something like assets, so your bank account, your stocks and bonds, your house, your money, things like this would be included in wealth, right?

01:41 Chris Edwards: That’s right. So Ryan Bourne analyzed a new study for Cato, we just look at wealth inequality. And if wealth inequality considers everything, your financial assets, your pension assets, your house, the Democratic proposal’s currently to impose a wealth tax, the general idea is to tax everything that the richest Americans own, their home, all their home furnishings, their jewelry, their art collections, and all their financial assets, and their pensions and their business assets. So the idea is to try to be a measure of wealth as broadly as you can.

02:15 Aaron Powell: Does debt factor into that? So like a physician who is making a ton of money, but has a fixed… Every month, they’re paying student loans. Does that come out of when you’re looking at total wealth, does it draw it down?

02:29 Chris Edwards: Absolutely. So here’s… We have one good source of wealth in the United States, and the Federal Reserve does a survey every three years, called the Survey of Consumer Finances. And they look at both assets you own and household debt as well. And this plays a big role in the statistics. So people, for example, young people who are just starting out in their careers, they don’t have a lot of assets, but they got a lot of student debt, and that pushes them into the negative wealth territory. And of course, then people with… Own homes, they have a lot of home debt, so debt very much plays into the statistics.

03:06 Aaron Powell: So I guess this raises a question of when we talk about… When people are like, “Well, these… We have this inequality.” And what we imagine is that it’s this spectrum from absolute destitution to I own seven mansions and 100 cars and whatever else, but what that really… What that spectrum is when you’re imagining is like a spectrum of living standards. But is there a relationship or what is the relation? There’s obviously some, but how strong is the relationship between inequality in terms of wealth and income and actual living standards that the people we’re measuring?

03:46 Ryan Bourne: You’re exactly right, Aaron. And this is why some of the statistics used in this debate is so misleading. So every year, for example, Oxfam releases a report looking at global wealth inequality. And what they usually purport to show is that, say, the top 10%, or the top 10 wealthiest people in the world own as much as, I don’t know, the bottom 50% of the world’s population. And those can be very, very misleading because they use these net debt figures that Chris was talking about. So according to that, the poorest person in the world might be somebody, for example, who’s studied at Harvard, run up extortionate amounts of student debt to invest in their own human capital, which actually is gonna produce an asset in terms of their potential earnings over their lifetime, but they would appear in these statistics as the poorest person in the world. So it’s very misleading in regards to living standards.

04:39 Ryan Bourne: And of course, is there’s an additional problem there as well which is that when you’re looking at a wealth distribution at one point in time, you don’t consider… It doesn’t reflect the kind of life cycle that people go through, so it shouldn’t really surprise us, for example, that not many people have much in the way of assets until the time that they’re in their 30s, and their 40s, when they’re really earning significant amounts in the labor market, and are able to save sustainably, but if you’re looking at a snapshot of wealth inequality over time in a given distribution, quite often, you’re comparing people who very late in life, have wide ownership of assets, against some of these people who perhaps are just coming out of university with extensive amounts of student debt, or just through virtue of the fact that they’re fairly young, don’t own much in the way of assets in the first place.

05:27 Aaron Powell: How does that then play out when we look at the statistics? If we say wealth or income inequality is X in America, and so it’s… As a lot of people who we might talk about today, say it’s a very high number. It’s… There’s a lot of it. If you were to instead just compare income… Or not income bands, age bands, so we’re going to look at inequality among 30 to 40 year olds, or 50 to 60‐​year‐​olds, what does that do to… Does… How much of the inequality disappears, if you’re looking at comparing apples to apples, as opposed to comparing 18‐​year‐​olds to 65‐​year‐​olds?

06:00 Chris Edwards: So there are cross‐​country studies. You’re absolutely right. The demographics in different countries differ, some countries are younger, some countries have more grey‐​haired people. So there are sophisticated studies that try to adjust for that across country, but there’s all kinds of data out there in the popular media claiming that certain countries have more or less wealth inequality than others, but they don’t take into account important factors like that. Yeah, as Ryan touched on, supposing you as society, with just two people, they both earn say, 50,000 a year, but one of them was 25, one of them was say, 60 and nearing retirement.

06:42 Chris Edwards: Income inequality wise, it would be a completely equal society. But let’s say the person who’s 60 was fairly frugal and he saved throughout her life, she would have a lot of wealth. And so, that society would have no income inequality, but high‐​wealth inequality. So, Ryan and I have come to the conclusion that wealth inequality is a completely meaningless statistic. It really is meaningless for some of those reasons we just touched on. Income inequality is interesting to examine but wealth inequality doesn’t really tell you anything about the society. And we go into our paper some examples of this. There are measures across country of wealth inequality measured by the so‐​called Gini coefficient. So you get some countries like Kazakhstan and Ukraine and Russia that are highly unequal by the measures, and I think we know the reason, they’re very corrupt countries, so that’s probably why they’re very unequal.

07:39 Chris Edwards: Other countries like United States, have high levels of wealth inequality and it’s probably because of capitalism, probably because we have Silicon Valley, a lot of entrepreneurs who make many billions of dollars. So in those cases, wealth inequality is a reflection of very positive dynamic economy. A good example of that is China has become a lot more unequal over the last couple of decades, but anyone who reads economics news, understands that China is vastly wealthier across the board than it used to be. So ultimately it’s interesting to look at some of the causes of wealth inequality, but the measurements themselves don’t mean anything.

08:17 Ryan Bourne: And of course, one of the things, perhaps surprising things that we tend to find in the data is that some of the countries that we think of as being very equal when we talk about income inequality, the Scandinavian countries, Denmark and Sweden, are also found to have very high levels of wealth inequality. And in those countries that can actually be a reflection of the extensive welfare state in itself. Now why is that? Well, if through the government, you’re providing generous retirement benefits, generous healthcare benefits, social insurance in case somebody loses their job and all of these other eventualities, what you’re doing is both reducing the need, the incentive and actually reducing the means for ordinary middle class people, to save, because they have broad‐​based tax systems that actually take quite a big share of your earnings.

09:07 Ryan Bourne: And of course, another reason why that widens wealth inequality is that those benefits, in the terms of the retirement benefits, the health benefits are inheritable in the same way that ordinary private assets are heritable. So you add up all of those different things and what I think, the point Chris is getting at is that looking across countries there doesn’t appear to be any obvious relationship between the degree of wealth inequality a country sees and any meaningful metric of well being. Which I think is the point that you were trying to make in the question.

09:42 Trevor Burrus: It could be that… Is it also possible that some of these countries like Denmark and Sweden which I’m not too familiar with how complex their tax code is but I know it’s pretty high. It kicks in pretty high in terms of taxing and some of them used to tax wealth in the way that Elizabeth Warren is now but it seems like just describing what wealth can be, it makes it much easier to hide it from the tax or maybe if you have pretty high taxes for the rich people in Denmark, they’re actually better at hiding it too. They’re going and buying offshore things. They are buying investments that makes it difficult to tax it on that top end because tax avoidance is always something that richer people can do better than poor people, generally.

10:21 Chris Edwards: I don’t think that’s why… You’re right Europe is, they have a lot of cross‐​border flows of wealthy people over the last few decades because of high income taxes, high wealth taxes, a lot of wealthy Europeans, race car drivers and soccer players and the like they moved to places like Switzerland. Absolutely. There’s a lot of movement there. But there is pretty solid statistical data that what Ryan describing is what’s going on in Europe. There’s a good European Central Bank study a few years ago, they have a good database of 60,000 European households across a dozen countries or household finance data with their sophisticated statistical analysis, they pretty conclusively proved that these countries like Denmark and Sweden, that have the biggest welfare states, have the least middle‐​class savings. Countries like Spain that have smaller welfare states, they’ve actually got a lot more middle‐​class savings interestingly enough. And so that’s what’s causing the greater wealth inequality.

11:20 Trevor Burrus: Are we including things like 401Ks and savings. ‘Cause I mean that’d be a thing that Americans do because we don’t count upon this massive… ‘Cause it makes complete sense. I think the Denmark marginal rate of about 60% kicks in at about 55,000 or 60,000 Euros a year, which gives you very little to save or to put away and then you don’t, and then you’re like, “Well, they’re gonna give me checks no matter what. So what’s the point kinda thing? That’s the point correct?

11:45 Ryan Bourne: Yeah I think the point that Chris was making is there’s different dynamics here that offset each other. Clearly the US‐​Russia and Denmark have very similar Gini coefficients overall, but in the US a lot of that income inequality seems to be driven by returns to entrepreneurial and capitalist activity. In Sweden and Denmark, it seems to be a result primarily of the big extensive welfare state and in other countries, it can be cronyism too. Hence why just looking at wealth inequality statistics doesn’t on it’s own give you any meaningful information about the desirability of a wealth distribution because it doesn’t give us any information about how that distribution has arisen through economic activity or cronyism.

12:29 Chris Edwards: In this country, there’s been a lot of good data also about this crowding out or displacement effect of the welfare state. The former Harvard economist Martin Feldstein, one of the top of fiscal economists of the last half century or so, one of the things he wrote a bunch of papers on was how social security induced this crowding out of middle class retirement savings. So that’s pretty clear from his work that we discussed in our paper, there’s a good study a few years ago, these economists that modeled the US economy over the last half century and they found that the wealth inequality has risen in United States to some extent over the last few decades, they found that about half of that was caused by things like globalization and the market capitalism basically the Silicon Valley and that sort of stuff, but about a quarter was caused by this crowding out of the welfare state.

13:25 Chris Edwards: The US welfare state has got bigger over the last few decades, that has induced middle class people to save less and thus people, the wealth at the top, is mainly business wealth, and so people at the top still have their business wealth, it’s the people in the middle class, they save less than they would have because of all our entitlement programs.

13:45 Aaron Powell: Just a clarifying question about how we’re measuring this, ’cause we reduce this too. There is a certain level of inequality within a nation and we can measure that, but the way that we’re measuring that, how many people in a given income band does it take to count? So let me see if I can clarify that. That you could have a society where everybody makes $50,000 a year, but one guy makes a billion dollars a year and then you could have a society where 50% of the people make $50,000 a year and 50% of the people make a billion dollars a year. And would those have the same level of income inequality in the measurements?

14:28 Ryan Bourne: Well we’re talking about wealth inequality, but there are three different measures mainly that are used in this debate. There’s a Gini coefficient, which is a quite complex, all encompassing distributional measure that ranges between zero and one. Zero being absolute equality, one being absolute inequality.

14:47 Trevor Burrus: That would be like one person has all the wealth, and everyone else has nothing kind of thing.

14:51 Ryan Bourne: Exactly.

14:51 Trevor Burrus: Absolutely.

14:52 Ryan Bourne: Yeah. But increasingly economists are also supplementing that with different measures as well. So they’ll do the top 1% share of total wealth. So the top 1% of wealthy, you have a distribution where you put, list everyone and in terms of their wealth, how much what proportion of total wealth does the top 1% have or the top 10%. Clearly these sometimes can show different things depending on the distribution at any given time, but I think people are using these different measures to kind of supplement each other, try and give a more rounded story of what’s happened to inequality over time.

15:29 Trevor Burrus: When Chris talked, he talked about entrepreneurship and what the American wealthy are like, but I’ve known some people who’s great grandpa invented like the zipper or some small part of something that created a huge amount of… We had a lot of this wealth in the 1890s and 1900s in the Edith Wharton world with all the big houses in New York. And you just put that in a trust do some minor things to it, don’t dip into it and it will just go. It’s hard, if you have a $100 million trust in 1900 that could still be going to grandchildren, great‐​great‐​grandchildren who didn’t do anything to deserve it, whatsoever. And there are definitely those people in the world. But is that a lot of the rich people we’re talking about, the wealthy people?

16:17 Chris Edwards: So there’s a couple of points here, one is that one good source of data that a lot of analysts look at, is the Forbes Magazine has produced a list of the 400 wealthiest Americans since 1982. Every year they come out with a new list. And a lot of analyst had looked at that to see how much dynamism and the like the real, is on that list. One thing we know from that list, is that the share of the richest Americans the top 400 who earn their wealth themselves from their entrepreneurial activities has grown from about 40% in the ‘80s to 70% today. If you look at the list of the top 400 richest Americans, it’s mainly people like Jeff Bezos, the wealthiest person in the United States and other high‐​tech entrepreneurs. So the inherited wealth, has declined greatly in importance and most analysts looking at it, find that there’s, inherited wealth is more of an issue, more of the wealth of Europe than in the United States. That said, there’s nothing wrong with inherited wealth. In fact families that can continue their wealth and build their wealth over time, that is good for the rest of us. When wealthy people keep their wealth saved, it really means that the most wealth is business wealth, the vast majority of it. It is not gold bars hidden under the mattresses. Jeff Bezos…

17:39 Trevor Burrus: And it’s doing nothing.

17:40 Chris Edwards: Yes. So Jeff Bezos’ wealth is his 15% ownership of Amazon, so he owns all these assets, out across the United States that employ 600,000 Americans. So we want, the rest of us want rich people to keep their wealth saved and producing GDP which is good for the rest of us, so we want them to save. And that’s what I think people who’re coming in with a complaint about the wealthy, and want a wealth tax, they would hit all wealthy. Some wealth is cronyist wealth, and we wanna get rid of that. But what you would hit mainly with the wealth tax is business assets that expand the GDP and employ Americans.

18:17 Trevor Burrus: But it seems like that. So the top 400 sure, especially when you have dynamic economy, and new technologies emerging where you can capture tons of gains there. I was thinking more about the 20,000th to 1000th richest person in the world and how many of those people are just kids of rich people with trusts that do nothing.

18:35 Chris Edwards: They’re increasingly becoming… It’s getting increasingly entrepreneurial, it’s not just the top 1% it goes down as well. It’s not just the top 400, it’s the top 1% is increasingly entrepreneurial as well.

18:46 Ryan Bourne: And of course with globalization and kinda winner of takes all markets so that create, particularly in the digital sphere, when people do design the best product in a market, the returns are perhaps higher than they’ve ever been before. So a good example of this that we write about in the paper is WhatsApp. WhatsApp have designed a service that’s fairly extremely low revenue per customer, they charge in some countries for it and that kind of subsidizes the product and service for others, around the world. But as a result of designing that kind of best instant messaging app that’s widely used on smartphones.

19:25 Ryan Bourne: The founders of WhatsApp have, able to become billionaires and ultimately sold out to Facebook. So if you were just to look at the wealth inequality statistics, the foundation of a company, and then sale of a company like WhatsApp would show up as worsening wealth inequality in America, but actually, that’s reflective of providing a good and service that has provided low‐​cost, instant messaging services to billions of people around the world. Now, clearly from a economic welfare perspective, that is a good thing. And that’s another reason, a good example I think, of how these statistics don’t actually capture what the economic effect has been, that has led to them in the first place.

20:05 Aaron Powell: Do we have a way of capturing, measuring what you just described? The positive externalities so that we can see this person has… Their income is extraordinary or their level of wealth is extraordinary, but it’s only this small fraction of the overall wealth that they have created in the world. Or it’d just get too hard to measure that sort of thing?

20:28 Chris Edwards: In fact, there was a study that we discussed in our paper that goes exactly to that point. The economist William Nordhaus, N-O-R-D-H-A-U-S, I hope I’m pronouncing his name properly. He did a model of the US economy over the last half century and looked at the technological innovations and productivity in our economy. He found that technological innovation, 2% of it was captured by the entrepreneur and the entrepreneurial company, so like Jeff Bezos getting wealthy, but 98% resulted in broad benefits for society. In other words, consumers benefited. So he thinks that 2% of all this innovation we’re seeing in our economy was captured by the company and the entrepreneur, and 98% by consumers.

21:16 Trevor Burrus: Let me clarify what way, how that would be measured. Is this like you’re kind of saying how happy Amazon makes people versus how much Jeff Bezos earns?

21:25 Ryan Bourne: No. This would be quality‐​adjusted prices.

21:27 Chris Edwards: Yeah, it would be productivity, basically.

21:29 Ryan Bourne: Primarily. And improvements to the general efficiency of the economy. And so how much it raised… The activity raised GDP.

21:36 Trevor Burrus: The whole… All of Amazon itself, raising GDP both way…

21:39 Ryan Bourne: But he didn’t… He wrote this paper prior to Amazon. So we can’t say exactly that 98% of the benefits of Amazon have spilled out, but this was using previous technological innovations, but as a rule of thumb, he seemed to suggest that overwhelmingly, the returns to say, Amazon delivering lower prices to consumers. The fact that there was more choice on offer to consumers than ever before, as a result of the number of products on there, and the efficiency of delivering things to people at speed. If you add up all of those benefits, they tend to be legions higher than the returns to the individual entrepreneur.

22:17 Chris Edwards: If you think about how most technological innovations have happened in our economy. That you get an entrepreneur and an entrepreneurial company will come along, say Steve Jobs with his Apple Computer. And in the early years, he’s ahead of his competitors, and he makes high profits but high profits of course, in a market economy signal other entrepreneurs to come in and eat away at his profits, reducing his profits down to sort of a normal level. And so there’s this constant race of course, for entrepreneurs trying to make excessive profits but in a market with competition, those profits attract competitors and the excess profits are eliminated. So our general recommendation here, at Cato, of course, is to open up all markets as much as we can to invite vigorous competition to get rid of the excess profits, but Bernie Sanders and Elizabeth Warren seem to think that there’s excess massive profits everywhere. That isn’t true, but we would… If they’re for more competition to eliminate the excess profits in oligopolies, we would be with them.

23:17 Trevor Burrus: I made this point about the iPhone, or just to Steve Jobs in general. If you just take the iPhone, it’s related, I think, to your point of consumer surplus, how much consumer surplus did he add, and what would be the difference between how much someone would spend for an iPhone versus what they actually pay, if you would pay $2000 for it, and you paid $800 for it, you have $1,200 of consumer surplus. But the other aspect is, all the businesses that were created by the smartphone in general, WhatsApp you mentioned, and other things that people had no prediction, such as Square, right? Who thought that the iPhone would put cash register machines out of business, in this sort of churning productivity thing. Steve Jobs died however many billionaire, but I’m pretty sure that he added more than he took out on a…

24:03 Ryan Bourne: Now think of all the things that the iPhone has replaced as well. You only have to look through… On the phone, you have maps, you have calculator, you have compasses, address books, all of these other things that people used to previously buy as physical products, have now been replaced by that technology.

24:19 Aaron Powell: But… So Jeff Bezos makes a lot of money. And maybe he makes just some fraction of the overall wealth that his activity has created, 2% or whatever it happens to be. But as of right now, he has more money than he could reasonably spend in a lifetime. He probably can’t spend money faster than he brings it in.

24:43 Trevor Burrus: It’s like a Brewster’s millions problem but yeah so you’re probably right.

24:46 Chris Edwards: So, that’s good then. So his money stays invested in the economy and he’s not consuming it. What would be bad for me is if he used all his money to buy luxury yachts and stuff like that, because it would be his personal consumption. If he leaves his assets invested in the economy throughout his life and he dies with his massive amount of wealth invested in businesses, that would be great for the rest of us.

25:07 Trevor Burrus: But what’s wrong with the yacht thing? That’s the yacht business. We don’t have a problem with that.

25:11 Chris Edwards: No, it’s personal consumption. I think it’s less… It creates less leverage for the broader economy.

25:15 Aaron Powell: But I guess the point is, you’d see someone on the left like a Bernie Sanders, Elizabeth Warren might say, Okay, so yes, that money is in investments and growing and it’s supporting the economy and what not. But what he’s not doing with that money is he could be… How many people could he be feeding? How many people are going hungry right now, who could be fed if he took even 10% of the money that he’s stockpiled and put it towards feeding those people, or scholarships for kids, or all the kinds of things that government pays for. And so wouldn’t we… He would still, even if we took half of the billions that he has, he would still have many, many billions. And he would still have many, many billions worth of incentives to create a company like Amazon. And so couldn’t we get the best of both worlds?

26:00 Ryan Bourne: Well, you’re making two big assumptions, or they would be making two big assumptions. I know you’re playing devil’s advocate. So the first is that that money being spent through government would be more efficiently spent and bring more in the way of benefits to the broader population than that money being invested in the economy, in other businesses, or the like. And I think that’s a highly debatable point. The second point is that how you raise that in terms of a wealth tax in this case is it doesn’t risk deterring entrepreneurs delivering some of the entrepreneurial activity that has actually led to innovative companies like Amazon in the first place. Now, of course, we can’t say for every individual billionaire if a wealth tax had been imposed prior to the company coming about, how much that would have deterred them from actually undertaking that activity in the first place. But on the margin, that’s exactly what one would expect. And given these huge societal gains to some of these entrepreneurial technological breakthroughs, there only needs to be a small overall impact on the number of people that are engaging in those activities to be quite a big societal consequence in terms of the lost efficiency to the economy and the benefits of some of these innovative new products.

27:15 Aaron Powell: We mentioned the wealth tax a few times now, and I know this is something that Elizabeth Warren in particular has been campaigning on. And when she talks about it or her fans talk about it, they’re saying it’s 2%? Is what she said?

27:26 Trevor Burrus: She raised it to 6. I don’t know. It keeps going round and round.

27:28 Aaron Powell: Okay, but it’s like… But it’s like just two pennies in every dollar. That doesn’t seem like much. So, I guess, what is a wealth tax that’s being proposed, and why isn’t 2% not that big of a deal?

27:41 Chris Edwards: So, a dozen European countries used to have wealth taxes back before the 1990s, and they were generally around the 1% level. But Elizabeth Warren’s, even if it was a 2% wealth tax, that’s a very high tax because it’s an annual tax on a complete broad measure of an individual’s wealth. So, we were talking about wealthy people. Most of their assets are business assets. So it would be 2% of the value of Jeff Bezos’ business, and every business in America would pay 2% of all the, whole value of their wealth to the government every year. If you have an asset that is only, say, returning about, say, 4% a year to the owner and you impose a 2% wealth tax, it’s like a 50% tax on the income flow from the asset, which would be an enormously high rate. So, our top income tax rate in the United States now with state taxes is maybe around 45%. If you had a 2% wealth tax, and the rate of return on assets was 4%, so it would be like adding 50% on top of our current income tax of 45%. So, you get up to almost the government grabbing the vast majority of the return flow from every asset in the economy. So, a 2% tax, unlike what Elizabeth Warren is saying, is a gigantic massive tax on capital.

29:05 Chris Edwards: To go back to the previous discussion a little bit, in the long run, there’s a short and long‐​run difference here. In the short run, yeah, the government can confiscate wealthy people’s wealth and give it to low‐​income people, people in need. In the long run, the vast increase in our standard of living over the long run is determined by technological innovation and entrepreneurial activities. I’m sure you would agree. So, impediments and barriers to entrepreneurship and investment and technological advance impacts us all vastly in the long run, and that’s what I think we should be thinking about as policy analysts.

29:42 Trevor Burrus: How does this work in terms of impediments? ‘Cause occasionally you hear discussions of innovation or maybe lack thereof in Europe. Do we have any good numbers? So, we have the wealthy with their money in investments, in doing stuff, maybe VC firms for example, like venture capital, which is a huge thing starting up. There’s some big number. I think it was in Taya Cohen’s book about how many US firms are started with venture capital. Do we know, as a matter of course… Maybe you guys don’t have it on paper, but it’s harder to get such investment in Europe or in countries that take more of either the wealth, and in the high income than it is in America because they have less robust systems of investment?

30:23 Chris Edwards: There is, actually. The OECD has discussed, for example, that there are a lot more venture capital and a lot more so‐​called angel investment in the United States. Venture capital are these partnership companies that people contribute to that invest in a broad range of startups. Angel investors are single wealthy people that throughout US history have been important as source of entrepreneurial finance. If you go back, Thomas Edison was funded by angels and many other great entrepreneurs. Wealthy people tend to put about 5% or 10% of their money into angel investment, meaning startups and that sort of thing. Jeff Bezos puts a lot of his money into these very risky ventures. We need wealthy people to do this because other people don’t have the extra cash to invest in the really risky stuff. We need someone in the society to be investing in really risky long bets because some of them pay off. I mean, Steve Jobs and the microcomputer, who would have thought he’d be able to do that? At the time everyone thought that IBM dominated that industry, and it took some young guys with guts and angel investment upfront in order for them to get started and to start doing their innovating.

31:41 Trevor Burrus: But is there some corollary number to how much investment is wasted in this sense? Because someone could say, “Well, all right, let’s take all the money. Let’s take 50% of Steve Jobs’s wealth, and then the government will do that R&D. The government sent someone to the moon. They invented the Internet. Give them more resources. Why wouldn’t they be able to be the ones that can do this, and do it for the people, do it… Do it in a way that Democrat, not because someone has a vanity project, but actually for the people in a democratically accountable way.”

31:44 Ryan Bourne: Yeah, this all comes back to William Balmore and his distinction between invention and innovation. Of course, governments around the world have often pumped lots of money and investment into certain prestige products and things. You had the Space Race, for example, Russia spent a lot of its… They spent a lot of money on that. But really it’s only a dynamic free market economy that can utilize the technological breakthroughs for to consumer friendly products. And so economy is demand driven, and one of the roles of entrepreneurs is to tap into latent demands and provide us with things that we don’t even know we want right now. And you can only really find that out, and obtain that information through the trial and error process of the market economy. So yeah, you could have the government investing like crazy in certain technological fields. Whether that would result in products that actually benefit ordinary people in terms of, improvements in their lives or lower prices is much more unclear. You need a market economy to allocate resources such that it actually meets the needs of ordinary people.

33:23 Chris Edwards: The government cannot do what entrepreneurs and venture capitalists, for example, do for the economy. The future is unknowable. No one knows what the next Apple Computer is gonna be. You need a lot of experiments. Market economies work because there’s a lot of different pockets of money around and a lot of different experiments. So that’s what we want. If you look at venture capital for example, it’s not just the money flow. It’s the hands‐​on experience of the expert venture capitalist, choosing entrepreneurs, helping them build their company. It’s the same with angel investors. It’s not just that they’re giving money, giving wealth, like a government would. It’s the hands‐​on guidance to young entrepreneurs. It’s the due diligence, it’s the discovery of these entrepreneurs. Angel investors and venture capitalists are often expert in industry areas. They research, they find good entrepreneurs, and then they guide them in the future. And that offers the… That provides the best way I think to define the technologies that are gonna be real break‐​outs.

34:20 Aaron Powell: Okay. But maybe a counter example that sets my libertarian teeth on edge. But defense, weapons. Here’s an area where what we’ve got, the technology that we have today in weapons of war is wildly more sophisticated in ways that could never have been imagined than what we had 100 years ago. And it’s a market driven… It’s private actors building this stuff, but it’s a market driven entirely by one buyer, the government that’s allocating funds. And people are experimenting and coming up with new and innovative ways to kill people. But it seems to be leading to the kind of advancement that it sounds like you’re saying shouldn’t be happening or would be better happening in a market.

35:03 Chris Edwards: So I would push back on part of that. I think one of the reasons why the US Defense manufacturers have been so successful is because they’ve sold in global markets. There is competition, there isn’t just one buyer. And if you brought… And they are private companies, if you said… If you brought the R&D for the next fighter jet within the Pentagon building, it’d be a disaster. It wouldn’t work. You need… Lockheed Martin wants to sell a lot of fighter jets, not only to the US government but to governments around the world. And there are. There are European manufactures and Chinese manufacturers these days. I think that competition has been enough to really drive that industry ahead.

35:37 Trevor Burrus: Okay. So if we have this… The wealthy, and they do good things in the market, it seems pretty clear that they do bad things in the political sphere. In the sense of taking over our political systems, speaking disproportionately. Mike Bloomberg is running through $30 million of ads. Mike Bloomberg is a billionaire. So shouldn’t we be concerned about how the wealthy are operating politically? The system seems kind of rigged, and maybe it’s because they have disproportionally more influence. That seems like a pretty, not even crazy statement.

36:14 Ryan Bourne: Well it’s not a crazy statement on the face of it. And clearly, there is a lot of cronyist activity. But actually when you look at the details, what you tend to find is the worst forms of cronyism come when you have vested interests within the economy. Certain sectors all get together and demand something of government. Because then, quite often what you’re bringing is not just money to politicians, but also votes as well, a voting bloc, an interest group that benefits from a government program. Now, Elizabeth Warren, Bernie Sanders, like to talk about billionaires having seized the government. Many people hold this idea that the broader the distribution of wealth, the more political power resides within the top 1% say. But I just don’t think that that is borne out by the evidence.

37:03 Ryan Bourne: Larry Summers was at the Peterson Institute quite recently talking on this subject. And he made the point that, sure rich people tend to have more access to politicians than poor people. That’s always been the case. The question really is if you took a lot of the wealth away from the very wealthiest people, would that impact, in any meaningful sense, the amount of political access that those individuals had? He made the example that to get on to the top donor table of Democrats, you probably need to donate $4 million per year. Now clearly, these people that we’re talking about when we’re talking about the top 1% of entrepreneurs across the country, we’re talking especially, for the very richest people, the top 400 we’ve discussed. We’re talking about billionaires. The idea that any meaningful sense that a wealth tax that even reduced their wealth in half is gonna reduce their political access and then have any meaningful distinctive impact on political outcomes, just doesn’t seem to be the case.

38:01 Ryan Bourne: And actually if you go through and look at the views of wealthy people, on average, how their views differ from the rest of the population, they tend to be far more worried about government deficits. They tend to want to cut, or be more willing to contemplate cutting some entitlement programs. They want to spend less on defense spending, they tend to be in favor of free trade, and they tend to be very socially liberal on social issues. Now can one argue, at the moment, that they’re getting their way in any of these areas in any meaningful sense? Sure. They also tends to be more in favor of tax cuts for businesses, and they tend to be more hostile on the margin to regulation. But the idea that they’ve captured politics. At the moment, when you look at these studies of their views, and compare it to the political outcomes we’re seeing at the moment, it just doesn’t seem to be borne out by the evidence.

38:53 Trevor Burrus: But if they’re spread, okay so. We have some evidence of this, and there’s obviously a bunch of things happening in the economy with different interest groups playing off. But I mean, on one level, your point about taking their wealth how much would you have to take to diminish their influence, that’s… I think Bernie or Elizabeth Warren would say, “Well, that just means we have to take more until their influence is diminished.” I don’t think that Bernie has any problem with that. But if there… If you did say that, therefore lower taxes, therefore regulation. These are the kind of things that the average person on the… With the Warren camp thinks the world has been turned into, like a neoliberal pro‐​market oppressive thing run for the favor of billionaires. Just like the preferences that Ryan basically stated. They don’t pay over 50% of tax in America. They used to, they got that down. We cut the corporate tax from 35% to 23%, there’s no wealth tax, there’s no VAT. It’s a market for a new world, and it benefits the billionaires.

39:53 Ryan Bourne: I’ll make one obvious point in that. Chris and I anticipated this line of reasoning. So we actually looked at some numbers across the OECD on the top 1% wealth share against social spending as a proportion of GDP across the OECD. And on the face of it, there’s no relationship there whatsoever. Doesn’t seem to be any correlation at all. And as we talked about earlier, a lot of those states, the Scandinavian countries in particular, do have extensive social spending, which is the ambition of Elizabeth Warren and Bernie Sanders. They finance it through broad‐​based taxation. The middle classes pay a significant amount in their social security taxes. Now, they’re not advocating that. What Bernie and Elizabeth Warren are doing, in a very popular sense, is saying, “We’ve got a group of people that have been denied these benefits that people in other countries receive, and that’s all the fault of these rich people. And actually, if we just target the rich people with higher taxation, we can provide all these wonderful benefits.”

40:56 Ryan Bourne: Now, that’s just not the way that these other countries work. So I think this evidence that or this assertion that the wealth of the top 1% has come at the expense of the US having a broad‐​based welfare state is just not there. And actually, if you look at the views of individual Americans, there’s a reason why there hasn’t been these attacks on the rich in the past. Although on the face of it, if you ask them, of course, “Should these people pay more in tax to provide benefits for you?” Unsurprisingly, they say yes. But if you look at surveys and ask what is the most important issue facing America, to listen to Elizabeth Warren and Bernie Sanders, you’d think that inequality was. Now, that only ever polls around the 2% to 3% mark in terms of the…

41:41 Trevor Burrus: But on Twitter, it’s very…

41:42 Ryan Bourne: Well, on Twitter, yeah. Well now, this is one of the great ironies. The people most concerned by inequalities seem to be people in the top 10% of the income distribution or wealth distribution that are actually the nine percentage points below the top 1%. Maybe that’s because they all went to university together and see certain people who they think are less deserving obtain more wealth in a market economy. I don’t know.

42:06 Trevor Burrus: So, what should libertarians… So, there’s a bad form of wealth inequality. What should libertarians say about it or do about it? And so we can’t just be like, “Nothing is… Wave your hand. This is no concern. Nothing to see here.” How should we address those issues?

42:27 Chris Edwards: So, in our study, we have a section on cronyism, and we would agree with Elizabeth Warren and Bernie Sanders. If they wanna get on board with the Cato Institute to cut farm subsidies and sugar subsidies and other sorts of cronyist policies, we’d be all with them. With sugar, for example, the Fanjul family Florida has been the strongest proponents of these sugar subsidies forever. They have a family wealth of $8 billion, one of the wealthiest American families based on this cronyist federal policy. So we’re all in favor of getting rid of these crony policies. We discuss in the paper, you can think about… There are wholesale cronyist, wholesale cronyists. So, whole federal programs like the sugar program, in our view, are illegitimate and they create illegitimate wealth. We would get rid of those.

43:12 Chris Edwards: But then there’s also a corruption and retail cronyism. So, for example, there was a recent Pentagon scandal. This guy Fat Leonard got this… For years, he got these corrupt contracts from the US Navy in the Pacific. So he got wealthy from just the big government contracts and that sort of retail sort of corruption. Let’s shrink government, and we’d have less overall corruption. To put two data points on this, the number of federal subsidy programs has doubled since the ‘80s. The more subsidy programs there is, the more corruption and cronyism. And the number of federal regulations, has increased from 55,000 in 1970 to 185,000 today. The more regulations, the more leverage you’re creating for lobbyists to come in and cut themselves special deals in Washington.

44:03 Ryan Bourne: And I think that’s what we’ve gotta do. We’ve gotta change the conversation from trying to pit the bottom 99% against the top 1% to instead say, We wanna defend people who make their money through their earnings, through their labor market, through their ideas, in a free and open dynamic economy. And actually, what we wanna go after is not the top 1%, but people up and down the income and wealth distribution that obtain their resources through cronyism and rent seeking. So, that’s the way we need to reframe the debate of it.

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44:40 Aaron Powell: Thank you for listening. If you enjoy Free Thoughts, you can find our Free Thoughts discussion group on Facebook or on Reddit at r/​freethoughtspodcast. You can follow us on Twitter @freethoughtspod. As always, please rate and subscribe to us on Apple Podcasts, Spotify, or wherever you get your podcasts. Free Thoughts is produced by Tess Terrible and Landry Ayres. To learn more, visit us on the web at www​.lib​er​tar​i​an​ism​.org.

44:55 Trevor Burrus: Libertarianism.org’s podcast The Pursuit is back with season two. It features real stories of people who are pursuing happiness in the face of pernicious institutional forces. Subscribe on Apple Podcasts, Spotify, or anywhere you listen to podcasts.