chapter one
from the United Kingdom (#38, with $11.1 billion from media); and eBay’s
Pierre Omidyar, born of Iranian parents in France (#54, with $8.1 billion.) All immigrated to the United States from relatively advanced countries.30
Forbes’s 2016 map and tally of immigrant origins made clear that few immigrants who have accumulated great wealth in the United States have
come from the world’s poorest countries. Most arrived from relatively
wealthy places with strong educational systems and important elements
of similarity to Anglo- American culture. True, among the forty- two im-
migrants on the 2016 400- wealthiest list, seven came to the United States from China or Taiwan, and five from India. But five came from Israel
(highly developed, and with strong ties to the US and Western Europe),
and a total of thirteen came from various European countries. Only one
arrived from all of Latin America. And— setting aside two immigrants
from affluent South Africa— only one came from the entire continent of
Africa.31
Where They Live
The spring 2017 “world billionaires” edition of Forbes magazine included a map of metropolitan areas where all of the 565 US billionaires lived.
Most of them— when at home— were to be found on the coasts: seventy-
seven in New York; seventy in San Francisco/San Jose; forty- eight in Los Angeles; thirty- four in Miami/Palm Beach. A fair number of billionaires
lived in Connecticut (sixteen) and in Boston; Westchester County; Long
Island; New Jersey; Washington, DC; and out west in Seattle (ten or twelve each). Middle America is mostly empty of billionaires, except for several clusters in Texas (twenty- two in Dallas/Fort Worth, thirteen in Houston, seven in Austin, four in San Antonio) and a few in Chicago (sixteen),
Atlanta (nine), Phoenix (nine), Las Vegas (eight), and Denver (seven).32
“Home,” of course, can be a fuzzy concept for billionaires who own
multiple dwellings in the United States or abroad. Some summer in the
north and winter in the south. Some spend substantial time doing business in foreign countries or enjoying ski or beach vacations abroad.
Where the Money Comes From
At any given historical moment, most of a society’s wealthiest people tend to reflect its well- established sources of wealth. For centuries in most of
who the billionaires are
19
the world, that meant ownership of large tracts of land.33 Then— with
industrialization— a good many entrepreneurs and stockholders accumu-
lated great wealth in manufacturing. At any moment the wealthiest may
include some who have cashed in on new profit centers that have grown
rapidly in the recent past.
In today’s United States, the fastest- growing fortunes are those of founders, managers, or investors in high- technology firms that produce computer software (to a lesser extent hardware) or web- based applications for computers and mobile devices. An even larger— though no longer as fast-
growing— group of billionaires consists of masters of finance: investors, traders, or managers of hedge funds or private equity firms.
But since it takes time to accumulate a fortune, and since our property
and tax laws make it easy to pass wealth on to spouses and progeny, the
current set of billionaires also reflects great wealth accumulations from the past. Sometimes from the distant past, as with fortunes made in oil, steel, and railroad businesses during the late nineteenth century— though most
of that money is now widely dispersed among multiple heirs. More concen-
trated in a few hands are fairly recent fortunes like those made from Mars candies, Walmart retailing, and the Cox and Newhouse media empires.
Inheritance and “Self- Made” Wealth
Many big fortunes have been made by capitalizing on innovative business
ideas: drilling for oil underground and burning it for energy; building trans-continental railroads; manufacturing and selling “horseless carriages” with internal combustion engines; producing telephones, radios, aircraft, and
television sets; and, more recently, making and selling computers, software, mobile devices, and web- based applications and services. Many new billionaires are people who invented or (more often) seized upon great
new ideas and figured out ways to make and sell appealing products—
founding a new firm and holding onto substantial ownership as the firm’s
value soared. Some of the most successful billionaires, including Bill Gates, have shifted their wealth into other investments when their original firm’s growth slowed.
Forbes magazine categorizes wealthy Americans’ fortunes as “inherited,” “self- made,” or “inherited and growing.” Steve Forbes and his
staff are especially enthusiastic about “self- made” wealth. The propor-
tion of the 400 largest fortunes that they have judged to be self- made has been increasing in recent years, reaching two- thirds (68 percent) of all
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US billionaires’ fortunes in 2017.34 Based on historical experience, how-
ever, we may expect that the proportion of inheritors among the wealthi-
est Americans will rise once again after the finance and high- tech booms crest and major fortunes derived from them are passed on to heirs. Economist Thomas Piketty has documented increasing flows of inheritances
and gifts in recent decades that may contribute to continued overall in-
creases in the concentration of wealth.35
In any case, the concept of “self- made” wealth is complex, and the term
invites exaggeration. It is impossible to build a business without help from partners or employees. No one is likely to have a shot at accumulating
great wealth without receiving a lot of help and support from parents,
peers, mentors, and indeed entire societies— and their governments. Gov-
ernments often provide entrepreneurs’ own schooling. Governments also
foster well- trained and disciplined work forces; fund basic research that can yield profitable applications; facilitate or subsidize the financing of startups; structure property rights in ways that encourage and protect the acquisition of great fortunes; invest in infrastructure, law enforcement, and other public goods necessary for the accumulation of wealth; and more.
Yes, many entrepreneurs come up with innovative ideas, work hard,
live thriftily, and play parts— sometimes, perhaps, irreplaceable parts— in pushing those ideas to fruition. But their ability to do so depends heavily upon what one might broadly call “luck”— being born in the right place,
at the right time, to the right parents.
Malcolm Gladwell points out that out of the seventy- five largest fortunes in world history, a remarkable fourteen were accumulated by men who were born in just one country (the United States) within nine years of each other (around the mid- 1830s): just in time to participate as young adults in the big takeoff of US industrialization. Similarly, most of the world’s first wave of computer billionaires were born— again in the United States— around
1955, just in time to participate in the computer revolution that began
around 1975.36 These titans were born in the right time and the right place.
Most made excellent choices of parents as well.
Industrial Sectors
The hottest US industrial sector today, in terms of producing new, top-
ranked US billionaires, is technology. But the largest single group of billionaires still comes from finance. In 2017, Forbes classified 142 US billionaires (25 percent of the total) as gaining their wealth from finance
who the billionaires are
21
an
d investments. Seventy- six billionaires (13 percent) were in technology.
Fairly close runner- up sectors— but with far fewer billionaires ranking
among the very wealthiest— were food and beverages (fifty- two billion-
aires); fashion and retail (fifty- one); and real estate (forty- three).37
We have already mentioned many of the high- tech billionaires who num-
ber among the wealthiest Americans: Bill Gates (Microsoft), Jeff Bezos
(Amazon), Mark Zuckerberg (Facebook), Larry Ellison (Oracle), and Larry
Page and Sergey Brin (Google). Others among the top twenty wealthiest
Americans include Steve Ballmer (Microsoft), Michael Dell (Dell comput-
ers), and Paul Allen (Microsoft).
There is every reason to expect that the ranks of high- tech billionaires will keep growing, as more and more owners and managers of new internet
startups command rapidly growing companies for long enough periods to
amass great fortunes.
Finance is not exactly new, of course. More than a century ago, Marxists were already complaining about the emerging dominance of “finance
capital,” and the banker J. P. Morgan amassed one of the greatest fortunes of early- twentieth- century America. But in recent decades, onrushing economic globalization, which involves increasingly free international trade and increasingly mobile capital— together with new technology— have
created many lucrative investment opportunities. The new, worldwide la-
bor market that includes hundreds of millions of low- wage workers in poor countries may not be an unmixed blessing for workers in advanced countries (it tends to put downward pressure on their wages38), but it is definitely a boon for US businesses, wealthy individuals, and financiers. Investment opportunities abound in the United States and in fast- growing countries
around the world— not just China and India, but also the “tigers” of Southeast Asia and various countries of Latin America and Africa.39
In both economic and political terms, capital has leapt ahead of la-
bor. Investing in fast- growing industries at home and abroad— along with such variant branches of finance as currency speculation, computerized
electronic trading, and the trading of derivative financial instruments—
has become a royal road to riches.
Recently, for example, a startling number of hedge fund and private
equity managers have actually each earned more than one billion dollars in a single year. Five did so in 2015, and two in 2016 (apparently a tough year for top hedge funders). This was not a fluke. Three hedge fund or
private equity winners made more than one billion dollars each in 2014.
Four did so in 2013. And three did it in 2012 . 40
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It may tend to take longer to accumulate a really big fortune from a
megasized annual income in finance than it does to pile up capital gains
from ownership of a skyrocketing high- tech startup. And some hedge
funds have not done very well since the 2008– 9 financial crisis. Nonetheless, a good many stars from various parts of the financial services and
investment sector have made it into the top ranks of wealthiest Ameri-
cans. Eclectic investor Warren Buffett ranked #3 on the 2016 Forbes 400-wealthiest list. The wealth of #1- ranked Bill Gates should probably count as partly finance- based, because he greatly expanded his Microsoft fortune through diversified investments. George Soros (#19) is a clear case— a
hedge fund manager who famously scored big by betting against the Brit-
ish pound.41
In the next tier of wealthiest billionaires, Paul Allen (#21), like Gates, leveraged his Microsoft winnings with diverse investments, particularly in Vulcan Aerospace. James Simons (#24), another hedge fund manager, has
specialized in mathematical models to reap profits from trading inefficiencies. Ray Dalio, #25, founded the world’s biggest hedge fund, Bridgewater Associates, which currently manages about $150 billion. Investor/takeover artist Carl Icahn was #26. Hedge fund magnate Steve Cohen had been penalized $1.8 billion and stripped of outside investors in an insider- trading scandal, but in 2016 he still presided over an $11 billion family fund and ranked #31 among the wealthiest Americans. Ronald Perelman, leveraged-buyout terror of the 1980s, was 2016’s #33; David Tepper (Appaloosa hedge fund) was #35; Philip Anshutz (investments in oil, railroads, telecom, enter-tainment, and hospitality) was #39.42
Additional big finance- based fortunes include those of Stephen Schwarz-
man, #45 (Blackstone merger- and- acquisition advice, leveraged buyouts,
asset management); Andrew Beal, #49 (banks, real estate); John Paulson,
#52 (hedge funds); and Ken Griffin, #57 (Citadel hedge fund).43
The wealthiest Americans also include some people who occupy unique
niches, like Michael Bloomberg (#6, Bloomberg LP business and finan-
cial news); Charles and David Koch (#7, oil, chemicals and petroleum);
Sheldon Adelson (#14, casinos); Phil Knight and family (#18, Nike); and
Donald Bren (#27, California real estate). And, as we have noted, quite
a few inheritors of fortunes, including the Walton heirs (Walmart); the
Mars candy family; Laurene Powell Jobs (widow of Apple founder Steve
Jobs, and the biggest individual investor in Disney), the heirs to the Cox and Newhouse media fortunes, thirteen or fourteen heirs to grain giant
Cargill, and more.
who the billionaires are
23
Fair Compensation?
Rather tangential to our main concerns— but perhaps worth asking now
that we have introduced our billionaires— is the following question: Do
America’s billionaires deserve their riches?
One possible answer is: “Of course! They earned it.” It may be useful
to evaluate this claim in terms of economists’ “marginal product theory”
of wage determination, which asserts that— in a perfectly functioning,
fully competitive labor market— each employee of a firm receives wages
exactly equal to the market value of the products produced by the last
equivalent employee hired by the firm, as the firm reaches its equilibrium level of profit- maximizing production.
A mouthful! But the essence is simple: under perfect market competi-
tion, an employee would get paid exactly what one particular equivalent
employee (the last one hired) produces. When we turn to billionaires—
most of whom are owners of capital, rather than wage or salary workers—
the marginal product theory of wages is relevant only to provide a con-
trast or an analogy. And it says nothing at all about inherited wealth, a substantial part (roughly one- third) of all billionaires’ wealth, which is rarely
“earned” in the usual sense.44 It is hard to come up with a compelling philo-sophical argument in favor of the inheritance of great wealth.45
The marginal product theory does not tell us much about billionaires
who found, own, and/or invest in highly profitable and fast- growing businesses. Economists have a great deal to say about market- based returns to capital and the efficiency thereof, but little to say about whether current rewards to owners are fair or just.
Even Milton Friedman, one of the most eloquent enthusiasts for pri-
vate enterprise and free markets, had to acknowledge that he found it
“difficult to justify either accepting or rejecting” what he called “the capitalist ethic”: “to each according to what he and the instruments he owns
produces.” Friedman noted that the value of what a worker produces
depends heavily upon skills or endowments that he or she inherits from
his
or her parents, and that it is hard to find an ethical justification for rewarding such inheritance. More broadly, Friedman noted that “most
differences of status or position or wealth can be regarded as the product of chance” at a far enough remove.46
Our point is certainly not that billionaires are worthless to society, or that all their wealth should be confiscated. Yet in thinking about billionaires’ political strategies, it is important to bear in mind that no major
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voices in American society are calling for the wholesale confiscation of
billionaires’ wealth either. Rather, the political debates largely concern increases or decreases in their tax rates. In that context, it is useful to bear in mind that no compelling ethical or economic principle that we
are aware of dictates that US billionaires have an inviolable right to every penny that currently passes into their hands, or that the highest marginal tax rates ought to be just 20 percent rather than 40 percent, 60 percent, or some other specific figure. Nor does any practical necessity seem to
dictate tax cuts for billionaires, or prevent us from requiring them to share more of their gains with the wider society.47
In our view, the experiences of other times and places make clear that
incentives other than ever- increasing wealth— such as exalted status, or a sense of self- fulfillment, or simply relative rather than absolute economic standing— can be sufficient to encourage extensive innovation, risk taking, and economic growth. It seems possible that society would be better off
if billionaires were required to share more of their wealth. At minimum,
this possibility should not be ruled out of bounds for vigorous, democratic debate.
But such a debate is not our main concern. We are chiefly interested
in the politics of billionaires, not in matters of economics or moral phi-losophy. The following chapters analyze political talk and action by US
billionaires, with an eye to what billionaires want from government, what they say and do about it, and what they get. In the course of these analyses we will encounter some normative questions of a different sort, concerning the role of political accountability in the workings or nonworkings of democracy.
chapter two
Stealth Politics on Taxes
Billionaires and Stealth Politics Page 4
