Wealth Inequality Is Beautiful
. . . it is the perception of inequality that induces people to take risks.
—Reuven Brenner, History: The Human Gamble
The New York Times may be the “paper of record,” but USA Today bills itself as “The Nation’s Newspaper.” While the Times can claim news bureaus around the world and a highbrow readership, USA Today prints the news in an eminently readable format for the masses. More Americans rely on the ubiquitous USA Today for a snapshot of what is happening in news, business, and entertainment than on any other newspaper. And its sports page is arguably the best in the United States.
The late Al Neuharth rolled out USA Today in 1982 in the midst of a grinding recession. His timing might seem counterintuitive, but entrepreneurs see what others do not. They disrupt an existing market and provide goods that consumers perhaps did not even know they wanted. In short, entrepreneurs improve life.
Neuharth grew rich thanks to the success of USA Today. As he sometimes relayed to readers in his weekly column, his wealth allowed him to adopt many kids coming from poor backgrounds. Capitalism has a tendency to be compassionate.
“I was a poor German-Russian kid from South Dakota,” Neuharth recalled. “My dad died when I was two.”1 He compensated for his lack of financial means with a rich spirit and a drive to do great things. Comparing himself with the talk-show host Larry King (who grew up poor in Brooklyn, and whose dad died when he was in grade school), Neuharth wrote, “Larry and I both knew we’d have to take some big risks if we wanted to make it big time. He gambled on a late-night radio talk show that he got syndicated nationally in 1978. It ultimately developed into CNN’s Larry King Live. I gambled on USA Today in 1982. It became ‘The Nation’s Newspaper.’”2
Politicians and pundits often decry income inequality or the wealth gap, but their unhappiness is unfounded. Individual success that leads to wealth disparity often causes those who are not wealthy to take the risks necessary to attain riches. The success of King and Neuharth attests to economic freedom’s sterling track record of improving the living conditions of those who are not rich.
Neuharth created a newspaper that democratized access to information, while King gambled on a show that brought the lives of the rich, famous, and erudite into America’s living rooms. King ultimately thrived on CNN, a network founded by another restless entrepreneur, Ted Turner. A billionaire today, Turner’s willingness to gamble on the once laughable idea of a twenty-four-hour news channel has further democratized access to knowledge of the world around us.
It was not long ago that J. K. Rowling was a divorced mother whose reduced circumstances forced her to live with her sister in Edinburgh, Scotland. In an interview with the Daily Telegraph, Rowling reflected on that impoverished period:
I had no intention, no desire, to remain on benefits. It’s the most soul-destroying thing. I don’t want to dramatise, but there were nights when, though Jessica ate, I didn’t. The suggestion that you would deliberately make yourself entitled . . . you’d have to be a complete idiot.
I was a graduate, I had skills, I knew that my prospects long-term were good. It must be different for women who don’t have that belief and end up in that poverty trap—it’s the hopelessness of it, the loss of self-esteem. For me, at least, it was only six months. I was writing all the time, which really saved my sanity. As soon as Jessie was asleep, I’d reach for pen and paper.3
Impoverished financially but not in spirit, Rowling spent many days and nights writing what became the Harry Potter series. She gambled on her talent and created what is probably the most successful children’s books franchise of all time.
Contemplating suicide because of mounting debts, a broken family, alcoholism, and a drug arrest, Dominick Dunne fled Beverly Hills in shame in the 1970s. He rented a room lacking a television or a telephone at Twin View Resorts in rural Oregon. He was finished as a movie producer, but Dunne gambled on a career as writer. His first movie script was roundly criticized, and his first book, The Winners, was a flop. Dunne wrote in his journal, “I have never believed in myself more than when I was writing my script. I was never happier with myself.” With a burning desire to succeed despite his dire financial circumstances, Dunne persisted. He died in 2009 as one of the most popular criminal fiction writers in the world.4
Bernie Brillstein recounted his early difficulties in his autobiography, Where Did I Go Right? At the age of thirty-five, “I owed money, and I’d begun to believe that I might not make it in life.”5 The success of others in the entertainment industry and his own relative failure burdened him. With nothing to lose and desperate to prove himself, Brillstein started his own talent management company. His firm had a role in everything from Saturday Night Live to The Muppet Show and Ghostbusters. More recently, Brillstein’s firm was behind The Sopranos. Inequality in hypercompetitive Hollywood (the subtitle of his book is You’re No One in Hollywood Unless Someone Wants You Dead) fueled his creative fire.
Michael Bloomberg was let go by the investment bank Salomon Brothers in 1981, although his severance package included ten million dollars.6 By any measure, including the massive fortunes of today, Bloomberg was very rich. He could have retired to a life of ease. But he was eager for something more in life, including business success that would rate a New York Times obituary. So the “unemployed” Bloomberg got to work on creating his own market and global news organization, what is now Bloomberg LP. His gamble on the news terminals now deemed essential on Wall Street and beyond has made him one of the richest men in the richest city in the world—a city he served as mayor from 2002 until 2013 and which will benefit from his charitable endeavors long into the future.
Inequality is highly visible, so opportunistic politicians thunder against it. What you hear less about is the fire that inequality lights under the rest of us. The achievements of others can spark a constructive form of envy. As the economist Reuven Brenner explains, “the more envious one is, the more one is willing to gamble.”7 Even better, the successful gambles that make some people wealthier than everyone else produce abundance for all, actually reducing the “lifestyle gap.”
The modern age of commercial computing began in 1964 with the introduction of the IBM System/360, the most basic version of which cost over a million dollars.8 Only the wealthiest could afford a computer that consumers of modest means today would scoff at for its limited speed and features. The prohibitive price of those early computers is a reminder of the value added by an entrepreneur. The successful envision what most do not. Indeed, what is evident to them is a problem in need of a solution, at which point they get to work.
When Michael Dell started his company in 1984, Apple was making waves with its Apple II, but personal computers were still rare. They were an expensive hobby for techies. Dell concluded that computers could be sold to the masses more cheaply by eliminating expensive retail showrooms. He’s a billionaire today because he figured out how to mass-produce a product that only the rich had been able to enjoy. What was once a slow, elephantine, million-dollar, internet-less machine is now used by people of all income classes. Dell’s story is one of many reminders that luxury is a historical concept. The rich get that way because they turn obscure luxuries into common commodities.
As recently as the 1970s, owning a telephone was impossible.9 You rented your phone from Ma Bell, which charged you for the “luxury” of placing a call to a friend one block away. Handheld cellphones? They didn’t exist in the 1970s. But by 1983, Motorola had introduced the DynaTAC 8000X, the “brick” made famous in Oliver Stone’s 1987 film Wall Street. It couldn’t fit in your pocket, its battery charge lasted thirty minutes, and it lacked the text, e-mail, and television capabilities that animate today’s mobile phones.10 A phone like Gordon Gekko’s would set you back $3,995, not including the monthly service and long-distance calls, which were hundreds of dollars more. The early mobile phones were therefore rare and usually seen only in the stomping grounds of the rich and famous. Fortunately, profits—or at least the possibility of profits—attract imitators. Motorola began the cellphone revolution, but soon enough other technology companies and service providers entered the market to serve a global population eager to have connection from anywhere.
Some readers remember calling home to check messages left on bulky answering machines that have gone the way of the payphone, or literally waiting by the phone for a call from a client, boss, or future spouse. Younger readers may not comprehend the relative deprivation that was the norm for so long. Nowadays we look askance at cellphones with only a call function. Email, internet access, movies, and even the ability to watch your favorite sports team—live—are features we expect on our “smart” phones, which are both functional and affordable.
A mid-level Apple iPhone that retails for several hundred dollars (or less if the purchaser enters a contract with a wireless provider) has thirty-two gigabytes of flash memory, which would have cost the consumer $1.44 million as recently as 1991. Taking into account all its other features, an iPhone that the whole world uses today would have cost over three million dollars the year before Bill Clinton was elected president.11 The proliferation of low-cost cellphones that dial call almost anywhere for a nominal fee is the result of entrepreneurs being matched with capital—entrepreneurs whose success increased the wealth gap. Far from being socially destructive, a rising wealth gap signals the democratization of goods previously enjoyed only by the wealthy. Capitalism is about turning scarcity into abundance, and wealth inequality is an important corollary to that truth. As the billions of the late Steve Jobs attest, wealth inequality is a welcome signal that lifestyle inequality (as opposed to income inequality) is waning.
It’s the same story with movies. It has long been the rule that filmmakers who desire consideration for Academy Awards must screen their films for at least one week in New York and Los Angeles. Blockbusters of the Superman variety have always enjoyed wide release, but as recently as the 2000s, people in out-of-the-way places were out of luck when it came to viewing most of Hollywood’s fare. A film like 84 Charing Cross Road would make it only into the “art houses,” concentrated in the biggest cities. VCRs and video rental stores like Blockbuster mitigated the problem of distance, but even then the most rural among us had limited, not to mention inconvenient (remember “late fees”?), access to the wonders of film.
Entrepreneurial genius sometimes appears in the strangest of ways. It was not the movie industry that discovered a way to broaden access to its art but a technology firm from Silicon Valley. Reed Hastings and Netflix solved the problem of inconvenient and under-stocked video stores and abolished late fees. The replacement of video cassettes with DVDs allowed easy distribution of films through the mail, so a Netflix customer in Montana suddenly had as easy access to obscure films as any cineaste in Manhattan.
DVDs by mail removed the barrier of geography, but that was not the end of the matter. Hastings, mindful that the next innovation would do to Netflix what Netflix had done to Blockbuster, saw time as a barrier to enjoying Hollywood’s abundance. Instant access to a film, he saw, would be even better than DVDs by mail. Netflix subscribers can now watch movies when they want through streaming video over the internet. Hastings is now rich. So are the innovators who have enhanced the capacity and speed of the internet, making streaming video possible. Should I resent them because they have more money than I do, or should I be grateful for the economic system that allowed them to enrich my life and the lives of millions of other people?
A perusal of the annual Forbes 400 list of the world’s richest people shows a highly descriptive trend. America’s greatest fortunes are largely a monetary sign of entrepreneurial activity that made life better. Patrick Soon-Shiong, a 400 member, is a manufacturer of an anti-cancer drug. The list includes heirs to great fortunes such as the Waltons of Walmart fame, and the mere existence of their wealth means everyone else has greater access to the funds necessary to build their own fortunes (see chapter six). The Waltons are worth billions today because Sam Walton democratized access to all manner of consumer goods, and in doing so, gave Americans a “raise” every time they shopped in one of his stores.
The fortune created by John D. Rockefeller (1839–1937) is arguably the most famous in the United States, and his heirs are among the Forbes 400 to this day. In the mid-nineteenth century, the Biblical admonition that “night cometh, when no man can work,” was still literally accurate. Rockefeller started selling kerosene at low cost to families whose houses went dark when the sun set. He made his initial fortune by eliminating this discomfort.12 He later applied his entrepreneurial genius to gasoline. Before anyone decries his grand riches, do not forget that Henry Ford’s mass-produced automobile was possible only because Standard Oil made gasoline broadly accessible.
Some might concede that wealth inequality reduces lifestyle inequality but object that entrepreneurs and their heirs aren’t the only ones in the Forbes 400. What about the billionaires who are on the list not for creating anything but for simply “moving money around” on Wall Street? That’s an understandable objection, but it’s shortsighted.
The hedge fund manager John Paulson made billions in 2008 when the mortgage securities on which he had purchased insurance went bust. Thanks to his bet against the housing market, Paulson’s net worth skyrocketed, so some concluded that his fortune was made on the backs of hapless homeowners whipsawed by a collapsing housing market.
Yet behind every mortgage is a saver. People can borrow money to purchase a home only insofar as rich and poor alike are delaying consumption in favor of saving. In a certain sense, the truly “hapless” characters in the drama of 2008 were the prudent savers. People who bought what they could not otherwise afford used the savings of the prudent.
Whatever the motives of the borrowers who went bust, the reality is that the world has limited capital. When some of it is destroyed, the broader economy is harmed by the mal-investment. Everyone sees the empty houses that no one wants to buy, but no one sees the venture that might have been the next FedEx but dies from lack of investment because so much seed capital flowed into home construction and mortgages.
Paulson sensed that something was amiss, and the markets rewarded his astuteness with a fortune. Yet whatever he earned is a small fraction of what his mortgage call meant for the broader economy. His successful investments saved a great deal more capital from being consumed by a housing sector that no longer needed it. There are many fathers of the financial disaster of 2008, but Paulson’s billions were a powerful signal to investors to look elsewhere when committing capital. Investors do not grow rich by blindly buying and selling. Rather, they anticipate where capital will achieve its highest return. Paulson signaled to investors where capital would vanish if it were deployed. Economic growth is weakened when capital is used sub-optimally, or in the case of housing in the 2000s, destroyed. Rich investors like Paulson take the initial intrepid risks that provide everyone else with information about where to place their money.
The movers of money and credit do the economy a great service for the market signals they provide. But their importance does not end there. Investors are always looking for positive returns, and some achieve them by reviving what is debilitated. Mitt Romney was one of these investors. He earned his fortune as the head of Bain Capital, a private equity firm.
During the Republican presidential debate in 2012, Romney chided his opponent Newt Gingrich for taking consulting fees from Fannie Mae, a notorious recipient of a government bailout. Gingrich responded, “If Governor Romney would like to give back all the money he has earned from bankrupting companies and laying off employees during his years at Bain Capital, then I’d be glad to listen to him.”13 Gingrich’s derogatory description of how private equity firms make money is hardly unique, but it’s also highly incorrect.
Private equity’s best and brightest don’t become wealthy by buying up successful companies and selling them a few years down the line. That does occur, but the old investment axiom “buy low, sell high” still applies. The real profits in private equity result from the purchase and revitalization of companies near death or already in bankruptcy.
Investors can earn a nice return from buying shares of the companies in the Dow Jones Industrial Average, and it’s easy to buy an index fund that invests only in those “blue chips.” Investors are doing something very different with private equity. Leaving aside the safety of diversification, they pay large fees to private equity firms to join their investments in seriously ill companies. It’s very risky, but if the private equity firm is able to nurse a company back to health, the returns can be enormous.
Are there layoffs at these sick companies? Of course. They’ve been run, almost by definition, by bloated and ineffective management. Before its merger with United Airlines, Continental Airlines was an industry-wide joke. Its hapless management once instituted a flight from Houston’s Intercontinental Airport (Continental was based in Houston) forty-five miles down the road to Houston’s Hobby Airport. Enter David Bonderman and Jim Coulter of the private equity firm Texas Pacific Group. They bought Continental in the 1990s and ultimately made ten times their money on their investment—not because Continental was healthy, but because it looked as bad as the inedible food it served its passengers.14
Whether it is John Paulson entering into investments that save vast sums of capital from destruction, Warren Buffett investing in well-run companies in order to achieve a long-term positive return, or private equity executives like Bonderman seeking outsize returns by resuscitating dying companies, the investors disparaged for “moving money around” deserve accolades. Their great wealth is a certain signal that they are wisely deploying the capital that is the lifeblood of economic growth.
But in spite of the undeniable wealth creation going on all around us, many complain that economic opportunity today is limited. Pundits and economists produce all manner of statistics supposedly proving that the poor and middle class have no clear path to improvement. Statistics, however, can and do obscure reality. In any country, immigration is as good an indication as any of opportunity. The migration of millions of human beings to the United States, legally and illegally, is a powerful market indicator of the possibility of upward mobility in this country. If not, the world’s tired, poor, and huddled masses would go elsewhere.
The other common complaint concerns the growing wealth of the “1 percent” versus the “99 percent.” Pundits and economists have recently feasted on studies showing outsize income gains of 31.4 percent for the 1 percent from 2009 through 2012. Again, however, statistics can mislead. The Cato Institute’s Alan Reynolds found that the top earners experienced a 36.3 percent decline in real income from 2007 through 2009. The demonized 1 percent were earning quite a bit less in 2012 than they were in 2007.15
It’s fruitless to get bogged down in statistical duels. The important thing is to understand that growing income among the top earners is a sign that enterprise is being rewarded and technology is advancing. In a sane world, a decline in wealth inequality would be cause for worry, because it would signal reduced opportunity for the ambitious and a stagnating standard of living for everyone else.
The anxiety that people feel because of inequality of wealth is actually an implicit endorsement of free-market capitalism. To understand this paradox, consider that the 2014 NBA Champion San Antonio Spurs beat a Miami Heat team led by LeBron James, Dwyane Wade, and Chris Bosh. Of the eight players on the Spurs who averaged more than 20 minutes a game in the 2013–14 season, only two attended a big name basketball factory from a BCS conference, and only one was drafted higher than 15th.
Even better, consider that in Super Bowl XLVIII (Seattle Seahawks 43, Denver Broncos 8) there were as many players on the field who had played college football at Portland State (DeShawn Head, Julius Thomas) as had played at college football “blue bloods” Alabama, Auburn, Louisiana State, and Ohio State combined. These four traditional powers could claim only two alumni on the two rosters: James Carpenter from Alabama and Trindon Holliday from Louisiana State.16
The NFL is nothing if not a meritocracy, and its teams will go to great lengths to find the most talented players, regardless of pedigree. In a multi-billion-dollar business catering to fickle fans with numerous choices about how to occupy their Sundays, selecting players on the basis of anything other than ability to play will produce a losing team that hemorrhages money and attendance each year.
Russell Wilson, the starting quarterback for the Seahawks, was instrumental in their Super Bowl victory. Thanks to his diminutive-by-NFL-standards height of five feet, eleven inches, Wilson was selected in the third round of 2012 draft. The Seahawks had also signed Matt Flynn to an expensive free agent contract, reflecting management’s initial view that Wilson was not ready for the NFL. But in a meritocracy, where teams, coaches, and owners are judged by wins and losses, Wilson won the starter’s role in the preseason before the 2012 season.
Connections of the political type do not apply to the NFL. Wilson proved the better player ahead of his rookie year, and despite the relatively low expectations that followed him into the league, he became the starting QB. In 2012, he led the Seahawks to the playoffs and was named Rookie of the Year. One year later, he hoisted the Lombardi Trophy.
Soon enough Wilson will have a new contract that makes him the highest paid player on the Seahawks and one of the highest paid in the league. And none of his teammates will begrudge him that salary. They know that however good the rest of the team is, they’re unlikely to win it all without a top-flight quarterback. Quarterbacks are like CEOs—the good ones are hard to find, and they therefore command a big salary. That’s why inequality of wealth is never a problem in a purely capitalist, meritocratic system. Those who contribute the most are paid the most, and rarely is anyone bothered.
Super Bowl XLVIII is also a reminder that wealth and success are hardly static. All the talk about the 1 percent and “concentration of wealth” ignores the capitalistic truth that each year’s team picture is never the same as the year before. And just as change at the top is a constant in professional sports, so it is in the rest of the economy. The vast majority of the 2013 Forbes 400 were not in the original list in 1982. Facebook’s CEO, Mark Zuckerberg, wasn’t even born yet.
The coach who led the Seahawks to the lopsided victory in Super Bowl XLVIII, Pete Carroll, was out of football altogether in 2000. He had been fired as head coach of the New England Patriots in 1999. Five years earlier he had been fired as head coach of the New York Jets after one season. If you had predicted that Pete Carroll would be the winning coach in the Super Bowl thirteen years down the road, you’d have been laughed out of the room.
Carroll’s story proves that nothing is forever in a merit-based system, and the past does not predict the future. Hired by the University of Southern California as head coach in 2001, Carroll had the Trojans ranked number four in his second season and won national titles in 2003 and 2004. His wilted reputation revived, he was offered the head coaching job at Seattle in 2009. Four years later, his Seahawks won the Super Bowl.17
Inequality of income and wealth simply does not matter in a capitalist society. Immense wealth creation by an ever-changing 1 percent improves life for everyone and is non-discriminatory. The 1 percent club is always open for new members.
Every football fan knows the anguish of a star player’s going down with a knee injury, wiping out the entire team’s prospects for the season. What if a surgeon came up with a way to quickly cure shredded knees, getting injured players back on the field in a week? If that surgeon became a billionaire, would football fans bemoan his contribution to wealth inequality? This scenario is not as far-fetched as you might think. In the Civil War, men suffering gunshot wounds to the abdomen or chest were left to die. A fractured hip was a death sentence. The odds of death from a broken femur were three to one. Cancer? Forget about it.18 Capitalism has an impressive track record of making the impossible possible. As medicine advances, it is not unrealistic to bet on doctors’ eventually making a torn ACL yesterday’s problem. Will society be worse off if the physician who achieves that breakthrough is enriched for it? What about the scientist who finds a cure for cancer?
Income inequality in a capitalist system is truly beautiful. It provides the incentive for creative people to gamble on new ideas, and it turns luxuries into common goods. Income inequality nurses sick companies back to health. It rewards hard work, talent, and achievement regardless of pedigree. And it’s a signal that some of the world’s worst problems will disappear in our lifetimes.