Mechanics of Wealth Concentration Under Casino Capitalism


Posted by Bob Lord

If you've ever stayed up at night wondering how our casino capitalism causes wealth to concentrate at the top, this post is for you.  

Start with Dean Baker's piece from a few days ago, The Big Silicon Valley Super Powerball Lottery. Baker explains how Silicon Valley has become the Wall Street of the West, where vast fortunes are created overnight for those whose start-up companies hit it big:

However in some cases there will be jackpots. Most of the time, it will prove fleeting, but our lucky Silicon Valley Powerball winners may still be able to walk away with hundreds of millions or even billions from their bet. In rare cases a company may survive, but even then, the market value after an initial flash may be just a fraction of its prior peak. This means that Silicon Valley lottery winners would have an opportunity to dump off their stock at grossly inflated prices before saner eyes bring the price back down to earth.

The same phenomenon occurs on Wall Street, where star traders or hedge fund managers achieve vast wealth over a very short period. And we've re-defined the American Dream to match our casino economy. No longer is the American Dream the chance for any American who works hard to live a good life. Instead, it's the infinitesimal chance of acquiring vast wealth if the stars align just right. We've decided it's more important to us that one person get a billion dollar windfall than it is for thousands of us to live comfortably.

While we hear a lot about rags to riches stories, we rarely hear about riches to rags stories. Why? Because when a Silicon Valley start-up hts it big then fades, the losses are shared by thousands of investors who have gambled only the tiniest slice of their wealth. When a trading disaster occurs on Wall Street, it's the bank that employs the trader (or perhaps the taxpayers) that bears the loss. 

In any group at the top, whether it's the top 1%, the top .01% or the Forbes 400, there are newcomers to that group. In many cases, the newcomers join the group because they've steadily increased their incomes and perhaps have done a bit better than average with their investments. Those newcomers tend to join the next higher group at the bottom, just nosing out a member or two previously holding one of the last places. But the winners of overnight fortunes, whether from Wall Street, Silicon Valley, or some other source, blow past a huge portion of the group when they join. Think of how high on the Forbes 400 list Mark Zuckerberg is now. Just a few years ago, he was not even on the list. 

Put that on hold and consider how the aggregate wealth of one of the groups at the top accumulates. In today's tax rate environment, the wealth of a top most group, say the Forbes 400, is growing faster than the aggregate wealth of the entire population. Why? Because, unlike the rest of us, those at the top are not required to consume the lion's share of their income on living expenses. It used to be that tax rates at the top prevented wealth at the top from accumulating more quickly than aggregate wealth, but we now have historically low rates for taxes on income from capital and inheritances.

Thus, even if the membership of a top most group were static (no newcomers or departures), the wealth of that group would accumulate faster than the nation's aggregate wealth. Some members of the group would do worse than others and some might even lose a few bucks to bad investments, but overall the group's rate of wealth accumulation would exceed our rate of aggregate wealth accumulation. As a result, the share of aggregate wealth controlled by that group necessarily would increase over time.    

Now consider the impact of the new entrants to the group. Those who join at the bottom don't have much of an impact on the group as a whole, because they replace folks who are barely less wealthy than them. But the winners in casino capitalism have an enormous effect. Take the Forbes 400 for example, where the 400th person on the list
has just over One Billion in net worth (I think it’s $1.1 Billion). So, along
comes Mark Zuckerberg, who goes from not on the list to $20 Billion plus really
quickly. He knocks Mr. 400th off the list, increasing the total net
worth of the group by $20 Billion or so. That, right there, represents about a one
percentage point increase in the total net worth of the group.

It's also about one-thirtieth of one percent of our entire aggregate wealth. Think about that. One winner in casino capitalism causes a noticeable increase in the percentage of our aggregate wealth jammed into the top one millionth of the population. 

The Forbes 400 currently averages about $4
Billion per member, with a total of $1.7 Trillion in wealth, which is just shy of 3% of the country’s aggregate wealth. Three decades ago, the share of our aggregate wealth lodged in the Forbes 400 was less than one percent. In just one year, 2012, the Forbes 400 added $200 Billion to its total wealth, about a 13% increase.

Where will this trend lead us? Will the bottom of the 400 be a $10 Billion net worth, as casino capitalism winners continue to dislodge the mere billionaires at the bottom of the list? Could the total for
the whole group reach $15 Trillion in a decade or two? It seems altogether possible, absent a crash,
of course. Like it or not, the combination of casino capitalism and low tax rates at the top is leading us to a society where over ten percent of our wealth is held by a group that could fit into a movie theater. 

It’s not as easy to identify, but the same thing
is happening with slightly larger groups – the top .01%, the top .1%, etc. The
effect is not as dramatic in those groups for each new entrant into the group,
but the number of new entrants in those slightly less lofty groups is many
times the number of new entrants to the Forbes 400. Thus, just as the share of our wealth held by the Forbes 400 is growing as a result of casino capitalism, so are the shares held by the top .01%, the top .1% and even the lowly top 1%.

Do our statistics on wealth show the rapid accumulation at the top? They would, if wealth were counted accurately. For several decades, the reported share of the income of the top 1% has grown tremendously, approximately doubling during that period. Paradoxically, the reported share of the top 1% in aggregate wealth over the same period has barely grown. The explanation for this lies in the trillions the wealthy have stashed in tax havens. In Mitt's Offshore Shenanigans: The Bigger Story, Sam Pizzigati explains:

“Almost all these hidden assets are owned by the world’s wealthiest individuals,” note Tax Justice Network analysts, a reality that means that all previous studies “exploring economic inequality have systematically underestimated the wealth and income enjoyed by the world’s wealthiest individuals.”

The lead researcher on the Tax Justice Network’s new research, James Henry, formerly served as the chief economist at the prestigious McKinsey corporate consulting group. In the Network’s new report, The Price of Offshore Revisited, he mines a wide range of public and private sector data sources to gauge capital flows in and out of “offshore” secrecy jurisdictions all around the world.

These havensnotes Henry, host over 3.5 million paper companies, thousands of shell banks and insurance companies, and “tens of thousands of shell subsidiaries for the world’s largest banks, accounting firms, and energy, software, drug, and defense companies.”

This vast web, aided and abetted by weak and poorly enforced government regulations, has enabled, notes Henry, fewer than 100,000 people — just .001 percent of the world’s population — to “control over 30 percent of the world’s financial wealth.”

Americans make up, according to various previous surveys of the world’s ultra rich, almost a third of the world’s super wealthy. That would put the American share of unrecorded offshore private assets as high as $10 trillion.

Add this $10 trillion to the wealth of America’s top 1 percent and the inequality disconnect between wealth and income largely disappears. The top 1 percent share of the nation’s household wealth, a steady one-third according to the Fed Reserve data, jumps to the neighborhood of nearly one half.

Paradox solved. The distribution of wealth in the United States has become more top-heavy at a ferociously fast rate, just like the distribution of income.

Which of course brings us back to the ultimate question: How much wealth and how much income can we cram into the top 1% before the bottom 90% explodes? We may be finding out sooner than we thought.