The Greedy Rich Don’t Need Incentives
What makes megamillionaires tick? Every year Forbes Magazine publishes its list of the 400 richest Americans, and every year I like to cross-check that list against notions about wealth in America promulgated by the likes of Malcolm Forbes and his friend Ronald Reagan.
“The real excitement . . . of the 400,” Forbes writes, is that “the country’s GNP grew 2.7%” thanks to “the competitive free-for-all among our free enterprisers.” The 2.7% is nice, but not as nice as 16%, which is how much the net worth of the Forbes 400 grew last year. The minimum fortune needed to make the list grew from $150 million to $180 million, which is an even nicer 20%.
These numbers give added weight to the question whether the way individuals enrich themselves in the American economy actually adds to social wealth as well. Three years ago I calculated that only 59--one out of seven--of the Forbes 400 actually earned their own fortunes in socially productive ways. The rest made the list through inheritance, the passive holding of land and energy resources, economically useless paper shuffling, and the free acquisition of valuable government monopolies such as TV licenses.
Not much has changed since then, but each year brings its own special flavor. The best way to achieve a fortune in America remains inheritance. Fourteen of the 51 newcomers in 1986 chose this route, including one reverse inheritance: Bella Wexner, who owns $210 million of stock in The Limited, the clothing chain founded by her son, Leslie. What a nice boy!
But the novel development of 1986 is the arrival en masse of Reagan-era financial manipulators: 10 of them, of whom no less than six (including former Treasury Secretary William Simon) made their fortunes through so-called “leveraged buy-outs.” A seventh--the richest newcomer, with an estimated $500 million--is investment banker Michael Milken, the pioneer of “junk bonds,” high-risk securities often used to finance leveraged buy-outs.
Yet another LBO operator, John Kluge, is now the second richest man in America, with at least $2.5 billion. Just two years ago Kluge had barely $300 million to his name. In a leveraged buy-out, a small group of investors borrows a large sum of money to buy a company from its public shareholders. The huge fortunes come from the fact that the company is usually worth far more than the hapless shareholders are paid. Kluge, for example, was chief executive of Metromedia, owner of TV stations and other communications businesses, when he offered the stockholders $38 a share, or a total of $720 million, for their stock. For a fee of $4 million, the distinguished banking firm of Lehman Brothers certified that this was a fair price.
Kluge sold off Metromedia’s assets for a total of $4.6 billion. Clever? Sure. Socially productive? Hard to see.
This year, as always, the newcomers to the Forbes 400 were already very rich before they made that last big breakthrough. Some floated up with the stock market. But most, we are assured, work very hard. Twelve hours is “a short day” for Michael Milken, grinding out junk bonds.
What’s the point? Anyone with, say, $20 million or $30 million can sate virtually any material desire, and so can his children and grandchildren. Anyway, says a psychologist in the current Forbes, “Many millionaires--in fact, the majority--live simply.” It’s a tenet of the Reagan/Forbes mythology that most rich people work hard and live below their means. It’s probably true.
Ironically, though, this makes hash of other basic Reaganite axioms. Capitalist theory--especially in its Classic Comics version, supply-side economics--is based on narrowly behavioristic assumptions about human psychology. People are moved to be productive in order to increase their claims on the goods and services produced by others. They work in order to buy. But this incentive is at constant risk of being snuffed out by taxes, which lower the trade-off between effort and reward.
The Forbes 400 demonstrates that all the main actors in the American economy are exempt from these basic assumptions about what makes the economy tick. Why do they do it? “It’s a sickness I have in the face of which I am helpless,” explains arbitrageur Ivan Boesky ($200 million). That’s melodramatic, but there must be a grain of truth. A sensible maximizer would stop accumulating at $10 million or $20 million, when it becomes pointless. But few do that.
The explanation must be that the type of person who would be inclined to stop at $10 million--that is, most of us--won’t get to $10 million in the first place. The lesson is not that all megamillionaires are social parasites, though many are. The lesson is that the ludicrous coddling of wealth in recent years--the large tax cuts, the virtual abandonment of death duties, the cultural celebration of the rich--has been unnecessary. Human greed, the seed of capitalist prosperity, is hardier than that.
