Is the Existence of Billionaires Inherently Harmful?

by Brian Dunning
July 27, 2021

As the world's billionaires fly into space, disrupt crypto markets with their tweets, and buy comically ridiculous megayachts, the rest of us often roll our eyes and grumble. And it seems that more and more often, we see little meme graphics shared on social media saying how evil billionaires are, or making fun of them or their habits, or of how disconnected from reality they are. I've never seen a positive one. Clearly, most people don't seem to think very much of the ultra wealthy, and just as ubiquitous as these memes is the popular belief that the existence of billionaires is not just fodder for the comedians, but it's actually harmful to economies, to social justice, to world health, to the environment, and to just about everything else. Today we're going to dive into the research and find out just what impact billionaires truly do have on the rest of us — if any.

A quick Internet search for headlines gives us a temperature reading of what readers are hungry for. From The New Republic:

Billionaires Are Eating the Economy

From Inequality.org:

Billionaires Are a Sign of Economic Failure

From The Washington Post:

Young Americans Say Billionaires Do More Harm Than Good, Study Shows

From The New York Times:

Abolish Billionaires

From The Atlantic:

Cancel Billionaires

Clearly many people are not fans. When we seek to understand why, it's the subtitle under this last headline that tells a lot: "Wealth inequality hurts society." Billionaires are the icons of inequality, and many people place the blame for inequality — or at least some of the blame — squarely on the shoulders of billionaires.

So, really what we're asking when we wonder if the existence of billionaires is inherently good or bad is whether income inequality is good or bad. Economists usually refer to it as economic inequality, and it's not all that easy to define. There is inequality of income, of wealth, consumption, health, education, opportunity, income mobility, and lots of other metrics. These are often represented with a metric called the Gini coefficient, named for an Italian statistician. Countries with very high economic inequality like South Africa or Namibia have a higher Gini coefficient for wealth of around 60; and countries with low inequality like Slovenia and Czechia are around 25. The United States is on the high end of the middle at 41; Australia and the United Kingdom are lower at around 34.

Decades ago, economic theory held that inequality was actually good for a nation, as a standout wealthy class had lots to invest and drive growth. It's true that the great barons of yore built huge factories and railroads and industries, employed hundreds of thousands, created cities, and drove growth and opportunity where none had existed before. And today, that's still the case, though on a less monumental scale — think of Elon Musk with his PayPal fortune, and now see how many people work for Tesla Motors and SpaceX. However, over the course of the 20th century, economists' perspectives gradually flipped, as more impactful factors began to take over. Today we see economic inequality correlated with all the bad things: crime, poor health, starvation, social and racial problems, poverty, lower life expectancy, etc. The reasons and causes are not always clear, and it's an active area of research among economists. One reason for the 20th century shift seems to be the transition from reliance on physical capital, like machines, to human capital, like skilled professionals. Regardless, suffice it to say that in the 21st century, lower inequality does absolutely correlate with the good things we all want our society to achieve. Nations need to get low Gini coefficients, according to all the data, in order to be most successful. Economic inequality is definitely undesirable. No need for a Skeptoid episode on this one.

So, with that established, we can then move on to our main question of interest: are billionaires the drivers of economic inequality? Clearly they're symbolic of it, but are they a cause? If we got rid of billionaires, would that be what it takes to fix all of the correlated problems throughout society?

This is a question that a lot of economists have studied. The most influential and often-cited paper on this topic from recent years comes from Sutirtha Bagchi and Jan Svejnar and was published in the Journal of Comparative Economics in 2015. What they found was the same thing all the other economists before them had found, and it's that there simply weren't any clear, consistent links between a nation's billionaires and its Gini coefficients. So Bagchi and Svejnar did a type of analysis that hadn't really been published before, which was to divide the billionaires into two groups. They had to do this manually, billionaire by billionaire, using the Forbes list of billionaires in every country. The groups were (1) those who acquired their wealth due to political connections, and (2) everyone else.

To some degree, practically every billionaire benefits from political connections. If Jeff Bezos wants to build a new Amazon warehouse somewhere, he snaps his fingers and politicians from every state trip over each other offering Amazon the best tax incentives or whatever. However, political connections are not how Bezos acquired his wealth to begin with, which was by selling books online. On the opposite end of the spectrum we have the huge crowd of Russian oligarch billionaires. Their typical story is that of some modest state employee who worked in the oil sector, upon whom fortune smiled in the 1990s when Russia privatized state assets, turning civil servants and friends of the Kremlin into CEOs of oil companies. Presto, lots of billionaires who did no work to get to where they are, but had the right political connections. Bagchi and Svejnar placed billionaires who acquired their wealth politically into one group, and the other group was people who built businesses, inherited their wealth, or obtained it by any other legitimate way.

And once they did this, they got a result. A very clear result. When they looked at each country's billionaires as a whole, they found that the more billionaires, the worse was that country's economic growth. But once they separated those billionaires into the two groups, it was only the politically connected wealth inequality that was correlated with lower growth. Politically unconnected wealth inequality had no correlation at all. In plain language, billionaires who owe their wealth to their government connections hurt economies; billionaires who obtained their wealth on their own do not. They don't help, they don't hurt, they just don't have any clear impact.

In a country like the United States that has all kinds of securities laws and oversight, the president can't simply anoint a crony a billionaire by gifting him some state asset; so the US has very few billionaires who obtained their wealth through political connections. As a result, Bagchi and Svejnar found that US billionaires have no harmful impact on the economy. But in countries rife with political corruption like Russia, Indonesia, or India, billionaires have a pronounced detrimental effect. Working billionaires tend to hold their wealth in investments; corrupt billionaires tend to try and cash it out.

Nevertheless, articles with headlines like those listed earlier remain popular, and the memes continue to be shared, claiming that billionaires hurt everyone else. If the data show that they don't (non-politically connected ones anyway), where's the disconnect?

One common misconception is that when one person gets richer, everyone else gets correspondingly poorer. Billionaires are often blamed for having stolen and hoarded the wealth that might otherwise be nicely distributed among the poor. This is not true at all. A nation's economy is not a zero-sum game, which is a system in which there is no net gain among participants — think of three cavemen gambling with ten rocks; at the end of the game, there are still going to be ten rocks, one guy would have them all and the others would have nothing. That's a zero-sum game. But national economies aren't zero-sum games; they don't have only a fixed amount of wealth that people have to scrabble over. Let's say I start a small business making bedazzled ukuleles, and you think it's such a great idea that you invest $10,000 in it in exchange for 10% ownership. That gives the company a valuation, on paper, of $100,000. Since I own the rest of it, I am now worth $90,000 in stock; literally, my net worth is $90,000 more than it was yesterday. But the government didn't print $90,000 in new cash, so does that mean that everyone else in town must have just collectively lost $90,000? No. We created new wealth. It's not in cash that I'm spending all over town causing inflation, so it doesn't impact anyone else's wealth. This is a key concept that's frequently misunderstood. Other people creating and accumulating wealth does not reduce the value of your wealth; and when it's virtual wealth, like shares of a company, it doesn't alter the money supply and doesn't contribute to inflation. The vast majority of the wealth owned by most billionaires is on paper; very little of it is in tangible assets like cash or property. Unequivocally, a billionaire being rich does not mean that his wealth would otherwise be in the pockets of the needy.

Another reason the billionaires might not be the problem comes from another recent and influential finding, from World Bank economist Martin Ravallion and published in 2012 in The American Economic Review. Ravallion studied 90 developing nations to find out why they weren't undergoing "poverty convergence" — a prediction that countries will see converging levels of poverty, due to a number of effects that are beyond the scope of this episode. Ravallion's findings were complex, but among them was a robust conclusion that it is a country's poverty rate that is the primary driver of its wealth inequality's impact on its economic growth. So again, doing my best to put it into plain language, wealth inequality does hurt a nation's economy, but the problem is the number of poor people, not the number of rich people. To extrapolate from that: stop worrying about the billionaires who don't really have any impact; and start worrying more about those at the poverty level. Improving a nation's economy will not be done by "canceling billionaires" (as The Atlantic so eloquently put it) but by vigorous implementation of programs to give the poorest citizens better opportunities and a better start. Punishing billionaires might seem emotionally satisfying to some, but the data show it wouldn't help the people who need help, and it wouldn't help the economy.

But then we have those politically connected billionaires, who don't do anything much except personally cannibalize their state-gifted companies, leave their employees jobless and worse off than before, and then find janky overseas investments to launder their money out of the country. That particular class could indeed stand a good "canceling". And it's nice to know that that's a robust finding from the latest in economic theory, and not just a meme.

By Brian Dunning
Follow @BrianDunning