When is individual wealth too large?

In an interview with Ta-Neishi Coates, Alexandria Ocasio-Cortez tries to answer the recurrent question of ‘when is it just too much money?”

Here’s the clip. Watch the whole thing because I am going to comment on it.

The AOC position

Ocasio-Cortez’s position here is simple. I think of it like the 1964 Potter Stewart argument in the Jacobellis v. Ohio case about pornography, “I know it when I see it”. She is saying that in all circumstances, anyone who has amassed $1 billion of wealth has not earned that money. As she puts it at the beginning of the video, “No one ever makes a billion dollars. You take a billion dollars.”

Let me use Bernie Sanders here as an example because he’s a millionaire. I can easily see Ocasio-Cortez giving Sanders a pass, saying that he’s amassed his wealth through years and years of hard work at the age of 78. But a person making as much as $5,000 a day for as much as 500 years would only receive $912,500,000  – and that’s before expenses. So while Sanders’ wealth is within reason, billionaire wealth is not, according to AOC.  Stolen money? “I know it when I see it,” she might say; and billionaire wealth is definitely taken, not made.

In this telling, somewhere between the Sanders level of honest work and the billionaire lies a line where one’s wealth accumulation is so large, it is unseemly. And, it must have been earned off the backs of ordinary citizens. As she puts it later, “you employed thousands of people and paid them less than a living wage to make those widgets for you. You didn’t make those widgets. You sat on a couch while thousands of people were paid modern-day slave wages…”

My take

I find this viewpoint extreme and indefensible because it is so categorical i.e. “you are a billionaire, so you must have exploited people.”

I could give you examples like Jan Koum, co-Founder of WhatsApp, or JK Rowling, the writer, saying they made their initial billion without exploitation. Even Bill Gates, the man who later came to use the monopoly power of his Windows operating system at Microsoft to tie Windows into his other products, made his first billion largely without exploiting people that he “paid modern-day slave wages”.

But that’s beside the point. The big problem here is the us vs. them framing. It’s the same makers versus takers paradigm that Mitt Romney used in 2012, except reversed. And I think it’s toxic. It’s divisive, just as it was when Romney used that framing.

So, let me tell you how I look at it. In society, there is accumulated knowledge and infrastructure that we can all benefit from. Some benefit more than others though, through luck and also through a tilted playing field that favours the well-connected and rich over the poor. But the difference between a Bill Gates and an Edward Harrison is not necessarily raw intellectual horsepower, though it may be. It’s more luck. Bill Gates essentially won a lottery ticket when IBM selected MS-DOS as its operating system.

The question is: how do you deal with that inequality in a social democracy?

In recent decades in the United States, the playing field has been increasingly tilted to favour the well-connected and wealthy, allowing them to accumulate and hold onto wealth in much larger amounts. And in a globalized world, the ability to reach billions more people with products has only multiplied the potential for wealth accumulation. A lot of people – AOC included – say enough is enough.

But, in my telling of this story, I am not making a categorical statement that a specific level of wealth accumulation is prima facie evidence of theft and exploitation. That’s pure envy. What I am saying is that there are ways to level the playing field. But none of those ways will or should eliminate wealth and income disparities – because (disparate levels of ) wealth accumulation is the key difference between a capitalist and a communist society. And we live in a capitalist one.

Solutions?

One policy response mooted by Elizabeth Warren and Bernie Sanders is wealth taxes. But that’s a blunt instrument designed to claw back ‘unnaturally accumulated wealth’ which is a sign of policy failure. You don’t need a wealth tax if your other policy apparatus is working.

Better solutions include rolling back Citizens United, breaking up oligopolies, enforcing anti-trust more assiduously, putting caps on CEO pay as a percentage of average salaries, increasing notice periods for dismissal, increasing maternity leave, increasing mandatory vacation periods, and making healthcare insurance a right of citizenship. Those are good goals. And I reckon if you implement enough of them and enforce the laws to prevent power accumulation, you won’t need a wealth tax at all.

But there’s one more important point here and that’s about the redistributive nature of wealth or income taxation.

In a society where the medium of account and currency of exchange is a government I.O.U., the government has barely any funding constraint. It can literally credit accounts with these I.O.U’s. So, taxation doesn’t serve a ‘funding’ purpose for government. It serves the purpose of both giving government money value through the tax liability, and of redistributing wealth in society.

Now, Modern Monetary Theory talks a lot about the power of taxation in making government money valuable. They say the tax liability is the one thing that makes government money irreplaceable. And I would agree that the tax liability is important. But, when we hear MMT arguments, we hear less about taxation’s redistributive effects.

Think about it for a second: if as a society we get to decide which common goods are created and maintained collectively through government largesse, we also get to decide where the money to facilitate those common goods comes from. Yes, we could just credit accounts and deficit spend. But we don’t. We tax. We tax income, we tax consumption, we tax corporations. And in so doing, we are effectively redistributing.

Let me give you an example. Let’s say we lived in a society of 100 people where 99 people made $1 each and 1 person made $101. We have $200 of gross domestic product. Now, let’s say we want to create and maintain public goods worth one fifth of our productive capacity. We could contract people to do work and then credit accounts with $40. Or we could tax people and simultaneously credit those accounts. The latter example is effectively a redistribution. You can’t say the taxation literally paid for the public goods. But you can say that we now all have public goods – highways, Internet,  healthcare. And some people will now have more of those benefits than they otherwise would have had before the taxation and government spending.

If we taxed the rich guy at 35% and got $35.35, everyone else would be taxed at 4.7%. That’s redistribution. And that’s what taxes do.

In the case of US policy, a clear corollary here is that you don’t need a wealth tax. There are many other ways of leveling the playing field. And income taxes are certainly a major source of redistribution you can use without a wealth tax.

Socialism

At the end of the day, when it comes to thinking about a social democracy, I think of it as rooted in capitalism. And so, I am very uncomfortable with categorical statements like Alexandria Ocasio-Cortez’s. She’s effectively demonizing wealth to make a larger point about exploitation and inequality in modern society.

She could have made that point without saying you ‘take’ aka steal a billion dollars. But, she is trying to start a revolution. And so she’s thinking in us vs them terms. That’s the kind of language revolutionaries use.

What AOC is effectively saying is that – as we concentrate on the ‘social’ part of social democracy, she wants a wholesale shift. The incremental approach of Obama and Clinton is a sellout. She wants much more socialism. And the way to get it is to pick an enemy – the wealthy – and attack them as takers.

Obama had his opportunity. And all we got from it was Trump. AOC wants much more radical change next time.

Robespierre is coming.