Corporate culture is another limiting factor: The larger your company gets, the harder a great corporate culture is to maintain. From all accounts, WinCo has a great community of workers, and it has 15,000 of them, which sounds like a lot. But Wal-Mart has more than 1 million employees in the U.S. It might be hard to maintain that level of excitement as you get into the hundreds of thousands of employees. If you try to expand quickly to get scale, your core of loyal employees who have been with you forever shrinks relative to the newcomers who don’t yet have the same commitment to the company. This is particularly a problem in employee-owned companies; as you get more employees, you can dilute the sense of ownership, because each employee’s contribution makes such a tiny impact on the bottom line — or you may get wars between groups of employees, as we saw with United Airlines.
This is related to another key challenge: management. As organizations grow, they have to change. Anyone who has been through a startup can attest to this — when you start out, you don’t need to have many meetings; you just hash stuff out impromptu when the need arises. As the company grows, you start to need management reporting lines, and defined roles, and scheduled meetings, and other bureaucratic unpleasantness that everyone hates. But if you try to do without it, everything quickly degenerates into a chaotic mess.
Not every company is good at this transition. If one of the things that made you great as a little baby company was your informality and flexibility, you may find that growing makes your key producers unhappy and ultimately saps the creative flux that made you great at what you do.
This is also a big challenge as the company moves beyond “small” and into “large”; in fact, every time you dramatically increase the size of your business, you will find that it needs to gut-rehab its management structure. Your three great managers who made all the trains run on time can no longer oversee things at the level of detail they once did; they need to spend more of their time making sure that other people do so. Some of them aren’t good at that role, but they will be unhappy if someone else is promoted or hired over their head. You start to rely more and more on well-standardized processes rather than individual initiative, which may require some compromises on quality to maintain the price point that your customers expect. It is the difference between an exquisitely pulled shot at your local coffee shop and the massive amount Starbucks has invested in machines that make exactly the same coffee every time.
Megan McArdle, “In-N-Out Doesn’t Want to Be McDonald’s”, Bloomberg View, 2014-10-02.
September 17, 2015
QotD: Corporate culture and management overstretch
September 16, 2015
QotD: A booming economy gives more power to individual workers
A few days ago there was a big debate about a New York Times expose on working conditions at Amazon.com. (BTW, it would have been useful for the NYT to compare labor practices at the Seattle company to working conditions at firms operating in the Amazon region of Brazil.)
Many liberals were appalled, while conservatives often wondered why, if working conditions were so bad at Amazon, people didn’t simply “get another job.” I have sympathy for both sides, but probably a bit more for the conservative side.
One liberal objection might be that it’s not easy to get another job. And perhaps that’s because monetary policy since 2008 has been too contractionary. And perhaps that’s because conservatives have complained about the Fed’s QE/low interest rate policies, which has made the Fed reluctant to do more.
Regardless of how you feel about monetary policy, it’s clear that if employers feel they have a “captive audience” of workers, who are terrified of losing their jobs, it would be easier for the employer to crack the whip and drive the employees to work extremely hard. One advantage of a healthy job market is that workers have more power to negotiate pleasant working conditions.
Scott Sumner, “How bad government policies make us meaner”, Library of Economics and Liberty, 2015-08-25.
September 15, 2015
Ontario wineries and the demands of the Chinese market
In the most recent edition of his wine review newsletter, Michael Pinkus just barely avoids sounding like an editorialist from the anti-Chinese era of American yellow journalism (er, sorry) over Chinese money being used to buy up Ontario wineries to concentrate on icewine production for the Chinese market:
Hinterbrook, Joseph’s, Marynissen, Alvento, Lailey – all wineries in Niagara that have seen a major shake-up of ownership over the past few years; in fact it is reported that about 8 or so wineries have seen new ownership, which potentially can be seen as a good thing: a revitalized interest in wineries in Ontario’s largest growing area.
Now before I go any further, I’m sure this topic is going to spark some controversy and some of the comments I’ll make might come off a tad inflammatory, but hear me out over the next few paragraphs.
The majority of these wineries have been purchased by those of Oriental decent, namely Chinese interests, who see exporting Ontario Icewine back to the homeland as a path paved with gold … On the positive side this provides wineries and workers with jobs, another bonus is that Icewine is still being made here at home, instead of being falsified, forged, misappropriated, and wrongly-labelled elsewhere; and some longtime growers and owners are finally cashing-in after a lifetime of tilling the soil, and growing the grapes to make the wines we all know and love … but at what cost to the industry and reputation of Ontario wine?
We have been battling a snake-belly-low reputation for years – one that never lets us forget we put Baby Duck and inferior Baco Noirs (with apologies to Henry of Pelham) into bottle. Now we have some of our most beloved names (namely Lailey and Marynissen) seemingly on the brink of becoming Icewine houses. The fear here is that Ontario will be bought up by foreign interests and our wines moved off-shore, and most, if not all our grapes used for the purpose of making Icewine – for all intents and purposes killing off our quality domestic dry wine production.
These fears were realized once again in July after reports were confirmed that Lailey had been sold. They then closed their doors for “renovations”, subsequently re-opened to sell their remaining inventory, and netted their entire 2015 crop to be used in the production of Icewine … As the French say, “quel domage!” (what a pity) – those beautiful old vines of Chardonnay and Pinot Noir, that fantastic Syrah, the Sauvignon Blanc … all the grapes that were lovingly nurtured so that they produced the fruit to make wines full of terroir / character will go into lifeless sweet Icewine. Frustration and dismay were echoed time and time again on Twitter and FaceBook with the hashtag “RIPLailey”.
No matter how we may try to romanticize them, wineries are just businesses. Not only businesses, but farm-related businesses. Farming is a hell of a way to earn a living — ask any farmer — so if someone comes up to your farm gate and offers you enough money to sell up … at least some farmers/grape growers/winery owners are going to take the cash and split. From the list of wineries that Michael lists, I’d had poor experiences at three of them … bad enough that I’ve never been back. If my experiences were typical of other customers, then selling up was a great thing for the former owners. Treat your customers like shit, don’t expect them to come back (but do expect them to mention you to all their friends).
If someone thinks that it’s worth the money to buy up these places and convert them to all-icewine production and concentrate on exporting to China, great. More wineries are opening every month, so the loss of a few under-performing (and customer-abusing) “old names” has more chance to improve the overall wine scene in Ontario.
QotD: The Ex-Im Bank
… every time the Ex-Im Bank gets involved in a deal, there are only two possibilities: The government is needlessly subsidizing something that would have happened anyway, giving away cheap money to a huge corporation. Or else it’s subsidizing a deal that wouldn’t have happened anyway, in which case we are defending the use of taxpayer dollars to sell cheap manufactured goods to foreigners. It’s not even as if we’re picking out especially needy foreigners, who may require a charitable contribution from the prosperous citizens of the United States; the subsidy is distributed on the basis of who is willing to, say, buy cut-rate U.S. airframes. And guess who benefits? U.S. corporations that export a lot.
This is not a good use of taxpayer dollars, and conservative ideologues, bless their hearts, are quite right to want to get rid of it. Their passion is a little out of proportion to the harm that this agency does, but even a small step in the right direction is better than none. The bank’s opponents concede that. For them, the appeal of taking on Ex-Im is that they might be able to take it down.
Against this impeccable economic and political logic, the bank’s supporters marshal a few arguments. First, they often claim (as Nocera implies) that the Ex-Im Bank generates a lot of money for the Treasury. Which is sort of true … except. First of all, it doesn’t account for the opportunity costs of the distortion; resources are diverted into production of certain goods, and away from others. And second of all, government accounting for loans is rather weird. According to the Congressional Budget Office, if we used a fair value accounting method, which would account for the risk of changing market conditions, the Ex-Im Bank’s six largest programs would be generating a deficit, not a surplus.
We are also told that Ex-Im is a vital matter of national security. I’m going out on a limb here, but I’m pretty sure that if the U.S. government needs to find some money to give foreigners as a vital matter of national security, they will manage to find it even if the Ex-Im Bank is shuttered and its silent halls hold only the lingering ghosts of departed exporters.
Megan McArdle, “Ex-Im Bank Is a Tiny But Tempting Target”, Bloomberg View, 2015-08-03.
September 14, 2015
Cash is still king … and we’d be insane to abolish it
In the Telegraph last month, Matthew Lynn made the case against eliminating cash:
Trying to get a plumber in France? In the rather unlikely event that you can actually find one who isn’t still on his grandes vacances, gone above his permitted 35 hours a week, or indeed long since relocated himself to South Kensington, then you’ll also have to make sure that you can pay by cheque or bank transfer.
From today, France is banning the use of cash for transactions worth more than €1,000, or slightly more than £700. On one level, that is about combating crime and terrorism. But on another, it is also part of a growing movement among academics and now governments to gradually ban the use of cash completely. It is inefficient, oils the underground economy, and makes it harder for central banks to manage the economy, or so runs the argument.
Much like gold, it is a “barbarous relic”, as some publications loftily dismiss it. The trouble is, cash is also incredibly efficient. And it is a crucial part of a free society. There is no convincing case for abolition.
When it comes to creeping state control, it is no surprise to find the French out in front. In the wake of this year’s attack on the Charlie Hebdo office, the government has clamped down on the use of cash. The maximum permitted transaction has been reduced from €3,000 to €1,000, and any cash withdrawal of more than €10,000 will be automatically flagged up to the police (tourists have a higher limit, but even that is being reduced to €10,000 – just in case you are planning on ordering some very expensive wine on your next trip to Paris).
[…]
In reality, cash is far too valuable to be given up lightly. In truth, the benefits of abolition are largely oversold. While terrorists and criminals may well use cash to buy weapons, or deal in drugs, it is very hard to believe that they would not find some other way of financing their operations if it was abolished. Are there really any cases of potential jihadists being foiled because they couldn’t find two utility bills (less than three months old, of course) in a false name to open an account? The web is full of false payment systems and anonymous names.
Nor is clamping down on the black economy such a big deal. Admittedly these things are hard to measure, but according to research by the London School of Economics, the black economy only accounts for 10pc of British GDP, which is the fourth lowest in the EU. Many of the people working in it are below the tax threshold anyway, and certainly below the VAT threshold. So the tax collected even if you clamped down completely is unlikely to amount to more than 1pc of GDP. As for negative interest rates, do we really want those? Or have we concluded that central bankers are doing more harm than good with their attempts to manipulate the economy?
QotD: “Fair” prices
I think that there’s a lot of very dumb rhetoric about “fair trade” and “fair pricing,” usually coming from people who want to tell others how to set their prices. I generally distrust the word “fair.” But there is an emotional side to pricing. Smart businesses want their customers to feel good about transactions, especially repeat-business propositions such as restaurants. That’s why bartenders give out the occasional free drink, restaurateurs sometimes send out a free appetizer or dessert, etc. And, all the management consultants and books notwithstanding, there’s a lot of gut in business; if a cafe proprietor in New Mexico thinks that a price feels right, or wants to know whether his customers think a price feels right, I don’t think that’s insignificant. Businessmen want to do the right thing, too, at least as often as anybody else.
It does get tricky, sometimes, e.g. the car-dealer who adds $1,000 to the price of everything so he can tell gullible buyers he’s giving them $1,000 off. I think the Internet has made pricing “fairer” in the sense that sellers cannot as often get away with charging above-market rates; there are a fair number of stores that will sell you a product at whatever the lowest price you can document is. It’s hard to say no when somebody’s showing you the same product at a better price on his phone.
Kevin D. Williamson, “A Fair Point”, National Review, 2014-09-29.
September 9, 2015
When part of your job offends your religious beliefs, you have two choices…
… and those choices are either get a different job or accept that your religious objection does not free you from having to perform all of the normal duties of the job. Some people, however, have the fixed notion that their religious beliefs must be respected and deferred to by everyone:
I’ve said it before but religious people really seem to believe that their religion ought to grant them special, legal privileges which are not provided to the rest of us. For some reason, certain people are so entitled that they believe their spiritual beliefs can be used to justify their own idiotic behavior, and if you dare to criticize them for their idiotic, unfair, or immature decisions that is evidence that you are simply an anti-religious bigot. What’s especially bizarre is that no other ideology is treated in the same way. If I were an investment banker and started refusing to do my job on the grounds that I was a socialist or if I were a cop and started refusing to make drug arrests on the grounds that I was a libertarian, no one would ever even attempt to argue that this was justifiable behavior. However, if I refuse to do my job because I’ve decided certain aspects of that job are against my religion, suddenly millions of people will view me as a martyr and I can expect pro bono legal counsel as members of my religious sect rush dutifully to my aid.
This situation is getting frankly ridiculous. The most famous recent example, obviously, is Kim Davis — a woman who was elected to a position that required her to issue marriage licenses and began refusing to do her job after the Supreme Court legalized gay marriage. If she didn’t want to do her job, there was one relatively simple option which was available to her since the very beginning and is still available to her should she choose to exercise that option — she could just quit. That would, in fact, be the adult thing to do if she feels that her religious beliefs do not allow her to meet her current job requirements, but instead she has decided to turn herself into some sort of ridiculous martyr to the religious right … and of course her $80,000 a year government salary, courtesy of the tax payers of Rowan County, Kentucky, probably had something to do with this decision. She deeply and truly loves her God, you see, but doesn’t love him quite enough to forego that sweet-ass government pension plan on his behalf.
Everyone knows the Kim Davis story, but what many people do not know is that at this very instant there is a virtually identical story involving a Muslim employee’s dispute with a Midwestern regional airline called ExpressJet. The woman’s name is Charee Stanley. Three years ago she became a stewardess for ExpressJet and then two years ago, presumably after sustaining some sort of catastrophic brain injury, she decided to convert to Islam. After her conversion, she found that her new faith frowned upon the serving of alcoholic beverages, so she began refusing to serve alcohol to passengers. More recently, she was suspended from her position pending a review because other flight attendants complained that they were being required to do her work in addition to their own. I personally don’t feel this is a particularly unreasonable complaint, and if it had been up to me, Ms. Stanley wouldn’t have simply been suspended, she would have been fired immediately for failure to meet her job requirements.
And just to prove you don’t need to actually be religious to hold this kind of belief, there’s also mention of Canada’s own Christian atheist, Reverend Gretta Vosper of West Hill United Church.
September 5, 2015
Raising the minimum wage also means raising prices for many retailers
Louis DeBroux on the plight of some marginal businesses in California who are seeing lower support from their customers as they raise prices to ensure they can keep paying their current employees at the new mandated minimum wage:
Earlier this year, labor unions in Los Angeles whipped up low-wage workers into a frenzy with demands for a minimum “living” wage of $15 per hour. They achieved their goal and the $15/hour wage bill was signed into law. This was supposed to be a huge victory for the workers (though, it should be noted, within days of the law going into effect, the same labor unions that lobbied for the $15/hour minimum wage were lobbying government for an exemption for union companies, so that union companies could pay well below the new minimum wage).
Even so, some California business owners decided to show solidarity with the cause of low-wage workers, significantly increasing their starting wage of their own volition.
Vic Gumper, owner of Lanesplitter Pizza (with stores in Albany, Berkeley, Oakland, and Emeryville, California), voluntarily raised wages for his employees to between $15 to $25 per hour. In order to cover the cost of the higher “living” wage, Gumper began advertising $30 “living wage pizzas” to his customers, which include patrons from the Pixar Animation Studios and biotech companies located near his shops. In doing so he declared these pizzas “sustainably served, really … no tips necessary”.
The result? Sales have dropped by 25% as liberals in these communities have balked at having to pony up more money for the pizzas. The hit has been so significant that Gumper has had to close during lunch hour at several locations (think about that…a restaurant that has to close during LUNCH because it can’t afford to stay open!).
Gumper says that “The necessity of paying a living wage in the Bay Area [which has one of the highest costs of living in the nation] is clear, so it’s hard to argue against it, and it’s something I’m really proud to be able to try doing…At the same time, I’m terrified of going out of business after 18 years.”
There really isn’t a free lunch … if you use the power of government to raise the costs of doing business, either the local businesses pass on that increased cost by way of the prices they charge to their customers or they economize by reducing their labour costs (and the number of employees they support). A more drastic solution is going out of business or moving out of the jurisdiction: neither of which is typically considered during the legislative process.
QotD: The existential problem facing Reddit
Network effects are wonderful for a technology firm when it’s growing. Early movers can gain an advantage that is very hard to displace, because once everyone else is using Microsoft Word or a Playstation, there’s a cost to switching away. On the other hand, investors (and antitrust lawyers) often assume that network effects are more durable than they actually are. In fact, they can be quite fickle. Once your network starts shrinking, the collapse can be sudden, because every node that gets subtracted from your network makes it less valuable to the people who remain. Networks that start growing often start shrinking — and a modest decline can quickly prompt a stampede for the exits. Anyone remember MySpace?
And so the problem that Reddit has is this: Having attracted a bunch of people on the promise that they could say anything they wanted, the company risks alienating those people, shrinking the network and shrinking itself right out of existence. Reddit would probably be a better place if the fat-shaming hobbyists and racist trolls were surgically excised. But they won’t be; they’ll be forced out bluntly, along with others, and that will drive away many of the users Reddit would like to keep.
Deciding what is offensive is inherently a political act, because one man’s deep truth is often another person’s deep offense. To take one obvious example, do you treat conservative Christians who say terrible things about gay rights activists the same as gay rights activists who say terrible things about conservative Christians? Men’s rights activists the same as feminists?
We are all more attuned to the offenses against our own beliefs than we are to what may seem terribly offensive to others. And with the culture war raging hot, it is going to be very hard to make choices that don’t look as if you’re taking sides. Even if you try to be scrupulously fair, chances are that you will miss something, causing one side to understandably point out: “See, they crack down on us, but not on those equally offensive other people!”
Reddit is trying to avoid this by splitting the baby in half: designating much of the worst content as questionable, and then segregating it, but not banning it. It’s far from clear, however, that this compromise will work. I don’t think a lot of people are going to mourn when the racist subreddits are segregated. But those are among the most notorious cases precisely because most people can agree that racist epithets are not okay. The border cases are likely to be more numerous, and the decisions will convince some users that Reddit is not for them.
Megan McArdle, “Policing Reddit Could Kill Reddit”, Bloomberg View, 2015-07-17.
September 1, 2015
August 31, 2015
Newspapers in the 21st century – what are they for?
Colby Cosh on the confusion even among newspaper folks themselves on their real role in today’s society:
But the newspaper is part of a different ecosystem now. A front page is a late contribution to an ongoing conversation in a way it was not in 1963, or even 2003. Editors making decisions about what images to use had heard Alison Parker’s screams; they knew many readers had heard them. That non-graphic touch made the photo of Parker with the killer’s weapon in the foreground “graphic” — too graphic for the proverbial breakfast table. (Although I would remind sensitive editors and media critics that the “breakfast table” is an incredibly outmoded way of thinking about our jobs, much like the idea that we are presenting news in a utilitarian, isolated way to readers who haven’t heard it.)
The truth is that the minds of most newspaper creators and editors are not completely clear about what these strange flat objects are good for in the year 2015. The New York Daily News, which does know what it is for, was unflinching in its front-page treatment of the WDBJ shooting. It caught immediate hell, but its confidence in its mission is a virtue. The paper knows that it exists partly because when something happens, New Yorkers can’t wait to see what those crazy-ass bastards in the tabloids will do with it.
Does the newspaper do harm with its relative sensationalism? It seems impossible to know. But it is certainly not the infliction of harm that critics and second-guessers fear most: it is the giving of offence.
August 27, 2015
Incentives matter … but in a perverse manner for public employees
On the Property and Environmental Research Center website, Warren Meyer explains why the US Forest Service is cutting ties with private organizations that have been running federally owned facilities for less than the Forest Service is able to do … despite the private company’s proven higher levels of service:
Private concessionaires pay all operations costs out of the entrance fees paid by the public — and without further taxpayer subsidies. In addition, the concessionaire pays the public agency a concession fee. The resulting savings to taxpayers can be quite compelling. In a recent PERC case study, I showed how a parks agency had to supplement every dollar in visitor fees with an equal amount of tax dollars to keep a park open. By privatizing the park’s operations, the need for tax revenues could be eliminated. And in fact, the park could be turned into a money maker for the agency.
While this may resonate with the public, it’s a hard sell to the agencies themselves. The National Park Service uses concessionaires to provide some visitor services, but it has not considered private operation of entire parks. Even the Forest Service — which does allow some private park management — often seems eager to go back to running the parks themselves.
[…]
No private company would behave like this. So why does the government? Over the years, I have observed three possible explanations:
1. Government employees have incentives that go beyond “public service.” For most agency managers, their pay and prestige and future job prospects are tied to the size of their agency’s headcount and budget. Privatization savings that look like a boon to taxpayers may look like a demotion to agency managers.
2. People who are skeptical of private enterprise and more confident in government-led solutions tend to self-select for government jobs. Even in the Forest Service, concessionaires frequently experience outright hostility from the agency’s rank and file. “It’s wrong to make a profit on public lands” is one common statement.
3. Government accounting is not set up to make these sorts of decisions well. Few agencies have reports that tell them whether an individual park’s revenues are covering its full operational costs. Costs can be spread over multiple budgets, making it seem as though public park operation is less expensive than it really is.
To overcome these obstacles, we’ve learned that progress generally has to start above the agency. Some sort of legislative push is necessary. And we try to find ways to pitch our solutions as a way for agencies to free up money to address other problems, such as fixing rotting infrastructure.
August 26, 2015
Organic food recalls on the rise
It must be a trend if even the New York Times is reporting on the increasing number of food safety recalls involving organic food:
New data collected by Stericycle, a company that handles recalls for businesses, shows a sharp jump in the number of recalls of organic food products.
Organic food products accounted for 7 percent of all food units recalled so far this year, compared with 2 percent of those recalled last year, according to data from the Food and Drug Administration and the Department of Agriculture that Stericycle uses to compile its quarterly report on recalls.
In 2012 and 2013, only 1 percent of total units of food recalled were organic.
Kevin Pollack, a vice president at Stericycle, said the growing consumer and corporate demand for organic ingredients was at least partly responsible for the increase.
“What’s striking is that since 2012, all organic recalls have been driven by bacterial contamination, like salmonella, listeria and hepatitis A, rather than a problem with a label,” Mr. Pollack said. “This is a fairly serious and really important issue because a lot of consumers just aren’t aware of it.”
August 25, 2015
Roger Kimball says Elon Musk is crazy
Oh, sorry, he actually said Musk is “crazy like a visionary“:
I am an unlikely fan of Elon Musk, the flamboyant, Steve Jobs-like (some would say Tony Stark-like) entrepreneur behind SpaceX, SolarCity, Tesla Motors, and other enterprises that seemed like starry-eyed impossibilities a scant decade ago. Musk’s two governing passions, he has said repeatedly, are “sustainable transport” to battle “global warming” and finding a way to make mankind an interplanetary species, beginning with a space colony on Mars.
For my part, the word “sustainable” has me reaching, if not for my revolver, then at least for an air-sickness bag. I regard the whole Green Lobby as a cocktail composed of three parts moralistic hysteria mixed with a jigger of high-proof cynical opportunism (take a look at Al Gore’s winnings from the industry) fortified with a dash of beady-eyed left-wing redistributionist passion. You can never be Green enough, Comrade, and if the data show a 20-year “hiatus” in global warming (so much for Michael Mann’s infamous hockey stick), that’s no reason not to insist that capitalist powerhouses like the United States drastically curtail their CO2 emissions right now, today, while giving egregious polluters like China a decade or more to meet its quotas.
No, when it comes to energy, I often quote, sometimes with attribution, the Manhattan Institute’s Robert Bryce: what the world needs now is cheap, abundant energy, period, full stop, end of discussion. My motto is: frack early, frack often. Do you want to help the poor/clean up the environment/save the spotted wildebeest? Then you need economic growth, and to achieve that you need energy, which at the moment means you need fracking. Q.E.D.
When it comes to interplanetary travel, I suspect that Musk’s passion for transforming us into “space-faring” creatures was heavily influenced by his youthful reading of Isaac Asimov, Robert Heinlein, and (one of his favorites) The Hitchhiker’s Guide to the Galaxy. Not that those adolescent chestnuts necessarily argue against the plausibility of his ambitions. Behind Musk’s enthusiasm for space colonization is a worry that a future “extinction event” might delete human consciousness from the emporium of the universe.
For what it’s worth, I’m very much split on Musk and his works: I generally agree with his desire to help get humanity expanding beyond our single, frail planet … I just wish he wasn’t guzzling down government subsidies to get there. I’ve read the book Kimball is reviewing (Ashlee Vance’s Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future), and I certainly feel I got my money’s worth from the purchase … Musk is potentially a very great man. Right now, he’s a pretty good man who still takes everything he can get from the government.
August 24, 2015
Billionaires, good and bad
In the Washington Post, Ana Swanson examines the good and bad (for economic growth) of the billionaire class:
Over the past few decades, wealth has become more concentrated in the hands of a few global elite. Billionaires like Microsoft founder Bill Gates, Mexican business magnate Carlos Slim Helú and investing phenomenon Warren Buffett play an outsized role in the global economy.
But what does that mean for everyone else? Is the concentration of wealth in the hands of a select group a good thing or a bad thing for the rest of us?
You might be used to hearing criticisms of inequality, but economists actually debate this point. Some argue that inequality can propel growth: They say that since the rich are able to save the most, they can actually afford to finance more business activity, or that the kinds of taxes and redistributive programs that are typically used to spread out wealth are inefficient.
Other economists argue that inequality is a drag on growth. They say it prevents the poor from acquiring the collateral necessary to take out loans to start businesses, or get the education and training necessary for a dynamic economy. Others say inequality leads to political instability that can be economically damaging.
A new study that has been accepted by the Journal of Comparative Economics helps resolve this debate. Using an inventive new way to measure billionaire wealth, Sutirtha Bagchi of Villanova University and Jan Svejnar of Columbia University find that it’s not the level of inequality that matters for growth so much as the reason that inequality happened in the first place.
Specifically, when billionaires get their wealth because of political connections, that wealth inequality tends to drag on the broader economy, the study finds. But when billionaires get their wealth through the market — through business activities that are not related to the government — it does not.
