If you want to know what’s wrong with the economy, I advise that you to turn your attention away from the people who think it’s in rotten shape and focus instead on the people who think it’s doing great.
A New York Times/Siena College poll conducted last week found 93 percent of working-age registered voters rated the economy poor or fair. They’re wrong. The Labor Department reported one day after the survey was completed that 372,000 jobs were created in June, that unemployment remained a very low 3.6 percent, and that hourly wages were up 5.1 percent over the previous year. Wage growth lags inflation, which was up 8.6 percent over the previous year in May and was possibly higher in June (we’ll know Wednesday). But the Fed is on the case, and opinions remain divided about whether the economy will soon be declared in recession. If we do have a recession, it will likely be mild.
It isn’t the pessimists who scare me so much as the optimists at Bain & Company, who, according to a new study, predict that in the next eight years the demand for “wealth management services” will double to $500 billion. The driver, according to Madison Darbyshire of the Financial Times, is “a rising tide of young do-it-yourself investors” coming into large inheritances.
Eight years ago, the French economist Thomas Piketty published a hugely influential book titled Capital in the Twenty-First Century that said the global economy was returning to what Piketty called “patrimonial capitalism,” by which he meant a capitalism driven by wealth inheritance. Reviewing economic data over multiple centuries, Piketty concluded that the return on capital exceeded the rate of economic growth (“r > g”), typically by a factor of four or five.
When Capital in the Twenty-First Century came out, I objected to Piketty’s formula (which, to be fair, he never meant as a scientific equation so much as an observation about how things tended to turn out). I argued that you couldn’t fairly compare the preindustrial global economy, which ended in the late nineteenth century, with the industrial and postindustrial economies that followed it. Life after global industrialization was too radically different from life before it. Instead, you had to confine observation to the period from about 1870 onward. When you did, you got a split decision. For about half that time, return on capital outpaced economic growth. For the other half of that time, it didn’t.
I reached that conclusion eight years ago, and I still think the jury is out on whether r > g in the current economy. But I don’t like the way it’s going.
At the moment, the United States remains mostly not a nation whose richest citizens inherited their fortunes. Among the top 10 in the Forbes 400, all 10 earned their money rather than inherited it. You may not like how they earned it, and you may think the extent to which the market rewarded their business acumen was wildly excessive (which it was). But Jeff Bezos, Elon Musk, Mark Zuckerberg, Bill Gates, et al. all earned their way into the top 10.
The troubling possibility raised by Bain’s new study is that half a century from now, when most or all of today’s 10 richest Americans are dead, we’ll still see the surnames Bezos, Musk, Zuckerberg, and Gates at the top of the Forbes 400 because their children will have taken their places. A possible hint of things to come is the list of the next 10 richest Americans, most of whom are heirs: assorted Kochs, Waltons, and MacKenzie Scott (whose wealth derives from a divorce settlement with Jeff Bezos that’s indistinguishable, economically, from an inheritance).
Granted, rich families are geniuses at dissipating their capital, through either a high-minded commitment to public service (the Kennedys) or a low-minded pursuit of earthly pleasures (assorted Gettys). But the burgeoning wealth management industry is determined not to let this happen in the future. According to the Financial Times’ Darbyshire, growth in the asset management industry (which manages stocks and bonds) is expected over the next decade to lag growth in the wealth management industry (which manages stocks and bonds and protects capital through the establishment of family trusts and other tax-dodging mechanisms). The Bain report is mostly about how wealth management firms can court rich brats of the future by flattering them that they’re socially responsible investors by turning over to them some pittance for recreational day-trading, and so forth.
Revulsion against the prospect that the U.S. would become a wealth aristocracy fueled creation of the progressive income tax in 1913 and the estate tax three years later. One likes to think such revulsion remains an enduring aspect of the national character. But when Illinois Governor Jay Pritzker tried in 2020 to turn his state’s 4.9 percent flat income tax into a mildly progressive tax, voters rejected it. President Joe Biden’s too-modest proposed restoration of the top marginal income tax rate to 39.6 percent, up from the current 37 percent, has still not cleared Congress, and Biden’s fellow Democrats rejected outright his proposed elimination of the “angel of death” loophole that allows capital gains to escape taxation when an investor’s wealth passes on to his heirs. States, meanwhile, are creating opportunities to fund what they unashamedly call “dynasty trusts” that are sheltered from taxation forever. As I wrote last year, public policy increasingly serves the interests (or anyway the money) of the dead at the expense of the living.
That isn’t just bad for society; it’s bad for the economy. The strength of the U.S. economy lies in the belief that through hard work, you can get ahead. That remains true, up to a point (though less true these days than in Western Europe, which has greater economic mobility). Should it cease to be true altogether, economic growth will suffer. Effort demands reward.
Back in the nineteenth century, in Europe, you couldn’t typically reach the top by earning even a comparatively high salary; if you sought serious wealth, your only possibilities were to marry it or be born to it. Bain’s optimistic outlook for the wealth management industry is a possible sign that the same circumstance is aborning in America. Far more than the prospect of a recession, Bain’s sunny prediction should chill you to the bone.
