There was an interesting little dialogue on Twitter yesterday between me and Will Wilkinson, who blogs for the Economist. It went like this:
Wilkinson: What financial reforms could be reasonably expected to both improve allocation of capital & slow top 1% income growth?
Stoll: Why is "slow top 1% income growth" a goal? Why not speed up everyone else?
Wilkinson: There is a well-founded suspicion, which I share, that the financial sector has distributed upward without boosting growth.
Stoll: Plenty of top 1% not in financial sector. Oprah, Steve Jobs, Zuckerberg, Brin, pro athletes, actors, cardiac surgeons, Bezos
Wilkinson: Sure. For much of this set, we can slow wealth-accumulation while improving efficiency by reconfiguring IP rights.
Stoll: ok, but same question for non-financial 1%: why do you want to slow their wealth accumulation? Why not just raise the rest?
Wilkinson: If a small % reaps huge gains in a way that doesn't payoff for others, the rules that produce that result are probs a problem.
Wilkinson: That is to say, seems quite likely that speeding growth for the rest requires rewriting rules that benefit *only* the top.
I'd just add a few points. First, the distinction between the "financial sector" and the rest of the economy is not always as bright-line clear as critics of the financial sector would have it. One example of this would be Warren Buffett and Berkshire Hathaway. Are Mr. Buffett and Berkshire part of the financial sector because Mr. Buffett allocates capital for a living and a big part of the business is investing the float of insurance companies? Or is it the non-financial sector because he owns tangible businesses such as newspapers, Dairy Queen, furniture stores, and See's Candies? Other examples are private equity fund managers who own retailers or manufacturers, or venture capital fund managers who invest in software or energy startups. Are they in the financial sector because they are fund managers, or are they in the rest of the economy because the underlying businesses in which they invest are non-financial? It's a bit of a false dichotomy.
Second, Mr. Wilkinson's response to my question about "Oprah, Steve Jobs, Zuckerberg, Brin, pro athletes, actors, cardiac surgeons, Bezos" was to say that it is a problem "if a small % reaps huge gains in a way that doesn't payoff for others." But in each of those cases, there is a payoff for others. It may not be a financial payoff, but there's an increase in welfare. Steve Jobs gained because he got rich from Apple, and all those iPhone and iPod and Mac users gained too, because they got devices that they enjoyed using or that made them more productive, which is why those customers will willing, voluntarily, to pay money for the devices. The cardiac surgeons are getting rich, and the patients are enjoying extra years of life because of the stents or bypass operations. Jeff Bezos is rich, and tens of millions of Amazon customers now can benefit from the convenience of shopping without having to leave the house and can save money because of the increased price transparency of online as opposed to in-store shopping. In other words, it's not always a zero-sum game in which the 1% prosper at the expense of everyone else. Instead, it's often a win-win game in which the 1% prosper by creating products or services that do pay off for others.