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In this week’s Grumpy Economist Weekly Rant, John Cochrane examines the case for wealth taxes and the misconception that billionaire wealth can simply be redistributed as consumption. Responding to a recent essay by Thomas Piketty, Joseph Stiglitz, and Emmanuel Saez, Cochrane argues that most billionaire wealth is not sitting idle in cash, but invested in businesses, stock, innovation, production, and employment.
Cochrane warns that taxing away business wealth would not create more goods and services for the poor. It would draw resources away from investment, capital formation, and the companies that generate future prosperity. The question, he argues, is not how to divide a fixed pool of wealth, but how to preserve the incentives and productive capacity that have helped reduce poverty and expand opportunity.
Transcript
Hi, I’m John Cochrane, senior fellow here at the Hoover Institution, and welcome to my Grumpy Economist Weekly Rant.
This week, I’m ranting about the wealth tax, a thousand-year-old answer that always has new questions.
And what sparks me is a recent, uh, essay by famous economists Piketty, Stiglitz, and Saez, advocating that we tax away the billionaires’ wealth and hand it out to the world’s poor.
There are many misconceptions about this idea. One I’ll focus on today is the difference between wealth and consumption.
Most of the billionaires’ wealth lies in businesses, stock in businesses that they started, and those businesses are providing great products and services to us, innovation, and hiring lots of people. Just what’s wrong with that?
The billionaires aren’t consuming very much. If Musk even consumes $10 million a year, that’s a hundredth of 1 percent of his wealth.
There’s a mistake to think of this great wealth as a swimming pool of coins like Scrooge McDuck had that could be handed out.
Well, actually, even that wouldn’t work, because if you gave people all that money, they would just drive up prices.
Better yet, maybe people think that the billionaires sit on a great grocery store and that you can just give things to people to consume. That’s not the way it is. It’s invested in companies.
Now, you can’t eat existing companies, but you can try. And if the point is to raise the consumption of the poor, it must come out of investment in our factories.
And without investment, next thing you know, we don’t have the companies, we don’t have the capital stock, and we all become poor.
Perhaps the thought is that they can send us the dividends and the government will take the dividends and give it to the poor, but that doesn’t work either. Most investment comes from reinvested earnings or reinvested dividends, too.
Perhaps you think we can run companies for the benefit of people rather than profit. But we know how well the government does at running companies.
Look at NASA versus SpaceX. NASA is a pretty well-run government agency, but SpaceX is making all the new rockets and making things happen much more cheaply.
There is lots wrong. There isn’t enough money in the billionaires’ wealth to make a dent. Even Musk’s trillion: that would finance US social programs for a year if we could turn that wealth into consumption.
Taking the wealth away would remove the incentives for people to create new companies, and again, we would all end up poor.
World poverty and world inequality have plummeted in our lifetimes, and that has been the benefit of capitalism.
Piketty, Saez, and Stiglitz now embrace degrowth. The poverty and depopulation that socialism brought are now apparently features, not bugs.
“Tax the rich, feed the poor, till there are no rich no more.” That was a song from the rock band Ten Years After when I was young, in 1971.
The impulse goes on, and notice it’s “till there are no rich no more.” Maybe that makes you feel better, but that will do nothing to help the unfortunates in the world.
Thanks for listening, and if you like this Grumpy Economist Weekly Rant, don’t forget to click to subscribe.
John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover Institution at Stanford University. An economist specializing in financial economics and macroeconomics, he is the author of The Fiscal Theory of the Price Level. He also authors a popular Substack called The Grumpy Economist.