assassinating the forbes 400 myth, larry summers edition

Everybody is under suspicion
But you don't wanna hear about that...

It is to two economists with the American EnterpriseInstitute, Steven Kaplan and Joshua Rauh, that we owe the meme that the Forbes 400 represents the fruits of social mobility, the rewards of an essentially meritocratic society..

Kaplan and Rauh have divided the individual who find places in the Forbes 400 from 1982 to 2012 into three categories: that that come from wealthy families, those that come from upper middle class families, and those that come from working or middle class families. The claim to discern a distinct change from 1982 to 2012 – the number of individuals coming from wealthy families declines, while those from upper class families increases. Thus, there is churn at the top, due to the meritocratic structure of American capitalism.

Lets go into the ways Kaplan and Rauh are full of hooey.

A.     Granting, for the moment, that the categorization, although a bit fuzzy, does actually represent three different kinds of individuals, we have to trust Kaplan and Rauh on their judgments as to which class individuals fall. They don’t include the list of all individuals on the list – in Peter Bernstein’s book about the list, All the Money in the World, there were 1302 people on the list from 1982 to 2006, which makes it likely that there might have been fifty to one hundred more in the six years after 2006 – but instead give us representative names – which is how we know that they included Bill Gates in the upper middle class group, because his father was a well known lawyer. This tells us a lot about the laziness and bias of the authors. Even a cursory glance at the numerous profiles of Bill Gates over the years would tell you that he was endowed with a million dollar trust fund by his maternal grandfather, who owned a Seattle bank. A million dollars back in the sixties was a figure to reckon with. If one can’t trust the authors about Gates, one of the five names they mention, how are we to trust them about the rest?

B.     Of course, family money is a tricky subject. Carl Icahn definitely came from a middle class family. On the other hand, when Icahn was 32 and wanted to buy a seat on the NYSE, it was certainly convenient that he had an uncle, Elliot Schnall, who was a Palm Beach millionaire and who could loan him the money without questions.

C.     But even granting that there are meritocrats in the purest sense on the 400, like Jeff Bezos, does this prove Kaplan and Rauh’s point? By no means. Because we want to know that wealth is churning in response to meritocratic pressure from below. One of the symptoms of a vigorous churn would be the fact that few 400 figures remain on the list for long. If they do, we have evidence of wealth stratifying in a hierarchical way – wealth is just going to wealth. Go back to Jeff Bezos. He has been on the list since 1999 – giving him a stretch of 15 years. This is not unusual – as is obvious from Bernstein’s appendix in 2006. This fact should lead us to a deeper contextualization about the 400. As almost all economic histories show, between 1932 and 1979, America experienced a great leveling. It wasn’t that the wealthy went away; however, the labor and white collar wage class enjoyed incredible gains in income and opportunity. When you look at the 1982 list, you are looking at dynasts who made it through the leveling period plus that subgroup that benefited ‘meritocratically’ from oil, building, manufacturing, and real estate. In the years since, the list reflects the baby boomer years – year in which, among other things, higher education was relatively cheap and available for the ambitious. We have now reached the period when that group is going into its sixties, and the wealth is definitely settling into place. Along with the perrenial dynasts, there are the long timers  – people who have been on the list 15 years or more – who need to be broken out.

D.     As well, it is unclear from Kaplan and Rauh’s charts if they double count these perennials. If Bezos is counted, each time, as coming from the wage class in their compilation – rather than once, when he entered the list – they are making an elementary error. I suspect they make it. I suspect they know that they are making it. I suspect that they are working for the American Enterprise institute.

E.      However, the larger criticism concerning how well the 400 represents dynastic wealth. In fact, the very framework seems to occlude it. In 1987, CBS news reported that, curiously, there was not a Dupont on the list, even though the Dupont family was worth an estimated 10 billion dollars. CBS resolved this anomoly by pointing out that if each of the 1500 Dupont relatives got a share of that money it would come to 5 million apiece. However, this is a deeply misleading. The Dupont fortune operates as a unified entity through family trusts. As an entity, it is as unified as the ‘Gates’ entity. In a list of individuals going from 1982, sheer mortality and reproduction would naturally diminish the part of the inheritors, but this would not really give us an idea of how much money is under dynastic control. In 1937, a journalist named Lundberg published a book about America’s wealthy dynasties, and the names in it seem foreign to us, who are used to reading about tech barons and hedgefunders. But those families rarely lose their money. The Pitcairns, for instance, who started PPG, have a private family investment fund in which all the family participates. Individually, they would not be on the list, but as an entity, it is a good bet they would be. The same is true for the Weyhaeusers. There are many many families like this.

Forbes recognizes this in other lists – for instance, they simply amalgamate all the Walton wealth into Walton Family on their world billionaires list. But they are very inconsistent about it in the 400 lists. Sometimes children and spouses appear separately, sometimes they don’t.

For all these reasons, Kaplan and Rauh’s 400 proof is a farce. A farce that, I should say, is easily seen through. One doesn’t have to go through some complicated mathematical proof, one simply has to apply elementary social science reasoning. It is the kind of thing that is dogfood for the dogs, rightwing columnists who can wave the paper about and claim to have refuted the socialists and Stalinists once and for all. Only mooks would fall for it.

This is, of course, why it gets an honored place in LarrySummers’ review of Thomas Piketty’s Capital.  Summers, Obama’s favorite economist, the man who design the Clinton era deregulatory architecture – or should I say, instead,  wrecked regulation of the financial markets and helped midwife the depression?  - inserts the following paragraph in gesturing towards other evidence that American wealth is not becoming so unequal:

“A brief look at the Forbes 400 list also provides only limited support for Piketty’s ideas that fortunes are patiently accumulated through reinvestment. When Forbes compared its list of the wealthiest Americans in 1982 and 2012, it found that less than one tenth of the 1982 list was still on the list in 2012, despite the fact that a significant majority of members of the 1982 list would have qualified for the 2012 list if they had accumulated wealth at a real rate of even 4 percent a year. They did not, given pressures to spend, donate, or misinvest their wealth. In a similar vein, the data also indicate, contra Piketty, that the share of the Forbes 400 who inherited their wealth is in sharp decline.”

A brief look here can be defined as the look one gives the index card on which one has copied some “happy facts” to share with the assembled plutocrats at one of Summers $50,000  talks. It is the index card that has the orange sauce from the duck on the corner.

I am not shocked that Summers would publish something this stupid. It is not that Summers is a stupid man – he is, mainly, an “insider” – someone who knows how to “play” in DC, as he famously told Elisabeth Warren.  In the economics profession, Summers is widely regarded as a genius. This says less about the elevation of his intellect than the shallowness of his field – a molehill is an Everest to a herd of aphids.

Like the overwhelming majority of economists, Summers isn’t very good in thinking in broad terms, or understanding the economy and what it is for. He is perpetually like a man standing with his nose three inches from a pointillist painting – he can see all the dots in detail, but he can’t see or imagine the picture. This is fortunate for him – economics is the handmaiden of the plutocrats, and those who step back and begin to see the picture are soon quietly sidelined.