A Tale of Two Fortunes

                                                 

                                A Tale of Two Fortunes

Resentment of wealth is not always mindless, it's just usually bigoted, generalizing from the worst example.

A tale of two fortunes, from Henderson, in Reason:

"The issue of wealth and income inequality, to my mind, is the greatest moral issue of our time," said presidential candidate Sen. Bernie Sanders (I–Vt.). Former Secretary of Labor Robert Reich claims that "great wealth amassed at the top" will cause us to lose democracy. To fight economic inequality, presidential candidate Sen. Elizabeth Warren (D–Mass.) is calling for a 2 percent annual tax on household net worth between $50 million and $1 billion and a 3 percent tax on net worth above $1 billion.

In 1949, Robert McCulloch introduced the 3-25, a one-man chainsaw weighing only 25 pounds. This revolutionized forestry. A friend of mine, now in his late 80s, told me that when he was a teenager, his father made him cut wood for a whole winter of heating a large house. When my friend found out about the 3-25, he used his own allowance to buy one. It changed his life.

McCulloch made a lot of money with his chainsaw. But everyone who bought a 3-25 wanted it. It's likely that almost all of them got a large benefit from the purchase. McCulloch got richer, and so did his customers, who were able to save huge amounts of time and effort. Eventually, competitors produced their own chainsaws to compete with McCulloch's—products that were better, cheaper, or both.

That increased the benefits to consumers while reducing the profits to McCulloch. Still, he made a lot—enough that his innovation almost certainly increased income inequality, by raising McCulloch's income far above most other people's.

Now consider a story in which someone used political power to make himself and his wife very wealthy. In 1942, a young congressman from Texas had a net worth of approximately zero. But by 1963, when he became president of the United States, Lyndon Johnson and his wife had a net worth of about $20 million, a large part of which could be attributed to a license from the Federal Communications Commission (FCC) to operate the radio station KTBC in Austin, Texas.

During the 1964 presidential campaign, Johnson claimed that his wife had turned an asset she bought for $17,500 into a property worth millions by working hard. Not quite. Lyndon had worked hard—at using his political influence as a congressman. Before his wife acquired it, KTBC's owners had spent years trying to get the FCC's permission to sell the station. On January 3, 1943, Lady Bird Johnson filed her application to buy it, and just 24 days later, the owners were suddenly allowed to sell. That June, the future first lady applied for permission to operate for more hours a day and at a much better part of the AM band. She received permission a month later.

While all this was happening, the FCC was under attack by a powerful congressman, Eugene Cox, who wanted to cut the FCC's budget to zero. Lyndon Johnson strategized secretly with an FCC official named Red James and used his influence with House Speaker Sam Rayburn to deflect the attack. James later admitted that he had recommended to Lady Bird that she apply for the license.

Over the subsequent decades, the FCC didn't just clear an easy path when her radio station (and, later, a television station as well) needed an application approved. When a competitor wanted to make a move, the agency would put regulatory barriers in its way. In this manner, Lady Bird's company came to dominate Austin broadcasting.

So here we have two examples of income and wealth inequality increasing. In the first case, inequality increased because a man's company introduced a product that made the lives of those who bought it substantially better, raising their real incomes. In the second case, inequality increased because a politician used his influence to get monopolistic privileges from a federal agency, making the politician wealthier and lowering the real incomes of people in the Austin area.

There are at least two reasons to think differently about these two cases. The first is that McCulloch's actions improved others' well-being in addition to his own, while the Johnsons' actions benefited themselves at the expense of others. The second is why McCulloch's actions had those benevolent social effects and Johnson's didn't. McCulloch's wealth—and the benefits to his customers—were rooted in voluntary transactions in the marketplace. The Johnsons' wealth was rooted in raw political power.