They don't pay their fair share in taxes. Many of them subsist on government subsidies and bailouts. And some have poor manners, to boot. So, what good are the rich? That's the question I posed to Robert Frank, the long-suffering Wall Street Journal extreme wealth correspondent and author of the new book, High Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble, and Bust.
Well, they do spend a lot. And therein lies an irony. Just as we've constructed an economy in which the top one percent garner the overwhelming share of gains, we've also constructed an economy in which their spending accounts for a hugely disproportionate share of consumer activity. Lots of companies and professionals, it turns out, have business models that rely on catering to the rich. "We have an economy ,a tax system, and financial markets that are increasingly dependent on this group that has most of the wealth and the income," Frank tells me in the accompanying interview.
Take taxes. There's been lots of discussion of what percentage of citizens pay what percentage of taxes at the federal level. But the impact is even more pronounced at the state and local level. "One of the consequences of rising inequality is that the top one percent accounts in some state for more than 40 percent of personal income tax," Frank says. And that exacerbates the boom-bust cycles. After a couple of good years in the markets, states like New York and California receive a gusher of tax revenues from income, bonuses, and capital gains. States then establish the boom-era levels as new revenue and funding baselines. If markets nosedive, high earners with volatile wealth and income suddenly pay fewer taxes. And that can leave states with significant budget problems.
Rich people also spend a lot of money. And in so doing, they provide a lot of employment for those lower down the income scale. Frank notes that the top five percent of earners today account for more than 37 percent of consumer outlays. "Most Americans are very strapped for cash, so they're not spending," said Frank. "And at the top you have an arms race in status spending and conspicuous consumption, which, love it or hate it, creates la lot of jobs." Think of all those employed building yachts and jets, constructing fourth and fifth homes, running catering businesses, and making the hair products that keep Donald Trump's mane aloft.
In the book, Frank quotes Michael Feroli, chief U.S. economist at JP Morgan Chase, on how the rich today are carrying the burden of driving the consumer economy: "The heavy lifting is being done by the upper-income households." To which Frank adds: "if one defines a Birkin bag as heavy, of course."
In recognition of today's hard times, Robert's publisher has given us a couple of copies to give away. Send an email (preferably with your mailing address) to firstname.lastname@example.org to be entered in a drawing for a free copy.
Daniel Gross is economics editor at Yahoo! Finance
Email him at email@example.com; follow him on Twitter @grossdm
- Robert Frank