By Noah Smith / Bloomberg Opinion
If the 2016 presidential campaign was defined by clashes over race and gender, the 2020 campaign is noteworthy for its focus on class and wealth. Of the three front runners, two — Sens. Bernie Sanders and Elizabeth Warren — have made antipathy toward the country’s wealthiest individuals a centerpiece of their campaign. Warren, for example, recently released a campaign mug emblazoned with the phrase “billionaire tears.”
Why the sudden outpouring of class resentment? After all, there were plenty of billionaires in the U.S. during earlier elections, and wealth inequality was quite high for most of the past four decades. But the legitimacy of vast fortunes wasn’t a focus at the time. One reason might be delayed anger at the bursting of the housing bubble, in which many middle-class Americans lost their nest eggs while many wealthy people (who have much of their money in stocks) emerged with little more than a scratch:
This asymmetry might lead some people to wonder if American capitalism is rigged. Psychologists often find that people are willing to tolerate inequality as long as they perceive the system as fair; it’s unfairness combined with inequality that inspires rage.
And that’s a problem for the U.S. economic system because there are a number of mechanisms in place that make the rich less likely than others to suffer catastrophic losses. There are still rags-to-riches stories, but there are few cases of riches-to-rags.
In 1931, a photographer captured a photo of millionaire stock-market investor Fred Bell selling apples on the streets of San Francisco, still wearing a fine suit. Bell had lost everything in the Great Depression, and he wasn’t the only one. Economist Irving Fisher, who had made a fortune inventing what’s now known as the Rolodex, lost it in the crash that he confidently predicted wouldn’t come. Tales of investors and stockbrokers jumping out of windows in 1929 might be a myth, but some rich people really went broke.
That’s simply not as likely today. An entrepreneur whose money is tied up in a highly illiquid private company will lose their fortune if the company goes bust. But although many of today’s extremely wealthy people made their money betting big on one company, once they reach the top they usually diversify their holdings.
Modern financial markets and technology make it very easy to diversify, not just across individual assets but across asset classes. A properly constructed portfolio now includes stocks, bonds and real estate all over the globe in both developed and developing markets. It would take a synchronized worldwide financial crisis more severe than 2008 to make that wealth vanish.
In addition, government policy now treats many of the institutions controlled and owned by wealthy people as too big to fail. The bailouts of the financial crisis may have helped prevent a second Great Depression, but they allowed the owners and creditors of banks and big companies to walk away with their fortunes relatively intact. Meanwhile, the Federal Reserve’s unprecedented monetary easing may have saved millions of Americans from losing their jobs, but it also created a giant windfall for holders of stocks and bonds (whose prices tend to go up when interest rates go down).
Diversification, bailouts and monetary stimulus don’t mean that rich people bear no risk; in fact, falling out of the very top echelons is common. A 2013 study by the Internal Revenue Service found that only 3 percent of the top 400 taxpayers in the country maintained that lofty status for a decade or more, while 72 percent reached it for only one year before dropping out. And a 2014 paper by sociologist Thomas Hirschl found that 12 percent of Americans will experience at least one year of being in the top 1 percent of earners, meaning that most drop out of that group.
But in the modern economy, true riches-to-rags stories tend to require a criminal conviction; such as that of Bernie Madoff or Allen Stanford, who became billionaires running Ponzi schemes. The lack of widespread criminal prosecutions in the wake of the financial crisis is thus understandably a sore spot for many.
A middle class that has learned to live with the constant anxiety and dangers of medical bankruptcies and layoffs may be looking at the wealthy and wondering why they don’t seem to have comparable risks. But the key to allaying a sense of unfairness isn’t to ban diversification or allow financial crises to wreck the economy. Instead, policymakers who want to avoid destructive class conflicts should focus on reducing the risks faced by the middle class. National health insurance and policies to encourage full employment would give those of modest wealth a feeling of greater security. If a middle-class lifestyle is less likely to end in tears, the clamor for billionaire tears might subside.
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.