In a recent article in the Washington Post, blogger Ana Swanson reported on a new study in the field of economics that found some revealing and, perhaps, surprising results. The article, entitled, Why some billionaires are bad for growth, and others aren’t, summarizes the findings of two economists, Sutirtha Bagchi of Villanova University and Jan Svejnar of Columbia University. (Note: Bagchi and Svejnar published their findings in the Journal of Comparative Economics and a summary of their findings is available at the link.)
In their analysis, Bagchi and Svejnar, took Forbes magazine annual list ranking the world’s billionaires, normalized the raw data to account for country size (either by GDP or by population or somehow – Swanson wasn’t particularly clear on this point), and then correlated the result with economic conditions in the country as a whole. According to Swanson, what the pair concluded was that as wealth inequality grew so did economic conditions for the general citizen worsen in the form of slower economic growth.
Also, the Bagchi and Svejnar correlated a percentage of the billionaires’ wealth to their political connections to the government. This measure of cronyism is supposed to help shed light on the positive and negative mechanisms that cause concentrations of capitol to exist in a country and that lead to wealth inequality. To illustrate this point, Swanson notes that the United Kingdom and Indonesia have similar Gini coefficients (I found them to be 38.1 and 38.0, respectively, in the World Bank Gini coefficient table) but that the business climate in these two countries are quite different.
The implication of this further analysis helps justify the title of the article – namely that not all concentrations of capitol come about for the same reasons and some billionaires are better than others.
In a nutshell, what Bagchi and Svejnar concluded were:
- Gini coefficient doesn’t tell the whole story determining national growth
- Cronyism is a drag on the economy
- Innovation isn’t a drag on the economy
Wow! What a big surprise. I would never have seen that coming. Some billionaires actually deserve their fortunes because they enable rather than impede growth. To be fair, Bagchi and Svejnar didn’t actually state that billionaires who earned their money without political connections helped economic growth, simply that they didn’t impede it.
There are really two points that are worth addressing. The first one is on methodology. The second is on economic and philosophical outlook.
The methodology employed in the study requires one take the data with a grain of salt. For example, a few, simple queries of the Forbes list, Google, and the World Bank find the following data for Columbia and the United States.
| Country | ||
|---|---|---|
| Columbia | United States | |
| Number of billionaires | 3 | 536 |
| Billionaire Wealth Held ($B) | 18.5 | 2564.4 |
| Percentage Cronyism | 84 | 1 |
| Country GDP ($B) | 380.1 | 18124 |
| Billionaire Wealth held as % of GDP | 4.9 | 14.1 |
| Crony Wealth Held as % of GDP | 4.1 | 1.4 |
| Growth Rate (2013) | 4.7 | 2.2 |
| World Bank Gini Coefficient | 54.2 | 41.1 |
The data in this table do support the idea that the larger percentage of billionaires in the population the slower the growth as the percentage of billionaire-held wealth in the US is almost 3 times higher than that in Columbia. But that’s where the data stop making sense. Bagchi and Svejnar determined that 84% of the billionaire-held wealth in Colombia is due to political ties with the government. In other words, it is due to cronyism. In contrast, they found that only 1% of the billionaire-held wealth in the US is due to cronyism. Making the required adjustments, I found that ratio of Crony Wealth to GDP was 4.1% for Colombia versus 1.4% for the US and yet the Colombian GDP growth rate is double that of the US. Paradoxically, the Gini coefficient, which measures income inequality and is supposed to not be a reliable indicator of the harm that concentrations of capitol have on an economy, seems to be much more correlated with the Bagchi-Svejnar conclusion than their measure of ‘politically-connected wealth inequality’.
Perhaps the way that they chose to classify billionaire-held wealth is the problem. Well, I don’t have access to the original article so I can only quote what Swanson said
Now I’m not asserting that the Bagchi-Svejnar conclusions aren’t correct. They may be for all I know. I am asserting that there seem to be correlations that support some of their conclusions and others that don’t. Causation is another thing entirely.
Now on to the second point on the economic philosophy behind this whole revelatory study. Basically, these two economists claim to have discovered a data-driven conclusion that it matters how people get that wealth and how the government spends its money. In other words, that the basic neo-Keynesian idea about money and spending is wrong. That it is not enough for an economy to get money moving. That is does matter if the work is productive. That those who say “Go ahead and dig ditches even if you have to fill those ditches back up again. All that matters is that we’ve kept busy.” are wrong.
Of course, Bagchi and Svejnar may not say it quite that way but the conclusion is inescapable. For that matter, Ana Swanson may not say it that either but how else can one interpret the subtitle of her article ‘Not all inequality is created equal’!