Ban billionaires? What progressive Democrats don’t understand about the economy

Here are three ideas I’ve come across recently. Let’s break them down.

1. Should we ban billionaires?

Democratic presidential contender Bernie Sanders says we should ban billionaires. It’s all part of the growing trend in the idea of wealth taxes that have become popular with some Democrats.

It sounds like an OK-ish idea if you’re into progressive taxation, but it’s also an impractical idea that is predicated on misunderstandings. For instance, the majority of extremely wealthy people don’t actually have billions of dollars sitting in their bank accounts. They are paper billionaires who mostly own illiquid assets (like corporations or real assets).

If they actually liquidated their assets they might quickly find out that they’re not worth what they think they’re worth.

But it’s also impractical because there’s no reasonable way to value many of those assets. For instance, I might be worth millions of dollars. I have no idea what Orcam Financial Group, my company, is actually worth. But let’s be crazy and assume that the IRS says my firm is worth $50 million (which would be a very inaccurate assessment, by the way).

That means I would have to come up with $500,000 to pay Bernie’s wealth tax. I don’t have $500,000 of liquid Orcam Financial Group stock sitting around. So how am I even supposed to pay this tax? It’s ridiculous.

The idea is completely impractical. A better idea if you’re into this sort of thing is to raise the capital-gains tax since that operates like a wealth tax and is predicated on people actually having liquidated the assets applied to the tax. There are practical ways to deal with this issue, and while wealth taxes are a good campaign slogan, they’re impractical.

Anyhow, Nick Maggiulli had a pretty good assessment of this idea, so take a peak at his post.

2. Does anyone work for a billion dollars?

Here’s another Bernie Sanders supporter making an interesting point about the ultra-rich:

There’s so much wrong here I don’t even know where to start.

The reason Amazon’s

AMZN, +0.71%

 Jeff Bezos is ultra-wealthy is because he worked to make capital investments that contributed to the value of other people’s lives and financial assets.

A socialist utopia where no one invests and the government just hands out thousands of dollars is not a real thing.

Investment is the element of the economy that makes the entire financial system work. Without people investing and spending for future production, we’d all just be borrowing more and more money to consume finite resources and inevitably inflating the value of the money away.

People who spend for future production create value and thereby create demand for money. That demand for money helps maintain the value of money. It creates a virtuous cycle, whereby investment creates demand for money, and demand for more goods and services creates demand for more investment.

If all we had was consumption and people getting paid $5,000 to sit on their rumps, there would be no incentive for investment, and the whole system would inflate away.

If, on the other hand, you took that $5,000 and invested it in something innovative, you’d have the opportunity not only to earn that hypothetical $5,000, but your savings would grow thanks to future investment and compounding.

For instance, at just 2% per year, your investment of just one $5,000 investment grows to $170 million over 527 years. Of course, you need investment to generate the real return and, without it, your $5,000 just withers away.

So, no, this socialist utopia where no one invests and the government just hands out thousands of dollars is not a real thing. It’s a fiction based on misunderstandings of how the value of money is created.

Now, there are perfectly good arguments for higher taxes on the ultra-wealthy. But this idea that they didn’t earn it or didn’t work for it is just wrong on its face. The whole reason they’re worth billions of dollars is because they worked to make capital investments that other people then placed a market value on.

And then their capital investment compounded its face off. It’s not just earned and worked for, it’s entirely validated by the way other people vote on the value of the financial assets they created from nothing.

3. Biblically responsible investing. WHAT. IN. THE. HOLY. HELL? I got this email this morning:

And last week there was a new SEC filing for a biblically themed ETF that would cost 1.9% for any investment under $1 million (thanks to Jeff Ptak).

What is this trash? Look, I was raised a good Catholic boy. I went to Jesuit schools. But those Jesuits also stressed the importance of understanding science and being able to decipher the Bible as a library of guiding narratives and not necessarily a book that was to be read literally.

So I get very concerned when I see high-fee funds that sell a deeply emotional narrative that takes advantage of people trying to do good because the empirical evidence clearly shows that paying high fees and doing good does not necessarily lead to a better return on investment.

In fact, we know pretty definitively that higher fees are the dominant determinant of lower performance, and the higher those fees are, the more likely you are to perform worse. And 2% is an egregious fee structure for any investment product, let alone one that claims to be able to predict which firms will perform well based on the subjective idea of how “good” they are.²

Anyhow, I’ll step off this soapbox now. But, please, don’t buy into this nonsense. Investing is mostly about controlling your emotions, and any strategy predicated on capturing high-fee assets because it sells an emotional narrative is likely to perform worse.

² – I’m not sure what Jesus would think about this, but my guess is that he’d want his biblically themed ETF to be free. Just guessing, though.

Cullen Roche is the author of the Pragmatic Capitalism blog, where this column first appeared. Follow him on Twitter @cullenroche.

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