Is Harry Potter Making You Poorer?
J.K. Rowling is the former welfare mother who wrote the Harry Potter books. She’s worth an estimated $1 billion. That makes her one of the richest self-made women in the world.
I don’t know what her U.S. income is, but I’m sure she is in the top 1 percent. Make that the top 1/10th of 1 percent.
So why should you care? If you’re not a fan, there is no reason why you should. Harry Potter books and Harry Potter movies certainly are not making you any worse off. If you are a fan, you have lots of reasons to care. Rowling has undoubtedly made your life richer. Every time you plunk down the cash needed to buy one more book or see one more movie, you are getting something that is probably much more valuable than what you paid for it. At least I rarely hear anyone complain. The way J.K. Rowling got really, really rich is by making millions of ordinary folks really, really entertained.
Most people get this. One person who doesn’t is Paul Krugman, editorial writer for The New York Times. We are experiencing an “extreme concentration of income,” he writes, and this is “incompatible with real democracy.” It’s “oligarchy, American style,” he complains.
Did you know that every time you buy a ticket to see a Harry Potter movie you are contributing to extreme inequality of wealth? Did you know that you are undermining the foundations of our democracy? Did you know you are helping one more billionaire to get more than her fair share of our national income?
Ah, but wait. Before you succumb to mind-numbing guilt and sink into fits depression, there is a cheerier side to all this. Back before Krugman was churning out folklore designed to make left wing lunacy look respectable, he actually wrote about real economics — which is why he won a Nobel Prize. Let’s tackle the real economics first. Then I’ll return to the folklore.
For more than 100 years there has been a fairly well established economic theory about personal incomes. In fact it’s so well established that it isn’t even controversial. In a market economy, people tend to get the value of what they produce, at the margin.
When J.K. Rowling writes a book, she is creating something new, something of value. She is creating something that would not have existed at all, but for her efforts. This new entity she creates isn’t taking anything away from anybody else. It adds to humanity’s stock of wealth. It doesn’t subtract anything.
The words, “at the margin,” are important here. Let’s say that theater tickets to the latest Harry Potter movie are $8 a piece, and Rowling gets some fraction of that amount. The marginal movie-goer is the one who won’t pay any more than $8. He is paying a price that is exactly equal to what seeing the movie is worth to him. But there are a lot of other people who would have paid $10 to see the movie. Some would have paid $20. These movie-goers are getting something worth a lot more to them than what they have to pay.
Bottom line: The only way Rowling can get rich is by producing products that people want to buy. And whenever Rowling receives a dollar, she has probably created a value worth many times that amount for most of her fans.
This same principle applies to Steve Jobs, Bill Gates, Sam Walton (creator of Wal-Mart), Bernie Marcus (cofounder of Home Depot) and many others. The only way Steve Jobs could get rich is by producing iPads, iPhones and other products that meet our needs. He became rich by making you and me better off.
Here’s something else that’s interesting. The vast majority of all wealth is self-made. Inheritance only accounts for 2 percent of the wealth of millionaires and 9 percent of the wealth of the wealthiest 1 percent. Furthermore, inheritance makes the distribution of wealth more equal, not less equal. That’s because wealth transfers are more important to the poor and the middle class than to the wealthy.
Now let’s turn to the folklore. Many on the left completely ignore wealth creation. They ignore the link between production and income. They think there is a fixed income pie that somehow comes into existence and somehow gets divided. If one person gets a larger slice, everyone else must be getting a smaller slice. The rich are rich because other people are poor.
Now to be fair, Paul Krugman doesn’t actually say any of these things. But I bet that 90 percent of his readers think that he has said those things. That’s because Krugman’s stock-in-trade is writing columns that make economically illiterate readers think that their folklore views are endorsed by a real economist. In fact, there is no other way to make sense of what Krugman writes other than seeing it as an attempt to dress up economic illiteracy in respectable clothing. (I’ve seen Jeffrey Sachs do the same thing on Morning Joe and more recently in The New York Times.)
There is, however, one place in our society where the folklore view is correct. In a lottery, there really is a fixed pie (the prize). Everyone pays in and one person (the winner) walks away with the whole kit and caboodle. In a lottery, one person’s gain is another person’s loss. Lotteries are zero sum games. The winner’s gain is only possible because of everyone else’s loss.
As I have written before, lotteries are the most regressive institution in our society. They take in money from (mostly poor) people and give it to a person who emerges as a multimillionaire. There is no other event in our economic life that creates more inequality more completely and more swiftly than a lottery.
Yet people on the left almost never complain about the unfairness of lotteries. Maybe that’s because lotteries are created by government.
Years ago, Peter Passell told me liberalism is a sociology, not an ideology. If you think it’s an ideology, you will try to make sense of why inequality of intelligence, academic achievement, status, and other personal characteristics is okay, but inequality of income is not. (See David Brooks on which inequalities are PC and which are not and on the difference between red state and blue state inequalities.) If you understand that liberalism is a sociology you won’t try to find sense where there is none.
When trying to explain this to people I take much the same tactic, though I use Mark Zuckerberg, not JK Rowling.
“Income inequality” is a bugaboo. Zuckerberg becoming one of the richest people on the planet has not made you and I poor.
Or I just ask them about a friend or a family member. I ask them “If I give $1000 to your friend, but not to you, have I hurt you?”
Personally I blame Obama for the seemingly recent rise in economic illiteracy. He goes out and incessantly gives these speeches on “fair shares” and other inventions of his, painting a picture of rich people relaxing on the backs of the poor like some pharaoh. The joiners believe it, and suddenly their world view is one in which all the ills that befall them are because some rich person is taking advantage of them/the system/whatever.
The new progressive era that Sachs writes about seems to be little more than misguided youth who all want something for nothing.
An unintended consequence of inheritance tax law is the way wealthy families often create foundations to distribute part of their wealth to worthy causes after death. The pretax cost of diverting money to a foundation is far lower than distributing it to relatives. For instance, if the marginal tax rate is 70% as it was in the 1970s, a benefactor could set up a foundation and bequeath $1 at a cost to his descendants of only $0.30. Say, a scion of industry had three adult children, the cost of contributing $1 for a foundation was only $0.10 apiece per offspring. The problem is that many foundations tend to drift left over time. As a result, there are undoubtedly very well-funded foundations fighting the very causes the original founder supported. This is mostly the result of tax law.
John – Fantastic post ! You are right on. You know some folks say we only use 90% of the capacity of our brains. I’m convinced it is much smaller for liberals.
I think what Krugman and the Occupy Wall Street crowd are getting at is the large part of the 1% who get that way through manipulating laws by using money to buy Congress and state legislators and,yes, courts. Maybe J.K. Rowling made money the creative way, but Warren Buffet just got a special pass from the SEC while he was accumulating a stake in IBM. And just have the average Joe try to get in to see his U.S. Senator. Good luck on that one. Everyone knows that you don’t get to see your elected representative unless you shell out big bucks. The last time I tried to talk to Senator Kay Bailey Hutchinson about health issues, I found that $1000 didn’t even get me 30 seconds. Now the Koch Brothers, I’m sure they know a lot more about health care and all policy matters than the 99 percent who aren’t as rich. Being rich gives you infinite wisdom in these United States. That’s why car dealers and Junior Leaguers get to sit on hospital boards and decide how doctors and which doctors practice medicine. Medicare Advantage HMOs get our tax money to compete against doctors who don’t get that subsidy. Are they creative? I don’t think so. They just have better access to the politicians. They get rich and don’t make anybody better off but their executives and maybe some shareholders. It is naive to pretend that the rich got that way through creativity alone. The one man or woman doesn’t have one vote problem pertains to both Democrats and Repbulicans. Former Texas Medical Association lobbyist Kim Ross once defined the “free market”: “I’ve got the franchise and you don’t.”
Most of the Left does in fact see wealth creation as a lottery, hence, calling people who have wealth “the fortunate of society.” They became wealthy by being fortunate, not by being industrious or visionary. Sadly, conservatives rarely object to this sort of terminology. When someone wants to raise taxes on “the fortunate,” we should correct them and say, “oh, you mean the industrious?”
How do you account for people like Paul Krugman, Michael Moore, et.al., who make a tidy profit from the act of decrying the benefits of capitalism?
Liberalism is advertised and sold on the obverse premise of shared burdens – – “we’re all in this together, etc.” The necessary (but largely unspoken) reverse of that premise is that the resources needed to meet the burdens are shared as well. Liberals believe (when they bother to think about it) that the “idea” of Harry Potter and his adventures belongs as much to them as it does to Rowling; that is the only way they can lay claim to her earnings.
Liberals in the U.S., especially elected officials, generally cannot and do not publicly advocate communism. Instead they create artificial bogeymen who embody some kind of moral sin: in finance, it’s greedy Wall Street executives; in healthcare, it’s greedy payor executives; in general tax policy, it’s “the rich”- – however unnamed and undescribed. Liberals do this to provide the justification for their “taking,” but it is merely a smokescreen to the underlying premise: they are only taking what is already theirs. This post neatly illustrates the incongruence of liberals who insist on both private ownership of resources and public ownership of the burdens of living.
Interestingly, the #Occupy protestors get it. If you read their signs, they say quite clearly that they believe capitalism has failed them. “Income inequality” is the phrase Obama needs to use to avoid saying he is supporting communists. The bottom line of liberalism is that resources – – your fertile fields, in both a literal and metaphorical sense – – and the value that flows from them, belong to everyone.
I had a heated discussion with friends last week on the same issue. The rich are not the bad guys whose sole intention is to make other people poor and miserable. In fact, their wealth creates a lot of opportunities such as jobs, funding for charitable actions and tax revenues for governments. I kept telling my friends that they were blaming the wrong people.
Devon, I believe the tax was 55%. Essentially the law makes one pay taxes on amounts earned, but not distributed. Earnings can easily be legally manipulated. To distribute the funds one might have to pay third parties. Third parties thus can earn substantial amounts of money running a well endowed foundation. I think the max amount is ~30% of earnings. That means the earnings of the foundation can theoretically get passed down to the children and grandchildren etc. Of course that is added to what they earn elsewhere for tax purposes, but the bulk of the foundation can be used to help promote future generations.
The drift you discuss is clearly seen in the Helmsley dog situation. The money was taken from the legitimate owner, the dog, and placed in a foundation chosen by others due to liberal court involvement. It didn’t even go to anything related to animals. The left that complains so much seems to control most of the money in these foundations though I have no data to prove it. It appears our government and courts in many cases believe they are the owners of our work product both while we are alive and after we are dead.
I agree with Brant, the wealthiest have leverage to law makers and politicians and their influence earns them policies and laws that favor them at the expense of those who have less means.
This is neither fair game nor democracy but rather what Jeffrey Sachs referred to as corporatocracy!
Absolutely correct. Sowing and reaping is a universal law. You reap according to how you sow and you reap more than you sow and need others to help you bring in the harvest.
@ Guilliana:
well said
John:
This is a great piece.
Brant and Guilliana note and bemoan the undue influence of the rich in the political spectrum. While the term “money talks” is certainly valid, and has been so since the beginning of time, maybe we should examine the alternatives.
There will always be winners and losers in the final analysis. If there were not we would all probably shoot ourselves in the head out of the terminal boredom of complete equality. If we can use the “Sport of Kings” in analogy we could say in our society we try to make sure that no one jumps the starting gate, but we cannot insure that all horses are equally bred, trained and endowed with equal competitive spirit. Nature requires us to compete to live, and our advanced society quantifies our scores partially with wealth.
So if it is a given that some of us will achieve more than others, but we want to limit the influence of these achievers, what do we do? Where should that power be shifted? Should it be shifted to bureaucrats and politicians who have the power of the legal system (government and guns) to perpetuate their positions? Could the resulting graft and corruption be less dangerous and easier to remedy than “corporate greed”?
I’ll pass on that presumption, and take my chances with wealthy adversaries who are subject to lawsuits, bankruptcy, competition and prosecution.
I think all conservatives agree that the federal government is too big; that lobbyists have too much influence; and that we’l like to see businesses invest less in lobbying and more in innovation and service.
However, unless we fantasize that we will someday live in a perfect society ruled by enlightened princes immune to lobbying, we mut conclude that the lobbyists are less able to guarantee their rents that one might expect.
Look at General Motors and Chrysler: They’ve been industrial behemoths for a century but both went bust (twoce, in Chrysler’s case). Very few businesses have been able to buy political protection for the long term in the U.S. Innovative firms, e.g., Microsoft, Apple, Google, were able to rise up without government favor. (Having risen, they attracted the attention of politicians and had to invest in lobbying.)
All in all, the American system does a pretty good job of disintegrating political power.
I thought Chrysler and GM got bailed out by the taxpayers. And while we’re on that subject, both automakers–instead of designing cars that Americans wanted to buy – spent a lot of time bashing doctors and hospitals. And Dr. Reinhardt: Please answer the question you posed years ago in Medical Economics: “Why is it good when Americans buy cars but bad when they buy health care?” Is it because the auto makers have better lobbyists?
John,if you want to get that deer in the headlights look from a liberal, as him/her if their liberal hero Ted Turner is a modern day robber baron.
Your analysis as usual is spot on.
Sam Walton was very wealthy, and now his heirs are, but most Wal Mart employees earn marginal wages. I don’t understand why people who provide vital services to their societies don’t seem to deserve to earn a decent, liveable wage, but executives in corporations can get millions in bonus paid by taxpayer funded bailouts. Why it was okay that millions of people lost their homes, jobs and any hopes of retirement because others were playing cowboy with their money and got away with it. This seems extremely unfair to me. A good job, a home and retirement are what most people in this country get out of bed for every day but its mostly just a big lie. So I wonder really if our wealthy politicians, bankers and corporate CEO’s who offshore everything do anything to add value to our lives. When the more money you have guarantees you will pay less in taxes than people with less money, or no taxes at all, how is that equal? We’re told we’re wrong for refusing to buy goods produced in other countries and imported here tariff-free, that we hurt our economy by refusing to consume so much, that we put honest, hard working people out of work, but hasn’t that already happened? How can corporations like Wal Mart expect us to buy, buy, buy, when we’re all out of work or making minimum wage? Seems pretty unequal all the way around.
@ Jennie:
Serfs up all over America.
Jennie, exactly on whom are you taking out your frustration? Is it Sam Walton’s company that provides hundreds of thousands of jobs to people? That’s not the same as Wall Street bankers that (through their political connections) were able to get taxpayer funds directed to their interests. Millions (well maybe thousands) of people lost their homes because they couldn’t afford them in the first place. They would not have been in that mess if politicos had not perverted the mortgage market to allow it to happen.
Walmart can hire all the people it hires because of the products it buys cheaper overseas (because of low tariffs). Those jobs would not be there otherwise. Bit if you are saying manufacturing jobs are better than retail jobs, who’s fault is that?
Your frustration is understandable, but I hope your ire is pointed in the right direction.
Jennie, Guilliana and Brant all make some excellent points. The problem is not the free market. The real problem is a government that has far exceeded the constitutional limits of its power and influence. If the federal government allowed bad business to fail rather than bail them out . . . if the federal government didn’t issue regulations that make the cost of entry (competition) and the cost of remaining small (again, competition) prohibitive for many companies in many industries . . . if representatives of the federal government didn’t cozy up to businesses . . . if the federal government didn’t create a tax environment that makes it less expensive to manufacture offshore . . . if the federal government didn’t distort markets, didn’t subsidize the politically favored, didn’t discourage innovation and hard work and just let people alone to interact with those individuals and institutions whose products, services and ideas make them better off, then we’d have a far different society today. And how much do you think it would cost to access a US Senator if the federal government limited its role in our lives to constitutionally-limited activities of protecting the territorial integrity of the United States from foreign invasion, served as a referee in disputes (federal courts limited to interstate issues), conducted peaceful relations with foreign countries and otherwise left us free to apply our labor, time and minds in ways that improve the lives of others?
Outstanding post, Bill.
Excellent article overall, with one big BUT. I was all set to send the link to all my “liberal” family members for their edification, when I saw the last paragraph about liberalism being a “sociology” rather than an “ideology.” Huh? Knowing my relatives, they’re going to hone in on this obscure point and demand an explanation which I will not be able to provide, thereby enabling them to completely evade the point of the rest of the article.
Either leave out that paragraph, or add some explanation of this idea, and then it’ll be an article that can be usefully given to fence-sitters, and to liberals who still have a vestige of open-mindedness.
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