Bashing Billionaires: 'Tis the Season

Dec. 10, 2010— -- Is society better off when the rich give away their wealth, or when they keep it tight in their well-manicured hands? It depends, say economists.

Earlier this year, Carlos Slim, Mexico's (and the world's) richest man, kicked up something of a philanthropic ruckus when he questioned the social value of giving away his money -- some $53.5 billion.

"Trillions of dollars have been given to charity in the past 50 years," said Slim, at a conference meant to promote charitable giving. "They don't solve anything."

You could have heard a shrimp fork drop. Other conference attendees included donors who have pledged to give away at least half their wealth, including Bill Gates and Warren Buffett.

To give away 50 percent of one's wealth, Slim said, is to accomplish "nothing." Better to hang on to it and use it to build your own business, thereby creating jobs. "The only way to fight poverty is with employment."

Slim is no Scrooge. He provides employment around the world for thousands and has contributed tens of millions of dollars to foundations. Some might view his investment in the money-losing New York Times as an act of charity. But his comments begged the question: what should the rich do with their money?

The answer turns in part on whether the billionaire is still in the creative phase of his (or her) career, says economist Lawrence J. White of New York City's Stern School of Business.

If the wealth-creator is still financing new ventures out of his own pocket, then society is better off if he keeps his money. Having the young Bill Gates hang on to and invest his tenth million produces more social good -- through job creation, say -- than young Gates' giving the same amount to charity.

Past economists, including Milton Friedman and Friedrich Hayek, have argued that the rich serve another economic purpose: Just by being rich, they constitute a class of consumers able to buy costly things -- and "costly" often is synonymous with "new." TVs, cell phones, cars, supercomputers -- all were prohibitively expensive when they first came to market. Yet they came, in part, because manufacturers knew there were people rich enough to buy them.

Economist and author Gary Shilling, president of AGS & Co. investment advisors, subscribes to this view.

"At this very minute," says Shilling, "there's some new device coming out that lets you watch first-run movies at home -- on the same day the film appears in theaters. It's ridiculously expensive. Only the very wealthy will be able to afford it." But the fact they can afford it guarantees that it will come. "If it succeeds, of course, more of these systems will be made, and the price will come down." That allows consumers of lesser means to enjoy the same benefit.

The rich function, too, as poster children for success, as motivators. Personifications of reward, they dangle carrot-like from the economy's stick. "There are people who will create without reward," says White. He cites some artists. "It's like Gene Kelley says -- they've just 'gotta dance.'"

Lesser mortals, though, need motivation. "The rich inspire creativity. It's the aspiration of becoming rich that motivates someone to come up with the better mousetrap. That's where our golden eggs keep coming from. If there were no rewards, maybe people would not put in the effort."

How much reward must society provide? White doesn't know, but says, "I would be real reluctant to impose a limit on wealth accumulation. At the same time, we have a substantial income distribution problem in this country, and it's gotten worse over the past few decades. I'm prepared to see redistribution efforts, provided we continue to maintain incentives not just for the better mousetrap but for better software, for a baseball hitter who can hit 300 -- all those things. We need market rewards."

George Gilder, author of the book "Wealth and Poverty," argues that the self-made rich serve as multipliers of wealth: "The people who create wealth know best how to make more of it," he says. A wealthy individual can move from one investment to another quickly, unilaterally, making bets more daring and unconventional than could an institution.

"The wealthy back things others might regard as nonsensical or outrageous -- like airplanes, junk bonds or Wal-Mart. Imagine putting all those huge stores out in the boondocks."

White cautions, however, that questions of social utility are complex. Charity itself is an investment, even if its return is hard to measure.

"Always, there are tradeoffs," he says. "If we devote resources to raising up the bottom end of society, we may do so at the cost of lower economic growth, a lower standard of living. There's no such thing as an easy answer."