Why Congress Protects Car Dealers More Than Elon Musk - ft. Eric Zwick

Capitalisn't

This episode explores the hidden landscape of American wealth, revealing that most ultra-high-net-worth individuals are not tech billionaires

Key takeaways

• Over 70% of wealth held by households worth $5M+ belongs to people with less than $100M net worth.

Main topics

• Hidden wealth distribution in America

Notable quotes

For every member of the Forbes 400, there are more than 4,000 private business owners worth at least $10 million.

Conclusion

While the American Dream of wealth creation through small business rem

Transcript preview

Speaker 1 (0:00) people's brains are just like distorted by what they are consuming every day about what the problems are and who's really rich in America. And it's a wildly distorted view of reality. Speaker 3 (0:12) I'm Bethany McLean. Did you ever Speaker 5 (0:15) have a moment of doubt about capitalism Speaker 2 (0:17) and whether greed's a good idea? And Speaker 5 (0:19) I'm Luigi Zingales. We have socialism for the very rich, rugged individualism for the poor. Speaker 3 (0:26) And this is Capital Isn't, a podcast about what is working in capitalism. Speaker 5 (0:30) First of Speaker 4 (0:30) all, tell me, is there some society you know that doesn't run on greed? And most importantly, what isn't? We Speaker 5 (0:37) ought to do better by the people that get left behind. I don't think we should have killed the capital system in the process. Speaker 3 (0:43) So Elon Musk has officially become the world's first and only trillionaire, leaving behind 14 other Americans who are worth more than $100 billion and 142 who are worth more than $10 billion. The number of simple billionaires, just plain old billionaires, is roughly 1,000. Speaker 4 (0:58) These people get all the attention, but what amount of wealth in America do they actually represent? Surprisingly little. Of all the money held by American households worth more than $5 million, billionaires represent... Only 10%. So Speaker 3 (1:14) the question is, who has the rest? Speaker 4 (1:17) It is the people nobody writes about and most people barely even think about. It is the beer distributor in your town, the dentist with multiple offices, the HVAC contractor whose tracks you see every day. Speaker 3 (1:30) It turns out that 70 % of the money held by households with $5 million or more is owned by people worth no more than $100 million. So not Wall Street, not Silicon Valley, Main Street. Another way to think about this, for each member of the Forbes 400 list of America's wealthiest people, the authors of a new book called The Everywhere Millionaire, Who is Really Rich and How They Got There, find that there are more than 4,000 owners of private businesses who are worth at least $10 million apiece. Speaker 4 (1:56) We're very fortunate to have as a guest today, Eric Zwig, professor of economics and finance at the University of Chicago Booth School of Business and co-author of the forthcoming book, The Everywhere Millionaire. Speaker 3 (2:08) For years, Eric has had exclusive access to numbers many never see. IRS data, yes, your tax return and mine, but anonymous. And thus, he has easily become the world expert on income and wealth distribution. Speaker 4 (2:21) Zwick argues that the American rich are far more numerous, far more scattered, and far more ordinary than our picture of inequality suggests. They call them Main Street millionaires, private business owners with at least $5 million. Speaker 3 (2:39) The central thesis of your book is that the American rich are much more numerous, geographically dispersed, and rooted in ordinary private businesses than our usual picture of inequality suggests. Yet the answer depends a lot on the way you define rich. If you define the rich as over $100 million of net worth, can you arrive at the same conclusion? Speaker 1 (2:57) Over $100 million, for sure. You would still have tens of thousands of people there as opposed to the Forbes 400, maybe close to 100,000, depending on... exactly where the cutoff is. And collectively, their net worth would be much more geographically dispersed. The source of it would also be much more diverse than, say, a bunch of tech and Wall Street bros. And I think their stories would be a lot more nuanced than, say, Elon, Zuckerberg, Bezos, those stories that we hear over and over at Infinitum. We call them the everywhere millionaires or the Main Street millionaires. We say if you have more than $5 million in net worth and you own a... closely held business or you're a business owner, basically. We're going to classify you as a Main Street millionaire. This is a group that includes about 3 million Americans, roughly. So it's between the top 1 % and 2 % of people. So it's a bit broader. But then if you go up to the centimillionaires, I think our story is still holding up quite well. Speaker 4 (3:57) Now, you calculate people's wealth based on two different sources. Can you explain to our listeners what they are and what biases there might be? Why this is such a source of controversy. Speaker 1 (4:10) So there's no administrative data source that directly measures wealth in the United States. To measure wealth specifically, you have to draw on either high quality, but very small sample surveys conducted by the Federal Reserve called the Survey of Consumer Finances. And it's, I think, quite high quality, you know, for its purposes. We have to understand its limitations, which is that it's a very, very limited set. Then... The census has basically no information. The Forbes 400, well, that's 400 people that Forbes does its best to try and figure out who the richest people are, but they're going to be biased geographically by the location of the journalists a little bit. They're going to be biased towards public companies because those ones you can see because those are listed companies and the owners of those companies will be biased towards the rich people who want to be seen. Maybe imagine a few that like to buy media companies to get into the public eye. So it tends to miss the reclusive mirror. One, two, three billionaire, of which there are many. And then, you know, the data that we draw it on to try and measure wealth was administrative income tax data. That's anonymized. So we don't know who the individuals are. Like we don't see their names, but you do have everybody, but you only have the income flows. So then to figure out wealth, you have to kind of guess, make some assumptions for measuring wealth, which we do, which others have done to try and get estimates. But that's sort of like the constellation of available data on this thing. And that's one of the sources that we use in our research to try and figure out who these people are. But something that struck us when we even looked at Forbes, more than half of the Forbes 400 list are private company owners, not these public company owners. So you go below the top 10 or top 15, you start to see more mundane business owners, private business owners that are kind of similar to the Main Street Millionaires. The problem is that we're really fixated on... these billionaires, not that we shouldn't pay attention to the loopholes that they benefit from, but it's just like not sufficient to characterize inequality, to solve our fiscal problems and so on, to focus only on them when this huge class gets so much less attention. Speaker 4 (6:17) One thing that I find strange is you emphasize a lot that we shouldn't focus on the billionaire or the hundred millionaire. But then all of your examples, basically, in the book are in that category, starting with my favorite one of the hot dog stand, Portillo. Speaker 1 (6:35) So Portillo, it's an amazing story of like a Chicago fast, casual hot dog stand restaurateur that over 40, 50 years grew a business into. being able to sell it to a private equity investor for around a billion dollars. You know, Musk and Bezos and these types are like hundred billionaires. And if we look at wealth tax proposals and these kinds of things, it's really about the hundred billionaires, like a handful of people, not this larger group. But, you know, we... Found some of these stories like Portillo's quite interesting and illustrative, but a lot of the stories that we tell are people who made $50, $75 million selling, you know, ready to order quiche or running a series of franchises of waxing and tanning salons, making a $5 toothbrush. These are mere hundred millionaires, right? So I think we're trying to interested in up and down the scale with like a threshold basically above which. Most Americans would agree that this person seems quite rich. And I think that's like a pretty interesting set of people to learn about. Speaker 3 (7:40) So there is one set of people or institutions who figured this out before you did, and that is the private equity firms. And they've been active for a while and buying up some of these previously family-owned business. How does that dynamic change the story that you tell? Do you see that happening at scale too? And did you come across those stories as you were talking to people? And do you see that starting to shift the dynamic here? Speaker 1 (8:05) So I teach private equity and venture capital in my day job as a business school professor. So I've been sort of fascinated by this. And there's this amazing Matt Levine quote that we talk about in the book where it's sort of like, what are you doing with your career? Oh, I'm like going to Harvard Business School so that I can go to a private equity shop to run a plumbing business in like Georgia or something like that. And we view that as sort of an important lesson about how broad this phenomenon is that's kind of transforming finance over this multi-decade period, attracting capital. because they see how much money is there. They usually enter when there's no natural heir, no natural successor. You know, the people who are the founders usually make off quite well. The private equity people make off okay. The workers, it's a mix of good, bad, and ugly. I think we talk about stories of all kinds. And then we talk about MBA students who don't even want to go the private equity route. They just want to go direct and like go find even smaller business to... to buy from a founder and run an operator that's called a search fund. And we have some vignettes about search funders, which I think is an interesting way that sort of the allocation of human capital and finance is being tilted towards this world. I don't think it's changing it, but it's sort of present. It also increases the net worth of the ones who haven't sold. It creates an exit opportunity for people in the U.S. that's like less present in other countries. They basically convert this really illiquid asset that they have, which is their business. into something that they can consume. I think a lot of the characters, we end up being able to find them and identify them because we can't use the tax data for that. Or once you did get to that phase of exiting through private equity acquisition, because then it gets a little bit of publicity and we can learn a little bit more. And that's when they typically go and buy the yacht or the jet or whatever that we use to find them in our yacht and jet registration data. Speaker 4 (9:59) So in reading the book, I struggle a little bit because what I would like to have an answer to is the question of, is this accumulation of wealth good overall for the economy? It's certainly good for the people accumulating the wealth, but is it good for the economy or not? And why people make such an extraordinary amount of money is that they are extraordinarily lucky, is they're extraordinarily creative. Or is that the system is not really competitive and they take advantage of that? At the end of the day, I come with a very mixed view, but I would like to know your view. After doing this analysis, what do you come down to? And it's just, you know, this policy advisor of Alexander Ocasio-Cortez said that every billionaire is a policy failure. So I want to paraphrase this today. Is it true that every 100 millionaire is... an antitrust failure. Speaker 1 (10:55) Right. No, I don't think so. One of the reasons we tried to write the book in the way we did with like a lot of narrative and a lot of profiles of different people is because there's a lot of richness and nuance to the story of who the top 1 % is. There's a lot of Speaker 4 (11:10) richness in the rich. Speaker 1 (11:11) Yes, they're very rich. It's rich and textured and nuanced, which, you know, in the comic book morality of our times is not necessarily what we're used to. But I sort of feel like there's room for both good and bad stories. Portillo. That's like massively competitive. So fast casual restaurants, how many brands open, close, how many shops open and close. So to do that successfully, I mean, there was a Scandinavian economist who read that chapter and just like couldn't believe that it was possible to make a billion dollars selling hot dogs. Must be market power. Basically couldn't even fathom that it was possible. So that's one example. But we have another example, another Chicago example, since we're here, I might as well. Mike Madigan, who was, you know. Speaker of the House is state of Illinois, like the longest running leader of a legislative body. We classify him as a Main Street millionaire. His business was property tax appeals for commercial properties. And this person, you know, was indicted. Eventually, I think is like in the process of like being exonerated or like having being dismissed or something. So this is alleged. But then you can read the indictment was like sort of shaking down people for those property tax deals. and made over a million dollars a year, many years, running that law firm with his partner. So, you know, there's room in our story and in the top 1 % for both Portillo and Mike Madigan. And