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Thursday, March 01, 2007

Enough is Not Enough

Why do the super-rich keep accumulating wealth when they already have more than they or their heirs can ever spend?:

For the Super-Rich, Too Much Is Never Enough, by Austan Goolsbee, Economic Scene, NY Times: ...In February, the Slate 60 list of the year’s biggest philanthropic gifts comes out, followed in March by the Forbes magazine list of the world’s richest people.

This time, one name — Warren E. Buffett — will appear conspicuously on both. His fortune will probably rank second in the world behind only Bill Gates’s... In philanthropy, however, Mr. Buffett is No. 1 by a wide margin. Last year, he shook the world of billionaires by pledging more than $42 billion for charity ..., close to the total of all the Slate 60 donations for the last six years combined. ...

[T]he move by Mr. Buffett raises the question of ... what the other billionaires ... have in mind for their money. According to the economist Christopher Carroll at Johns Hopkins University, in his article “Why Do the Rich Save So Much?,” the ... question ... turns out to be a real puzzle.

The rational economic argument for accumulating wealth says that people want to use it for something: to spend, to give to their families to enhance their future standard of living or to do something philanthropic.

When you look at the Slate 60 list, however, you see that philanthropy can’t be the main reason. ...[T]he super-rich typically do not give away their entire fortunes, or even a big share. That’s what makes Mr. Buffett so notable. ...

Professor Carroll says the super-rich can’t be accumulating the money with the intention of spending it, either, because no one could spend that much.

To see his point, take Oracle’s founder, Lawrence J. Ellison. Mr. Ellison’s net worth last year was around $16 billion. ... With ... a 10 percent rate of return, Mr. Ellison would need to spend more than $30 million a week simply to keep from accumulating more money..., to say nothing of trying to spend down the $16 billion itself.

He spent something like $100 million on his Japanese-style mansion in Woodside, Calif... But ... a house doesn’t actually spend down his net worth because it is an asset that can be resold. ...

Mr. Ellison would have to spend that $30 million a week — $183,000 an hour — on things that can’t be resold, like parties or meals, just to avoid increasing his wealth. While somebody might be able to spend like that — Paris Hilton, maybe — it certainly wouldn’t be easy, and it can’t explain why the super-rich accumulate.

The last of the seemingly rational explanations is that the billionaires want to pass it on to their children. But, again, their fortunes are growing far faster than their number of heirs, so each of the children will have the same problems spending the money that their parents had.

Sam Walton’s fortune is now divided among his family, and the Forbes list will probably show that his children account for 4 of the 10 richest Americans in the world (with his wife being No. 11). The children are in their 50s and 60s, and if they live to be 80, ... their fortunes will rise by four to eight times and they will each have more than they can ever spend or their children can spend, and so on.

Further, the data, according to Professor Carroll, just doesn’t indicate that children make much of a difference. ...[F]or example, ... only 4 percent of the richest Americans said that providing an inheritance ranked in their top five reasons for saving. On top of that, he says, the data shows that elderly super-rich people who do not have children save just as much as the ones who do.

If it isn’t to spend, to give to their children, or to give to charity, then why do the rich save so much? Professor Carroll says maybe they love money, not for what it can buy but just for its own sake. Perhaps they get something different from having money — clout, power, the ability to dominate an industry. Or perhaps these are just competitive people who care about their position compared with other people on the list. They accumulate more so they can lord it over the other families who have less...

However you look at it, though, it isn’t for the reasons that everyone else saves money. In a few weeks, you will see the list of the world’s wealthiest people... Warren Buffett will probably be the only one pledging to give his fortune away. The other billionaires will probably think he’s crazy, but it may make him the most rational person on the list.

    Posted by on Thursday, March 1, 2007 at 02:31 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (97)

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