August 5 2014

How Did the Rich Get Rich?

Charlotte Hays

Quote of the Day:

It seems they took a risk.  

--James Pethokoukis on how superrich Americans got that way

That is Pethokoukis' one-sentence summary of the Tax Foundation’s  William McBride’s explanation of how people get rich in the United States. It is in McBride's debunking of “Thomas Piketty’s Fasle Depiction of Wealth in America.”

Piketty, of course, is the left’s economist du jour stoking fears of inequality. Piketty sees the rich primarily as people who have inherited wealth and believes that inherited wealth will come to be concentrated and thus create more (you guessed it) inequality.

McBride’s look at the Fortune 500, however, suggests that wealth is more ephemeral than that and that those who have it are more likely to have it because of their own entrepreneurship than because they have inherited it:

– Of the Forbes 400 from 1987, 327 people have dropped off the list. Of the remaining 73 people, those with the highest annual rates of return are generally self-made entrepreneurs and investors—not heirs—with an average annual real rate of return of 5.6 percent over the last 26 years.

– The rate of return for the Forbes 400 as a whole, 2.4 percent, is roughly equal to Piketty’s estimated returns for the entire population.

– Wealth today is largely generated by entrepreneurial skill, with the number of entrepreneurs on the Forbes 400 list rising from 40 percent in 1982 to 69 percent in 2011.

– The role of inheritance has diminished over the last generation; the share of the Forbes 400 that grew up wealthy has fallen from 60 percent in 1982 to 32 percent today.

Of course, this will not calm the president’s fears about inequality. I suspect he is just as opposed to wealth generated by entrepreneurship as inherited wealth (unless the rich person is a Democratic donor, and that makes it okay). He summed up his view of the self-made rich in his famous “you didn’t build that” speech. Still, McBride’s reality check on Piketty is nice to have.

Hat tip to James Pethokoukis

  

 

 

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