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Rich jerks in space

from Dean Baker

As a big fan of the original Star Trek, I have to confess that it was kind of neat to see Captain Kirk actually go into space. But there is a real issue here about the silly games of the super-rich that is worth some thought.

There have been numerous stories and papers about the huge increase in the wealth of the super-rich since the pandemic began. Virtually all of this is due to the run-up in the stock market during this period. Part of that is bounce back, the S&P 500 lost almost one-third of its value between its pre-pandemic peak in February of 2020 and its pandemic trough a month later. If we want to tell a really dramatic story we can start at the pandemic trough and take the rise in the stock market from March 20th.

But even if we are being serious, there has been an extraordinary runup in the stock market in the last twenty months. The S&P 500 is more than one-third higher than its pre-pandemic peak.

There are several different explanations for this increase. One is simply that low-interest rates generally boost stock prices. Interest rates did plummet during the pandemic shutdown, with the 10-year Treasury rate falling from a bit over 1.8 percent in February of 2020 to lows of under 0.6 percent last summer. As a general rule, lower interest rates will mean higher stock prices.

But this explanation will not go too far: the interest rate on 10-year Treasury bonds is currently over 1.6 percent. The gap between a 1.8 percent pre-pandemic Treasury yield and the current 1.6 percent yield could only explain a small portion of the rise in the stock market.

A second possibility is that stock investors are genuinely optimistic about the outlook for future profits. People are often confused about what the stock market is supposed to measure. Stock investors don’t give a damn about the future of the economy, they are asking about the future profits of Amazon, Facebook, and other stocks that they hold. If they think that their profit picture looks good, then they are willing to pay more for their shares.

This could be because they think that the economy will do well and that all the doomsayers in the media don’t have a clue. If the economy has strong growth in 2022 and 2023 and corporations get their share in higher profits, then high stock prices might be justified.

An alternative story would be that they expect the recent shift from wages to profits to continue. In this case, profit growth could be strong even if economic growth is not. This would again mean that all the people whining in the media, about companies being squeezed by rising labor costs, are clueless. But, what else is new?

And, there is the third possibility that we are just seeing another case of irrational exuberance. The possibility that there is no rational basis for stock prices should not seem strange to anyone who saw the collapse of the stock bubble at the end of the 1990s and the collapse of the housing bubble from 2007 to 2009. Investors are often ignorant of economic fundamentals, so it is certainly possible that there was no economic basis for the run-up in stock prices over the last 20 months.

But, whatever the rationale, there is no dispute that the run-up in stock prices has made the super-rich much wealthier. The question is how much should we worry about this.

I have always said that I am not very concerned about wealth inequality. It is poorly measured and highly volatile. I am far more concerned about income inequality.

I recognize the political power that is associated with extreme wealth, but I don’t believe the people who make this argument have given it serious thought. Suppose we cut the wealth of the super-rich by 50 percent or even 75 percent. Will Jeff Bezos lack the resources to push his political agenda if he only had $50 billion at his disposal? If we want to address the enormous gap in political power created by extremes of wealth, we have to look for ways to build the power of those at the middle and bottom. The idea that we will do it by reducing the wealth of those at the top is hardly plausible.

What About Space?

Okay, so what does all this have to with Captain Kirk going into space? If we think about how the extremes of wealth can hurt the rest of us, it gets back to their command over resources in the economy. This is the story of the clogged supply chain and overloaded ports. We are demanding more goods and services than the economy can deliver just now.

The space flights being promoted by Jeff Bezos, Richard Branson, and presumably Elon Musk, involve an enormous use of resources. It takes large numbers of often highly skilled people to plan and monitor these space flights. With the enormous amount of free advertising the media has given these ventures, we can expect that many more very rich people will be getting in line to take their trips into space.[1]

This will mean pulling many workers away from areas where they could be doing more productive work, like designing better solar and wind energy systems, better batteries for storing energy, and better ways to produce vaccines and drugs. This will be a real cost to the economy.

The frivolous use of large amounts of resources by the very rich is a problem for the economy and society. This is distinct from their wealth as a bookkeeping entry. For example, Warren Buffet is one of the richest people in the world, but by all accounts, he lives a very modest lifestyle. If his wealth doubled it is hard to see why it would create any major economic issues. On the other hand, if the billionaire gang manage to make space travel a major form of recreation for the very rich, this is a real problem.

I don’t have any great plans for stopping the latest space race. I have always argued that the best way to prevent extreme inequality is to stop structuring the market in ways that generate extreme inequality. This means less reliance on patents and copyrights as mechanisms for financing innovation and creative work. It means downsizing the financial sector by structuring it in ways that promote efficiency, not extreme wealth for the few. And, having a corporate governance structure that doesn’t make it so easy for CEOs and top management to rip off the companies they work for.

These, and other issues, are addressed in Rigged, but the main point here is that we should try to keep our eyes on the ball.  Wealth as a bookkeeping entry should be largely a matter of indifference to the rest of us. When the super-rich pull away large amounts of resources for their fun and games, that is a big problem.

[1] I’ll skip the obvious joke that the problem isn’t sending rich people into space, it is bringing them back.

  1. TomS
    October 22, 2021 at 8:38 am

    As we are of similar age, I was not only a fan of Star Trek, but also watched the Muppet Show. Somehow the “Pigs in Space” gig was more visionary that I realized then.

    Misallocation of resources is often attributed by economists to wrong incentives or prices. So the cost of space travel should be much higher that what they are right now (hopefully they don’t receive subsidies somewhere along the road).
    And at the very least the costs should cover the enormous impact on the environment.

    For those who missed the Pigs in Space:
    pollution:

    and the meaning of it all:

    • Ikonoclast
      October 22, 2021 at 11:15 am

      That first clip is uncannily like the plot of the movie “Gravity”, 2013, starring Sandra Bullock and George Clooney. I mean the space junk, being knocked away from the ship and then being in a space can again and seeing an hallucinated ex or to-be lover… or something. It really just shows the merry-go-round of space drama narrative memes, of course. Those memes were old when Pigs in Space satirized them. Then the writers of Gravity used them all over again. There’s nothing new under the sun, in Hollywood.

      “How much of you is repetition?” – Sixto Rodriguez.

  2. Hepion
    October 29, 2021 at 10:17 am

    Could the 6 trillion used in pandemic stimulus perhaps, maybe, have something to do with buoyant stock prices?

    Money makes world go around

  3. Ken Zimmerman
    November 2, 2021 at 7:20 am

    In a story published by the Washington Post three days ago, (Two doors, few windows and 4,500 students: Architect quits over billionaire’s mega dorm) 97-year-old Charlie Munger, vice chairman at Berkshire Hathaway, has donated hundreds of millions of dollars to universities and high schools to build school facilities he designed himself. But the amateur architect’s latest idea for a mostly windowless mega-dorm to be built on the University of California at Santa Barbara campus faced objection this week when a university architectural consultant quit, calling the plan “unsupportable from my perspective as an architect, a parent, and a human being.”

    Dennis McFadden, a Los Angeles architect and member of the university’s design review committee of 15 years, wrote in his resignation letter that he was “disturbed” by the 11-story, 1.68 million-square-foot building with just two entrances. The massive dorm would house 4,500 students, 94 percent of whom would not have windows in their compact single-occupancy bedrooms. McFadden called the dorm the “wrong answer” to the need for more housing ― raising the question of how much authority wealthy donors have when it comes to planning the buildings on which their names are etched.

    “As the ‘vision’ of a single donor, the building is a social and psychological experiment with an unknown impact on the lives and personal development of the undergraduates the university serves,” McFadden wrote in the letter, first reported by student-run newspaper the Daily Nexus and community outlet the Santa Barbara Independent. Munger, who has no formal architecture training, says he’s unfazed by McFadden’s objections, telling The Washington Post that “this is not some crazy idea.” He said his plan has been in the works for years and compared virtual windows that would simulate sunlight in the dorm rooms to those in Disney cruise staterooms.

    The $1.5 billion project, of which Munger is contributing $200 million, will proceed despite McFadden’s letter, a university spokeswoman said. “We are delighted to be moving forward with this transformational project that directly addresses the campus’s great need for more student housing,” Andrea Estrada wrote in a statement to The Post. “We are grateful for Mr. McFadden’s contributions and insights during his tenure as an advisory consultant,” Estrada added. “We believe that it is a valuable part of our process to consider multiple design perspectives, which is why we ask several external consultants to assist with our project reviews.” Munger has previously called conventional architecture “massively stupid,” earning him little favor among professionals. “Architects don’t love me,” he told the Wall Street Journal in 2019. “Either I change architects, or he does it my way.”

    Munger said he approaches designing buildings as he would investing: with extreme rationalism. After years of hearing family members complain about sharing bedrooms in communal college dorms, Munger realized it was possible to give people their own sleeping space by sacrificing the rooms’ natural light. “I was bound by the conventions when I realized how stupid it was,” he said. “Naturally, I was sort of ashamed taking so long to reach such an obvious conclusion.”

    Munger rejected McFadden’s claim that the plan had little input, saying he has spent years on the project with architectural firms. “I’m not anti-architecture,” he said. “I just love it in a different way.” His idea has earned the praise of school officials. UC-Santa Barbara Chancellor Henry T. Yang called Munger’s design “inspired and revolutionary.”

    McFadden resigned following the presentation of the plan at an Oct. 5 design review committee meeting. During the meeting, Navy Banvard, the architect for Munger Hall, told the committee members that the bedrooms will have “virtual windows that simulate daylight,” the Daily Nexus reported. McFadden wrote that “an ample body of documented evidence shows that interior environments with access to natural light, air and views to nature improve both the physical and mental wellbeing of occupants.” “The Munger Hall design ignores this evidence and seems to take the position that it doesn’t matter.”

    Some builders have cut out windows with the goal of enhancing workplace productivity or heightening security, but architects who favor the light they provide argue windows are necessary for sustainability and comfort. McFadden also raised concerns that the building would look “out of place” in its surroundings on the waterfront campus and reach an unprecedented density. The dorm would qualify as the eighth densest neighborhood on the planet, falling just short of Dhaka, Bangladesh, according to McFadden. “The project is essentially the student life portion of a mid-sized university campus in a box,” he wrote.

    McFadden told The Post that others on the committee raised the same concerns during the meeting. In his letter, he wrote that it was apparent the expert committee was viewed as a “mere formality” and that approval or input was not required for the design “described as 100% complete.” “Yet in the 15 years I served as a consulting architect to the DRC, no project was brought before the committee that is larger, more transformational and potentially more destructive to the campus as a place than Munger Hall,” he wrote. “This is the very project the committee exists to consider.”

    Carla Yanni, an architectural history professor at Rutgers University, emphasized the importance of consulting students, architects and student services staff to design a dorm that considers the residents’ needs and surroundings. She described how her university has built full-scale models of housing for students to test before construction begins. Dorms should be planned in a way that encourages students to mingle and collaborate, said Yanni, the author of “Living on Campus: An Architectural History of the American Dormitory.” But, she said, this manifestation of that idea doesn’t acknowledge the spate of social science research explaining the consequences of such a windowless design. “The arrogance of the proposal is breathtaking,” Yanni said.

    So, again what exactly are super rich donors buying with their contributions to public colleges and universities and what are university administrators willing to sell? Just about everything it seems.

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