A Reply to Ezra Klein

January 2016

I thought perhaps it would be worthwhile to reply to what Ezra Klein wrote about Economic Inequality. It's an important topic, and his seemed to be among the most thoughtful of the responses.

This is my best shot at a complete list of his points. As far as I can tell, all 9 seem to be mistaken, in the sense of either being false or not affecting my argument. But decide for yourself.

1. He says I think startups are responsible for most economic inequality in the US. I don't think that. He thinks I do because I said "startups are almost entirely a product of [the] period" since about 1980. I don't see how saying startups are limited to some period implies I think they're responsible for most of the growth in inequality during it. [1]

What I do think is that startups are responsible for a significant fraction of economic inequality. Anyone who wants to can see that for themselves by looking at the Forbes 400. [2]

(I also think, though Ezra didn't talk about this, that startups will be responsible for more inequality if other ways of getting rich are closed off.)

2. He says the number of startups has been declining. In support of this he includes a graph with a line going down. But though the graph has the word "startups" on it, it is not a graph of the number of startups, but of all new businesses.

As I've explained many times, startups are a tiny fraction of businesses. Most businesses are barber shops, gas stations, restaurants, and so on. What his graph shows is that fewer of these are being started. If you want to see the trend in startups, one way to see it is by looking at the trend in VC deals.

Any graph of VC deals will show the trend has not been downward. And most such graphs understate the growth in startups, because in the last 10 years the traditional VC series A round has become a later stage investment.

3. He says there is no observable relationship between startup formation and inequality. The Economist disagrees, saying founders and early employees of startups "represent the most significant concentration of business wealth in the world."

Again, anyone can see this for themselves by looking at the Forbes 400.

4. He says it's not people who get rich from startups that are the problem, but people who get rich from finance. It is the latter "that this conversation is really about."

But that is my point: that the public conversation about this topic is way too sloppy, and that we should focus not on crude statistical measures like economic inequality but on the specific underlying components. If you're angry that people are making so much money in finance, then attack that, not economic inequality. Imagine how much more alarmed those who benefit from the carried interest loophole would be if public attention were focused specifically on that, rather than the harmlessly broad target of economic inequality.

Though indeed Ezra is mistaken when he says the conversation is really about finance. Many of the most influential people who have written about the topic recently have been talking about economic inequality overall, not merely that caused by finance. Piketty for example clearly thinks great variation in wealth is in itself a problem.

5. He says I'm attacking a strawman when I say that ending economic inequality would mean ending startups. Other people have tried to claim that too, so I replaced that sentence with:
Eliminating great variations in wealth would mean eliminating startups.
This is not backpedalling, incidentally; this is a stronger claim than I had in the original.

The median household net worth in the US is about 80k. It is common for the stock of a successful startup founder to be worth a hundred times that, and not unheard of for it to be worth ten thousand times that.

The goals of eliminating great wealth disparities in your country and having startups in your country are fundamentally incompatible. It might be possible to cram together these two very differently shaped jigsaw puzzle pieces, but it would require hacks as messy as have ever been tried in the history of taxation, and even then it probably wouldn't work.

6. He says that Sweden has more startups than the US despite having lower economic inequality. Though the article he links to is about new businesses generally, not startups, it is true that Sweden has a lot of actual startups per capita. That means they're willing to tolerate great variations in wealth, which seems the smart choice.

People trying to use Sweden as a counterexample seem to be implying that I think economic inequality is a prerequisite for startups. Actually the prerequisite is not high current economic inequality but the willingness to tolerate it in the future.

7. He seems to disagree with my claim that the growth of technology will cause increasing economic inequality. His argument is that since governments have figured out how to deal with increasing variation in productivity in the past, they will in the future. But (a) governments have in fact made some truly disastrous decisions in this department in the past, and (b) when something grows exponentially, the past is not much use as a guide.

Plus, as I explained in The Refragmentation, we got a free pass for a big chunk of the 20th century because a unique combination of circumstances suppressed the effects of increasing variation in productivity.

Ezra says the Silicon Valley elite pay higher taxes now than in the 18th century and yet still invent things. But this doesn't support the idea that no degree of inequality is inevitable: the fortunes of the Silicon Valley elite represent enormous wealth disparities. [3]

8. He says I think modest changes to the tax code will derail technical progress. But I don't think that. Larry Page's Google stock is worth billions of dollars. It would take way more than modest changes in the tax code to change that fact. If you made those kinds of changes, it would decrease the number of startups in your country—and break God knows what else.

9. He says I am being pessimistic. But I don't think it's pessimistic to think growth in technology will increase economic inequality, precisely for the reasons I gave in the essay. Economic inequality per se doesn't seem nearly as much of a problem as adjacent ones like poverty or the conversion of money into political power. If we had a society with no poverty and perfect social mobility, and economic inequality didn't translate into social or political inequality, would it be that bad if there was also great variation in wealth? It might still bother some people, but I'd take that over what any country has now. [4]

That's the sort of society I think we should work toward. And that's why I don't think we should focus on economic inequality per se, but the real underlying problems like poverty and lack of social mobility.

Decreasing poverty is not identical with decreasing economic inequality. Some measures for decreasing poverty could well increase economic inequality. For example, if you gave every child in America the same quality of education Bill Gates had, that would surely decrease poverty. [5] But you would then create a lot of new Bill Gateses as well. These kids wouldn't all stop short at middle class. The more ambitious ones would shoot right out the other side.

That would be a great problem to have, you say? I think so too.


[1] This is so puzzling that I wonder if he didn't simply misread what I wrote—that he read the statement that startups were a product of this period as if I'd written that the period (in the sense of the trends therein) was a product of startups.

[2] Incidentally, the numbers in the Forbes 400 are nonsense. But it will do for a test like whether people are getting rich from startups or not.

[3] As anyone who has studied the history of taxation knows, there is a big difference between saying that tax rates were higher and that people paid more in taxes.

[4] By definition perfect social mobility would seem unfair to anyone with a mistakenly high opinion of their abilities. Indeed, I suspect this phenomenon is already a factor in people's opinions about economic inequality even with the imperfect social mobility we have now.

[5] I know Bill Gates had many other advantages besides his education. I'm not saying this would level the playing field completely, just that it would help.

Thanks to Sam Altman and Jessica Livingston for reading drafts of this.