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  • Fahad Ezzi

How do billionaires affect the economy?

You have probably at least once googled the renowned question “Who is the richest person in the world?”. Wealth is notorious to be accumulated in the hands of only a few global elites. Considering the handful of billionaires, this plays an enormous role in the global economy. However, does it damage or benefit the economy?

Initially, while some economists believe that inequality attracts growth, others disagree. They argue by proposing the question: since global elites can provide us with a dynamic economy, why do we like to distribute wealth by unfavourable methods, such as taxes, just for the sake of equality? The Journal of Comparative Economics ushered a new study to put an end to this argument. To answer the question of whether billionaires affect the economy negatively, we must first calculate their affluence.


However, economists always have a hard time measuring those numbers. Indeed, it is very challenging to calculate all their finances, assets, and earnings, including hidden businesses, minus their debts and liabilities. Instead, economists tend to ask the person how much they earn weekly. Then, they go on with the formula and call it a day. However, this method does not always work because total income inequality is vastly different from wealth inequality. Linguistically speaking, wealth is the sum of earnings accumulating over time. Thus, wealth imbalance tends to be vastly different from income imbalance.


With the help of Forbes magazine to measure billionaires' net worth, we can precisely know how much money those elites are possessing compared to the national standard. With this method, we can understand exactly how much is going off the bar. Sutirtha Bagchi of Villanova University and Jan Svejnar of Columbia University calculated the sum of all money owned by all billionaires of specific countries. They then used that coefficient in several formulas related to population, GDP, and the market. Firstly, the results showed that more than 65% of the subject countries were experiencing an inequality increase. Furthermore, they found that the more billionaires there are in a country, the slower the growth. Surprisingly, however, poverty and income inequality have little effect on growth likewise.


But that is not the end of the research result; it’s quite the contrary. The results unravelled that neither the presence nor the level of inequality matter to growth as much as the reasons for the inequality's existence in the first place. Past studies have always studied inequality itself but never the reason for its occurrence – whether it's structural inequality, such as political power or raise, or it’s simply the result of some people being better in the market than others. For instance, Indonesia and UK are similar in one of the inequality formulas called Gini. However, they are absolute opposites when it comes to both political and business environments. After a moment of hypothesizing, Sutirtha and Jan turned their focus to political connections instead. The researchers found that some countries had much higher proportions of wealth that were products of political connections than others did. After analyzing the data, the researchers found that Russia, Colombia, Malaysia, Argentina, Australia, South Korea, Thailand, and Italy had more politically connected wealth, while Hong Kong, the Netherlands, Singapore, Sweden, Switzerland, and the United Kingdom marked zero on the graph.


When the researchers took those results and analyzed economic growth during times of inequality change, the answer to the question mentioned earlier was clear enough now. Billionaires who are politically connected weigh more on the economy. Politically connected prosperity is also responsible for nearly all the negative outcomes on growth. Based on the Washington Post, “The researchers estimate that a 3.72 percent increase in the level of wealth inequality would cost a country about half a percent of real GDP per capita growth.” On the other hand, wealth inequality that was not related to political connections had little effect.


Do global elites affect the economy negatively? Well, it turns out it depends. When it comes to billionaires whose wealth comes from political connections, it does. But billionaires who attain their affluence from the market, such as Elon Musk, create a hypothetical lift on economic growth. However, since most billionaires are politically connected, we can officially say that billionaires implicitly affect us negatively.


Bibliography:

- https://www.washingtonpost.com/news/wonk/wp/2015/08/20/why-some-billionaires-are-bad-for-growth-and-others-arent/

- https://www.sciencedirect.com/journal/journal-of-comparative-economics/articles-in-press

- https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwiAgPLipLjyAhVE6uAKHehvCfsQFnoECBkQAw&url=https%3A%2F%2Facademiccommons.columbia.edu%2Fdoi%2F10.7916%2FD8T442R2%2Fdownload&usg=AOvVaw30GR2QJrOjTS5nnAhaO7Kj