Value-Creation Over Wealth-Creation; or, getting Atlas to stop shrugging.

These days, it seems that the conventional wisdom is that taxes and regulation always hurt the economy. Even Democrats seem to buy into this idea. For many Democrats, the question is how much tax and regulation can we stomach in the name of other values, such as fairness and justice. Instead, the question should be how much tax and regulation we need to have a strong economy. “Big government” can make us a wealthier, more vibrant nation.

There are many ways that this idea can manifest itself, but today I want to talk about one in particular: the distinction between the creation of wealth and the creation of value. A healthy economy is one that creates value. Our current economy is biased too far towards the creation of wealth.

This works better with some examples.

Example 1: The NPR show Planet Money recently discussed the “new” airline industry. There are limited profits to be made from running an airline, so many big airlines have turned to finance. They speculate in the oil market, buying and selling oil futures depending on daily fluctuations in the price of oil. They’re currency speculators. They buy and lease aircraft. According to the Planet Money team, the real profit center at major airlines is the “bank” side of the airline. The best and brightest minds, the most valuable employees—they work for an airline, but they’re really financiers. Meanwhile, the airline industry as a whole suffers, because nobody is putting enough time or effort into thinking about how to run a successful airline.

Example 2: The patent wars. Apple and Google both spend huge amounts of money on R&D, in order to develop better smartphones. Apple and Google also spend huge amounts of money buying up hardware and software patents, as both an offensive and defensive litigation strategy. If each company spends a billion dollars developing smartphones, there’s a wonderful externality: we, the consumers, get more and more amazing devices. If each company spends a billion dollars fighting patent litigation, there are no externalities (except to the law firms involved).

Example 3: Lobbying. Today, corporations spend millions (if not billions) on lobbying efforts. The idea is to create laws, or loopholes in laws, that benefit the corporation. One example is the famous “American Jobs Creation Act” repatriation tax holiday in 2004. Economists determined that every dollar that corporations invested in lobbying for this law created a 22,000% return on investment. Another example is the 1998 Copyright Term Extension Act. For a relatively small amount of lobbying money, Disney managed to push through legislation that made sure that Disney—which became an empire by repackaging public domain works—could never be “out-Disneyed.”

In each case, the rational corporate strategy creates wealth for the company and its investors. You cannot blame an airline for wanting to make money for its officers and investors, and you cannot blame Apple for needing to partake in the patent wars. You certainly cannot blame companies for trying to get a 22,000% ROI. But the more time and money that is spent on these collateral pursuits, less time and money is spent on building things. The capitalists of the twenty-first century are not Galtian “producers” who take wealth and built railroads; they are financiers who take wealth and build more wealth.

This is the entire paradigm of the modern Republican party. There’s this idea that has grown up in the last 40 years or so that there’s a tremendous amount of “slack” in the economy. There’s untapped potential for generation of wealth, in the form of poorly organized and poorly managed business ventures. If only the right capitalists come along, whether in the form of the LBO craze of the 1980s or the private equity craze of the 21^st century, they can reduce the slack and make the economy perform to its full potential.

And there’s certain evidence to believe this is true. Between 1974 and 2008, real (inflation-adjusted) mean income in the United States grew 76%, from about $26,700 per year to about $47,000 per year. Of course, averages are incredibly deceptive. The median American in 2008 took home only $26,500 — only 26% more than he did in 1974 and less than the “average” worker made in 1974. The ratio of mean to median income in 1974 was 1.27. The ratio in 2008 was 1.77. In the decade from 1998 to 2008, median income was completely stagnant, while mean income increased 14%.

So, yes, the United States has become a much wealthier country in the past few decades. But, as should come as no surprise to anyone who reads the newspaper, this new wealth has become incredibly concentrated. This is problematic for many reasons. Of course, there are the issues of justice and fairness—that the wealth of capitalist-friendly economics has almost entirely failed to “trickle down.”

But there are other problems that are more hidden in more insidious. Every person who goes to work for an investment bank or a hedge fund or the finance division of a corporation or (yes) a white-shoe law firm is somebody who is not building something. Instead, they are taking money and turning it into more money. They are creating wealth. What they are not doing is creating value. They are not creating jobs, they are not creating new industries out of wholecloth, they are not investing in either physical or human capital.

America may be richer than ever, but its foundation is crumbling. Why invest in better airlines if hedging oil futures is more profitable? Why invest in more R&D if investing in patents is more profitable? Why take a chance on a new product if creating a tax loophole is simpler and cheaper? If the wealthy are the engine of the economy, all they have managed to do is hook up a brand new engine to a 40-year-old transmission.

The great irony is that these capitalists, who never outgrew their Ayn Rand phases, forgot what Atlas Shrugged is about. In Rand’s dystopian future, the world is crumbling because the producers stopped producing. Francisco D’Anconia became a billionaire playboy instead of an industrialist. And in the greatest irony of them all (given who quotes Atlas Shrugged), the great invention that John Galt withdrew from the world was a hyper-efficient new form of green energy. Today, John Galt would never even have invented his motor. Today, he’d be too busy designing mortgage-backed securities.

So, if the problem is that capitalists put too much emphasis on wealth-creation and not enough emphasis on value-creation, what is the remedy? How do we shift the balance back in the other direction?

This, obviously, is the big question that we must answer. And the answer, in my mind, requires government intervention. Consider the mid-20th Century. In the 1950s through 1970s, the extremely high marginal tax rates created a disincentive for marginal wealth. Paying wealthy shareholders dividends or paying CEOs huge salaries was effectively just handing money over to the government. So AT&T put its extra cash into Bell Labs. Xerox put its extra cash into PARC. Lockheed Martin put its extra cash into Skunkworks. Research and Development flourished, because high tax rates incentivized R&D. And society is still reaping the benefits of those projects.

So, first and foremost, raise taxes. In addition, if capitalists put primacy on wealth-creation, make it harder to engage in wealth creation. Impose transaction taxes on financial institutions. Increase short-term capital gains taxes to disincentivize speculation. And if all else fails, change the rules. Decrease patent protections and copyright terms. Prohibit large financial institutions from engaging in certain forms of speculative behavior. And, most fundamentally, do whatever it takes—through a constitutional amendment or otherwise—to get money out of politics.

Note that the goal of all these suggestions is to improve the economy, not to throttle it in the name of fairness. Indeed, if I am right, these suggestions will reduce the need to focus on inequality and injustice. My goal with these suggestions is to create jobs and build a stronger, more robust economy. If taxes, laws, and regulations can divert wealth to productive uses, we have the potential to change the trajectory of wealthy inequality in America. Is this all a pipe dream? Perhaps. But I fear these pipe dreams may be the only way to salvage the American dream.