Capitalisn’t: Why Congress Protects Car Dealers More than Elon Musk

Episode Transcript

Eric Zwick: People's brains are just distorted by what they are consuming every day about what the problems are and who's really rich in America, and it's a wildly distorted view of reality.

Bethany McLean: Elon Musk has officially become the world's first and only trillionaire, leaving behind 14 other Americans who are worth more than $100 billion and 142 who are worth more than $10 billion. The number of simple billionaires, just plain old billionaires, is roughly 1,000.

Luigi Zingales: These people get all the attention, but what amount of wealth in America do they actually represent? Surprisingly little. Of all the money held by American households worth more than $5 million, billionaires represent only 10%.

Bethany: The question is, who has the rest?

Luigi: It is the people nobody writes about, and most people barely even think about. It is the beer distributor in your town, the dentist with multiple offices, the HVAC contractor whose trucks you see every day.

Bethany: It turns out that 70% of the money held by households with $5 million or more is owned by people worth no more than $100 million, so not Wall Street, not Silicon Valley, Main Street. Another way to think about this: For each member of the Forbes 400 List of America's wealthiest people, the authors of a new book called The Everywhere Millionaire: Who Is Really Rich in America and How They Got There, find that there are more than 4,000 owners of private businesses who are worth at least $10 million apiece.

Luigi: We're very fortunate to have as a guest today Eric Zwick, professor of economics and finance at the University of Chicago Booth School of Business and co-author of the forthcoming book The Everywhere Millionaire.

Bethany: For years, Eric has had exclusive access to numbers many never see- IRS data, yes, your tax return and mine, but anonymous- [laughs] and thus he has easily become the world expert on income and wealth distribution.

Luigi: Zwick argues that the American rich are far more numerous, far more scattered, and far more ordinary than our picture of inequality suggests. They call them Main Street millionaires, private business owners with at least $5 million.

Bethany: The central thesis of your book is that the American rich are much more numerous, geographically dispersed, and rooted in ordinary private businesses than our usual picture of inequality suggests, yet the answer depends a lot on the way you define rich. If you define the rich as over $100 million of net worth, can you arrive at the same conclusion?

Eric: Over $100 million, for sure. You would still have tens of thousands of people there as opposed to the Forbes 400, maybe close to 100,000 depending on exactly where the cutoff is. Collectively, their net worth would be much more geographically dispersed. The source of it would also be much more diverse than, say, a bunch of tech and Wall Street bros. I think their stories would be a lot more nuanced than, say, Elon, Zuckerberg, Bezos, those stories that we hear over and over ad infinitum. We call them the Everywhere Millionaires or the Main Street millionaires.

We say if you have more than $5 million in net worth and you own a closely held business or you're a business owner, basically, we're going to classify you as a Main Street millionaire. This is a group that includes about 3 million Americans, roughly, so it's between the top 1% and 2% of people. It's a bit broader. Then if you go up to the centimillionaires, I think our story is still holding up quite well.

Luigi: Now, you calculate people's wealth based on two different sources. Can you explain to our listeners what they are and what biases there might be and why this is such a source of controversy?

Eric: There's no administrative data source that directly measures wealth in the United States. To measure wealth specifically, you have to draw on either high-quality but very small-sample surveys conducted by the Federal Reserve called the Survey of Consumer Finances. It's, I think, quite high-quality for its purposes. We have to understand its limitations, which is that it's a very, very limited set. Then the census has basically no information.

The Forbes 400, well, that's 400 people that Forbes does its best to try and figure out who the richest people are, but they're going to be biased geographically by the location of the journalist a little bit. They're going to be biased towards public companies because those ones you can see because those are listed companies, and the owners of those companies. They'll be biased towards the rich people who want to be seen; maybe imagine a few that like to buy media companies to get into the public eye, so it tends to miss the reclusive, near-$1, $2, $3 billionaire, of which there are many.

Then the data that we drawed on to try and measure wealth was administrative income tax data. That's anonymized, so we don't know who the individuals are. We don't see their names. You do have everybody, but you only have the income flows. Then, to figure out wealth, you have to guess, make some assumptions for measuring wealth, which we do, which others have done to try and get estimates. That's sort of like the constellation of available data on this thing. That's one of the sources that we use in our research to try and figure out who these people are.

Something that struck us when we even looked at Forbes: more than half of the Forbes 400 List are private company owners, not these public company owners. You go below the top 10 or top 15, you start to see more mundane business owners, private business owners that are similar to the mainstream millionaires. The problem is that we're really fixated on these billionaires, not that we shouldn't pay attention to the loopholes that they benefit from, but it's just not sufficient to characterize inequality, to solve our fiscal problems, and so on, to focus only on them when this huge class gets so much less attention.

Luigi: One thing that I find strange is you emphasize a lot that we shouldn't focus on the billionaire or the 100 millionaires, but then all of your examples, basically in the book, are in that category, starting with my favorite one of the hot dog stand, Portillo.

Eric: Portillo, it's an amazing story of a Chicago fast-casual hot dog stand restaurateur that over 40, 50 years, grew a business into being able to sell it to a private equity investor for around $1 billion. Musk and Bezos and these types are like 100 billionaires. If we look at wealth tax proposals and these kinds of things, it's really about the 100 billionaires, like a handful of people, not this larger group.

We found some of these stories, like Portillo's, quite interesting and illustrative, but a lot of the stories that we tell are people who made $50, $75 million selling ready-to-order quiche or running a series of franchises, waxing and tanning salons, making a $5 toothbrush. These are mere 100 millionaires, right? I think we're trying interested in up-and-down the scale, with a threshold, basically, above which most Americans would agree that this person seems quite rich, and I think that's a pretty interesting set of people to learn about.

Bethany: There is one set of people or institutions who figured this out before you did, and that is the private equity firms, and they've been active for a while and buying up some of these previously family-owned business. How does that dynamic change the story that you tell? Do you see that happening at scale, too? Did you come across those stories as you were talking to people? Do you see that starting to shift the dynamic here?

Eric: I teach private equity and venture capital in my day job as a business school professor.

Bethany: I know.

Eric: I've been fascinated by this. There's this amazing Matt Levine quote that we talk about in the book where it's like, "What are you doing with your career?" "Oh, I'm going to Harvard Business School so that I can go to a private equity shop to run a plumbing business in Georgia," or something like that. We view that as an important lesson about how broad this phenomenon is, that it's transforming finance over this multi-decade period, attracting capital because they see how much money is there.

They usually enter when there's no natural heir, no natural successor. The people who are the founders usually make off quite well. The private equity people make off okay. The workers, it's a mix of good, bad, and ugly, and I think we talk about stories of all kinds. Then we talk about MBA students who don't even want to go the private equity route; they just want to go direct and go find an even smaller business to buy from a founder and run and operate. That's called a search fund, and we have some vignettes about search funders, which I think is an interesting way that the allocation of human capital in finance is being tilted towards this world.

I don't think it's changing it, but it's present. It also increases the net worth of the ones who haven't sold. It creates an exit opportunity for people in the US that's less present in other countries to basically convert this really illiquid asset that they have, which is their business, into something that they can consume. I think a lot of the characters, we end up being able to find them and identify them because we can't use the tax data for that are ones who did get to that phase of exiting through private equity acquisition, because then it gets a little bit of publicity, and we can learn a little bit more, and that's when they typically go and buy the yacht or the jet or whatever that we use to find them in our yacht and jet registration data.

Luigi: In reading the book, I struggled a little bit because what I would like to have an answer to is the question of: Is this accumulation of wealth good overall for the economy? It's certainly good for the people accumulating the wealth, but is it good for the economy or not? Why people make such an extraordinary amount of money, is it that they are extraordinarily lucky, is it that they are extraordinarily creative, or is it that the system is not really competitive and they take advantage of that?

At the end of the day, I come with a very mixed view, but I would like to know your view. After doing this analysis, where do you come down to? It's just that this policy advisor of Alexandria Ocasio-Cortez said that every billionaire is a policy failure. I want to paraphrase this. Is it true that every $100-millionaire is an antitrust failure?

Eric: No, I don't think so. One of the reasons we tried to write the book in the way we did, with a lot of narrative and a lot of profiles of different people, is because there's a lot of richness and nuance to the story of who the top 1% is.

Luigi: There's a lot of richness in the rich.

[laughter]

Eric: Yes, they're very rich. It's rich and textured and nuanced, which in the comic-book morality of our times is not necessarily what we're used to. I feel like there's room for both good and bad stories. Portillo, that's massively competitive. Fast, casual restaurants. How many brands open, close, how many shops open and close. To do that successfully, there was a Scandinavian economist who read that chapter and just couldn't believe that it was possible to make $1 billion selling hot dogs. "Must-be market power." Basically couldn't even fathom that it was possible. That's one example.

We have another example, another Chicago example since we're here; I might as well: Mike Madigan, who was Speaker of the House in the State of Illinois, the longest-running leader of a legislative body. We classify him as a Main Street millionaire. His business was property tax appeals for commercial properties. This person was indicted; eventually, I think, is in the process of being exonerated or being dismissed or something. This is alleged, but you can read the indictment, was shaking down people for those property tax deals and made over $1 million a year, many years, running that law firm with his partner. There's room in our story and in the top 1% for both Portillo and Mike Madigan, and that's a pretty important lesson for us as we try to think about what inequality in America really is.

Luigi: Let me push back a little bit on the antitrust failure because there's a disproportionate number of billionaire or under-millionaire in car dealership, beer distributor, retail, real estate sector, all stuff that really, really is a failure of antitrust. The car dealer is the most protected class in America. The beer distributor, same thing. Honestly, if I were to do the same analysis in Italy, I would expect that you see some very talented fashion designer; you would see some innovators of motorbikes, or they created some stuff that you actually think is useful and creative that you want to reward, but beer distribution, car dealers, and real estate, I'm not saying you want to wipe them out all, but almost, right? Number one, it is a failure of antitrust. Number two, you should tax them heavily because they don't create any real innovation and value in the economy.

Eric: We profile, through a series of industrial vignettes, industries where we see a disproportionate number of people in this class where it's not through being exceptionally productive that they've gotten richer over time, but through the fact that they are gatekeepers in growing markets, standing between consumers and producers, so the car dealers, the beer distributors, the realtors. Then we also spend a lot of time on occupational licensing- the guilds or cartels, depending on how you want to refer to them- of the doctors and the dentists who have gotten very rich because they restrict entry or restrict access to alternative providers of certain services that they provide.

I completely agree that that's a failure of antitrust. I was talking with a former Chief of Staff for Lina Khan when she was at the FTC, and I was like, "Why didn't you go after the car dealers? They have these state laws that protect them from competition, that protect them from having their contracts revoked, that give them all kinds of preferential pricing and so on, and they're just not really on the radar because individually they're not quite big enough relative to going after Amazon or these big platforms, even though from a consumer welfare perspective, they might be more deleterious than somebody like Amazon."

I think Amazon's pretty bad, like how they do treat their workers, for example, but for consumers, it's quite unclear. Relative to the car dealers, where we have no other option, that seems pretty clear as a failure of antitrust, but it's a failure of industrial organization economics to think about anti-competitive practices at a regional market level, as opposed to all national markets.

Bethany: I think this is the same question, but asked in a slightly different way. It's something that I was struggling with in the book. Most of the reviews of the book have been really positive that this is a good thing, this is a great thing that all these people exist, but there is this really negative side to it as well, as you tell. Did you come away happy at the end of writing this book, or did you come away mixed?

Eric: I'm an optimistic person by nature, which is not to say I'm Panglossian. There's a view I think right now that prevails that makes the point that the American dream is completely dead. The system is completely rigged. There's no upward mobility. Kids are screwed. I feel like that's just too negative. We have these historical examples like Portillo that happened a long time ago, of course. We have more recent ones, and I think there's still a lot of room for moving from the bottom to the top through entrepreneurship specifically than I think the popular narrative really carries.

At the same time, it's not an equal playing field at all. What are the factors that rich parents give to their kids that make them more likely to be successful entrepreneurs than poor parents give to their kids? Is it capital, or is it something else like occupational exposure, training, the ability to get into certain jobs or careers or professions, et cetera, exposure to running a business itself? We find that the latter, that exposure experience story, is much more compelling when we look at the population of new business founders over the last 25 years to try to understand where they come from.

We're trying to say, "Look, there's room for hope and room for optimism, which is provocative in the current environment, but there's also problems that we need to solve. Tax policy problems, local market power problems of over-representation of certain categories of people in society, problems of sharing of the growth in the sector between the owners and the workers, and we shouldn't ignore those."

Luigi: Speaking of taxes, if I think about taxes, imagine this was constitutional. I'm not even sure it is, but imagine it was constitutional to have a wealth tax. What is the cost of having-- I see efficiency cost. Of course, cost for the rich is a lot, but efficiency cost of having a tax on a $100-millionaire, okay? From reading your book, at the end of the day, if Portillo end up with $100 million less in his portfolio, I'm not so sure that we lose much. Certainly, if Madigan ends up with half of his wealth, we're probably all happy, and it's an improvement. Tell me the story of why taxing wealth through your examples is such a terrible thing to do.

Eric: First of all, the book really isn't strongly advocating for particular policies.

Luigi: No, no. I know, but this is the premise.

Eric: I know.

Luigi: You set it up as a premise, so I want to go to the conclusion.

Eric: I got you. I got you. I agree; your point about the efficiency costs, I think, are largely second-order. What's the menu of options for taxing these people? It's not the one at the top of the list, necessarily, except the transfer of these businesses across generations through the estate inheritance tax system, which has been considerably watered down over time. That really benefits this group. If you want to collect more revenue from these folks, you tax their profits directly through the income tax system, which we have the infrastructure in place to do, and over time, we've chipped away either through reducing the top rates or creating different categories of income to get preferential rates, this thing called Section 199A for the pass-throughs.

They get a special business deduction of 20% of their income, which reduces their effective tax rate below the top rate if you're a wage earner. They get around the cap on state and local tax deductions that other people, such as very successful professors at the University of Chicago, have to only get their SALT deductions capped at $40,000 or something like that. They get a workaround because you can do it through the business, and this happens in red states and blue states. You get the full deduction through the business.

There are a lot of ways that are, I'd say, more incremental, but they will raise just tons and tons of revenue, and I would start there. The fact that we haven't gone there is evidence of how entrenched this class is and how politically powerful it is, because there's a lot of money there to be raised. I think, to your point, the efficiency costs would be pretty minor.

Bethany: I think this is another attempt to pin you down, and I can already guess what you're going to say in response to this [laughter], but it's something I was wondering as I read your book and thought about this conversation. Do you view this as more of what you found is a more democratic capitalism, or do you view it as a more geographically diffuse but still an insider economy? In other words, the fortunes are spread across the country; they're not concentrated in Silicon Valley or Wall Street, but the ownership is still private. Employees and ordinary investors generally aren't sharing in the upside. Is this pointing toward a better form of a more democratic form of capitalism, or is it simply millions of local insiders, many with enough influence to shape taxes and zoning and licensing and regulation, operating in their own favor or their own interest?

Eric: I appreciate that, and I apologize for being effective on the stand occasionally, but I think I will say that this is a more democratic form of capitalism than the popular narrative, which is like the billionaires on the stage at the inauguration, is my view of the popular narrative, and I feel like that's massively reductive as a characterization of the American economy presently or in the past 30 years.

Then there's a list of problems that we should solve. I don't really see why there should be these non-compete, effectively, agreements for car dealers and beer distributors, et cetera. I don't see why the realtors should have a cartel that protects them from people just selling houses to each other without these middlemen that collect 4% or 5%. That's crazy. I don't see why we should have lower numbers of doctors per capita than anywhere else in the OECD, pretty much, other than through a collective kind of-- I don't know, you don't call it a conspiracy, but it's like an intention to, like, "Oh, if we increase, if we open the doors to let more doctors in, wages will go down." That seems like a real problem with our healthcare system we need to solve. I started out positive, and I got dark. I think that's sort of the arc of the book a little bit, is like it contains multitudes, I guess.

[00:22:26] Eric: At the end of the day, your image is not only not very different between the car dealer, sort of Mark Zuckerberg, in FRONTLINE. I think the car dealer is a little bit less rich, but he's made his money in a worse way, to some extent, than Mark Zuckerberg, and has brought less innovation than Mark Zuckerberg. Let's not pick Mark Zuckerberg because I hate social media, but think about Amazon, okay? Jeff Bezos.

We can quibble about market power. We can quibble, but there's no doubt that he brought an enormous amount of innovation. Elon Musk, there's no doubt. If I want to make the case for "You need to allow people to become filthy rich," it's because this drives the willingness to disrupt the system and create something uniquely original. Thinking like an economist, I'm much more willing to see Elon Musk get filthy rich with that creativity than, with all due respect for Portillo, Portillo get a billion dollars for producing hot dogs that he did not even know how to cook, because in your book, it said that he learned how to cook on the job. He has zero expertise, zero human capital, zero everything, and he made a billion. Why did he need to make a billion?

Bethany: I don't know, Luigi. I think this says that you like rockets more than hot dogs. I'm not sure. [laughter] A lot of people don't belong there.

Eric: What if he was making gelato?

Bethany: I'll let you answer. Go ahead.

Eric: Yes. I think they have gelato at Portillo's now, so maybe you could--

Luigi: I would not even taste it because I know it is crap.

[laughter]

Bethany: Well, that's that deal.

Eric: Right. They also have Italian beef, which I would not encourage you to go near either, for your sensibilities. It's not a native species of Italian cuisine. Okay. I don't think I disagree with a lot of that rambling and fun anecdote about Musk and Bezos and so on. Zuckerberg, I think the social value of social media, I think potentially has the opposite sign of the private value, and so that's a separate conversation, but Amazon, I feel like, is, across many of its business lines, a consumer surplus machine, and then there's lots of issues.

The car dealer is a little bit more a ward of the state through its protections. In these cases where you have wards of the state basically being protected by laws that prevent competition and entry, and people getting rich because of that, that feels like a public policy problem. If you have people making $100 billion, inventing something that has massive social value, then that seems like not a public policy problem at all.

At the same time, if those people turn around and then try to cater influence from politicians to protect themselves or to get contracts by media companies and try and tilt the narrative in their favor and so on, that's a policy problem. That's a different policy problem, I think, than just the fact that they're rich, sort of what they're doing. I think there's room for us to think about the car dealers separately because they are a policy problem because they are affecting, say, tax policy like we talk about, in a way that weakens the fiscal position, so I think I'm with you on that.

Bethany: Were those rules changed over the years because of the political power of this class, or were the rules changed because there was a sense that we as a country, we wanted to create this class and we wanted to help this class?

Eric: Yes. The history of the emergence of especially these pass-through business owners goes back to the 1980s with the 1986 Tax Reform Act, which was passed as a bipartisan piece of simplifying tax legislation. President Reagan at the time made a bunch of money as a movie star prior to his career in politics and paid high taxes on the income he earned making those B-Westerns. He found common cause among the Democrats in Congress, Senator Bill Bradley, from New Jersey, who was a star basketball player and didn't like those high individual tax rates when all the people that they knew that were rich in other ways were getting all these loopholes.

The individual tax reform brought the individual tax rate down in the 1980s below the corporate rate for the first time in the history of the income tax and unleashed the growth of these businesses in a way that was not the intention of those tax writers and legislators at the time. Then subsequently, we've been shipping further away at the effective tax that these folks pay through the Bush income tax cuts in the early 2000s, through exempting profits from payroll tax. This is called the Gingrich-Edwards loophole, which is to say it's a bipartisan loophole in terms of "It's being used by folks on both sides of the aisle."

I think one of the stories that we try and tell in the book is you look at a quarter, roughly, of Congress. They seem to come from this class. A third of the tax-writing committees during the 2017 tax reform, which further reduced the tax burden on these types of businesses, were pass-through business owners. We think they're even more represented at the state and local level because these are part-time, low-paying jobs that business owners are naturally a good fit to become elected officials.

It's not just the lobbying story that I think is more visible and more prominent, but there's a direct representation story that we found quite striking when we were witnessing the 2017 law being written. Yes, it's an unintended consequence, but also these folks have increased power and the representation; they sort of pass these laws and protect them in ways that not only benefit their donors, but also benefit themselves in a lot of cases. It's bipartisan. It's not just on one side of the aisle, which I think also helps explain why it's persisted across administrations and across control of Congress so, so, so effectively.

Bethany: I thought that perhaps the most important thing you do in the book is to shed light on members of Congress, who they are, and what they have really been up to because the common narrative, again, is captives of billionaires, and that's just not the story at all. Maybe if we all just start by recognizing how Congress is operating and why, that is critically important. Do you disagree with that?

Eric: No, I think that was one of our big lessons from the 2017 debate, was seeing how they were able to hold up. This was a tax reform that was quite beneficial to the large public companies, but then the pass-throughs who are represented by members of Congress, but also members of Congress are pass-through business owners themselves, such as Senator Ron Johnson from Wisconsin, who holds up his vote because he just has in his heart a real affinity for these pass-throughs, but he's a plastics manufacturer. I think recognizing these pivotal votes do depend on people who are voting their interests and not just the interests of their constituents is an important lesson for politics.

Small business pass-through tax increases, we've been told, that's a third rail, more so even than other things that you might expect the billionaires to care more about. In the One Big Beautiful Bill debate very recently, Elon was at the peak of his powers with his connections to the administration, but Tesla lost the EV tax credits, and the car dealers got their pass-through tax cut made permanent, which is a tax cut that Elon doesn't receive at all, and they also got a new provision, which is the deduction for car loan interest for new cars.

I think it's just an amazing illustration of how much influence they have on the policymaking process. Then if you go below the federal level to the state and local level, their influence is only greater in different ways because a lot of the decisions that affect our everyday lives are public policies that are not made at the federal level, but also at the state and local level.

Luigi: Maybe this is another book, but I did not see, in the book, really a comparison: What is the power of one versus the other? Both groups are influential, but the leading case you just mentioned of Senator Ron Johnson, when he successfully raised the pass-through deduction, he did it to benefit his largest donors that were two billionaires. It's not like Ron Johnson was representing the mom-and-pop-everywhere millionaire; he was representing the billionaire. Even your best example of Main Street capturing the legislator is a bunch of billionaires.

Eric: Well, maybe you just focused on the term billionaire. It wasn't Elon Musk or Jeff Bezos or these types.

Luigi: Okay, so you're not saying you're just a-- Okay.

Eric: This is like pass-through business owner billionaires in the middle of the country that own a plastics manufacturer company, the Ulines, or a, I don't know, liquor supplier, some kind of business. I don't remember what the other example was: Diane Hendricks and Johnson himself. I think that's a story that's not as well appreciated, but maybe we're mincing words on how when we talk about billionaires, that kind of thing.

Bethany: I think it augments your point rather than detracts from it. Sorry, Luigi, but we can debate that later. You've pointed out that people from affluent families in the top 1% or even the top 10% of income are disproportionately more likely to found companies, but you also point out that when these businesses are inherited, it doesn't always work out well. I think this was from The Economist review of your book, and I love this. "Disappointing children are a gift to capitalist reinvention." What do you want to be if you're a kid? Do you want to be born in one of these families in the top 1% or 10% and have a higher likelihood of going on to found a business, or do you fear becoming the modern incarnation of the Vanderbilts?

Eric: Right. People ask me, well, part two of the book is called How to Get Rich, which is a bit tongue-in-cheek, but also fun. There's a chapter called The Shortcut, which is all about this inheritance path, and we try and estimate what fraction of people in this class got there through inheritance. We figure that it's between 20% and 30%, but it can be a bit hard to figure that out exactly because of data limitations. It's similar to what we described at the beginning.

Now, just because you inherit this business and say you do run it into the ground, it's still probably better to be that person than to be born into poverty. I still recommend the number one way to get rich is to be born rich. That's always been true, but it didn't work out so well for Cordelia, and it's not a guarantee of happiness or salvation.

Bethany: As a closing question, we've touched on some of these things. If you had a top three list of what you'd do to make this an unqualified good story in terms of policy changes, what would you do?

Eric: One would be: Harmonize the income tax such that these folks pay similar tax rates to a high-income, salaried worker, including payroll and Medicare and everything tax. Close all these loopholes on the income tax side, which would raise, I think, hundreds of millions of dollars a year at this point, almost. There's also a reshoring of the transfer tax, the inheritance and estate tax, to make it harder to transfer $50 million, $100 million, $200-type business and pay no estate tax, which it's now very easy to do with lots of rules and games and stuff.

We talked about this, the market power stuff. We really need a reconsideration of market power away from just national monopoly platforms and so on to think about anti-competitive laws and regulations, and practices in certain industries at the local, regional level, like these auto dealers, beer distributors, and I think thinking about the number of doctors and what things they prevent nurse practitioners and others from doing, cross-state practice rules that really restrict the ability of people to move in or prevent Canadians from coming in to be doctors in the US, this kind of thing, the anti-competitive stuff is a big deal.

Then a third bucket is like, we document a fair amount of growth in this class. The pie is growing, but the owners are grabbing a bigger and bigger slice of it. We talk a little bit about ways to promote more sharing of that success with the workers at these businesses. We're not advocating for unionization, which we think is a pretty hard thing to do when you're talking about these small, disconnected businesses and lots of industries, but something that has been shown to be quite effective: minimum wage increases, and we're not talking about a specific number, but the federal minimum wage is quite low by historical standards. It's not been inflation-adjusted. It's well behind where it would be if it was at its 1980s level in real terms, and that would transfer some of the surplus to the workers. That doesn't seem crazy.

We think that the healthcare system is quite inefficient. If you think about providing workers with healthcare, effectively, you can pay them with wages, or if you have to give them healthcare, that's a very expensive cost for employers. Our system is quite inefficient, and so that ends up suppressing wage growth in a lot of industries, both large and small. It also makes it harder for folks with limited resources to become entrepreneurs themselves because they want healthcare. We think we should have a robust public option or something like that that would help workers and help aspiring entrepreneurs with something that seems like an important barrier.

Luigi: Now that you have outlined a program, why don't you find somebody supporting it? It says the Republican Party used to be the party of Main Street millionaires; now it's the party of Main Street millionaire and of the billionaire, so it's not going to go for that. The only choice you have are the Democrats, but they don't seem to be so active, at least the Main Street or the traditional Democrats, unless you go to the Democratic Socialists to embrace this agenda.

Can you explain to me why they don't embrace it? Because some of the stuff you said, I don't want to mean it in a negative way, but it's pretty obvious that it's the right thing to do, and it doesn't take a genius to figure it out, but you figure it out in a very systematic way, and even still they don't listen. Why?

Eric: I'll take that as a compliment that it doesn't take a genius because I think that's definitely how you meant it.

Luigi: Yes, absolutely.

Bethany: I think it takes a genius.

[laughter]

Eric: Yes, definitely how you meant it. Right. I agree that it's more likely the Democrats will be attracted to some of those ideas. It's not crazy to me to see some Republicans being interested in them as well. Why is nobody capturing it? I think it's because of the original problem that the book identifies, which is that they're not seeing the economy as it is. It goes back to the social value of social media. People's brains are just distorted by what they are consuming every day about what the problems are and who's really rich in America, and it's a wildly distorted view of reality.

I think if Democratic politicians, especially once they get off the campaign trail and get into Congress or into the state houses, do understand the economy a little better, there's a lot of sympathy for some of these ideas. Then the hurdle is the political power, because we've said it's not just one side of the aisle, and you can really see that when you talk to folks about, "What's the likelihood that, say, the pass-through tax cut gets reversed or rolled back?" They just sort of almost roll their eyes a little bit, saying, "That's really hard."

Every member has a friend, or they know somebody, or they are somebody who benefits from that. It's a real problem, and that's not just on the right side of the aisle; it's on the left side of the aisle, too. I think that might be the problem of our time, but there's also AI, I guess. I'm so glad that we got through the whole conversation without even talking about it. That's awesome.

[laughter]

Luigi: It's a very interesting book. There are a lot of novel facts worth reading, but the first part reads to me as a celebration of America and how easy it is to become filthy rich and how everybody can become filthy rich. The second part is a story of how the rich are terrible in distorting America, and the two parts don't seem to talk to each other.

Bethany: It's really hard to tell if it's a how-to manual or if it's a please-don't manual, right? [laughs] I did disagree with your characterization of innovation because I think there is small-scale innovation and large-scale innovation. Maybe not the hot dog maker, but some of these people are genuinely innovative to notice that there's a better mechanism for a piece of rubber footboard than what exists. That is a form of innovation that I think should be rewarded. I like that there still are all these opportunities for making money in ways that aren't just the obvious ones, but it's really hard when you look at the political power and particularly the representation in both Congress and throughout local governments to celebrate this in an unqualified way.

Luigi: Sorry, I might be old-fashioned, and I prefer manufacturing, but to me, what was missing in the picture, but not because they are missing, it's because it's not there, in my view, are mainstream millionaires that actually make stuff. If you notice, all the people he describes are in services. Now, it's true that services are becoming a bigger, bigger part of the economy. Still, it's surprising that you don't see, as you said, somebody that makes something like the invention of the wheels on luggage. You know that we went on the moon before we put the wheels on luggage.

Bethany: I did not know that. I do know, however, that I resisted for a really long time having wheels on my luggage because I did not want to be one of those people wheeling a suitcase through an airport. Don't ask me why. It was just this thing that stuck in my brain that I did not want to be, and finally, I just got too old to carry my bags over my shoulders, and I had to give in and become the person with the wheelie suitcase. Anyway.

Luigi: It's so convenient.

Bethany: I know.

Luigi: This is to say that I value even small innovation. If that guy, I don't know, made millions or billions, that's fine. For example, the guy who invented the bar coding. Now, I just learned that the guy who invented a QR code is a Japanese that worked at, I think, Toyota and gave it away. The reason for the success of the QR code is that it's basically free for everybody to use. When you see that the guy who invented the QR code got nothing, and I'm sorry to pile down on Portillo, but the guy who sells hot dogs he didn't know how to cook that makes a billion, it's kind of hard to be gung-ho about the system. While I see the major innovation of Amazon, I fail to see, and I need to at this point. We need to have a date to go to Portillo to see the quality of the food, but I fail to see what Portillo has brought to humankind, honestly.

Bethany: I think there are a lot of people who care a lot about their hot dogs. I'm not one of them. My defense has to end at a certain point with just advocating for people who do things like make hot dogs, but not because I am a hot dog aficionado in any way. I think, Luigi, that this whole thing that you are picking on Portillo's is because I think that you are an Italian snob. [laughter] That's all that this is about, is that you're looking at our terrible American food choices, including hot dogs, and saying, "How dare somebody make money with an abomination like that?"

Luigi: No. Look, America has made money with mediocre coffee served in what I consider an inefficient way, which is Starbucks.

Bethany: That's a bigger bastardization than bad hot dogs, right? [laughs]

Luigi: Exactly. Exactly. However, now Starbucks has reached some economies of scale, so I can see better the benefit of Starbucks than this regional stuff. Look, I have nothing against them making money, but if I want to go in front of an audience of young people and justify why we need powerful incentives to innovate and the powerful incentive is through people to become rich, I can certainly present the inventor or one of the founders of Moderna, for example, who those guys clearly represent his dream. If I read through the pages of this book, I cannot find one.

Bethany: Yes. I think that might be the result of the pass-through income structure, but I still think it's a good point. I did think--

Luigi: Sorry, can I? Because you raise an excellent point, which is the pass-through structure. I don't have the data to prove it, but my fear is that part of their results is driven by the lens they chose to look at the data. Because if I am a financier, I don't have a lot of stuff to pass through, and so I don't appear, but if I am a car dealer, I do everything pass-through.

Bethany: Did I get this wrong? I thought I heard him say, which provided more clarity for me than the book did, that this is not a single source of data. It's not just this IRS data that they waded through, and good heavens, I can only imagine what that was like, but it was that they attempted to triangulate and combine with other sources of data, like the Forbes 400 List so that it misses less people than you would think. It may still miss a chunk, but I didn't--

Luigi: Wait a second. It means that they added 400 people to the entire IRS database. I understand that the 400 people are very wealthy, but it's only 400 people. Everybody who is not there is missing, and probably, it's missing a big chunk of their income.

Bethany: That's true, but I still think that the great strength of the book and the thing that it changed my mind about, or that it made me see through a new lens, is this idea of who Congress is and where political power really lies. That, I think, is really interesting and really worthwhile to understand as we start thinking particularly about the midterms and then about the next presidential election, is that really narrowing this to the way it's often covered in the press, is this contest between dueling billionaires is just not the story at all.

I completely agree with what he said, that if you're looking at the wrong story, even if what they offer is still just a piece of this, if you're looking at the wrong story, then you can't even begin to understand where power really lies or what the solution should be. I really thought their analysis of both Congress and of state and local government through this lens is incredibly compelling and important to understand.

Luigi: I partly agree with you. I think that what is interesting is to show how much direct representation of rich people bias Congress. Generally, all the emphasis is on campaign financing. I think that what is very telling, I didn't know that, what is very telling is the 1986 Tax Reform was somewhat driven by the personal experience of Ronald Reagan and Bill Bradley because they were taxed very heavily and they wanted to be taxed less. There is nothing like a senator or president in the case, or a congressman, having experienced something on his or her own skin to push an agenda in one particular direction.

Bethany: Yes, I think it'd be really interesting if some academic wanted to dig into this to do a follow-up bit of work because something that has always troubled me about the narrative of campaign finance, even though I understand how important it is, is that people like the Kochs who have donated away in support of their candidates or people like George Soros have not always gotten their way, so the campaign contributions are perhaps less powerful as a mechanism for entrenching or enacting political power than you might expect.

I wonder if you could compare or contrast that in any way to the power of these Main Street millionaires to get what they want, and if that's actually, if you would then see if a pattern would emerge about where power really actually does lie. I think there's got to be a systematic way to go, a quantitative way to go after that. That to me is really interesting because then the story isn't as simple as, "Oh, this money in politics isn't all terrible because at least these people don't always get what they want." It might be, "Actually, these people always get what they want. It's just that the people aren't the ones we're thinking of, and the mechanism isn't campaign finance." I think that is really interesting to me.

Luigi: Definitely. Now, after reading the book and discussing with him, are you more or less optimistic about American capitalism?

Bethany: Oh, boy. I don't know, right? That's the question I tried to get an answer from him. It really is both the beautiful and the really ugly in a nutshell, and it's really hard for me to decide whether the beautiful optimism in this outweighs the ugly, so I'm really not sure. I know that's a cop-out of an answer. I feel like I've taken a cue from him now. [laughter] I don't really know. I think I'm more disturbed than I am happy, actually. I'm really happy that there are all these, that it's possible to make a fortune in all these interesting ways that are outside of the coasts, but I think the mechanism by which government really may have been corrupted is very disturbing to me.

Luigi: I have a version of what you said. I think that I am disturbed by the lack of what I call good success stories and the diffusion of bad success stories of industries that are basically weak, to begin with, where success is due to protection. That might be preexisting because I think, in some cases, I don't think that they prove the case that the people who made money now with the dealers are the ones who lobby to begin with, but it doesn't really matter.

It's the fact that once you have these barriers to entry, you give an enormous advantage to some at the cost of everybody else. How much more expensive are our cars due to the car dealers? How much more expensive are our houses due to the realtors, and how much more expensive is our beer as a result of that? I think that those are pretty important numbers that I would like to know, and it makes me worried.

Bethany: Yes, I agree with that.