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March 01, 2007

Mo Money, Mo Problems Giving It Away

The rich. They're just not like you and me -- they're so very much richer:

Mr. Ellison’s net worth last year was around $16 billion. And it will probably be much bigger when the list comes out in a few weeks. With $16 billion and a 10 percent rate of return, Mr. Ellison would need to spend more than $30 million a week simply to keep from accumulating more money than he already has, to say nothing of trying to spend down the $16 billion itself.

He spent something like $100 million on his Japanese-style mansion in Woodside, Calif., making it among the more expensive private residences ever built. But that is only about three weeks worth of the interest he earns on his wealth. And a house doesn’t actually spend down his net worth because it is an asset that can be resold. At least part of the $100 million is just a different way of saving.

Mr. Ellison would have to spend that $30 million a week — $183,000 an hour — on things that can’t be resold, like parties or meals, just to avoid increasing his wealth.

That comes from Austan Gollsbee's exploration of why the rich horde their wealth. It's actually a fairly surprising outcome. There's no reason billionaires actually need multiple billions, or that those with nine figures of wealth couldn't slim down to eight. Their lifestyles wouldn't change at all, and their children would be lavishly cared for. But even the largest philanthropists, political participants, and spenders channel relatively small fractions of their bank accounts to their causes and indulgences. And "only 4 percent of the richest Americans said that providing an inheritance ranked in their top five reasons for saving." Weirder yet, "the data shows that elderly super-rich people who do not have children save just as much as the ones who do."

So what gives? Some economists have dived into the question, and their hypotheses basically boil down to greed. "[The superrich] get something different from having money — clout, power, the ability to dominate an industry. Or perhaps these are just competitive people who care about their position compared with other people on the list." Maybe so. Or maybe this is just humankind's innate loss aversion -- our tendency to irrationally avoid loss even more than we court gain -- at work.

March 1, 2007 | Permalink

Comments

Larry Ellison is not my favorite guy, but I think he is a bad example here. Yes, the reason he keeps accumulating more dollars is that he has a pathological desire (need?) to have more chips than Bill Gates. But Ellison made his first billions by being vastly more forsighted than his managers at IBM, by striking out on his own, and by risking his own money to develop and deliver a product that has been very useful to mankind[1]. Since that time he has taken some decisive and somewhat risky decisions in an attempt to reshape the computer software industry in ways that many informed parties believe is necessary (Mr. Gates disagrees of course).

I am quite bothered by the earnings ratio that has developed in the USofA, but honestly I am not much bothered by Mr. Ellison (or even Mr. Gates). He did make his money from scratch, and it will end up at a foundation or university somewhere eventually. What really bothers me is the hired hands, such as Nardelli, the Enron managers, etc who build nothing of value themselves but who rig the game so that they can suck 10s of millions of unearned dollars out of the game. There are far more of them than there are Larry Ellisons, and they do far more insideous damage.

Cranky

[1] OK, it became somewhat less useful when he took advantage of the rise of the Internet to raise the price 100x.

Posted by: Cranky Observer | Mar 1, 2007 10:33:11 AM

when the saving and hording of money and possessions exceeds prudence and what most would consider "normal"...i agree, it is very much tied into fear of loss, sense of security, extreme ways to feel safe and protected...a way to have some sense of control...compensating for things that have been lost or taken away from someone, or something they never had in the first place.
....material abundance is often an attempt to compensate for the deficits one has in other areas of their lives. stinginess, or lack of concern for creating inheritances can be a kind of revenge or "lack of" payback to others. seeing others as being undeserving, untrustworthy or as a way to express hurt and anger.
....the way people choose to save or spend money has everything to do about their sense of security and feelings of being safe or paranoid in themeselves and their connections.
...i dont think economists need to dive into the question, as much as psychologists do.

Posted by: jacqueline | Mar 1, 2007 10:36:52 AM

I'd only like to point out, quietly, that there's a lot of unstated resentment of the wealthy in this post. That, and there's nothing wrong with being rich.

Posted by: weboy | Mar 1, 2007 10:39:43 AM

weboy....

i agree there is nothing wrong with being rich, but i think that when one reads that only 4% of the richest people consider leaving an inheritance as a reason for saving...when one sees lifestyles that seem to reflect incredible greed, it makes one wonder.
....for myself, i wouldnt call it resentment. i just think that when one has limitless resources to make the world a better place for others, one would feel a sense of responsibility, obligation or humility for having a gift, and being able to share it.
....i also think that a person with very great material wealth and resources who is unable to share it, has issues of insecurity,personal neediness, spiritual unenlightenment or hurt.

Posted by: jacqueline | Mar 1, 2007 11:02:13 AM

I'd only like to point out, quietly, that there's a lot of unstated resentment of the wealthy in this post. That, and there's nothing wrong with being rich.

True...especially when you earned it all instead of inheriting or marrying it. It just seems more legitimate.

Posted by: Fred Jones | Mar 1, 2007 11:04:44 AM

In terms of there being nothing wrong with being rich, it depends, of course, on how you define the words "wrong" and "rich." People like John Locke and Adam Smith, who no doubt would be cited to justify the accumulation of personal wealth, would both, no doubt, have big problems with examples like the one cited by Ezra. Locke believed in personal liberty to collect property, but only so long as there was enough left for others. Ellison is no longer mixing his labor with the natural resources of the world. Locke never envisioned a world in which the property you had a right to collect consisted of nothing more than bits of information. Similarly, Smith's pragmatic justification for a system in which people can amass wealth is hardly applicable to people like Larry Ellison.

Saying that there is nothing wrong with being rich in response to Ezra's post is a bit rediculous.

Posted by: PW | Mar 1, 2007 11:33:52 AM

Okay... but there's nothing wrong with being rich... and by extension with Larry Ellison being rich. How he chooses to spend, save or waste his wealth is really his decision. Outside of favoring high taxes (which I do), and wanting to see CEO salaries held in better check (which I also do), what do I care if Larry Ellison wastes $200 million on a house? If he gives his secretary $16 million? If he burns $100 bills for heat? It's his money. If you don't have a problem with people being wealthy, very wealthy, obscenely wealthy... then I, for one, don't see exactly what Ezra's complaining about here. Of course Ellison's money makes him more money; that's what investments do, if you structure them reasonably properly. What, exactly does one have a problem with? And I ask because I think the sense of class resentment in this country - which is certainly alive and well - is often not talked about, and should be. If your issues is taxes or salaries or business mismanagement, by all means, let's dive into them, but just not really liking it because others have more than you do? There's nothing really to argue there. Is all I'm saying. Not so quietly. My apologies.

Posted by: weboy | Mar 1, 2007 11:44:44 AM

Because, by the way, I think jacqueline's response is most honest - when one sees someone with that much wealth, I think one naturally wants to say "you could do so much good with that money, why don't you" and the fact is, it's none of our business. It's the decision of a wealthy person how to spend, save, or waste their wealth. Tut-tutting their choices is entertaining - and so much of what passes for gossip these days - but ultimately doesn't change all that much.

Posted by: weboy | Mar 1, 2007 11:50:40 AM

I think we tend to forget that there is no biblical dogma on issues like this. We just do the things we do because at some point, we decided to do it that way. So there's no inherent right to be rich in private or poor in public.

For instance, why is that the incomes and spending habits of the poor are subject to scrutiny yet the wealthy can "do whatever they want" with their money? Kind of an odd way to organize it, no? And it's a way to sort things that certainly benefits the wealthy.

The other things the pretend conservatives and spineless libertarians like to talk about is how wonderful the wealthy are about investing all that money this stimulating the economy. And it's left at that. No real disucssion of what form that investment takes. Is it investment that actually creates jobs or is it just another financial that can rake off another percentage for having X amount of money?

The truth is easy to see. There are fewer and fewer enormous investments in our society from the wealthy. Because the CEO of GM gets an hundred million doesn't mean that a plant to build cars gets built or a research lab to find better ways to power cars gets funded. It means that CEO has another hundred million dollars to stash away in whatever way he can so that it doesn't get grabbed by someone else be they government or not.

And none of this is to knock altruism. It's nice when the wealthy do things with some of their cash that help others. Good for them.

But the numbers are clear however, as a nation we're concentrating more and more money into fewer hands. And, as a society we either support that policy and all that it implies or we do not. It's that simple.

Posted by: ice weasel | Mar 1, 2007 12:03:00 PM

This is rather like asking why coin collectors have so many coins, isn't it?

I think one naturally wants to say "you could do so much good with that money, why don't you" and the fact is, it's none of our business.

It's our business to decide what we think of people. Nothing at all wrong with pointing out that hoarding wealth without thought for what good it could do is morally impoverished.

Posted by: Sanpete | Mar 1, 2007 12:03:07 PM

Oddly enough, there's no resentment in that post. I actually find it an intellectually interesting question why billionaires keep so much of their money. So far as normative claims go, I think they should pay higher tax rates, but I don't think it's, say, Larry Ellison's fault that he doesn't.

Posted by: Ezra | Mar 1, 2007 12:03:20 PM

How he chooses to spend, save or waste his wealth is really his decision.

Technically true, but I think many of us feel, as Jacqueline does that - "one would feel a sense of responsibility, obligation or humility for having a gift". I would go further and say that extremely large amounts of wealth do carry with them an obligation, moral if not legal, to give something substantial back to society. Where that threshold lies is a matter for debate, of course. But Bill Gates, Larry Ellison and all the other ultra-rich entreprenuers didn't get that way entirely on their own - they were smart and took risks, but they were also lucky and the beneficiaries of a system that's supported by all of us who live and work in it. And the nature of the system is that at a certain point, rewards far outweigh the risks taken to get them.

You see Ezra's post as showing resentment toward the rich, but true or not, does that mean the question he asks is meaningless? It's not a moral question - what makes people hold onto money that they can't possibly ever use? It's an interesting question in it's own right.

Posted by: Chris Howard | Mar 1, 2007 12:04:48 PM

One thing that's missing here is the way that the power games rich people play against each other distort the rest of the economy. At the very least, the money that's compensating them for their hard work is money that's not compensating the rest of us for ours. At the most, you have things like the biggest-yacht competition between Ellison and Jim Clark, which is cited by several reporters as a major contributor to Netscape going public far earlier than it would have if Clark had been willing to wait for, say, significant revenue or a realistic business plan. Which in turn contributed to umpty-ump similar companies going public without signficant revenue and ultimately the investing disaster that was the dot-com bust. Major stock-market bubble, major consequences to the US economy, because a couple of rich guys wanted to have a size war.

Posted by: paul | Mar 1, 2007 12:07:45 PM

I think we tend to forget that there is no biblical dogma on issues like this.

Well, there is, actually.

why is that the incomes and spending habits of the poor are subject to scrutiny

Because we all chip in for them.

Posted by: Sanpete | Mar 1, 2007 12:10:38 PM

there's a lot of unstated resentment of the wealthy...there's nothing wrong with being rich...they earned it.

It's amazing how many people come out of the woodwork to defend the rich. Honestly, it runs quite contrary to our established social values to think that someone would rather see people starve to death all over the world than give up something that they don't need. It is not the sort of behavior one would expect given our social values, and noticing that this is odd behavior doesn't make you a jealous jackass, it makes you a smart, observant and curious person. It's far more weird to suggest that this is the sort of behavior that's consistent with our professed social values.

Observing a phenomena like this lead to a lot of very interesting economic questions. What's up with the disconnect between our values and our actions? Why aren't we condemning these guys? Why would a super-rich person choose to hoard money that they don't appear to need, instead of doing something good with it at no cost to themselves?

Perhaps we as a society are systematically undervaluing philanthropic contributions, so people only see the downside? Perhaps in high-society, there is a strange social norm wherein useless income gives its possessors more social status?

Also, what's this weird double standard where one super-rich person hoarding wealth is OK, but another hording it isn't OK. Like, why isn't it OK for someone who married into wealth to hoard it like someone who "earned" it? There's a huge divorce rate, shouldn't people who enter into the covenant be highly respected for their achievement, for keeping their marriage together? I mean, why should we give special privileges to people who invent cool stuff and not people who uphold the social institution that, according to some, is the foundation of our society?

While it's great that Ellison invented a useful thing, he doesn't deserve special treatment like exemption from moral values. A lot of other people invented very useful things, should we be putting nobel-winning research scientists in Xanadu-like paradises?

And what about people like Tim Berners-Lee? The guy invented the web. But he didn't want a nickel for it. Do we need a world with more Berners-Lees or more Ellisons, and how should we structure our institutions and laws to encourage and reward the behavior we want to encourage?

These are all valid questions, and they're not about hating the rich. Frankly, if you want to get all ad-hominem about it, I wonder why so many people foolishly believe that if they suck up to the rich, they'll end up with money. Evidence indicates the rich ain't giving it away any time soon.

Posted by: anonymous | Mar 1, 2007 12:14:14 PM

I think that this post just shows an odd reality of how we accumulate wealth- at a certain point or critical mass it just grows exponentially, barring some outside force changing the equation. Ellison can apply an outside force by giving it away, spending it piling it up and burning it. An outside agency can crash the stock market, throw his business into collapse or pick it up in a tornado and drop it somewhere. Barring such an outside agency the wealth will just accumulate like water in a blocked pond, fallen leaves in fall or that dust in the corner that you just never seem to sweep up.
It really brings up the question of- is he hording it because of some psychological need or has it just gotten so out of control that he cannot stop its accumulation?

Posted by: Hawise | Mar 1, 2007 12:18:18 PM

There's one problem with the original story, that being there's no guaranteed way (or even expected way) for Ellison to be making a 10 percent annual return on his money. Even for billionaires, that's just not realistic for any length of time.

He might end up making that 10 percent annual return, true. But he also he might sink his money into California real estate as the bubble is popping and lose 25 percent of his investment.

Posted by: Boots Day | Mar 1, 2007 12:19:23 PM

Amazingly, I think I agree completely with Cranky.

As for billionares hoarding money, well, I don't how interesting a phenomenon it really is. The basic drive is pretty clearly identified: money=power=status=happiness. Regrettable, perhaps, and we should applaud those who are wiling and aren't afraid to give their money away. But entirely predictable.

Posted by: Korha | Mar 1, 2007 12:57:35 PM

Why do Professional Athletes continue to lobby for bigger & bigger contracts & continually move to wherever they might make the most money? Is the difference between 8 million a year & 10 million a year really enough to affect their families & standard of living?

My guess would be no, and even saying that, I find the prospect of them trying to amass as much money as possible and then spending it (or not) however they darn well please completely unobjectionable.

(real) Progressive Income Taxes? Cool.
A good strong inheritance Tax? Cool.
A good strong estate Tax? Cool.
What the insanely wealthy actually do with this after-tax money? Don't care.

Posted by: DRR | Mar 1, 2007 1:07:34 PM

money=power=status=happiness

If power and status were the goal, there would be many more efficient ways of getting them by spending the money than by merely accumulating it. I think it's more a matter of collector's inertia. These people collect money, and like many collectors, they end up with far more than they can even look at or use, but the drive to collect it still remains.

Posted by: Sanpete | Mar 1, 2007 1:25:36 PM

That's a good point, DRR. I think a lot of it has to do with using what's available to compare yourself to your peers. One pro athlete has an $8 million contract, and he sees another athlete, who is considered of similar or even less talent/value who has a $10 million contract. I can understand how the lower-paid guy would want to make it more "fair" for him by finding a way to get to the higher level as the other guy. At some point, which I think is far lower than what pro athletes make, annual income becomes just a number that's useful for comparisons. Let's say Tom and Stan live somewhere that's inexpensive to live. Tom makes $90k. Stan makes $100k. Tom believes with reason that he's just as good of an employee as Stan, so why shouldn't he make $100k, even though that extra $10k/year really shouldn't make any material difference in his lifestyle[*]. I don't know if this is the same way billionaires relate to each other, but I wouldn't be surprised.

* Granted, that extra $10k can be put away for college funds, or retirement savings, or a really fabulous annual vacation, but day-to-day, if Tom is living beyond his means at $90k, he'll probably still be living beyond his means at $100k. Go up much higher in salary, up to $150 or $200k, and we're at the point where the person is either living lavishly, or not, and another $10 or $50 or $100k/year is just gravy, but that doesn't mean people don't leave jobs that pay extremely well for others that pay even better.

Posted by: Stacy | Mar 1, 2007 1:51:38 PM

As I'm at work I don't have much to contribute, but I immediately though of "Brewster's Millions".

Posted by: Ben | Mar 1, 2007 2:07:34 PM

The truth is easy to see. There are fewer and fewer enormous investments in our society from the wealthy. Because the CEO of GM gets an hundred million doesn't mean that a plant to build cars gets built or a research lab to find better ways to power cars gets funded.

Spot on ice wiesel. Even if you look back to the guilded age the uber-wealthy still set up cheap museums and other public works. Now Paul Allen builds a (crappy) rock museum and has the audacity to charge $20 to get in.

Posted by: Fledermaus | Mar 1, 2007 2:45:39 PM

Why do the obscenely rich hoard their money? Wagner's metaphor was the Dragon of the Nibelung, who sat in his filthy darkened cave atop his pile of treasure.

Posted by: robtheheartthrob | Mar 1, 2007 2:48:32 PM

DRR,

One differencebetween pro athletes and Larry Ellison is that pro athletes have a short career except for the very best they have less than 10 years to make the big bucks, typically for the good but not great more like 3-5 years.

Sanpete,

Can't it be construed that we also contribute much of the income for the very wealthy, just like for the poor?

Posted by: BillCross | Mar 1, 2007 2:57:53 PM

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