Tight-fisted tycoons

The super-rich rarely give their wealth away, as seen by the philanthropic lists, but why do they hang on to so much money?

NEW YORK - For voyeurs of the billionaire life, a brief period from mid-February to mid-March serves up two of the juiciest glimpses they will get all year.

Last month, the Slate 60 list of 2006's biggest philanthropic gifts came out, to be followed this month by the Forbes magazine list of the world's richest people.

Warren E. Buffett's name is on Slate's list and will appear on Forbes'. His fortune will probably rank second in the world behind only Bill Gates'. In philanthropy, however, Buffet is No. 1 by a wide margin.

Last year, he shook the world of billionaires by pledging more than US$42 billion (S$64 billion) for charity - by far the largest philanthropic donation in history and close to the total of all the Slate 60 donations for the last six years combined.

You could almost see the editors at Forbes airbrushing the perplexed and stricken looks off the faces of their other billionaires. He's giving away US$42 billion? Is he crazy? Certainly that is not what most of them had in mind for their fortunes.

Buffett's move raises the question of what the other tycoons have in mind for their money.

In his article Why Do The Rich Save So Much?, economist Christopher Carroll at Johns Hopkins University wrote that the seemingly obvious question of why people would want so much money turns out to be a real puzzle.

The rational economic argument for accumulating wealth says that people want to use it for something: to spend, give to their families to enhance their future standard of living or do something philanthropic.

When you look at the Slate 60 list, however, you see that philanthropy can't be the main reason. For all of their generosity, the super-rich typically do not give away their fortunes, or even a big share. That's what makes Buffett so notable.

For 2006, the Slate 60, not including Buffett, pledged or gave a little over US$7 billion to charity. Yet as of September 2006, the 60 richest Americans had some US$630 billion of wealth, up US$62 billion from 2005. People are accumulating money faster than they are giving it away.

Mr Carroll says the super-rich can't be accumulating the money with the intention of spending it, either, because no one could spend that much.

Take Oracle's founder Lawrence J. Ellison, whose net worth last year was around US$16 billion. At a 10 per cent rate of return, he would need to spend more than US$30 million a week simply to keep from accumulating more money than he already has.

He spent US$100 million on his Japanese-style mansion in California, 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 lower his net worth because it is an asset that can be resold.

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

The last of the seemingly rational explanations is that the billionaires want to pass it on to their children. But, again, their fortunes are growing far faster than their number of heirs, so each of the children will have the same problems spending the money that their parents had.

The fortune of Wal-mart founder Sam Walton is now divided among his family, and the Forbes list will probably show that his children account for four of the 10 richest Americans in the world.

The children are in their 50s and 60s. If they live to be 80, and their wealth grows at 10 per cent a year, their fortunes will rise by four to eight times and they will each have more than they can ever spend or their children can spend, and so on.

Further, the data, according to Mr Carroll, just doesn't indicate that children make much of a difference. He found that only 4 per cent of the richest Americans said that providing an inheritance for loved ones ranked in their top five reasons for saving.

If it isn't to spend, give to their children, or give to charity, then why do the rich save so much? Mr Carroll says maybe they love money, not for what it can buy but just for its own sake. Perhaps they 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.

However you look at it, it isn't for the reasons that everyone else saves money. This month, you will see the list of the world's wealthiest people and how vastly their wealth has increased.

Buffett will probably be the only one pledging to give his fortune away. The other billionaires will probably think he's crazy, but it may make him the most rational person on the list.

NYT

Austan Goolsbee is a professor of economics at the University of Chicago Graduate School of Business and a research fellow at the American Bar Foundation.