On The Disparity Between Rich and Poor
This may be a post that I regret, we’ll see. So, I have had an ongoing debate with my pastor and some of my closest friends who often cite the disparity between rich and poor in America as one of the great inequities that needs to be resolved through policy and charity. I think it is an important topic because sentiment against “the rich getting richer while the poor are getting poorer” (whether entirely true or not) is often the rallying cry for many key policy initiatives that have wide ranging economic impact – income taxes, capital gains tax, corporate taxes, charitable deductions, estate taxes, etc.
Let me first say that I don’t have a completely researched view on this topic, and so I’m writing this post as much to pressure test some very high level sentiments I have. Let me also say that I fully recognize that being a venture capitalist, most of my daily life is not spent among the poor. But, hopefully those who spend far more time among the poor than I do can appreciate that I do spend much of my day around folks in the supply chain of innovation – which is a critical element to job growth in this country. For example, I just heard this week that 0.2% of GDP is invested by VCs, but 20% of GDP is produced by once VC-backed companies.
With that being said, let me raise some of my high level thoughts on the disparity between rich and poor in America (be nice if you completely disagree, I’m here to share and learn at the same time):
- I don’t really understand the objection between there being a disparity, even a big disparity, between rich and poor. “Rich” and “poor” are two words that are meant to describe opposite extremes along the spectrum of wealth. In the same way, tall and short are meant to describe opposite extremes along the spectrum of height. Dark and light are the same for color. Wide and narrow are the same for width. East and west are the same for coasts. There will always be a great disparity between rich and poor because the two words are meant to connote great disparity. When you pick two terms meant to describe opposite extremes, I don’t completely understand why we object to the fact that they are in fact…opposite extremes.
- It doesn’t seem to me that the disparity between the rich and the poor is the best litmus test for the equity of an economy. The one that makes more sense to me than the disparity of the extremes is the size of middle. For example, depending on what source you trust, between 100–300 million people have come out of poverty in China in the current generation due to the opening of their economy. It has to be considered a great economic achievement. Alongside the opening of the Chinese economy, I’m sure the upper class in China has also created more wealth for themselves. So, while the disparity between rich and poor has probably grown materially in China, doesn’t that bely the more important metric that the middle class is getting much bigger because hundreds of millions of previously poor people are getting wealthier?
- The math seems stacked against the rich. If you are poor and start making money, eventually you will no longer be “poor”. But, if you are rich, and you make more money, you will still be considered rich. There’s no cap on how rich a rich person can be, but there is a cap on how poor a poor person can be and still qualify. In this sense, due to the unlimited upside of the rich, they have unlimited downside on the disparity metric.
- I like to think that in general, the rich get rich for a reason, and usually that reason is a good thing for the economy and ultimately for all classes. I like to think that reason has something to do with being a part of producing something that has value to others. I also like to think that in the process of producing that valuable something, they are creating jobs for others which benefits many tiers of society both directly and indirectly. I say I like to think because I’m not sure, but it seems to make sense to me.
- Finally, I have never heard my friends or pastor who have strong feelings about this issue clearly articulate exactly how much disparity between rich and poor they do find acceptable. I’m almost beginning to believe that they don’t articulate an acceptable disparity because they think that the disparity in and of itself somehow violates a fundamental sense of equity. So, I guess what I’d ask those who also take great issue with the disparity between rich and poor – what exactly are you looking for and what consequences are you prepared to accept to get there?
In a circuitous way, this does get back to being a VC. My father once told me that the best thing you can do for someone is to give them a job – because if they have a job, they can put food on the table. It’s simple wisdom – which is the best kind. It therefore strikes me that one major reason the poor are poor is because they’re not making a sufficient wage or a wage at all. One major reason they aren’t making a sufficient wage or a wage at all is because of the absence or paucity of employment. So, it seems to me that a very effective way to mitigate poverty is to create more jobs. That’s one of the reasons I love being a VC because in some small (maybe big) way, I do feel like what we do helps to create jobs – and hopefully in some way that helps to create wealth for all of society.
I guess the reason I raised this topic to begin with is I worry that by focusing on the disparity metric and driving policies around mitigating that metric, we are in fact just lowering the wealth creation opportunity for everyone including the poor themselves. I’d rather focus on policies that enhance the wealth creation opportunity for everyone, than ones that are intended to bring one segment down to theoretically bring another segment up. I’m just not sure it really works that way.
My late father used to say, that he works so hard to make money, because he enjoys so much sharing it not only with his family, but with those a lot less fortunate. Many times I watched him slip a $20 or even a $100 to a guy or gal performing music on the street. He also found ways to take care of people who were there every day supporting him. It did not matter if those people were waitresses or his partners.
That all said, one important lesson I learned from him, while he still was alive. There is such a thing as Karma and you have to “deposit” into that account often and consistently. If you don’t… well you know what Karma does.
Instead of focusing on populist arguments, I would just worry more about taking care of my own karmic “balance”.
Apolinaras, thanks for all of your commentary on twitter and this comment. By the way, do you go by Apolinaras or is there a nickname you use?
I think your father sets a great example for everyone. I think what you’re talking about is what to do with whatever wealth you have and trying to create some balance. I absolutely have strong views on charity and giving, maybe one day I will post on that. So, I agree with your father in spades.
The reason I wrote the post, believe it or not, is sometimes I think that the sentiment on focusing on the disparity between rich and poor actually leads to policies that don’t actually help anyone. I’d love it if everyone could become wealthier, and then everyone could follow your father’s example.
I think the mistake many (including “policy makers” and News Cycle Talking Heads) make in “discussing” (insert “decrying” or “lamenting” depending) the issue of the “problem of the poor” lies in addressing it as the very question you raise in the beginning… the disparity of the rich vs. the poor. This tends to make it a divisive subject by the very way it’s stated. (And hence makes it much riper for those who accelerate or build their careers on saying they have a policy/answer)
Having grown up pretty damn poor, in a town that had the highest per-capita number of Welfare recipients in the state of Washington, I can say with some degree of confidence that the issue isn’t the disparity between the two… it’s that often times, those on the “poor” side of the scale feel like there is no way for them to bridge that gap, and move OUT of the “poor” categorization. There’s a reason you end up with things like a large number of meth dealers in those kinds of situations, or people desperately hoping to do something to “strike it rich” (whether that’s becoming famous as a performer of some kind, creating the next infomercial-level innovation, or the lottery)… it lies in the fact for many in that environment they see no way to progress step by step. No way to work their way out. They do not learn (either through school or mentors) to think strategically and how to leverage opportunities. Or, for that matter, how to find opportunities.
I’m friends with 3 different guys who all ‘escaped’ that town and now live in Los Angeles. Each one of us is what I would describe as fairly successful (and although none of US think of ourselves this way, by our hometown standards, we would be described as ‘Rich’) and we’ve spent a good number of hours discussing why and how we ‘made it’ (or escaped, if you choose). For each of us, it all came down to the belief that there WAS a way out of the poverty that surrounded us, even when everyone was telling us otherwise… and even when evidence at face value told us “no there isn’t”
Part of it I think lies in yourself/personality (the unflagging unwillingness to accept that things can’t be better), and part of it lies (and I very much believe this) in the people you surround yourself with, and the examples and lessons you learn from them. The latter is something that I think there needs to be more of in areas where the economics are on the ‘dire’ side. Mentor programs. Education that concentrates more on individual problem solving skills and how academics apply to the “real world”, rather that rote memorization so that schools can check off levels of “achievement”.
The former though? I really do not know if that CAN be taught, and I don’t know if that former part is the critical difference in finding that path to help individuals make their way up the ladder, or to simply improve their respective situations. It’s something I’ve thought a lot about over the last 20 years, and to be honest I’m no closer to a conclusion about it than when I began.
Rantz, I really appreciate your thoughtful comment. I almost want to post it on the blog itself. Thanks also for the reality check. Hearing the views of someone coming from your background is exactly the “pressure test” that I was hoping to get from the post.
I really agree with your commentary. My parents were immigrants to this country without the ability to speak the language or really knowing how everything works. They weren’t educated in the American system and had no connections or anything of that sort. They were like any other immigrants. But, many of the Chinese immigrants come to this country because they view it as the land of opportunity and they made the most of it.
Let me ask you – growing up in the community that you did – are there policies or programs aimed to help folks in your community that you think we should “double down” on (to ironically quote my last post), that you think are really effective? And are there policies/programs that you find to be very ineffective that is just a waste of time and money? I’d really value your point of view. I’d even appreciate your view on welfare since it’s you’ve seen it so closely in action.
Hey Larry… glad my comments were helpful. You never really know *what* the end result is going to be when you start getting into commenting on “big” topics late at night. I’ve written and re-written a response to this a few times now, trying to edit for brevity/focus, and also more than a bit concerned that (as you mentioned in your original post) this may be something I comment upon and then later regret. However, I do think it’s an important topic and one that should not be shied away from, so… bear with me and I hope it contributes something positive and productive to the discussion.
In terms of policies and programs that work, vs. those that fall short (no matter how well intentioned), I think addressing that issue is one that each of us (Us referring to the individual or the company) has to answer for ourselves, and IDEALLY, answer in a way that utilizes and contributes our unique skill sets. On a personal level, when we founded LongBox, Inc. one of the key philosophies for us in setting up the company was “How do we use this platform, once established to ‘give back’… to be able to facilitate the ability for aspiring comic creators to not just ‘get a gig’, but to establish careers?” The easy, pat answer would be “Well, we can contribute scholarships to schools such as SCAD or the Kubert School that have a program for aspiring comic creators.” However, we saw that (if that was the entirety of our solution) as being somewhat lazy and not really giving in a manner unique to our backgrounds or abilities. Taking that approach (to us) felt like more of the “throwing money at a problem” which has (as history has proven time and time again) a hit or miss result. After much discussion back and forth, we came up with a number of solutions. One of the key ones being paid apprenticeships with established, high profile creators.
To digress for a minute, when I went to art school a very good friend of mine went to a Culinary School, training to be a Chef. He was (and still is) an amazing, inventive cook, and it’s always a pleasure to eat anything he comes up with, no matter how seemingly off the wall it might be. After finishing his coursework, he was selected for a two year apprenticeship with a very well known chef. The apprenticeship was unpaid, but the lessons learned (both in terms of cooking and more *importantly*, the business and production side of running a top tier kitchen and restaurant) would be priceless. Unlike an intern program, he would be shadowing the Chef who stated very plainly that he would expect him to function as if he had been in the business for years, working as a peer, etc. With the position being in NYC, my friend’s expenses would be astronomical and when he excitedly told his parents about the opportunity, and asked for their assistance in helping cover the bills (comparing it to grad school, except that he would most likely have a very high paying position ready for him upon completion of the apprenticeship) they told him absolutely not. They had helped pay for his school, and he was now expected to do it on his own. The financial burden ended up being too great, and my friend ended up having to pass on a once-in-a-lifetime opportunity that could have completely changed the course of his career. (He does well as a pastry chef, but it has been a long, 15 year slog to get to that position)
Until the latter part of the 20th last century, it was not uncommon for skilled labor to have apprentice programs. In this manner, consumers knew that the goods they were buying, be it bread, furniture, tilework, masonry, construction, etc. were of a high, professional, *craftsman* level. Many times these workers would then go on to have their own apprentices, who would continue the cycle passing down critical knowledge. (You can see the remenants of this kind of approach in a few remaining fields, as Discovery’s “Deadliest Catch” shows with its ‘Greenhorns’.) As anyone who has entered a new field can attest, there is a vast difference between the world of knowledge and the world of application once in an actual production environment. This is true of bakeries or software development. There are core production and business realities that you learn (no matter how extensive your training is.) only when you are in an actual business/production environment. The lack of this has become very obvious… almost glaringly so over the last 5-10 years for me as the creative director for a game company, as a comic book editor, and as the ‘host’ of Panel and Pixel, a forum dedicated to connecting aspiring comic creators with established ones. In all of these cases I’m been asked more times than I can count questions like: “how do I ‘break in’… how do I know if my contract is good? How do I know if I’m on the right path for my career?”, and so forth. All important questions and ones that you tend to learn the answers to (especially in the fluid and evolving worlds of videogame tech/business as well and the current changes in the nature of comics) by being “in the field”
So, coming back to LongBox and “how do we give back” (“we” being LongBox, Inc. in this example.) there was a lot of examination on a.)how do we give aspiring creators (who have measurable merit and ability, but perhaps not the connections) that opportunity to be in the trenches, while b.)not making it a “charity” kind of thing and c.)ideally leading to them being able to spin off on their own and find their own career arc within the comics field with footing that is a little more assured. I can go into more detail about how the apprentice program is set up, how it’s different than an internship, and what its benefits are, but I want to try and keep the focus on the subject at hand and not “Look at LongBox”. I will say that the key for us in setting it up was identifying an immediate short-term solution, that had long-range benefits and (that if done correctly) could “seed” and benefit others. This again, is specific to our field, and all of the benefits are not necessarily applicable to other fields/industries/disciplines, but I think it’s important that all of us… if we wish to do more than tut tut at the problems, see what unique opportunities we can bring to the table. If we do (and maybe I’m just hopelessly optimistic here) I truly believe that we can return to a level of excellence across the board. (and financial compensation that reduces some of the divisive nature of the current landscape)
…Which leads a bit into my thoughts and feelings towards Welfare. I will say first off that I think a form of Welfare or public assistance is necessary and important. I know from a personal POV that my Mom, Sister and I having the ability to access public assistance for the first year after my Father left was all the difference in the world in us being able to eat (although I never in a million years want to again consume powdered milk or cheese that comes in 5 lb blocks). It was however, to us, a horribly demoralizing and depressing thing. We could not wait to get OUT, and back on our feet. There are many families who through one reason or another find them unexpectedly in a situation where they have no other choice but to access welfare while desperately and fervently working to get back to “normal”. However anyone who has been in that situation, and who HAS that mindset and approach (of wanting to get out of it as fast as is humanly possible) can attest that the Welfare System is badly broken, and does little to *encourage* that state of mind, OR to give long-range assistance (in the form of training, educational opportunities, awareness of financial management, etc.) to ensure that the short-term “bridge” of money and food is just that.
Working with Robert Kiyosaki on two projects based off his Rich Dad, Poor Dad book we discussed often the biggest lack that the American education system has… lack of financial awareness. Everything from putting together a basic household budget, to managing credit, to the bigger issues (on the individual level) such as buying a house or investing. That lack of education and awareness feeds not only into a direct effect on the potential success or failure of individuals and whether they ‘get out’ of poverty, but also greatly (in my opinion) contributes to the ‘us and them’ mentality that breeds divisiveness, and convinces some that they will “always be poor”.
Of course, “Fixing Welfare” is like fixing the government. It’s a cumbersome, lumbering, byzantine behemoth that will take years to turn or re-direct. So then, the question really becomes one of what works, and more importantly, what can we do as individuals (or as companies) to give ACTUAL help and affect change (rather than tax-deductible donations that salve our conscience, but do very little in the way of actual progress or assistance), while ALSO (ideally) looking at changing those policies and systems that continue their well-intentioned failure to offer real, lasting assistance.
Hope that wasn’t too rambling or long-winded.
Thanks for bringing the topic up. I’ve enjoyed everyone’s comments as well.
Rantz, thanks for taking the time and thought to post this comment. Your viewpoint is definitely one that I need to hear because you see this issue more holistically than I do certainly. Your comment actually spawned a lot of different thoughts for me and probably future posts. I agree with you on financial education. Your commentary on apprenticeship reminds me of the mentors I’ve had through my career. And, thanks for sharing your thoughts on being on welfare. Hearing your story makes me think that in your case, welfare was a good thing because you and your family wanted more. I almost wish you’d write a broader post on what it’s like to be on welfare because it humanizes the issue which is far too clinical. Not sure if you have a blog, if you did, I’d certainly be interested to read a post on that topic. Or I’d be open minded about you guest blogging here if you’d like.
Hey Larry – I have a blog-in-progress that will be dedicated to the development and launch of LongBox, as well as a focus on being a start-up in these ‘economic times’, so the examination/ruminations on Welfare probably would be out of place (if not completely Off-Message). I’ll email your addy at Fidelity and we can talk about the possibility of a ‘guest spot’ on your blog on the subject, if you’re really interested (as well as defining more of the specifics of what you’d like the focus to be.)
I agree that it’s very very easy, from a state of removal to see others as “them”… especially when they are in a situation you’re not only NOT in, but also one you’ve never been through. Conversely, I don’t believe the faded hippie idealism that “all the world needs is understanding”. Certainly, it is a critical element to finding positive resolution, regardless of the problem (whether you’re talking poverty or negotiating a deal). But that, in and of itself, isn’t a solution and CAN’T be. Knowledge must be held in equal measure with action. An imbalance of either leads to train wrecks on an epic scale.
Larry, I hope you don’t regret this post either.
If you haven’t read George Orwell’s “Animal Farm” it may be time to read or re-read it.
Giving a person a job is a “mitzvah” – and one of the highest ranked ones.
Yes, as a VC you are contributing to the economy and helping people get jobs.
But, let’s look at it another way, you’ve surely heard the adage about “give a man a fish and he eats for a day, teach him how to fish, and he eats for a lifetime.”
If the gap between rich and poor becomes too big (as it has been doing, which is a natural occurrence if other factors don’t step in – hence regulation, market forces) soon, the economy slows down if the rich don’t spend enough buying enough of the same things the poor need. Example- if all the rich people keep sucking up money- but never buy cars other than Maybachs, soon, there will be no way to buy Volkswagens.
This is why Henry Ford knew he had to pay his employees enough for them to buy his product.
When we have people who make $144M a year as head of a “Health Insurance” company- while not providing health care, but by running a protection racket (much the same as the mob forcing people to pay “extra” for their “protection”) we start having a problem. I have no problem with Steve Jobs or Bill Gates as founders of companies making money and a real contribution to society with jobs and products that make our lives better- but, the health insurance industry is one example of things gone haywire.
I run a small business. I can’t raise my fees 40% one year, 20% the next because I have grown so large and the system has embraced me, no- I have to decide between paying for “protection” or risking life and limb without.
What you do is not as noble as you think- because you aren’t really creating the wealth yourself, you are just a parasite that’s worked it’s way into a dysfunctional system – an extra step between giving a fish or teaching how to fish.
When our systems became too complex- we invented many new ways to finance things- some better than others. Are VC’s better than a regular bank? Are they better than a Credit Default Swap? It’s a continuum.
No matter what, when there are too many poor people, we end up with a revolution and the system disintegrates. Study history- see how many kings have been deposed by the proletariat.
I’m not advocating socialism, but, civilization requires civility, and that brings us back to basic needs, which are in many cases, no longer being met.
Sorry for the length- hope it was kind. I have a client who’d like to talk to a VC if you’re interested in some really amazing green technology
David, thanks for your comment. I actually thought your comment was plenty kind – never been called a “parasite” in a kinder way.
I appreciate strong sentiments – it’s half the reason I started the blog. I have no interest in living in an echo chamber.
First of all, I really appreciate that you run a small business. I really think the backbone of the American economy is the small business, and especially the small business owner.
I agree with actually a lot of your points and sentiments. Spending does drive the economy (as long as it’s not deficit spending). I agree with you that there are some rackets in big business which give business a bad name. I don’t know exactly what to do about them, but it’s crazy.
I don’t totally agree though, as you might expect that the VC industry is a parasitic one. To your point, why can’t the banks do this? Are we just another layer in the process? I’m not sure how we can be parasites if we’re just a financing option that you can choose to not take. To your point, anyone can walk into a bank and try and get financing for their business. In fact, as a VC, I’d recommend you go there first. But, my guess is that banks are offering the product that VCs offer because banks are risk intolerant. I think that’s why the VC industry exists – it’s risk capital. Try and imagine the difference in the DNA of a commercial banker and that of a venture capitalist, and you can appreciate that we’re filling different segments. So, while I actually think there are folks in the VC industry who act somewhat parasitically and perhaps give the industry a bad name, I actually think the industry in and of itself provides a valued service. I don’t think we should be too proud of ourselves by a long shot to your point, but hopefully we are in some small way helping grow the economy rather than hurting it.
Larry-
I was probably overstepping my bounds on the VC industry, but, there is a big difference über rich, and banks were supposedly dependent on stocks and bonds at one time.
Insurance companies used to be “mutuals”- now they are anything but.
I too, am a first generation American. I believe in the foundations of our country, and that hard work can, and will pay off. However, the payoff for a CEO these days, while laying off workers and off shoring jobs is criminal.
Access to capital is a key to any strong economy, but it has to be for the guy baking bread as well as the one baking new schema for the human gemome as well.
Deregulation of the banking industry has been a disaster, as has the casinoization of Wall Street. Investment needs to be back to sound fundamentals for long term business positions, not for day trading. As a VC, I’m sure you agree.
But, back to the gap. When the people playing with the market, wipe out pension funds, municipal rainy day funds, and still make millions, and then get a bailout from the very people they just robbed- we have a serious problem.
Besides running my small business, I also ran for Congress. I’ve thought about this a lot, and it comes down to this:
If we want to start fixing the gap- the first thing we have to fix is how we auction, I mean elect our representation. With a country run by the best politicians money can buy, we’re doomed.
(see, you really aren’t the worst of the parasites).
The “casinoization of Wall Street” is a great line. I haven’t heard that before.
Wow, lots of great stuff in your commentary. Where did you run for Congress?
Let me ask you what you’d want to do in the scenario of the CEO who gets paid while laying off workers and offshoring jobs. What would you rather that CEO do – not layoff workers and not move jobs offshore? Just trying to ask what you’d rather see since you obviously don’t like that scenario and think it’s “criminal”.
Investment does need to be based on fundamentals, couldn’t agree with that more.
You raise a big big issue on the election/auction of representation. How would you propose making it less of an auction and more of an election? You obviously know the ins and outs well since you ran for office. What are the problems with the process and what would you propose?
Oh yes, forgot. Thank you for taking time to read and respond to all of your comments. I follow you on Twitter to try to get insight on how VCs work- so that I can be better prepared with my client to pitch his green technology to people like you. Thanks again.
Thanks for following me on twitter, and I appreciate you taking the time to read and post a comment. That’s why I’m writing this blog in the first place – to interact with folks like you who I wouldn’t otherwise be able to.
Larry,
I think that you are not correctly representing the debate around the problem with the “rich getting richer and the poor getting poorer”.
The problem is not that the rich have a better chance of becoming richer by investing, creating new jobs, creating new solutions and innovating.
The problem is that often, those with the means will lobby, legislate or plainly abuse the system to their advantage.
From companies finding tax loopholes to avoid paying taxes (Microsoft being incorporated in Nevada to avoid paying Washington state taxes; Hundreds of multi billion dollar companies having their office in the Cayman Islands to avoid paying federal taxes) to lobbying (during the hearings this week about health care reform, there was not a single representative for single-payer health care system, the entire room was filled with insurance companies) to international bribery (officially outlawed in the US, but poor funding prevents this from working effectively).
If Google gets richer by becoming more innovative, you will not see anyone complaining about that.
So the problem is not the rich getting richer. The problem is the rich using their money to bend their system to their advantage at the expense of others.
Interesting discussion in the comments as well.
Miguel – how’s it going? I think I’m representing one slice of the issue which is the one I run into the most with my friends. But, I think slice of the issue that you’re raising is an interesting one. On one hand, I’m inclined to agree with you, but on the other hand, it’s hard for me to begrudge anyone who legally leverages the system as it is constructed to save money. Your MSFT example is a good one – if it’s legal for MSFT to be incorporated in Nevada, then is it wrong for them to do so? Many companies around the country incorporate in Delaware for example. I’m sure MSFT has to pay Nevada taxes (and I have to presume they pay some Washington state taxes, like income tax for Washington state employees). Is it MSFT’s fault in that instance or is it Washington state’s fault for not having a business friendly tax code (if that’s the case)? So, not sure I see this as an ethical or legal issue, but just a practical business/policy issue.
But, international bribery I find to be an ethical issue if not a legal one, and can’t support that.
Lobbying is a tough tough issue. There are many issues that I care about for which I think there are far more dollars lobbying on the other side. Like, I’m not a huge fan of guns for example, but the NRA has a ton of money. Do I dislike the NRA for spending all the money? I guess I could, but maybe the issue is more with the system than the NRA. Maybe lobbying dollars needs to be curtailed in some capacity to level the playing ground, but I’m not sure how one would practically implement that. I’m not smart enough about this issue or the system – how would you propose making the lobbying system more fair?
The other thing worth consideration is there are a lot of policies in the cue that are decidedly trying to take money out of the hands of the rich and corporations – higher income tax, carried interest taxed as ordinary income, lower charity deductions, higher corporate taxes, etc. So, either the wealthy are backing these policies or despite all of their wealth, they can’t win all of the battles. So I’m not sure what to make of that.
I definitely don’t think the rich should be able to use their money to “bend the system” to their advantage. If it happens, then I guess I wonder if we should blame them, blame the system, or both. Not sure… Good comment though.
Miguel – are you sure MSFT doesn’t pay Washington state taxes? It’s hard for me to believe, and I’m not sure it’s entirely driven by where the company is incorporated/domiciled. Where can I read more about that?
Hello Larry,
It has been covered for a few years, this is a good article from 2004:
http://www.seattleweekly.com/2004-09-29/news/citizen-microsoft/
Thanks Miguel – very helpful article. So, here’s my question to you – if you were Steve Ballmer, would you have set up the shop in Nevada to save the company money (and presumably hire more people, dividend more to shareholders, and invest more in the company) or would you have not set up the Nevada shop and pay more in Washington State taxes?
What I think people mean, or at least what I’ve meant, by “the rich get richer and the poor get poorer” is this: As the disparity grows, the poor get left further and further behind. It’s not strictly about the disparity; that’s a crude proxy for how disenfranchised the poor become.
They’re not just talking about CEOs, though that’s certainly an emotional anchor. They’re talking about Rich People. Remember: To people who are angry at Rich People, everyone you and I know probably counts as “rich”. I grew up lower-middle-class, and although Starbucks didn’t yet exist I’m pretty sure it would have been on the list of “things we can never afford to do”. (Once a month, we splurged: brand-name ice cream instead of generic.)
America’s become a more expensive, more sophisticated country than it was 50 years ago. If you’re upper-middle-class or wealthier, you’re expected to have a cell phone, e-mail, broadband, cable, a car, a condo, a laptop, an iPod, a working knowledge of current events, and the ability to afford Starbucks, Panera and Au Bon Pain instead of Dunkin Donuts and Wendy’s. When was the last time you met someone who didn’t fit that mold? But that IS rich. Homeless people aren’t just homeless anymore; they’re disconnected.
But that’s just an appetizer; your #4 is the main dish. Yes, as a VC, you meet brilliant people every day who truly create value and get compensated for it. You’re spoiled. I’m spoiled too; my first and only corporate experience was an exciting, creative environment where smart people did big things.
That’s not normal.
Most people’s concept of Rich People involves what we’d think of as rent-seekers: Mortgage brokers. Realtors with fancy cars. Everyone on Wall Street. Part-time legislators with full-time pensions. CEOs dumb enough to think that “Nothing good has come from the Internet, period”, who wear fancy suits and have three houses and all that. They’re not thinking about entrepreneurs; they’re thinking about Ken Lewis and Rick Wagoner. And they’re thinking, “A monkey could do that guy’s job.”
Most successful entrepreneurs are rich people, but most rich people are not successful entrepreneurs. They’re suits. People resent them.
Jay, interesting. So, do you think the sentiment is born more out of a disdain for rich suits or concern for the poor being left behind? I guess it could be both but I wonder if one is the bigger driver.
99% disdain/resentment. No question. (Well, except in Cambridge and Davis Square, of course. Maybe 65/45 here.) More precisely, I’d say:
Most folks could identify more specific Rich People they resent than specific Poor People they’re concerned for.
People don’t like other people who, they think, are freeloading: The rich have it easy and have everything handed to them, because of the Big Corporation Conspiracy. Nor, come to think of it, do they like the poor people who are freeloading on welfare and unemployment. It’s the fundamental attribution error, I guess; just like George Carlin’s driving rules, where everyone going slower than you is a jerk and everyone going faster is an idiot.
That’s my theory today, anyway.
Hi Larry-
I’ve been calling Wall Street a casino for a long time- today was the first time I said the “casinoization”- so there you have it.
I ran in OH-3, in the Dem primary, against the parties wishes. I was attempting to be a sacrificial lamb, to at least tarnish the teflon on Mike Turner, Dayton’s former Mayor and my “arch-nemesis.” He had almost a million in the bank, a gerrymandered district and has never faced a true challenger.
I have no problem with founding CEOs making huge sums- if the shareholders are being rewarded, and no problem with privately held firms paying well. The moment you accept equity financing, I believe there should be some ratios in place that put limits on compensation based on total payroll, numbers employed, total revenue, and a ratio between highest and lowest paid employees.
Dividends must be paid to shareholders before any bonuses are paid outside of the set ratios. No benefits packages that aren’t available to everyone- in other words, the CEO gets the same health benefits as the janitor.
I once figured that Charles Exley the former CEO of NCR was making apps $4k an hour when he made 7.2mill in a year. I’m sorry, but if you had to buy tangible goods for personal consumption, you’d need a full time staff to spend $4k an hour. During his reign, the company began its decline. He wasn’t the founder, he wasn’t an inventor and he wasn’t a brilliant manager, yet every day, he was making more than his secretary did in a year.
If you lay off, reduce work force, close plants, you get to be the lowest paid employee that year. With great reward, must come risk. It’s whats missing from corporate America today.
On the elections- it’s pretty simple: the taxpayers pay for the campaigning. No donations accepted. Every candidate must keep a blog, must be involved in community service before running and circulate their own petitions to get on the ballot. We give them equal media time, we publish a voters guide where each gets equal space to make their case. And, we limit campaigning to 12 weeks before each election.
We also vote by mail- no more slate cards, coercion at the polls, and no opportunity to lost votes due to weather, work, etc. We’ve had snow storms shut down our city- and had they happened on an election day- things could be dramatically different.
I’ve written for 4 years- almost 950+ posts on my ideas-
including unlimited H1B visas for employees who work for employers who both live and work in HUBzones- an easy cheap way to bring investment back to the “Historically Underutilized Business zones” and my idea to eliminate all corporate welfare disguised as “economic development” for relocation of businesses- to level the playing field and replace the site spiffs with a “Walk to work” tax credit- where companies would only get credits for staff that doesn’t depend on fossil fuels to get to work.
This would help lower our dependence on foreign fuels- and halt sprawl. Imagine how much better off Detroit would be if BMW and Honda and Nissan didn’t build plants in farmland- and instead concentrated where skilled workers lived nearby?
(Of course GM did the same BS with Saturn)- and of course, I hear the blame the union line coming- however, Unions wouldn’t have gained power had the bosses cared about their workers more.
You can read more at http://www.esrati.com
I’m currently running for Dayton City Commission. It’s a part-time job that pays more than the median family income in Dayton. I hope to fix that too.
Thanks for asking- and for thinking about thinking. I like to think it’s my job to make people think. In fact, a Pulitzer nominated journalist endorsed me as “The Thinking Man”
http://athousanddays.wordpress.com/2009/05/19/the-thinking-man/
Cheers. Would love to sit down over dinner sometime. If you are ever in Dayton, let me know.
In a capitalist society, a discussion of income / wealth inequality is really a discussion of tax (or as Joe-the-Plumber put it “redistribution of wealth”). Warren Buffet pointed out that he pays a lower tax rate than his secretary. I can see the argument that this is reasonable given the wealth he has generated. I also agree with Buffet that there should be a 90% tax on estates over $100MM.
I presume Buffett would want a 90% tax to force people to give it away. It’s interesting though, if you look at the list of the wealthiest families year after year, most of them are not big inherited family wealth – like the Rockefellers. A lot of the wealthiest families are new money, not old. That would suggest that even without the tax, the money goes away somehow.
Interesting. I had assumed that most wealth was inherited (after all, how else can the top 20% own 80% of all wealth?). But, if this WSJ blog post is correct, inherited wealth constitutes something like 10% of total wealth. Which leads to the obvious question of, “where does the money go?” when it “goes away.”
(Sorry for the uber-lenghty post.)
Thanks to TechCrunch, I stumbled upon your blog Larry. As once a public policy major, I couldn’t help but pay more attention to this than some of your other posts (but the metaphors from running is quite good – I could see why each was a metaphor as I read through each one of them). So for now, let me set aside my CFA books (though I haven’t studied for the day for next week’s exam) and comment on your post.
I come from a province in the Philippines, a Third World country, so whether on TV, newspapers or in my daily activities, I see a lot of wealthy people, the less well off, and the disparity that exists between the two groups. I am grateful to be part of the group that can afford, allowing me to pursue a Master’s in Public Policy from a private uni in the US. I am similarly grateful that my dad has been able to provide some help to the community we belong in. That greatly increased my appreciation for the stark realities that exist in my country as well as the for the potential I have of making a difference some day. Because of that, this post on the disparity called my attention and I thought I had to respond.
From among the five points you laid out, one I disagreed with the most was the first. I recognize
that the rich and the poor are two extremes, just as you mentioned there are tall ahd short, wide and narrow, east and west. But the similarity stops there. When you have such opposite extremes that can have serious social consequences, then it is perhaps not proper to simply look at the two as extreme opposites. So what many are objecting to is really that while some are progressing, a bigger group is falling behind. And with a bigger proportion of impoverished to the rich, we, then, need to actually mind the difference and try to do something about it. While you may see progress from both groups, it is undeniable that the rich are moving forward at a much faster rate than the poor are. Why that’s the case is probably one of the biggest issues that need to be resolved to slow the growing disparity. Of course, that is not to say we have to slow down the growth of the rich, because that would simply be partly anti-business, anti-capitalist, anti-free markets. Therefore, the issue is, while the rich move forward quickly, how do the poor catch up much faster?
To your point #2, I think what you’re saying about the disparity not being the best litmus test and that what makes more sense is the size of the middle are not completely unrelated. Because if you have such a fast-growing middle class, then it tells you that there is perhaps the right policies in place that are cutting the amount of poor people and/or narrowing the disparity. The poor are
actually able to move forward and catch up by now having more from their group moving to the middle class. With that said, I believe then it is a question of policies.
There is apparently some truth to why the rich get richer and poor remain poor or become poorer. One of those who commented above spoke of the belief, the confidence that the poor can have to be able to actually rise to the occasion and live a better life. But you have to look at the fact that these poor people are the uneducated and while many of them do dream of a better life, they are constrained by the fact that they do not have enough resources to start the change they want in their lives. I am a fan of rags-to-riches stories as some of the biggest businessmen here in the Philippines followed that path and my dad sure did also worked his way up to be able to establish our business. But when you look at others who, as was also said, have nothing else to do but to deal meth or whatever kind of drugs, or rob a bank, or steal or even resort to corruption – it is hard to easily jump into the idea that all that is needed is the belief that one day, they will get better and that they just have to surround themselves with the right kind of people and they simply have to learn to think strategically and how to leverage opportunities. For many of these people, there’s not a single experience, event or whatnot to learn from. Their being uneducated is perhaps the very reason they’re unable to think strategically. But I do believe from time to time they have those strategic thoughts and creative ideas. They’re just completely restricted, those very same thoughts and opportunities die when they sleep at night. Some of the most decent thing they are able to do is sell candies, banana on a stick, or low quality toys – and whatever they earn from those in a day could hardly even buy them rice for their family of 4 or 5 or 6.
Down to your last point. How much disparity, you ask, exactly is acceptable? Ideally, no disparity at all. We do not need to be told by my professors. But the fact is, there is a disparity and it is growing. And the least we can do is actually minimize it. Or at least try to stop the growth. How do we do that? I guess if the solution was that simple, we wouldn’t be having Third World countries anymore nor will there be poor in the US and any other country for that matter. But we have to accept it is not going away. We can only make it better. If maybe my country one day sees itself even beginning to ponder the idea of ceasing to be a Third World country and following the footsteps of South Korea, Singapore, China and India, there would certainly be others who will be faced with the same problem. Even then, we wouldn’t be rid of the same problems we are trying to solve now. The US still has that problem even being the biggest and wealthiest economy in the world.
So again, back to the solutions. I am in no way advocating for higher corporate taxes, taxes on capital gains and the other ridiculous proposals coming out of Washington. When you look at some of the things that are being done by other non-governmental agencies such as One.org, that’s a start.
When you look at the Bill and Melinda Gates Foundation, that’s a start. When you look at even multilateral institutions such as the ADB, the World Bank, and others, that’s a start.
I don’t believe higher taxes are the solution. It is just a product of the incessant bickering between the Democrats and the Republicans, which in itself is a problem. For these people, politics goes before economics.
Corporate social responsibility, as many of us know it, is one solution.
The $20/$100 bills people sometimes give musicians is one solution. (Though I wouldn’t say I’m a complete proponent of alms-giving.)
VC people like you is one solution (so yes, I disagree with the person here when he called you a parasite).
Bigger budget allocations for the establishment of small business are one solution, so is better checks and balances and sense of accountability to politicians so we can ensure that the budget allocations are indeed brought forward to the groups the funds are intended to go to.
Big salaries and bonuses are okay, so are tax havens. Regulatory loopholes are not. If people fume because of the seemingly insane amount of compensation bankers receive and tax havens many different companies and wealthy people park their money in, then they should be fumed by the very loopholes that the legal system countries have that allowed those very issues to arise.
Am I asking for tougher regulations? Maybe. Am I asking for better policies? Definitely. But those two alone won’t be enough. Because rich people can be greedy and poor people can be incapable. It is only when the former try to have a bit of a change of heart and realize what they’re capable of doing can the latter actually renew their hope and begin to act on their strategic thinking and leverage on opportunities.
That’s why I want to be rich. Apart from of course the comfortable lifestyle, I know what it means to have money. At the very least, I am aware of the contribution I would need to make to my community.
Tan, your feedback and commentary is one reason I’m writing this blog. It’s to get access to a community of insightful thinkers that I wouldn’t otherwise have access to sitting in my office. It’s interesting, you are one person who has a great disdain for the disparity between rich and poor, yet, in my opinion, you are very sensible in your policy stances about supporting capitalism, business, and not just trying to take down the rich. I respect and appreciate your point of view. I also appreciate your concern for the social ills that a big disparity between rich and poor creates. I think there’s a camp of folks who have disdain for the disparity, and aim to take down the rich. I like your camp, which is to have disdain for the disparity, but focus on how to help create faster wealth for the poor, while creating wealth for the rich. I’m completely in alignment.
Question for you – is it “undeniable” that the rich is growing at a faster rate than the poor? Can you just show me the data that makes you believe that – especially if there is data that is post this economic crisis?
Oooh, a numbers/data person, I see. I like that.
Anyway, Larry, there are various things that point out the truth to the claim. Just look at this from the WSJ, published back in July of last year:
“In a new sign of increasing inequality in the U.S., the richest 1% of Americans in 2006 garnered the highest share of the nation’s adjusted gross income for two decades, and possibly the highest since 1929, according to Internal Revenue Service data.
Meanwhile, the average tax rate of the wealthiest 1% fell to its lowest level in at least 18 years. The group’s share of the tax burden has risen, though not as quickly as its share of income.” [Read: LOOPHOLE]
(The rest here –> http://online.wsj.com/article/SB121677287690575589.html)
Then you have this wonderful research by the Center on Budget and Policy Priorities here —> (http://www.cbpp.org/cms/index.cfm?fa=view&id=2789) wherein they cited the growing disparity in the US:
“Between 1979 and 2006, real after-tax incomes rose by 256 percent — or $863,000 — for the top 1 percent of households, compared to 21 percent — or $9,200 — for households in the middle fifth of households and 11 percent — or $1,600 — for households in the bottom fifth. I kinda love the tables they had.”
Interestingly enough, they have a sub-heading there saying the current recession is likely to temporarily reduce the inequality.
You also have your list of billionaires courtesy of Forbes. I’m sure you follow that as well. Except for this year’s list, both of us can easily the growth in the wealth of these people (and their number).
And finally, on a more technical note, there’s also the gini coefficient which is one of the more common measures used to measure income inequality. It’s a bit hard to compare progress because of the rather outdated data they have on their report, but nevertheless, when you look at numbers you can still see huge disparities. If you’re interested, the report is here —> http://hdr.undp.org/en/reports/global/hdr2007-2008/
Question: “How big of a gap between rich and poor is acceptable?”
Answer: It doesn’t matter. That’s the wrong question. The real question is how can we eliminate poverty. If no one is in poverty nor lacks access to health care or education, then who cares how much the wealthy of us earn. If no one is in poverty then at least it is a level enough playing field that everyone can compete. It’s hard to study when you’re hungry…I’ve tried.
Put another way, it’s not class warfare case of “rich versus poor” instead it is a case of “all against poverty.” …or at least it should be.
FN – I agree with you 100%. One-hundred percent. I think my next follow-up post will be on this topic. I do think that sometimes those who are most compassionate for the poor, have it out for the rich. But, I’m not sure how taking down the rich will help the poor. The focus should be on poverty.
Larry, I was listening to old “Marketplace” podcasts today while working on one of my rentals. There was a piece about the reality of the American Dream- they said that something like 35% of the people were stuck in poverty, with no chance of getting out- generation after generation.
The piece on Microsoft setting up in Nevada- was fascinating. Would it be so horrible to make companies incorporate where they actually have the most employees?
We just lost Iams HQ in Dayton- after giving them tax breaks, to move to Cincinnati- because P&G wants to consolidate the office. The former CEO pocketed 2.1B when he sold to P&G- should he be paying back those tax breaks he extorted from the city?
Why is N.C. dropping their drawers to Apple with tax breaks for a server farm? When Apple has 25.1B in the bank?
I wrote about it here: http://esrati.com/?p=2482
This is corporate welfare, plain and simple. Politicians make lousy Venture Capitalists- but, as long as we have the best politicians money can buy, that’s what we’ll continue to get.
If the corporation’s main goal is the maximization of profits, then the governments should be the greatest good for the greatest number. It seems the two should be locked in mortal combat.
The loss of the middle class will come back to haunt us.
While it’s great that Bill and Melinda are giving it away-
Steve Ballmer doesn’t care.
We have to care about our community- the CEOs of old, Henry Ford, John Patterson (of NCR) understood that their employees needed to believe in the pursuit of life, liberty and happiness. We’ve lost that with our current crop of narcissists.
Larry,
I’d like you to go read this post: http://esrati.com/?p=2537
NCR just decided to pull out of Dayton to move to Georgia where the citizens of that State are giving them $60 mill plus for the relocation.
Bill Nuti, NCR ceo has lost 2/3rds the companies value since he took office, yet he keeps collecting a $2000/hr paycheck.
This is why it’s not fair. Why should people earning $7.50 an hour be subsidizing this fool?
I’ve been interested in taxations for lengthier then I care to acknowledge, both on the individual side (all my employed life-time!!) and from a legal viewpoint since passing the bar and following tax law. I’ve offered a lot of advice and righted a lot of wrongs, and I must say that what you’ve posted makes impeccable sense. Please persist in the good work – the more individuals know the better they’ll be equipped to comprehend with the tax man, and that’s what it’s all about.
Do we need a Referendum For A New Democracy?
Are you concerned about the future of democracy? Do you feel democracy is under attack by extreme greed in countries around the world? Are you sick and tired of: living in fear, corporate greed, growing police state, government for the rich, working more but having less?
Can we use both elections and random selection (in the way we select government officials) to rid democracy of undue influence by extreme wealth and wealth-dominated mass media campaigns?
The world’s first democracy (Athenian democracy, 600 B.C.) used both elections and random selection. Even Aristotle (the cofounder of Western thought) promoted the use random selection as the best way to protect democracy. The idea of randomly selecting (after screening) juries remains from Athenian democracy, but not randomly selecting (after screening) government officials. Why is it used only for individual justice and not also for social justice? Who wins from that? …the extremely wealthy?
What is the best way to combine elections and random selection to protect democracy in today’s world? Can we use elections as the way to screen candidates, and random selection as the way to do the final selection? Who wins from that? …the people?