It takes money to make money. Carpenters need tools. Programmers need computers, and enough ramen noodles to live on while coding their masterpieces. Car makers need hundreds of millions of dollars to design their product and build an assembly line.
Money: if you don’t have it, you have to borrow it from someone who does. Or sell shares in your enterprise. Or simply work for someone else.
Money: those who have it can lend it, for interest. In other words, if you have money, you can get paid for having money. If you have a lot of money, you get paid for being rich. This is great work if you can get it.
To get rich you have to be more productive (or criminal) than the rest of us – unless you have the right parents. But once you are rich it’s smooth sailing as long as you don’t get too greedy. This strikes many as unfair. Thomas Piketty has a best seller out on the subject; I have a copy on order myself.
I, for one, am not on the bandwagon for completely snuffing out the rewards of riches. Old money has its uses. And simply taking care of existing wealth is useful. The only member of the Big 3 car manufacturers to survive without a bailout is the family business: Ford.
But I can go for a damper on such incomes. When the rich get paid too much for just being rich, the wealth gap widens beyond that which can support a free republic. The United States is due to oscillate between oligarchy and socialism, just like our neighbors to the south. I find that prospect unpleasant.
Joining the Rich
In theory, interest and passive profits are mere multipliers. If everyone saved the same fraction of their income and got the same returns on investments, the existence of interest and profits would have no effect on the wealth gap. Piketty’s r > g would simply reflect how we take care of retirees.
But in general the well off save more. When the house is comfortable, the car shiny, and vacations sufficiently relaxing, the basic appetites are sated. Avoid ostentation, hedonism, or going into politics and the temptation to spend all you earn is blunted. Those who have pile up more.
There are exceptions. Some hardcore environmentalists who live like eco hippies while earning a professional income can go from college graduation to retirement in a few years. And there is a growing movement of educated folks saving for early retirement on a less austere budget. Interest and passive profits favor their lifestyles.
If the rest of the working class would be partly follow their lead, the wealth gap would stop widening so much. To that end, I have crafted The Ideal IRA, a savings plan simple enough that the middle classes can use it without hiring expensive financial advisors. Check it out, and if you like it, tell your congresscritter about the idea. This should be a bipartisan issue.
A similar savings rate is not necessarily enough to stop the widening of the wealth gap. If the rich get a better ROI on their savings, the gap will continue to widen.
Do they? Not at first. For today’s typical middle class saver, there are plenty of high ROI investments to be made: pay off debts, get more education, add energy saving features to your home, etc. But as these options are saturated, there may be an edge for the rich. The Fed has pushed interest rates on ordinary bank savings accounts down to negative levels in real terms. Sarbanes-Oxley has made fast growing companies stay private longer, limiting these juicy gains to angels, institutions, and accredited (well off) investors.
This is sad, and I want to turn the tide. To this end I have been doing most of my writing at a new web site, Finance and Freedom, devoted to alternatives to Sarbanes-Oxley and other burdensome regulations. There are alternative ways to keep the Wall St. crooks at bay, ways which allow The People to do capitalism.