Tuesday, December 18, 2012

Thoughts on economic inequality

The Economist published a survey of the World Economy last fall, For Richer, For Poorer, analyzing trends and cases in income inequality.  It’s interesting (airplane) reading, and I agree with their remedies:

  • Curb cronyism and enhance competition,
  • Remove subsidies for too-big-to-fail financial institutions,
  • Shift government spending, from transfers to education, and from older and richer people to younger and poorer ones,
  • Reform taxes, making them more efficient and fairer
  • Invest in education, beginning with pre-school and including retraining for the less skilled.

I would add to that Reform immigration laws, and Challenge the sense of entitlement.

1-  Immigration policy and residence processes for expats are a mess in both Europe and the US,  punitive and skewed against stated pro-growth policies. 

Populist movements are pushing for ever-lower quotas, punishing long-term residents with established lives and businesses.  The resulting trials I’m suffering with UKBA for a simple renewal are a typical of the consequences.

Efforts to be evenhanded with both unskilled and skilled migrants have led to emphasis on integration skills and financial maintenance to the exclusion of economic contribution or achievement.  No points are given for stating a business, importing capital, exporting goods, or creating jobs, perverse when growth is the mantra.

It’s impossible to take a long-term perspective in a hostile and changing immigration environment, where I have no assurance that I can stay more than a year at a time.

2- Governments and media promote accumulation of wealth, not creation of innovation, jobs, and markets.

There was a lot of debate about Makers vs. Takers in the recent elections.  The current debates about the Fiscal Cliff turns on whether to raise tax rates on the highest 0.1% of incomes and equalize tax rates for investment income and wage income.  Republican arguments still focus on not punishing success and the trickle-down benefit of having a high-net-worth cohort who buys and invests.

Politicians point to small business is a source of innovation and job creation. Government should, therefore, be supporting and incentivizing creative, energetic people who become entrepreneurs. They could scale regulations and fees, facilitate access to capital and resources, provide grants and tax incentives to those who take the risks and work to succeed.

But policies that benefit established wealth do not help those trying to create new wealth.  We suffer high health insurance costs, restricted access to funding, and anti-competitive practices in market access.  It takes 15% of my time to satisfy legal, financial, and tax reporting requirements every month; my tax rate is double that of Mitt Romney.

And it goes beyond that.

People in the top 5% of the US income distribution earn at least $150,000; the top 1% earn more than $340,000 a year.  0.1% of the population make at least $1.5m, and the top 0.01%, earn $8m or more (average income $24m).  The correlation of wealth with achievement, educational attainment or business success, is strong up to the 1%, but weakens rapidly above that.  The top .01% is dominated by inherited wealth, celebrities, real estate fortunes, hedge fund managers, and large-company CEOs (Economist). 

Not smarter or harder working, more right-place, right time.

I put long hours into the business for little reward at this point: there are a lot of lonely trains and grubby hotel rooms along the road to success.  I hope that one day I’ll market my product, improve patient care, generate of revenue, achieve a 30x exit, please my investors, and retire to St. Maartens.  But it’s fantastically hard work amidst high risk: I give my investors my very best, every day.

And in return?  I got this question yesterday:

The Articles provide first and second distributions to the Founding Members. These members received stock promotion and usually are the last to receive distributions after successful operations and return of capital plus preferential return to investors. It doesn’t look like the founding members have any investment ( skin) in the company but still receive early distributions and strong promotions. We need to examine the capital structure and valuation issues.

This attitude, the primacy of capital investment over sweat investment, really needs to change   We are each contributing a lot of value, taking a lot of risk, and the financier's argument that I’m the only one with something to lose get’s worn after my sixth consecutive 12-hour day. We both suffer opportunity costs, reputation risk, and there are mutual financial consequences.

I walked away from  job paying 250K/yr to work for less than a quarter of that.  If I don’t exit with at least 2M, it wasn’t worth it for me no for my investors.

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