BLOG STARTUPS, VENTURE AND THE TECH BUSINESS

November 22 2011
by Todd Hixon

Down With The 1%! Whoever They Are …

Unless you live in a deep cave, you’ve probably heard that the “1%” (top 1% of U.S. households ranked by income) enjoys a large percentage of U.S. after tax income (about 20% in 2007), famously documented by the CBO* (link). The Occupy Wall Street protesters imply that the 1% is mostly Wall Street traders and their big-CEO and idle-rich customers, and they claim that the 1% benefit from an economic system rigged in their favor. Despite the outrage, the protesters and mainstream media have told us little about the 1%. Before we throw them under the bus, we should ask ourselves, who are those guys, and what did they do to become the 1%?

CBO Director Elmendorf: The Face That Launched A Thousand Sound-Bites (Photo: cbo.gov)

I dug past the sound bites, and I learned that the top earners are a broad group of people: primarily entrepreneurs, managers, and professionals. Wall Street traders, big-company CEOs, and trust fund brats are included, but they are not typical. And, most serious analysts conclude that the concentration of more income with fewer people is mostly a result of changes in the economy and technology.

The CBO report gives some insight into the 1%: nonfinancial executives (a far broader group than big-CEOs) make up the largest subgroup: 31%. Within that group, the share of big-company managers declined sharply over the last 20 years, while the share of executives of small businesses grew. Medical professionals are 16%, financial professionals are 14%, and lawyers 8%. The picture that emerges is a wide group of successful people, many of them far from Wall Street.

Why have these people increased their income share? The CBO reports: 1) most of the gains in income of the 1% have come from employment and business income, not dividends, interest, and capital gains, 2) technology has made highly educated and talented people more valuable, by creating jobs that demand their talents and allow them to manage larger, more-complex activities, while it has made less-skilled people less valuable, by automating routine tasks and opening the U.S. to global competition, and 3) unions and minimum wages which protect less skilled workers have lost effectiveness (this is partly a result of the decreased market power of these workers, i.e. a consequence of #2).

In other words, the economy has changed in a way that allows the most talented to play on a larger stage to a larger audience. This is visible in media and sports; it works in business too.

The Economist profiled the rich globally in a recent article (link):

  • Almost half (47%) are entrepreneurs. 23% became rich through highly paid work. The global information society enables the most gifted to apply their talents to broader markets, and that’s a major driver of income inequality. Only 16% inherited their wealth.
  • “A typical American millionaire is surprisingly ordinary. He has spent his life patiently saving and plowing his money into a business he founded. He does not live in the fanciest part of town – why waste money you can invest?”

The Economist’s definition of rich is people with over $1 million of wealth. This broader definition is relevant, because although the outrage is directed against the 1%, the policy response is broader, e.g., Obama’s tax proposals target people with over $200,000 of pre-tax income, which I estimate is about 3x more people than the 1% as defined by the CBO.

You might say, “So what, I don’t worry about the welfare of the 1% or the 3%, they can all afford to pay more for the benefit of society.” I don’t worry about their welfare either.

I worry that we are taking away motivation for achievement, and achievement is essential to the success of our economy in an increasingly competitive world. I’m a venture investor, and a big part of my work is motivating entrepreneurs: money is not everything, but it really matters. Start-ups need highly talented people who will work incredibly hard and take a lot of personal risk to achieve a goal five or ten years in the future, and they can’t pay big salaries, so they need to offer a lot of economic upside via equity. Start-ups matter because they create the majority of net new jobs in the U.S. (source, and a neat video). And, technology and innovation, the work of our most talented people, underpin the U.S. standard of living: technology-based products and services create a big export surplus and enable the strong productivity growth of the U.S. economy. The career of Steve Jobs vividly illustrates the value of an extraordinary entrepreneur to the U.S.: Jobs was well worth his billions.

Highly talented, hard-driving people are becoming more valuable relative to the average; the money is just a reflection of this. They can contribute more, but if we take too much and drive them overseas or to different paths in life, we lose big. In these hard economic times, don’t kill our golden goose.

This post first appeared on my blog at Forbes.com: http://blogs.forbes.com/toddhixon/.

* The CBO is the Congressional Budget Office, a non-partisan institution providing analytical support to Congress.

COMMENTS

November 22 2011
by Peggy Backus

Well said Todd and this is long overdue and a viewpoint that many don’t realize. Having been married to one of these “Entrepreneur types” (whose name will remain unsaid ;) ) for 16 years, I used to say when he traveled on business he forgot to schedule sleep. He made what he earned because he busted his butt day after day, year after year. He read voraciously to keep up with the changing tides!!! And was always helping others/friends find jobs. He gave back to his community by holding positions to speak up for the needs of the community. When tax time came he paid his due and then some!!!!!!!!!!

This is an example of someone who got where he is with good old fashioned hard work, motivation and ambition!!!!! Isn’t that what the American Dream was built on?

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