On March 18, 2015, Michael Hiltzik writes in the Los Angeles Times:
The idea that the average guy can become rich via hard work and rigorously virtuous thrift is one of the compelling myths of the American experience.
But for the most part, myth it is. Two recent events are both driving it forward and exposing its basic phoniness. The first is the death last week of Thomas J. Stanley, coauthor of the bestselling book “The Millionaire Next Door,” in a car accident. The other is the death of one Ronald Read, a Vermont retiree who appeared to be one of Stanley’s emblematic secret blue-collar millionaires — after a lifetime of low-wage menial work and frugal living, he was discovered to have amassed a fortune worth about $8 million.
Let’s take them in turn.
Stanley’s 1996 book, co-written with William D. Danko, defined the “prototypical” American millionaire not as an ostentatious Gatsby or Trump but as the proprietor of a “dull-normal” small business — “welding contractors, auctioneers, rice farmers, owners of mobile-home parks, pest controllers, coin and stamp dealers, and paving contractors.” His (mostly) or her median income was $131,000, and median net worth $1.6 million.
“We wear inexpensive suits and drive American made cars,” the book said in the voice of its putative heroes. “Only a minority of us drive the current-model-year automobile.”
But as Helaine Olen points out in the most clear-eyed valedictory to the late Stanley, his book “was already describing a vanishing world when it was published.” Fewer young people starting their careers today have had even the middle-class upbringing or family resources of so many of Stanley’s quiet millionaires.
That makes a big difference, because it’s rarely appreciated that many small businesses start with family investments. Remember Mitt Romney? As a presidential candidate, his advice to young students was: “Take a shot, go for it, take a risk, get the education, borrow money if you have to from your parents, start a business.” But what if your parents don’t have any money?
Olen reminds us that the Stanley millionaire model was a bit fraudulent from the start. Economist Nassim Nicholas Taleb noticed, in his own book, “Fooled by Randomness,” that the picture painted by “The Millionaire Next Door” was the product of survivor bias — “the authors made no attempt to correct their statistics with the fact that they saw only the winners,” he wrote. What of the millions of investors who invested in the wrong things or whose paving companies failed? They outnumber the winners by a large margin.
Taleb also observed that the book reflected “an unusual episode in history” when the return on assets was astronomical in historical terms. It arrived when that episode was playing out. Only three years after its publication came the dot-com crash; less than a decade later came the 2008 crash and a grinding recession that consigned lots of formerly million-dollar small businesses to oblivion.
That brings us to Ronald Read, who died in June at the age of 92 in Brattleboro, Vt., and was soon discovered to own a safe deposit box stuffed with stock certificates and other investments totaling $8 million. The news broke last month, after it was learned that he had bequeathed millions to his local library and hospital.
There’s no doubt that Read’s accumulation of wealth from a lifetime of work as a service station hand and later an employee of his local JCPenney was an exceptional achievement. On CNBC, a panel of investment types praised his “strategy,” which appeared to consist of buying dividend-yielding blue chips, leaving them alone and spending little on himself.
But it’s hard to know what life lessons one should draw from Read’s experience. In part that’s because his life story already has been subjected to a certain amount of caricature. He was frugal but not the isolated loner who never spent a dime, as he’s sometimes depicted.
Read’s one marriage, at 38, brought him two teenage stepchildren, who he moved into a Brattleboro home he bought for about $12,000 (in the early 1960s) and supported through college. “He was a super good stepdad,” his stepson, Phillip Brown, 70, told me this week. He “never really took a vacation,” Brown says, and remained healthy well into his 80s.
One of CNBC’s analysts suggested that Read’s success could be replicated by merely investing $300 a month and letting it ride for 65 years; at an 8% compounded investment yield, that sum would grow to $8 million. That seems doable on the surface, but could it be done by a low-income laborer starting today? It’s extremely doubtful.
For one thing, as the investment website Philosophical Economics rightly observes, that $300-a-month investment estimate ignores inflation. “Sixty-five years ago, $300 per month was a very large amount of money…. No janitor on earth would have been able to afford it.”
The website calculates that the required investment was $524 a month in 2015 dollars. That would have been a real challenge for someone in Read’s economic position, so he deserves major props for achieving it through what seems to be genuine discipline in his lifestyle and investment practice.
But the real secret to his success was catching the asset wave that Taleb mentioned. In other words: luck. The period in which he invested started with extreme undervaluations in the equity market. BusinessWeek’s famous (or infamous) “Death of Equities” cover story ran in August 1979. Since then equities have been on a long-term tear; $100 invested at the start of that period would be worth $2,000 today.
But these trend lines occur less than once per lifetime, and ’70s-vintage rock-bottom valuations, which were themselves the product of a high inflation and interest rate environment, aren’t in place today, when inflation and rates are near historic lows.
Read’s frugality assisted his portfolio in another way. Since he apparently felt no need for the money, he didn’t have to draw it down at various low points — say in March 2009, after it had lost nearly 60% of its value at year-end 2007. And by not selling, he didn’t incur capital gains taxes, which were extinguished upon his death.
To sum up, we should admire Read for living in a style that suited him and that would eventually benefit at least two deserving nonprofit institutions in his community. But it’s one thing to admire that lifestyle, another to aspire to it.
“The Millionaire Next Door” elevated self-abnegation to an investment rule — what Thomas Frank, another critic of their book, termed the authors’ “militantly Calvinist attitude toward consumption” in which “saving and investing are ends in themselves, evidence of moral virtue, while spending is empty dissipation.” Olen, among others, mentions the neat irony that Stanley met his end while driving a Corvette, not normally a symbol of asceticism.
Sometimes spending isn’t a choice, either. If Read suffered from poor health during his working years or required long-term care, his estate would be a fraction of what it was.
For the rest of us, saving and investing is an act of deferred gratification — by waiting, we have more to spend on goods and services that please us. “I see no special heroism in accumulating money,” Taleb wrote, “particularly if, in addition, the person is foolish enough to not even try to derive any tangible benefit from the wealth…. I certainly do not see the point of becoming [a millionaire] if I were to adopt Spartan (even miserly) habits and live in my starter house.”
Thank you Michael Hiltzik for writing this excellent article. You have clearly identified the NUMBER 1 REASON why ordinary people have no real chance of ever becoming rich, without denying themselves consumption in order to save. As Hiltzik so well frames the problem: “The idea that the average guy can become rich via hard work and rigorously virtuous thrift is one of the compelling myths of the American experience.”
But why is this? Because the vast majority of Americans are enslaved to a menial job that pays a low wage from which to support themselves and their families. Even after a lifetime of low-wage menial work and frugal living, there simply never is enough money to meet day-to-day, week-to-week, or month-to-month expenses and to be financially prepared for a job layoff or an emergency, or to pay for a college education for their children.
Even for those whose parents are relatively wealthy due to higher wages earned at a job, the vast majority will never be able to start a small business (risk-prone) with family investments. As Heltzik points out, “fewer young people starting their careers today have had even the middle-class upbringing or family resources” required to have a chance at succeeding.
Because young people are so desperate to not end up in poverty or in dead-end or unrewarding jobs, they are encouraged to take a risk, get the education, borrow money if you have to from your parents, and start a business. But how real is that prospect? Most families are constantly struggling to end the month above water, struggling to pay rent or avoid foreclosure if they own a home (that doesn’t produce income but is consumed). We only ever hear of those who have succeeded, the tiny minority who were able to come up with a brilliant new invention or innovation or whose restaurant or other small business became a success or whose small savings are placed in the gambling market of second-hand stocks that Wall Street bosses want you to believe is an investment. The successes are far smaller than the failures.
I think that if you have read this far you get the picture. This doom will broaden as tectonic shifts in the technologies of production continue, at an exponential rate, to destroy jobs, devalue the worth of labor (thus earnings from jobs), and shift productive input from labor intensive to capital intensive (the non-human means) as the primary way to produce products and services.
THERE IS HOPE! But only if we can develop new leaders.
But first, there is a reality that must be understood. The Rand Corporation statistic was 98 percent, to represent the productive physical capital factor input to creating products and services. In concentrated capital ownership terms, roughly 1 percent own 50 percent of the corporate asset wealth with 10 percent owning 90 percent. This leaves 90 percent of the people scrambling for the last 10 percent, with them dependent on their labor worker wages to purchase capital. Thus, we have the great bulk of the people providing a mere 10 percent or less of the productive input. Contrast that to the less than 5 percent who own all the productive capital providing 90 percent or more of the productive input, and who initiate and oversee most of the technological advances that replace labor work with capital work.
Our scientists, engineers, and executive managers who are not owners themselves, except for those in the highest employed positions, are encouraged to work to destroy employment by making the capital “worker” owner more productive. How much employment can be destroyed by substituting machines for people is a measure of their success––always focused on producing at the lowest cost. Only the people who already own productive capital are the beneficiaries of their work, as they systematically concentrate more and more capital ownership in their stationary 1 percent ranks. Yet the 1 percent are not the people who do the overwhelming consuming. The result is the consumer populous is not able to get the money to buy the products and services produced as a result of substituting machines for people. And yet you can’t have mass production without mass human consumption made possible by “customers with money.” It is the exponential disassociation of production and consumption that is the problem in the United States economy, and the reason that ordinary citizens must gain access to productive capital ownership to improve their economic well-being.
As a result, the trend has been to diminish the importance of employment with productive capital ownership concentrating faster than ever, while technological change makes physical capital ever more productive. Corporate decision makers know this, whether in the United States or China, or anywhere organized assemblies of people engage in production. Technology is an easier and faster way to get a job done. Because technology increases the profitability of companies throughout the world, technology always has the advantage over human labor when the costs of them are the same. But because this is not well understood, what we as a society have been doing is to continually shift the work burden from people labor to real physical capital while distributing the earning capacity of physical capital’s work (via capital ownership of stock in corporations) to non-owners through make-work job creation, minimum wage requirements, and welfare programs. Such policies do not function effectively.
Why is this important to understand? Because earning an income through labor alone is not the solution to abating growing economic inequality. If we continue with the past’s unworkable trickle-down economic policies and focus on boosting the minimum wage and make-work full employment, governments will have to continue to use the coercive power of taxation to redistribute income that is made by people who earn it and give it to those who need it. This results in ever deepening massive debt on local, state, and national government levels, which leads to the citizenry becoming parasites instead of enabling people to become productive in the way that products and services are actually produced.
We desperately need new justice-committed leaders, especially those who want to end the corruption built into our exclusionary system of monopoly capitalism––the main source of corruption of any political system, democratic or otherwise. We need to radically overhaul the Federal tax system and monetary policies and institute proposals to get money power to the 99 percent of American citizens who now only rely on their labor worker earnings or who have become dependent on welfare programs. We need to adopt a more just and simple tax system, wherein access to ownership of the means of production in the future would by provided to EVERY child, woman, and man by requiring government to lift all existing legal and institutional barriers to private property stakes as a fundamental human right.
The system was made by people and can be changed by people. Guided by the right principles of economic justice, “we the people” can organize and demand that the system be reorganized to make true economic democracy the new foundation for true political democracy. The result of this new movement of new justice-committed leaders and activists can be inclusive prosperity, inclusive opportunity, and inclusive economic justice.
What we really need in the 2015 to 2016 presidential election years is a national discussion on the topic of the importance of capital ownership and how we can expand the base of private capital ownership simultaneously with the creation of new physical capital formation, with the aim of building long-term financial security for all Americans through accumulating a viable capital estate.
It is imperative that leaders seeking new solutions cease the opportunity presented by the 2016 presidential election to implement effective programs for expanded ownership of productive capital, and address the problem of education on this subject.
We need leadership to awaken all American citizens to force the politicians to follow the people and lift all legal barriers to universal capital ownership access by every child, woman, and man as a fundamental right of citizenship and the basis of personal liberty and empowerment. The goal should be to enable every child, woman, and man to become an owner of ever-advancing labor-displacing technologies, new and sustainable energy systems, new rentable space, new enterprises, new infrastructure assets, and productive land and natural resources as a growing and independent source of their future incomes.
The general and specific objectives of this Just Third Way have already been researched and published by a group of new leaders who need to be heard. Support the Agenda of The Just Third Way Movement at http://foreconomicjustice.org/?p=5797, http://www.cesj.org/resources/articles-index/the-just-third-way-basic-principles-of-economic-and-social-justice-by-norman-g-kurland/, http://www.cesj.org/wp-content/uploads/2014/02/jtw-graphicoverview-2013.pdf and http://www.cesj.org/resources/articles-index/the-just-third-way-a-new-vision-for-providing-hope-justice-and-economic-empowerment/.
A core principle of conservatism is,
“IF IT AIN’T BROKE, DON’T FIX IT”
So, why do conservatives keep fixing a system to make a few obscenely wealthy people even wealthier?
If they abided by their own principles they’d be fixing the system they claim is meant to make the poor and all people wealthier. That’s the system which is really broken.