By John Lawrence
Now that Thomas Piketty has clued us in with his book, Capital in the Twenty-First Century, that the upper one percent is making all the money and that the middle class is getting screwed, as if we didn’t already know that, the question remains what should we do about it?
Paul Krugman seems to think that government should redistribute money from the wealthy to the poor, and this would be a good solution, one that is achieving good results in Europe, but, since the US government is owned by the wealthy, one that is unlikely to be manifested here any time soon.
Piketty points out that income is derived from two sources: labor and return on capital or wealth. Capital and wealth are essentially synonymous by the way. Here’s Lesson #1: capital or wealth is not static; it generates income all by itself in the form of interest, dividends or rent.
The good news is that you don’t have to be “wealthy” to derive at least part of your income from wealth. The more income you derive from wealth, the less you have to derive from your labor. The average American, however, is not aware of this truth.
Lesson #2: you don’t have to be “wealthy” to derive some or all of your income from wealth. Neither do you have to be an exceptionally talented person and/or start a Fortune 400 corporation like Bill Gates (Microsoft) or Irwin Jacobs (Qualcomm) to derive part or all of your income from capital.
The problem is that most middle class Americans have been programmed to derive all of their income from labor, and they have been programmed to spend all of their income on consumer items. That’s the paradigm that needs shifting.
The conventional wisdom is that everyone should go to college. (This piles up student loan debt payable to Wall Street.) Next buy a house. (This comes with a mortgage payable to Wall Street.) Next buy a car. (Make that payable to Wall Street.) And then to make your lifestyle complete, spend to the max on your credit card. This lifestyle makes you poor and Wall Street rich. Over the course of a lifetime, perhaps as much as two thirds of all your expenditures will be interest payments to Wall Street via their local store fronts – Bank of America, Wells Fargo and Citibank.
To suggest, as I’m doing, that there is an alternative lifestyle of low consumption and wealth creation for the average Joe is revolutionary in and of itself because the American GDP is 70% consumption. The big corporations can’t survive if everyone consumes say 30% less and puts that money into wealth creation for themselves instead of wealth creation for Wall Street.
The middle class dream of a good job which comes with a pension and a comfortable retirement is passe. The premise is that you will work all your life till retirement and then you will get a pension till you die. But pensions have gone by the wayside having been replaced with an even more insidious bag of worms: the 401k.
First let me tell you why even pensions are a sick form of wealth creation for you. Your money was set aside in a separate account presided over by a pension fund manager. The income stream from the wealth that that created was used to pay your pension.
The wealth or capital itself, however, was owned by the corporation or government so that, when you died, the capital in and of itself went to the corporation or government and not to your heirs. Again you were used to create wealth for a corporation not for yourself. Secondly, pension funds have been raided by corporate raiders and hedge fund managers for years.
Financier Ronald Perelmen took over Revlon in 1985, shut down its pension plan and got control of more than $100 million in surplus pension assets. Charles Hurwitz took over Pacific Lumber, closed down its pension and used $55 million in surplus pension assets to help finance his buyout.
Recently, public workers in Detroit have had their pensions slashed after the city went bankrupt. Wall Street has also duped pension fund managers with interest rate swaps and other derivatives with the result that many pension funds have lost huge amounts of money. The biggest victims of interest-rate swapshave been local governments, universities, pension funds, and other public entities. More and more pension fund money is going to pay the exorbitant fees charged by the Wall Street firms managing the pension money.
If you took the same amount of money that was put in a pension fund and invested it yourself, not only would you derive the income stream generated by the resultant wealth, but, when you died, the principal amount could be passed on to your heirs and they could derive the income stream in perpetuity. Lesson #3: Generate your own wealth. Don’t depend on a corporation or the government to do it for you.
As exploitive as the pension system is, the 401k is even worse.
First, there is no guarantee that you will be able to even derive an income stream from it at all which will afford you a comfortable lifestyle after you “retire.” That means that you will essentially consume your asset instead of consuming an income stream from it that leaves your asset intact. And what will you do if it’s gone before you die?
Second, Wall Street managers are milking your 401ks, siphoning off huge amounts for themselves. Forbes says management fees are the “last great rip-off in retirement saving”.
Third, since the money is invested on Wall Street, you don’t know when the next financial cataclysm is coming that will make the bottom fall out of the stock market like it does periodically. The big guys, the high frequency traders and front runners, will sell short and make big profits. The average person with a 401k will see its value plummet perhaps just prior to retirement.
The US economy consists of bubbles which are inflated by government policies and then burst leaving the little guy in the lurch. The bursting of the stock market bubble in 2000-2001 and the housing bubble in 2007-2009 left the middle class poorer while the upper 1% only garnered a huger share of national income and wealth. Check out Piketty’s book if you don’t believe me.
So what I recommend is to accumulate wealth without resorting to a pension or a 401k, wealth that will allow you to derive part or all of your income from it at any age regardless of the rules about when you can or cannot “retire”. Lesson #4: The objective is to replace income derived from your labor with income derived from your wealth. Again you don’t have to be “wealthy”, you don’t have to be a millionaire, to replace income derived from labor with income derived from wealth. And you don’t have to have a “wealthy” lifestyle, you don’t have to own a big house, a yacht, a big car etc to be living off an income stream derived from capital. In fact you can lead a comfortable middle class lifestyle and derive all your income from wealth. Such is the nature of retirement.
The “wealthy” person with a huge house, several luxury cars and an ostentatious lifestyle may not be deriving any income from wealth at all. She may have a huge salary and spending every bit of it on mortgage, car, credit card and student loan payments, most of this going to Wall Street. She is in fact just a mega consumer and is probably house poor.
Far from being a repository of wealth, a huge house is an income sink because of mortgage payment, insurance, maintenance and property taxes. The plumber with a couple of rental units may be deriving more of his income from wealth than she is. Lesson #5: Ostentatious consumerism has nothing to do with deriving an income stream from wealth.
What I’m proposing is to stay away from Wall Street both as a consumer and an investor, not lead a life of conspicuous or ostentatious consumption and gradually over time replace income derived from labor with income derived from capital. Piketty points out that capital is almost evenly divided between real estate and financial instruments. Lesson #6: Avoid financial assets that mainly accrue to the benefit of Wall Street and invest in local real estate instead. The current stock market bubble will burst sooner or later leaving the little guy with a 401k broke.
I grew up in a town of 1500 people and two guys that I knew accomplished this objective without being particularly entrepreneurial or talented. Irv Treiser was an optometrist, and I imagine he wasn’t busy full time with his optometry business. He had the time and energy to buy fixer uppers, fix them up and rent them out. He thus created wealth and derived an income stream from the rents he received. Thus he could work or not as he chose. He wasn’t absolutely dependent on his own labor because he had an alternative income derived from wealth.
Art Siegle, the plumber who lived next door to Irv, did the same thing. Joe Albright, the barber, did the same thing. If they needed a loan, they went to see their neighbor, Paul Grau, at the local Farmer’s National Bank in town, a bank that was not affiliated with Wall Street.
Or, alternatively, take the $25,000. that you would invest in a college diploma and invest it instead in a piece of farmland and start an organic farm. Then at least you have an asset from which you can derive an income from both your own labor and the capital represented by the farm. For example Susie’s farm is a local farm producing organic crops for the people of San Diego. This is from their website:
Suzie’s Farm is a 140-acre USDA-certified organic farm located thirteen miles south of downtown San Diego. We grow over 100 varieties of seasonal vegetables, herbs, flowers, and fruits, year-round. Our Suzie’s farm-ily includes 85 employees, a handful of happy farm dogs, and a fleet of 300 egg-laying hens.
One of the exciting possibilities inherent in organic farming is CSA (Community Supported Agriculture) in which members of the community sign up for a box of produce at intervals of time and in effect become shareholders in the farming project.
There are many other ways to lead a healthy lifestyle while building wealth and serving the local community, combining sweat equity with a capital asset.Lesson #7: You can lead a productive life doing something you enjoy, serve the local community and build wealth at the same time. You can have a comfortable lifestyle devoid of ostentatious consumption while allowing you the free time to do whatever it is you really want to do whether that is surfing, skiing, traveling, playing golf or composing poetry. And you don’t have to reach “retirement age” in order to enjoy it. Unlike a pension, when you leave this earth, you can pass on your assets to your children.
The American lifestyle is so consumed by work that most people don’t have the energy to create wealth after work. Most people work eight hours with a one hour commute and a one hour lunch. They have no energy to do anything else but flop in front of the TV when they get home and run up their credit cards.
You really need to have your own business like Art, Irv and Joe and work part time in order to have the energy to create your own wealth. Lesson #8: Have your own business and work part time. This allows you the time and energy to build wealth in local real estate or anything else. It’s important to be self-employed and not be an employee of somebody else. For example, I make 5 or 6 times as much money per hour being self-employed as I would doing the exact same work as an employee. This allows you to meet basic living expenses without working full time. And you have to underconsume, putting your money not into savings which yields zero interest these days, but into building wealth by other means.
It also helps to acquire carpentry, electrical, plumbing and other skills preferably in high school so that you can put sweat equity into building wealth instead of acquiring the worthless knowledge foisted on you in order to get a sufficiently high SAT score to get into college.
Remember Einstein said that if he had it do over again, he would have been a plumber. And he could have been a plumber and worked out his Relativity Theory in his spare time.
Let’s give Thomas Piketty the last word:
Today around 10 percent of domestic production in the rich countries is due to nonwage workers in individually owned businesses, which is roughly equivalent to the proportion of nonwage workers in the active population. Nonwage workers are mostly found in small businesses (merchants, craftsmen, restaurant [owner/workers], etc.). For a long time this category also included a large number of independent farmers, but today these have largely disappeared.
On the books of these individually owned firms, it is generally impossible to distinguish the remuneration of capital: for example, the profits of a radiologist remunerate her labor and the equipment she uses, which can be costly. The same is true of the hotel owner or small farmer. We therefore say that the income of nonwage workers is “mixed,” because it combines income from labor with income from capital. This is also referred to as “entrepreneurial income.”