Black Economist Explains How America Works

Investment Analysis Clubs Macro Economic Trends and Risks
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Ezra Klein interviews economist Darrick Hamilton who wants to address wealth inequality by giving every poor baby born in the country a $50,000 “baby bond” at birth. Fine, people can agree or disagree on that proposal.

During the interview, Ezra Klein gives a powerful explanation of “How America Works”

{{For income, if you want more of it, you have to go out and work for it. You have to go lift a box or have a new idea or write marketing copy or something. But wealth isn’t like that. What you’ve got to do to get more money from wealth is just let your money go out there and make money on its own.

So the number here that, I think, is really striking is real household income, the money people work to get, it grew by about 30 percent between 1989 and 2018. The S&P 500 grew by about 400 percent. {intercst note: Klein’s off by quite a bit here: the S&P 500 index grew by 800% from 1989 to 2018, nearly 1,600% with dividends reinvested. Maybe he’s adjusting for inflation?} So if you’re working a job and getting raises, you can make more money over decades. But if you just had enough money that it could sit there in the S&P 500, it went up by multiples, and you didn’t really have to do anything new to get that at all.}}

I noticed that by about age 30. Working for wage & salary income was about the dumbest thing you could do in America. And the second dumbest thing you could do was to work more than the 40 hours printed on a salaried employee’s paycheck in the hope you’d get a big raise or promotion. You always seemed to do better by moving to another company every 2 or 3 years. I worked for 5 different Fortune 500 companies during the 1980s.

And since the return on capital far exceeded the return on labor, by far my highest paid hours of the week was the time I spent managing my stock portfolio, rather than doing anything that might make me “more promotable”. {LOL}

Darrick Hamilton points out it’s not just the wage theft and disparate returns on labor vs. capital.

{{DARRICK HAMILTON: The rate of return to capital has grown and continues to grow at a much faster rate than overall growth, and that is how society has been structured. And if you don’t have interventions from an entity like the government sector to allow for some redistribution, oftentimes due to tax code, then you end up in a perpetual cycle, where those that have the benefit of capital continue to grow their capital.

And then here’s the other point. That growth rate and capital certainly can transform political situations to benefit capital in the first place. So in other words, it’s not just economic growth that becomes compounded. The power associated with that increased wealth translate into ability to influence the political structure and system so as to have a feedback to grow your wealth even more. }}

intercst

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Yes, or at least he was trying to. Between 1989 and 2018 prices doubled. Of course you can’t ignore dividends, and half of 800% (9x) isn’t 400% (5x).

DB2

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Something like Pence and Ryan were welfare children.

Some people find help shameful for anyone else and exploit the blaming of poor people for supply side econ failures.

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I don’t disagree with you but…

When analysts talk about investing returns they usually talk about ‘risk adjusted’ returns. I checked your numbers, the raw increase from 12/30/1988 to 12/30/2018 is 803%. I suppose the inflation adjusted number is 400%. What is the risk adjusted number? According to the Pareto or Power Law distribution 3 out of 4 investors underperform the market average. Is the comparison apples to apples or apples to aardvarks?

The Captain

Spanish saying, “Poderoso señor es Don Dinero.”

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You’re correct about the distribution of investment returns for individual investors trading and picking stocks. You can avoid that risk by just investing in a low-cost S&P500 index fund and beat 90% of the impressively-credentialed, impeccably-dressed Wall Street active fund managers. I explain it to people this way. If you could earn a salary equal to or higher than 90% of your MIT engineering classmates, and never crack a book or attend a class, would you take that bet?

I know I would. You can get very wealthy over a few decades by just capturing the S&P500 market return (and of course, minimizing your “skim rate” of fees, commissions, trading costs and taxes.) You don’t need to work a portfolio of Saul Stocks, buy crypto, or worry about the next foolish thing Elon Musk is going to say if you own Tesla. You can actually do very well by doing absolutely nothing.

intercst

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With one caveat…

You need a stake. Most people are born not just naked but stakeless.

The $50,000 proposed stake might do it if not squandered. Holding on to money seems to be a very difficult task. :wink:

The Captain

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Absolutely! I had to work as an engineer for 17 years before I’d accumulated enough capital to retire early at age 38.

Talking about stakes. There was a post on Quora by an MIT grad who’s son was admitted to his alma mater. (MIT has no legacy admissions, everything is on academic merit) Dad was a successful software engineer, mom was a physician, so their income was large enough that MIT expected them to pay the full list price tuition of almost $300,000 for the four-year degree. Son also had free-ride offers from less prestigious schools like Carnegie-Mellon and RPI. Mom said save the money and pick one of the free-rides. Dad cut the check for $300,000. What would you do?

A $300,000 lump sum invested in the S&P500 over 40 years would likely exceed the lifetime income of the median MIT grad by a significant amount.

intercst

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CT Baby Bonds.

In 2021, Connecticut became the first state in the nation to pass baby bonds legislation. Under the current law, $3,200 would be invested on behalf of each child born into poverty, as determined by their birth being covered by HUSKY, the state’s Medicaid program.May 16, 2023

My comment: 18 years later under financial literacy requirements the money can be claimed.

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IMO, the typical financial definitions of risk adjusted return are almost useless for most investor, and if fact are usually misleading.

Most people outside of finance look at risk as to the chance of losing money. In finance risk is defined as the volatility–not the chance of loss. While the broader US stock market is volatile, and therefore risky according to the financial definition, in a practical sense over any reasonable length of time you can’t lose money unless there is a meteor strike or zombie apocalypse.

If you had invested in a low-cost index fund in 1989, the chances of you actually losing money (which is how most people think of risk) was infinitesimal.

For example, the inflation adjusted return of the S&P500 with dividends reinvested from 1989 to present is 985%. The risk adjusted return (Sharpe Ratio) is 0.45.

Over the same time period, the 10-year treasury with coupons reinvested, yielded an inflation adjusted 79%, with a perfect 1.0 risk adjusted return. But with the same actual asteroid/zombie risk as the S&P, it should be said.

So based on risk-adjusted return, which is the better investment? The safe one with the modest return but high Sharpe? Or the safe one that left you filthy rich but lower Sharpe?

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Just a thought.

Output is the product of labor and capital working together. Labor should have an ownership stake in capital so that labor can reap some of the benefits of the returns on capital that come from that output - this will be even more important as machines take over work from labor as time progresses and machines become increasingly sophisticated. (when most labor is done by machines I would want to be sure to have an ownership stake in these machines).

I would think having more people in society with an ownership stake in capital would lead to better societal outcomes. How to make this happen, I don’t know, we have employee stock purchase plans, retirement plans, but these seem out of reach for many workers. And then there are corporate governance issues such as voting rights that may or may not come with stock ownership and conflicts with large, legacy shareholders that may not want to cede much control.

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Hence the constant drumbeat that the “death tax” should be repealed, so the upper crust can perpetuate an ever growing pile of loot in their family’s hands, without any crumbs leaking out to the proles.

Steve

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It is very interesting how the narrative around this is framed.

People will become angry if you suggest that people who did nothing to earn $13 million could be taxed at the same rate who rolled up their sleeves and actually earned their own money. “Wealthy envy” is a term that is often used. As if having begin born with a giant silver spoon in your mouth is one of the most noble callings a human an aspire too. And even the tiniest sliver of that spoon cannot be lost, else the preciousness of that privilege will tainted and we are all diminished as a society.

Because teaching school or hanging drywall involve creating value through human labor, these activities are viewed as putrid wastes of human activity and must be punished through the tax code. It is their own fault those people weren’t worthy enough to be born into nobility.

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Amen to that.

Back in the 80’s, I had a cousin who inherited $400k when she turned 25. Her mother had been killed in a car accident when she was 2 years old and her mother’s parents had passed and left her part of their estate.

She went through all of it in less than 2 years. She had to go back to waitressing. It was really sad.

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Town drunk won $100k lottery. I would go into my barber at that time. Sitting in the chair the drunk would come in and be greeted with a “back again”. The drunk was ex military. He was getting a haircut every single day. I was in once a month and sure enough he was always in that day. He buzzed through his winnings in no time.

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Hamilton was searching for the relationship. The relationship is government spending to encourage factory buildouts. The middle class and lower middle class automatically benefit. Demand for labor goes up. Yes automation this and automation that. But it is not just factory jobs, it is design jobs, sales jobs, management jobs and more…plus the relative cost of living declines, economies of scale and all.

The supply side period starved our industrial base. Talk about a sales job to the public looking for the gullible, “get a tax cut. Lets layoff anyone we do not need”. Like anyone is not expendable…yet dopey supported this for himself and his family.

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The problem with “any reasonable length of time” is that people’s lifesspans don’t necessarily align well with economic and market cycles.

BTW, I agree that “risk adjusted” never made practical sense to me as an investor.

The Captain

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Some civilizations left their fortunes (land) to the first born while others allotted parts of it to all their offspring thereby creating micro farms. None of then were much concerned with the “proles.” If there are historians on the room, can they tell us which strategy worked out better?

On the death tax, I think people should be allowed to distribute their wealth as they wish but I also think it is a big mistake to pamper their children. Rich people should distribute their wealth before they die to useful causes like Andrew Carnegie did. Not like Bill Gates is doing. Warren Buffett is in between, better than Gates but with less control over the ultimate beneficiaries than Carnegie.

The problem with the ‘proles’ as beneficiaries is that it has no lasting effect like Stanford University, Carnegie Mellon University, Carnegie Hall, and Public Libraries. You can see it with recurring “Land Reforms” in LatAm countries where not long after the land is confiscated and distributed that it is sold back to the money class because the small farmers could not make economic ends meet, not even when joined in collectives. In Israel kibbutzim failed.

As much as I love individual freedom and initiative, economies of scale are real.

The Captain

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True. But of course, it’s not all about money. (I agree with Mom, by the way.)