by John Tamny
In The New Geography of Jobs (2012) Moretti asserts that “for each new high-tech job in a city, five additional jobs are ultimately created out of the high-tech sector.”14 As people prosper in tech, their need for other services grows—personal trainers, yoga instructors, investment bankers, lawyers, restaurants, wine. . .Since the average American spends 14 percent of his income on food and beverages, where there’s abundant wealth there’s the chance for the Wolfgang Puck or the Danny Meyer of tomorrow to pursue his passion alongside technologists pursuing theirs.15 A rising tide in technological centers such as San Francisco, San Jose, Austin, and Boston surely enhances opportunity for the majority of us not interested in, or intimidated by, technology.
Moretti finds that while Facebook’s workforce numbers in the thousands, the apps that bring Facebook its hundreds of millions of visitors each day account for 53,000 jobs, while 130,000 new jobs are indirectly related to Facebook’s success.16 Likewise, Moretti calculates that the number of jobs for which Apple is indirectly responsible is five times the number of persons employed directly by Apple.17
For many people, their passion for their work depends on being their own boss. Moretti finds that most small businesses cluster around the large ones.18 Big business makes small businesses possible because well-to-do workers need all sorts of services. Wealth begets new businesses and new jobs.
But aren’t these high-tech businesses the preserve of the infamous One Percent? Don’t they foster inequality, which we’re constantly told is bad for the economy? To answer that highly-charged question, let’s consider a revealing fact about human migration, which is a pure market signal. It’s clear that workers eagerly go to where inequality is steepest because that’s where the opportunity is. Danny Meyer is from St. Louis, but that’s not where he starts restaurants (a single Shake Shack being the exception), because it’s losing inhabitants by the day to places that embrace innovation and wealth creation.
The story gets even more interesting when we consider the contribution to economic progress of inherited wealth. Back in the 1970s, most households had only one or two televisions, and their viewing was limited to a few channels. In 1979, when Bill Rasmussen announced the launch of ESP-TV, the future New York Times reporter Bill Pennington thought, “This is the stupidest thing I’ve ever heard.”19 The venture that became ESPN sounded ridiculous. More to the point, ESPN almost didn’t make it. Rasmussen took out a $9,400 advance on his credit card to keep the company afloat.20 His son Scott emptied his bank account to pay the ninety-one-dollar incorporation fee.21 As Michael Freeman writes, the nascent sports network “was hemorrhaging so much some at the network feared it wouldn’t survive beyond 1980.”22
ESPN likely would have gone bankrupt but for the Getty Oil Trust. John Paul Getty, America’s richest man in the late 1950s, left his family a huge fortune when he died in 1976. Eager to diversify the family’s oil-based wealth, the trust invested $10 million in ESPN.23 A network was born.
There are many arguments against the estate tax, but easily the most important one concerns capital formation. Taxes on estates shrink the amount of capital in search of entrepreneurs. The hidden result is an erosion of entrepreneurial risk-taking and an economy riding its brakes.
Supporters of the estate tax dismiss this argument as inconsequential. After all, the $10 million invested in ESPN was a tiny fraction of the Getty family’s wealth. Even with a more confiscatory estate tax, they easily could have ponied up $10 million for this investment. Yet that contention actually clinches my argument. The Getty Oil Trust was happy to invest $10 million in this idea because it would feel no pain if the $10 million were lost. Would this investment have “made the cut” with a smaller estate? We will never know.
The Getty fortune’s role in ESPN’s rise is typical. The banking heir J. P. Morgan provided Thomas Edison with the initial capital for what became General Electric, a speculative investment that provoked his father’s ridicule. The elder Morgan, writes the economic historian Thomas Kessner, “wanted to have nothing to do with the eccentric inventor and his bulb experiments.”24
In 1924, Howard Hughes Jr. inherited his father’s hugely successful Hughes Tool Company, giving him what the aviation historian T. A. Heppenheimer calls a “bottomless pot of money,” which he used to purchase control of Trans World Airlines in 1939.25 Telling those around him “I’ve got the money,”26 Hughes invested in what became the Lockheed Constellation, a fast plane with a pressurized cabin that could fly above the weather.27 Passenger travel by air became common thanks to inherited wealth backing risky ideas.
Nowadays high-risk, high-reward investing is the preserve of venture capital. Since most start-ups fail, as Peter Thiel points out, we need those investors with the capacity to lose enormous sums before they land on the rare success story. Indeed, inherited wealth was particularly crucial to Silicon Valley’s rise. As Walter Isaacson recounts in The Innovators, “For much of the twentieth century, venture capital and private equity investing in new companies had been mainly the purview of a few wealthy families, such as the Vanderbilts, Rockefellers, Whitneys, Phippses, and Warburgs.”28 Venrock, the Rockefeller family’s venture capital vehicle, invested alongside Arthur Rock in Apple Computer.29
Technology is not the only field to benefit from the existence of inherited fortunes, of course. The institutions of high culture—symphony orchestras, museums, and such—are obvious fruits of established wealth, but popular entertainment benefits as well. Megan Ellison, the daughter of Larry Ellison, the founder of Oracle, has taken her inheritance to Hollywood, producing such acclaimed films as Joy, American Hustle, and Zero Dark Thirty,30 while Teddy Schwarzman, the son of the private equity billionaire Steve Schwarzman, has The Imitation Game and other films on his movie-production résumé.31
Because some have abundant wealth to lose, the broad economy gains. The vast amount of money backing all sorts of interesting ideas is producing exciting work. Some of these ventures will succeed, but most won’t, and that’s fine. Information, good and bad, is the source of economic progress.
It is easy to invest in what is known. The accepted strategy of wealth preservation generally involves allocation of capital to the stocks and bonds of established companies. That’s how you and I invest. The Gettys or Ellisons can lose millions on a failed investment without feeling any pain, but it pains me a great deal to lose ten thousand dollars.
That’s the chief problem with the estate tax. Apart from the economic distortions caused by efforts to avoid the tax, it forces heirs to invest what remains after taxes far more conservatively than they would do otherwise. A tax that intentionally breaks up fortunes forces heirs into defensive, as opposed to intrepid, investment stances. It’s a risk killer.
The estate tax yielded $20 billion for the U.S. Treasury in 2003.32 That’s a small number relative to the economy as a whole, but it looms large when we consider what entrepreneurs might have achieved with even a fraction of that $20 billion. How much entrepreneurial experimentation was lost? How many information-rich failures never happened? Taxes on wealth, like government spending, are blinders on the economy.
The visionary George Gilder explains in his brilliant book Knowledge and Power that the “key to economic growth is not acquisition of things by the pursuit of monetary awards but the expansion of wealth through learning and discovery.”33 Gilder’s essential point is that information, attained through risky entrepreneurial leaps and the unexpected, is the source of economic progress. The greatest drivers of modern prosperity—from the railroad, to the telephone, to the car, to the computer, to the jet, to the Internet (not to mention the medical advances that have doubled our life expectancy)—were all surprises. As the early technologist Howard Aiken once told a student, “Don’t worry about people stealing an idea. If it’s original, you will have to ram it down their throats.”34 Everything that’s good seems silly until it’s tried, and sometimes tried countless times.
Major innovations are suspect simply bec
ause they haven’t been tried before. This fact, so important to commercial leaps—those of the past and those to come—leads to a lot of failures and to some successes. More than 99 percent of the two thousand automobile companies founded in the early twentieth century failed.35 Nearly a century later, the vast majority of Internet start-ups vanished too.
Has the U.S. economy been weakened by all this carnage? Quite the opposite. Each era of innovation has been marked by intense experimentation that offered huge surges of information, producing inventions and ideas—all of them surprises—that transformed how we live. This is the source of the abundant range of jobs that is rapidly transforming work from an obligation to a passion.
While defensive investing for wealth preservation is a sensible goal for most people, it’s not the source of intrepid entrepreneurial leaps that produce path-breaking innovations. Estate-tax apologists can point to a microscopic number of U.S. heirs who annually hand over $20 billion or so to the government, but they miss the unseen advances that this money could fund.
It’s the wealth of the largest estates that, if not taxed, would most likely find its way to the riskiest ventures. When individuals and families have “too much” money to work with, their willingness to be experimental grows with each dollar that’s not taxed away.
ESPN, much like the automobile before it and the Internet after, has been a wonderful surprise made possible by untaxed wealth finding its way to a new idea. ESPN employs more than four thousand sports-mad workers at its Bristol, Connecticut, headquarters alone.36 We’ll never know what other brilliant advances never saw the light of day because of punitive inheritance taxes that made heirs far more conservative in their investing. And that forces many of us who aren’t rich to work rather than pursue our passion.
Besides encouraging the kind of investing that enlivens the economy, eliminating the inheritance tax would stimulate charitable giving. Arthur Brooks observes that “among families that give charitably, inherited income raises donations by about twice as much as other forms of wealth (such as money in a savings account or the value of a house), and more than four times as much as earned income.”37 Evidence supporting Brooks’s findings can be found at nonprofits themselves. Many, including the Cato Institute, employ planned-giving experts whose sole focus is capturing wealth that the rich intend to leave behind.
Brooks adds that $50 trillion more is set to be passed on to heirs between the time he was writing (2012) and the middle of the twenty-first century.38 If government taxes these transfers more lightly, the organizations that seek to solve society’s problems would have a great deal more to spend.
Antipathy to taxes—whether income or estate—and government spending is usually regarded as a “conservative” position, but from the standpoint of economics, there’s nothing ideological about it. It’s a question of what drives economic development, government spending or private spending, and the answer is the latter.
Most people are not lazy, but many people appear lazy because they’re in the wrong job. Economic growth is the path away from a life of job-generated misery and subsequent laziness, and economic growth comes from keeping privately created resources in the private sector and out of government hands. That’s not conservative or liberal. That’s reality.
If government spends and taxes less, venture buyers will inform entrepreneurs of what works, preparing the transformation of obscure luxuries into common goods. Reduced taxation of wealth will free up precious capital that can be directed to entrepreneurs, who will surprise us with commercial innovations that will improve our lives and make us healthier.
But won’t eliminating the estate tax breed an entrenched and ever richer ruling class? Remarkably, 70 percent of the persons in the Forbes 400 list didn’t inherit anything.39 The quickest path to pushing today’s Forbes 400 members off of the list is to let them hold onto every dime so that it can be invested in tomorrow’s entrepreneurs.
Indeed, there would be no companies, no jobs, and no nonprofits if no one first created and preserved wealth. No ideology can get around that truth. So the path to the sort of jobs that combine work and passion is spending and taxing less. If politicians were to spend and tax substantially less, the future of work would be bright.
CHAPTER TEN
Love Your Robot, Love Your Job
“I don’t really know what a vacation is. Usually, I’m so interested in what I’m doing and where I am, every night I’m making notes and keeping a record of it for myself. It’s like retirement: Some people look forward to retiring [but] I can’t imagine what that would mean.”1
—Russell Banks, novelist and travel writer
In his endlessly interesting autobiography, Open, tennis great Andre Agassi explains the immense importance of a well-strung racquet. He would bring eight to each match, since “the string tension can be worth hundreds of thousands of dollars.” Well, of course. In a prosperous world that can afford to pay millions of dollars to tennis players, the racquets with which they earn their living must be strung well.
Agassi didn’t let just anyone string his racquets. He employed an “old school, Old World. . .Czech artiste named Roman.” He continues, “So vital is Roman to my game that I take him on the road. He’s officially a resident of New York, but when I’m playing in Wimbledon, he lives in London, and when I’m playing in the French Open, he’s a Parisian.” You get the picture. So did Agassi. Roman’s stringing brilliance reminded him “of the singular importance in this world of a job done well.”2
Roman is the beneficiary of the explosion of highly specialized work sparked by immense wealth creation, and he exemplifies the truth that we’re happiest when we’re working hard at what we do very well. Agassi’s brilliance on the tennis court depended on other men’s doing what they did brilliantly. While millions thrilled to Agassi’s play, he relished “watching a craftsman” in Roman. Agassi intuitively gets the connection between free exchange and the specialization that frees us to do work that doesn’t feel like work.
Which brings us to the great economic thinker Henry Hazlitt. When he wrote his classic Economics in One Lesson (1946), Hazlitt took the charts, formulas, and statistics that informed a lot of economics books and threw them out the window. Because he understood that economics is about human action, not numbers, he made simple and accessible what had previously been obscure to most.
Even though the text is available for free on the Internet, Hazlitt’s seventy-year-old book still regularly ranks among the top 1 percent of bestsellers on Amazon. With good reason. It’s an amazingly insightful read. Those who read it will know more about economics than 99 percent of credentialed, Ph.D. economists. It’s that good.
I read it once a year, and my working copy is full of notes and underlining. My favorite passage, the one that I keep returning to, is this:
What is harmful or disastrous to an individual must be equally harmful or disastrous to the collection of individuals that make up a nation.3
At first glance, that assertion may seem unremarkable, but it’s arguably the most profound and informative statement in any economics book ever written. It’s so powerful that if economists and politicians fully grasped it, our country and the world would be vastly more prosperous than they are. And more to the point, there would be little laziness in the world and lots of joy on Mondays. We would be so productive that the four-day week would be the rule. People would be doing the work they love, so it wouldn’t be work.
I make three arguments in this book. First, everyone is intelligent in his own way. Second, everyone has a huge capacity to work if his work is matched with passion. Third, economic growth will allow work and passion to become one and the same for the greatest number of people. That’s why Hazlitt’s insight is so important. An “economy” is nothing more than a collection of individuals. When we take our economic thinking down to the level of the individual, we discover the secret to roaring economic growth: No individual is made more prosperous if local, state, and federal taxes
shrink his income. What governments spend represents lost spending and savings for every individual.
Of course, we work for money. In the United States, we work for dollars. In Great Britain they work for pounds, in Europe for euros, in China for yuan, and in Japan for yen. The money we work for is what we exchange for all that we don’t have. As individuals, we’re not made more prosperous if the money we earn is devalued by monetary authorities. When they devalue for the sake of what they deem the “greater good,” they vitiate the value of each worker’s work.
And then there’s trade. Absent it, we’d all be extremely poor. In my case, if I had to knit the clothes I wear, grow and raise the food I eat, manufacture the computer on which I type, and build the apartment in which I live, I would soon die unemployed, unclothed, unfed, and without shelter.
Thanks to trade we don’t have to focus on work that doesn’t match our talents. Instead, we can put our individual talents to work in the most remunerative way possible, then “import” from across the street and around the world all that we desire in return for our work. With free trade, we have the world’s producers lining up to serve us, desperately trying to win our business, allowing us to devote our own energy to what we are good at.
Don’t ever forget that an economy is made up of individuals. As individuals, we benefit from light taxation, money that holds its value, and markets open to trade. Those are the basics of economic growth.
What about savings? Economic pundits warn that if we don’t spend enough of what we earn the economy will implode. They argue that consumption is the source of economic vitality. But that’s a naïve error that comes from omitting the individual from their analysis.