This story was buried (bad use of word) in the obituary section of the LA Times on December 31st. It is the obituary of Dallas billionaire Harold Simmons who made his fortune as a Texas corporate raider, named Iceman, after structuring leveraged take over bids using junk bonds in the 1970s and 1980s. (quoted and paraphrased from the LA Times story).
The short bio in Mr. Simmons obituary triggered some thoughts about the nature of risk and risk taking in American capitalism; and how we treat risk takers in our culture and economy.
We revere risk takers, reward them generously, and give them many tax and legal breaks…..to make sure they keep taking risks. My belief is that (I am not stating this as an empirically verified fact): The amount of genuine risk taken by many entrepreneurs and investors is greatly exaggerated. It would follow that the benefits and accolades heaped on risk takers by our economic system and tax code (and culture) are excessive and unnecessary. And also harmful, after a point.
Before you are outraged by these assertions, I am going to preview my further remarks by adding that there are a class of (true) risk takers in our system who deserve every encouragement and break they can get. So, kindly stick with me.
An example of a risk taker who doesn’t deserve all the benefits and adulation he receives is the guy who starts out with nothing (or less than nothing). He is down and out, perhaps coming off a series of job failures or bad luck, maybe also failures in school, and thus has few real options other than to roll the dice. (Sure, an option is to file for food stamps, SSI, and section 8 housing, but I’m not going to give him much credit for avoiding that).
You hear often about the high school drop out (or the kid who got into Harvard but couldn’t handle it),taking his last few hundred dollars (perhaps dad was so mad at him for blowing his Harvard chance, that he cut him off), to help make the down payment on a real cheap fixer upper in a neighborhood on the verge of gentrifying. It’s then fixed-up and flipped – maybe that takes a few years — for a cool $500K. He goes on to become a real estate tycoon, and also runs for Governor.
Our down and out risk taker still has much to be proud of. But was it really the lower capital gains tax rate or the watered down building codes that made all of this possible? I would suggest desperation had much more to do with it. Sure, a lot of hard work and brains didn’t hurt, once the fearless investor took the leap. I’m not taking that away from him. Yes, he did build it.
At the other end of the risk spectrum is the gal who is so wealthy, that losing millions is barely a blip on herradar screen. Is the billionaire California venture capitalist who uses multi millions to aid a new business concept really taking much of a risk? Was it the many risk premiums that support investment that really spurred her to help the Silicon Valley start-up? More likely, it was the need for another adrenalin rush, the pure joy of scoring big (yet again), or adding to her legacy, that pushed her to make that investment. (I don’t especially like the “greed” hypothesis. I believe for many who can’t stop themselves from making more and more money, the motivation is similar to the artist who can’t stop painting or the chef who keeps striving for the perfect dish. Maybe I’m naïve).
Somewhere in-between the down and out guy who has nothing to lose, and the Forbes’ top 400 gal whose “risky” investments amount to pennies in her portfolio, are the true risk takers. Who are those folks?
Actually, Mr. Simmons, the subject of the LA Times obituary, was possibly one of them, at some point. If the obituary is accurate (quoting and paraphrasing from the LA Times), Simmons was born in 1931 in Wood County, Texas, in a home without electricity or plumbing. After earning degrees in economics he worked as a bank auditor. Reportedly using (his last?) $5,000 in savings and a loan for $95,000, he decided at age 29 to buy a small Dallas drugstore, which he parlayed into 30 more drug stores and then the buyout of the vast Ward drugstore chain. He sold his stores in 1973 for $50 million and went on from there to be listed as #40 on the Forbes list of wealthiest persons, with a net worth of $10 billion.
Arguably, Simmons a truly big chance at the point when he risked the security of a good college degree and a bank auditor job, where he surely would have made it to “vice president,” and received a (defined) pension benefit plan. He had a lot more to lose than our high school drop out, down to his last few hundred bucks.
Another example of true risk takers are the yuppie couple we hear about, with three masters degrees between them, who quit their urban professional jobs as CPAs, move to the country side, and take their total life savings to start a dog grooming business.
So, why are all these fine distinctions about risk takers so important?
How much risk entrepreneurs truly take in our economy is important because our legal and tax systems revere and reward all capitalists, all entrepreneurs, and all investors, without much regard as to how much risk they actually take, and whether or not they needed the incentives in the first place.
That might be OK if others, like all us timid guys too scared to leave a cushy job with a good health plan to start a business, didn’t have to make up for the lost capital gains taxes. Or, if elderly folks didn’t have to work into their late 70s because social security taxes don’t apply to wages over $108,000.
To sum up: Seems like folks who have so much, that losing would be hardly noticed; or folks who have so little, and thus nothing to lose, are not taking risks when they decide to become capitalists. The in-betweeners are the real heroes and heroines to me.
I don’t know what percentage of capitalists fall into each of these three groups. But I bet a lot fall into the first two categories. I wouldn’t be so annoyed with the guy in the first category if I didn’t have to hear him talk endlessly about how he made it big. This is not jealously or resentment, its just that too often, fellows like that believe poor folks don’t have the right stuff, or that in-betweeners like me, who didn’t quit the good job at age 29, are wimps.
I don’t have brilliant ideas on which economic or tax reforms would result in more fairness without (also) doing real harm to the economy. But, I bet that raising the capital gains tax for people who are already billionaires or allowing the social security tax to apply to incomes of over, say, $500K, probably wouldn’t result in fewer jobs. (Yes, there are some “wage earners” making over $500K. The receipts of workers who cashed in their stock options are treated as wages, or at least they used to be, but only the first $108K was subject to the social security tax.
I understand that if we raise the capital gains tax for billionaires, they may invest in Singapore, rather than Hoboken. So, we need to renegotiate NAFTA, for that reason, among many others. Ooops, does that mean I’ve listened too much to Bernie Sanders and Pat Burchanan? Wait till you see the funky left-right coalition that forms to fight fast track free trade agreements. That story won’t be buried on page seven or in the obituaries.