Devils Kitchen< Sedona
Check out this story: http://www.latimes.com/obituaries/la-me-harold-simmons-20131231,0,903769.story#axzz2pB34PBt1
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.
Page Seven 
Yes, yes!
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You raise a lot of questions on how we view entrepreneurship differently and how that shapes our opinions of people. I don’t view entrepreneurs so much by their actions as I do their mindset. I’ve only worked for someone else once in my life when I was going to college and even that was in an autonomous managerial role where I was the quasi “boss”. I can’t imagine ever working for someone else or having someone else make decisions for me. Genetically, I’m wired that way much like the scene in Braveheart where the Scottish army turns its back to the English and lifts their kilts (or was it the front). The American frontier called them rugged individualists, fraternity brothers of my era called me a GDI (God Damned independent) for my aversion to their club of conformity. So in that sense I look at people as a personality type which leads them to their chosen level of “risk taking” as you call it. To me the riskiest things I ever did was follow someone else’s opinion on how to move forward, because it was in their best interest first, not mine. Others seek the comfort and steadiness of a big corporation or big government agency to spend their lifes work. I totally get that and wouldn’t even consider that they were “wimpy” or too cautious. Part of me wishes I could be happy in that environment. The point I’m making is this difference in personality types seems to me to be the underlying conflict in our politics and our conflicts are evolving because our personality types change over time. Its probably safe to say rugged individualists and far left radicals temper their passions and opinions over time as biology and retirement anxiety take over. Our lack of understanding of these issues and diverse personalities gets in the way of our discourse which has turned very nasty over recent few decades. If I looked at your points above, our two personalities would come to different conclusions on the same subject. Capital gains taxes are already full of sticks and carrots. Invest for less than a year, you are taxed at your personal rate. Invest for more than one year and the rate comes down because the government deems long term investment as preferable to “evil speculation”. SS is looking at a baby boomer time bomb and baby boomer’s retirement anxiety is pushing them to look at everyone else to relieve their anxiety with higher fees and taxes. In my humble opinion, this leads teachers and professors to teach a self serving philosophy to the young who parrot the idealistic tones until its their turn to cut the check, now we are hearing only crickets as it pertains to the ACA. But all this mental tweaking of the tax code is the result of our powerlessness over our elected officials to balance the federal and state budgets. We accept the premise that we can’t fix them so we look for those we have power over to enable the irresponsible “leaders” we have elected to maintain their irresponsible status quo of spending in order to maintain their power and security in life. Until we fix this attitude that any cut in government spending is a catastrophe to whomever has to tighten their belt a little, the GDI’s of the World are going to have a hard time with having fingers pointed at them and being called names. We all believe in the temporary social safety net for those in need, but when its turned into a permanent get out the vote effort, generation after generation, some honesty needs to enter the debate. At this rate, the rising baby boomer expenditures are going to intersect with the rising “needy” expenditures sooner than we think and there won’t be enough of these fantasy billionaires on every street corner to make it all safe and comfortable again. We can make the real changes now or have a real catastrophe dictate the changes for us.
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Alex, Thanks for your insightful comments on risk taking. I am very comfortable with the “political psychology” and “politics/economics and personality” framework you use. One of the things that occurred to me while reading your comment is how many big life decisions we make based on things that happened to us in the womb and crib and early childhood — like genes and parental values and basic personality traits. Its interesting that I leaned toward academics for the same reason you leaned toward business. I was, according, to my parents, a very iindependent little brat, I also did not like the idea of working for someone else. I thought becoming a tenured professor (which I never quite achieved) was one way to do whatever I wanted. 🙂 🙂
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Irv
Ronald Reagan raised the tax on capital gains to the same level as ordinary income; basically the tax on income from work was equal to the tax on income from wealth [doesn’t that sound inherently fair, common-sensical?]. Even some “conservative” economists understand why that was important and why it worked. And Venture Capital [VC] marched on like there was no change at all.
Lowering the tax rate on capital gains is a political favor bought by Wall Street special interests, and why Buffett and Romney have lower tax rates than their secretaries; I guess secretaries don’t have a good K-Street lobby workin’ for ’em. ;~{)
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My experience with the VC world in Silicon Valley is that they were quite competent at understanding and creating the future, and successful at managing risk/reward ratios. Otherwise they wouldn’t survive very long. Their competence and financial innovations were an important part of creating Silicon Valley and its eventual global influence as the model for innovation and growth. I’m very positive about the Silicon Valley environment and its VC component. http://www.mdv.com/about-us
In the context of your post I think America needs more of Silicon Valley/VC culture and less of K-Street culture. I guess I’m saying America benefits from “greed” thru’ entrepreneurs creating industries vs. “greed” thru’ special interests buying corrupt favors and benefits.
BTW Mitt Romney failed at venture capital and had to revert to “private equity” — what TX Gov. Rick Perry called “Vulture Capital.” Romney had very little or no value to add as a market visionary, zero technology background, and had no operating business management experience [he was only a financial/cost consultant, not a line manager], so private equity made more sense for his limitations than venture capital. How Romney handled risk for himself feeds some of the thoughts in your post and is covered in the section on private equity in http://en.wikipedia.org/wiki/Mitt_Romney “…Bain rearranged the terms in a complicated partnership structure so that there was no financial or professional risk to Romney.” Romney made money taking risks with other people’s money, not his. I think that feeds the overarching point of your post.
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Kurt, Thanks for your high value added comments. And all I risked to elicit that from you (and Alex) was a blog post. Wow. I’m going to try that again.
I totally agree with you on the VC Silicon Valley (SV) model; and Route 128 in Massachusetts. It has worked well. I think I was clear that I want our system to encourage the VC-SV model, but I don’t think the VCers need the tax breaks to keep it going.
Now that I’ve reiterated this point, it occurred to me, just now, there may be a (big) exception to this asserton. The VCers who are in it to both make money and make a difference in the world, don’t need a lot of tax incentives. They are self motivated to want to change the world, and maybe also get some praise for it, and have a legacy.
But If you’re a rich guy and you’ve hired a big time professional money manager, like the Russell Company (one of my favorites in Seattle), and a raft of tax accountants, to advise you on big investments, they will steer you away from a VC fund, if VC doesn’t have the tax break. The Russell advisor will choose a hedge fund for you over VC, if its left to Russell.
But this is just another reminder that America has gotten away from classic capitalism (using money to build a better mouse trap), and now looks (more) to using money to make more money. I’ve called this “standin capitalism on its head.”
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Irv, it certainly does look that way at times (the new capitalism). The internet has enabled and provided a platform for a new generation with a specific skill (computer engineering/code writing) to collect eyeballs of attention that can be leveraged into billions of dollars. From our generational perspective, it doesn’t look like they have created anything, because bricks and mortar and thousands of employees were how these things were measured not that long ago. The “smart money” from the Wall st epicenter on VC is trying to catch up to the SV VC with its advantage on intellectual capital in these matters. Until the ACA roll out happened, I never heard, in hard dollars, how much VC it takes to create the capacity of a Facebook or Amazon to come to market with a combination of intellectual capital and investment capital. It’s still an enormous investment in real estate, inventory, machinery and people, but structured differently. There is still opportunity for old school perspectives, like ours, in this new capitalism, but it requires a very open mind to see the niches of untapped opportunity and the ability to cast off some “nose to the grindstone” characteristics that have served previous generations. “Some” of those characteristics, not “All” of those characteristics. Working smarter vs working harder has meaning, but having the ability to work harder is still a valuable weapon in our arsenal.
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