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December 12, 2011

Comments

Half Sigma, you are correct

There is a very competitive labor market, dozens of people fight hard for every super high paid job. Those people who have the ability to win that competition, get the high paid job, and perform well enough to keep that job are truly rich in a way that Marx could not imagine.

A passive investor gets what - 1% interest if he invests his money in a safe instrument. So in order to make $1 million a year as passive owner of capital you need to have $100 million in wealth saved up.

Alternatively you could have the skills needed to get a $1 million a year job, and zero money saved up.

So I agree with you on all that

however where I disagree with many of the people who post here is, how do people get those one million a year jobs.

People on this blog seem to think that if you are born in to the right "club" you are just handed a $1 million a year job. The truth is that the competition is really brutal for those jobs no matter who your parents and grandparents were.

I am sure that you Half Sigma know plenty of people from Penn Undergrad who were born in to the right families, who worked hard to get a $1 million a year job but who just did not succeed at getting and keeping the job while some smarter and hungrier and more socially adept person from an upper middle class background grabbed the $1 million a year job.

I think you have to stop using professionals as examples. The BigLaw partner is temporarily rich. In reality he's a just a highly compensated employee whose station could change drastically at any time if just one or two clients decides to go elsewhere, or if he says the wrong thing to a secretary, in which case the other partners will mercilessly dump him to save their own hides. Then he's just scrounging for contract work. In my experience, most law partners wouldn't consider themselves rich unless they controlled their own time. As a Skadden partner in S.F. once said in an elevator I happened to be in, "non-lawyers have time but no money, lawyers have money but no time."

Lots of people got rich through acting in past eras. Shakespeare and his friends, for example (although Will also was clever with his investments). His actor friend Edward Alleyn earned enough on the stage to found Dulwich College, which is still an educational institution (south of London) with a great little museum. In the Victorian age, Lillie Langtry and Sarah Bernhardt amassed pots of dough from acting, certainly the equivalent of today's cinema millionaires.

"I am sure that you Half Sigma know plenty of people from Penn Undergrad who were born in to the right families, who worked hard to get a $1 million a year job but who just did not succeed at getting and keeping the job while some smarter and hungrier and more socially adept person from an upper middle class background grabbed the $1 million a year job."

You simply have no idea what you're talking about. If your family members are investment bankers, than getting an investment banking job is trivial. You can even go to a third tier toilet school. If your family is not in investment banking, you need to first and foremost go to a target school and keep a high GPA. But at least in the current job market, this by itself isn't enough. The investment banks want to see previous internships, especially in things like asset management, which will be way easier to attain if you are from a connected family. If you aren't from a connected family you will need to do networking - basically convincing people you've never met before that they should use their connections to help you out. What I've seen is that most people who network their way into jobs have a girlfriend or very close friend from an investment banking family.

tl;dr, anyone can do banking from a connected family, from a non-connected family you need to get high grades from an elite school and make friends with people from connected families.

Dividend yield is not the correct way to look at return on the stock market. The return on the stock market is the returns from dividends + the returns from price changes. This is called the total return, and is the amount a passive investors earns. This is best illustrated by the fact that a company that returns a dividend has its share price fall the exact percentage that its dividend equals.

Great post, Siggie. I am going to reward you with another donation !!

BTW, what are your thoughts on the recent announcement that San Francisco is becoming the 1st city in the US to mandate $10 per hour for minimum wage?:

http://www.ajc.com/news/nation-world/sf-becomes-first-us-1257601.html

Shouldn't this be considered a great way to see the experiential results of your minimum wage theories?

[HS: According to the article, it's merely a cost of living increase to the already existing high San Francisco minimum wage. I haven't heard about any massive unemployment in San Francisco; the unemployment rate is similar to other demographically equivalent metropolitan areas.]

Ever hang out with a group of people who make more than $1 million per year in ordinary taxable income?

Overwhelming majority are not people who were born with big trust funds. Big trust funds tend to dull the instinct for hard work that is needed to make $1 million in ordinary income

Lots of people were from the normal upper middle class

Half Sigma, pull out the pigbook from your freshman year. Look at the people who are making $1 million a year today. What you will find are lots of normal upper middle class guys who didn't have the coolest clothes while at Penn, didn't have the upper class connections.

On the other hands, think about the guys from the quad who were born in to elite status old money and wealth. They joined Saint A's or the Castle, dined at the White Dog rather than Troy's or Lee's Hoagie house. Those guys lacked the hunger and drive to make $1 million a year in ordinary income.

Again, Half I am sure you still have the book from freshman year, or your yearbook, or some record of the people you went to Penn with. Look at it and report the results.

[HS: Hoorah for the Red and the Blue.

And by the way, it's very hard to know the difference between the mere upper middle class (who went to private schools) and those who are truly upper class; they tend to behave the same way, talk the same way, and wear the same clothes.]

1. There is an excellent law review article called "The New Property" which formalizes your intuition about human capital. Most law review articles are complete garbage but this one is very good. You should check it out.

2. The reduction in dividend payments probably has more to do with changes in the tax code than anything else.

Half, I am not sure that I agree with you when you say the following

[HS: Hoorah for the Red and the Blue.

And by the way, it's very hard to know the difference between the mere upper middle class (who went to private schools) and those who are truly upper class; they tend to behave the same way, talk the same way, and wear the same clothes.]

Back at Penn the truly upper class males would join the Castle and literally look down on the rest of the campus from their perch above Locust Walk. They could be seen sitting at the Paladium in the afternoon, drinking beer. Mark of distinction was in the vacations they took - sailing for the truly old money upper class males vs powerboating for the normal upper middle class.

Yeah, the old money types typically had their family connections get them plum jobs at the I banks. But they just didn't have the stamina to impress the older guys at the investment banks and get pulled in to the really high paying jobs.

Half, I think that your readers who did not go to Penn sometimes confuse GETTING a job at a prestige investment bank with KEEPING a job at a prestige investment bank. Hundreds of people get accepted in to the entering class of the I banks, but only a small percentage of them are impressive enough ON THE JOB to be able to get the $1 million a year jobs. Majority wash out.

Same thing at Biglaw. If the entering class at a group of biglaw firms is 100, and you visit those 100 people 15 years later, most have washed out. Not made partner, and also not made it in to a million dollar plus perch somewhere else

I think that the big mis understanding among people who read this blog is that they just assume that certain people are granted "tenure" or "seniority" or are made a "member of the club" and can just keep making a million a year for life.

It just doesn't work like that. getting a biglaw job, getting an i banking job is just the start of a harder, more challenging tournament. So yeah the upper class guys are more likely to get to the starting gate, but as I said, pull out the pigbook and see how people turned out. The upper middle class guy with IQ, drive, effectiveness, and social skills has wound up in that $1 million plus job and the well connected trust fund guys typically have not.

[HS: This all sounds correct to me, but I haven't worked at BIGLAW so I haven't been able to personally observe who washed out and who didn't, and as I said, on a casual observation it's hard to distinguish those with upper middle class parents from those with upper class parents. And I wasn't tuned in enough to the Greek system at Penn to know the rankings of the fraternities. I was clueless back then.]

When I played chess in HS I was pretty good. We won a state championship. But our first board was amazing. He went on to be a grand master. He would spot me pieces to even it out. Sometimes, with a big enough handicap, I'd win. Even though I was clearly worse. Growing up prole and competing with well off kids is like playing with a handicap. Sometimes you can overcome it, but it's obvious the game ain't fair.

Alex,

"What I've seen is that most people who network their way into jobs have a girlfriend or very close friend from an investment banking family."

Ah, so what I need is a girlfriend; that's the key to the kingdom.

"When I talk about human capital, I am thinking about it in a way different than the typical libertarian-leaning economist who often talks of human capital as being synonymous with how much education someone have."

I don't think most economists are too stupid to realize that Johnny Depp has very high human capital. Where mainstream economists go astray is in assuming that you can't be born with human capital, that it all consists of things you have learned, rather than things that come naturally to you.

Human capital is THE MOST understudied and misunderstood concept in economics relative to its importance, so kudos for bringing it up.

"I found this guy’s blog post which has a chart showing the declining dividend yield of the Dow Jones index stocks. The dividend yield has a lot of ups and downs, but if you divide the chart in half, the average dividend yield from 1900 to 1955 is dramatically higher than the average dividend yield from 1956 to 2011. I attribute the decline in the dividend yield to increased value transference taking place between the value creation of the corporate employees and the dividend check being sent to the shareholder. "

At some point corporations mostly stopped giving out dividends. That does not mean they started gyp'ing their shareholders. They just instead reinvested and turned the dividends into capital gains. Buffett's Berkshire Hathaway has never given out a dividend. Their poor shareholders all have probably purchased their own islands by now.


"When I talk about human capital, I am thinking about it in a way different than the typical libertarian-leaning economist who often talks of human capital as being synonymous with how much education someone have. "

Perhaps this sort of human capital is emphasized by a certain flavor of economist, but the definition at Wikipedia certainly includes the broader category of traits you are speaking of.

A notable difference between your definition and Wiki's would be that according to Wikipedia, if it doesn't create economic value, then it can't be human capital.

This would seem to rule out using human capital for the purpose of value transference. This isn't a serious problem either... I would tend to just accept the Wikipedia endorsed definition of the concept and then argue about which personal traits actually create economic value.

Some of your statements are wholly incorrect:

"Yes, the world has changed since the days of Karl Marx. There were no movies in the nineteenth century, and therefore no ways to become rich through acting. And there are countless other examples of this trend in other industries. In the nineteenth century, people generally became rich through owning a business. Today, while it still a viable way of becoming rich, people are more likely to become rich through working in law, finance, real estate, as the manager of someone else’s business (such as a CEO), and a few lucky people also become rich in sports and entertainment. "

And yet I recall that David Garrick (an actor) was very wealthy in the 18th century. And your assertion that one could not become wealthy through value transference in the nineteenth century is totally unfounded. Many became wealthy as owners of land, relying on the labor of sharecroppers or slaves to produce value for them. Entertainers were just as renowned: men like Mark Twain or Niccolo Paganini commanded huge fees for performances. People have become rich through value transference (or economic rents) since the beginning of human existence.

mwelt,

Who cares? So apparentely rich kids have to settle for making 300-500k/year as IB VPs if they don't feel like working hard and aren't bright. Boo hoo. Proles that have the same circumstances end up making <100k and hope they don't lose thier health insurance.

It is nice to know that "regular upper middle class kids" (i.e. people around the 90%+ of wealth) can compete with people in the top 2% with only a minor handicap. Meritocracy is alive and well.

mwelt,

People who burn out of IB analyst classes after two years usually go back, get their MBAs, and take on less demanding consulting, asset management, or F500 MBA roles. I.E. if they really are lazy wash outs they still end up making at least 200k, often more.

What does a non connected person have to look forward too, even if they work hard? If they are lucky they will work 3x as hard and get lucky enough to get onto a career track where they can earn as much as a guy with connections that slacked off.

Reread the Great Gatsby and see how the clash between Gatsby (human capital) and the Buchanans (the passive investment people, aka the Old Money) worked out.

The Old Money doesn't earn 1% from their wealth. They own stocks in the established companies, and their money managers also invest in today's markets. They earn way more than 1%.

Plus they have enough clout and connections to make more money.

There was the mention of Johnny Depp. Unless one of his kids become very successful actor, his descendants are extremely unlikely to increase the wealth Johnny has built; in fact they are very likely to deplete it.

Human capital is a one-generational thing, like Napoleon. After the human which made it possible passes on, the legacy soon disappears but those who had passive investment still remain out of sight and enjoy their wealth.

Do we have enormous human capital?

HS,

I think this article might be relevant to your ideas on value creation vs. value transference and human capital:

http://www.ourdime.us/1147/concepts/time-to-resurrect-an-old-idea-economic-rent/

I think the concept of economic rent might be related to the ideas you talk about, kind of as the overarching concept or theme.

"Today, while it still a viable way of becoming rich, people are more likely to become rich through working in law, finance, real estate, as the manager of someone else’s business (such as a CEO), and a few lucky people also become rich in sports and entertainment."

They still need their jobs to maintain their lifestyles, and are therefore working for their money instead of the money being put to work for them. Of course, they can and usually do have investments and stocks, but oftentimes these aren't enough to stop working.

I like the Johnny Depp comparison since a person's skills and other assets can frequently be cashed in to generate revenue whereas simply being given the money is temporary capital that can only be generated at its source, a source other than the individual holding the money. Hence, why it is better knowing how to fish than being handed a fish.

Johnny Depp also has a summer house in Chatham, MA on the Cape.

Acting was also considered a low-class profession and if you go far enough back it was only men who acted, including female roles. Even today many actors are considered lower class despite their incomes and wealth because they firmly hold onto their working class habits learned since early childhood.

That mysterious thing is called social status - if you're popular and people like you, you make money. Don't think so? I give you Sarah Palin.

Compare a woman like Palin to a man like Depp. It's about status or importance in the eyes of others even if it is based on a fiction or superficial things.

There is a term for BIGLAW guy: brilliant lawyer.

There are multiple terms for Johnny Depp: "movie star," "talented actor," whatever.

Rich means having a large number of assets that can be sold. You do not have to redefine the term "rich" to refer to something we already have a term for. It makes you sound like a Sunday School teacher.

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