Who Really Creates Wealth?

And who just acquires it?

It takes money to make money. If a wealthy investor buys stock in a company, and the stock goes up in value, and the investor sells that stock the following year, and makes a long-term capital gain (and then uses an accountant to pay a low tax on that gain), the investor isn't actually creating wealth per se (or jobs), they're just seeing a return on their "gamble"—just like playing craps or roulette in Las Vegas.

I was once a day trader, buying and selling stocks online from my desk at home every day (Monday through Friday, from 6:30 am to 1 pm Pacific Time) when the DOW was open. I listened intently to CNBC all day long as I watched the tickers and studied all the reports online. But no matter how much you study the publicly available company financials, or read the reports in Bloomberg or the Wall Street Journal (among many others), unless you have a crystal ball (or have inside information), it's usually a gamble. We all saw the movie Wall Street.

When the markets crashed in 2008, small fries like me got out after sustaining big losses (I needed rent and food, and couldn't wait until the markets returned). But if one has "enough" (or too much), that's not so much a concern. A billionaire can afford to lose half their fortune and wait it out, but the "little people" like me couldn't afford the risk—although I'm sure some people took that risk, and regret it today (because the market didn't bottom out until March the following year).

And just like gambling in Las Vegas, betting on stocks ("investing") can be very addictive and reckless. I know many gambleholics here in Las Vegas (scary $hit, just like drug addicts). And every once on a while, we read in the news how someone lost it all on a blackjack table, and then later jumped out of their casino hotel room (just like they did in 1929 on Wall Street).

The investor is gambling on the CEO of that company to create wealth—that the company might invest in research, invent a new product, build a factory, manufacture a product, market the product, and earn a profit. It's all the "people" along the way—the researchers, inventors, factory workers, advertisers, accountants, lawyers and the company managers—they are the ones that actually create the wealth.

And if a job is created somewhere along the way, it's usually just incidental (the cost of doing business), and has nothing at all to do with any particular decision the investor made (unless it's a CEO like Warren Buffett), other than betting on a stock (Actually, over the past 5 years, usually laying off people made stocks go up; not because of any increased demand, but because the company had cut costs).

George Soros gained international notoriety when, in September of 1992, he risked $10 billion on a single currency speculation when he shorted the British pound. He turned out to be right, and in a single day the trade generated a profit of $1 billion. How many jobs did he create? How much real "wealth" did his gamble create? Did some factory workers somewhere in Asia increase their production?

But the argument always goes, "But if not for us, the investors, wealth could not be created." True. But, as Obama said, "You didn't build it (all by yourself either)". It's a community effort. The investor contributed capital and all the aforementioned workers contributed their "human capital".

When investor's glorify themselves by claiming they took all the risks, that's not true at all. Each and every one of those people (like links in the chain) also took their own risks—just driving to work is a "risk". Working with dangerous equipment in a factory is risky; or moving across the country to take a job offer or investing in college is a risk—all involve some level of risk, more so for some than others.

Sometimes a worker will pay with their life, just trying to earn money for rent and food. A savvy investor rarely bets it all on one stock or company, they diversify, not putting all their eggs in one basket. And rarely is a bad investment lethal (unless they jump out of a 10th floor window on Wall Street).

And if the investor invests in a company when the CEO offshores jobs by building factories in China or Vietnam, how does that make them "job creators", if the only jobs being created are overseas? And if the jobs are created here, and they only pay the minimum wage with no benefits, or if people are brought here with H-1B visas, how could that be anything to brag about—especially when the income distribution mechanism is broken? (High productivity with little reward.) How would an investor like it if they just "broke even" all the time? The hired help would like to see a return on their "investment" as well. They've been waiting for 30 years already.

Investors don't "create" wealth, they just skim the wealth (profits) off the top of other people's labor. That's "manipulating" the wealth, not creating wealth. That's "redistributing the wealth"—from the bottom to the top.

Anybody can gamble. Capitalizing a new start-up is an investment; but betting on the returns of an ongoing operation is just gambling—betting that the company will dodge taxes, get cheaper labor overseas, skirt an environmental law, over-charge the consumer, bust a labor union, get a tax break, get a government subsidy, get a law changed or get a politician elected—betting that the CEO will raise the value of the company stock—because with stock-option grants, they too are also "investors", as are the large institutional shareholders (such as the banks, private equality partners and hedge funds).

From the economist, Mark Thoma: (Paraphrased and edited) regarding Obama's State of the Union speech:

To avoid being accused of waging class warfare, Obama will talk about creating ladders of opportunity, instead of focusing directly on the inequality problem...It's true that opportunity is unequal, and creating ladders of opportunity should be part of any attempt to address the inequality problem. But it's also true that the "distribution mechanism" is broken—the gains from economic growth have not been widely shared. To focus solely on "opportunity" does nothing to solve the problem of income being misdirected to the upper end of the income distribution.

For the last thirty years or so, we have focused mainly on production—on enhancing economic growth based upon the idea that a rising tide lifts all boats. By lowering taxes on businesses and on the so-called job creators at the top of the income distribution, the economy would grow faster and the gains from growth would be widely shared (Reaganonics, "trickle down", starve the beast, etc.) But history has shown us that that has not what happened.

If you accept that paying people according to their contribution to production is fair, equitable, and efficient— in terms of the incentives it creates (paying people the value of their marginal product in more technical terms), then something has clearly gone wrong with the distribution mechanism. Even though worker productivity has gone up for the last thirty years or so, wages and income have stagnated.

Many people and economists now seem to agree that the decline in unions and the increase in political power among the wealthy have caused a very unequal bargaining position between workers and firms. The unequal power relationship has allowed wages to stagnate while incomes at the top have soared. The mechanism that distributes income to various groups in society is broken.

We need better opportunity, particularly at the lower end of the income distribution; but we also need to be sure that when those opportunities are realized, then income also rises with productivity. When it doesn’t, correcting the problem through taxes and transfers or other means is not class warfare. It simply takes income that was undeserved according to societal norms, and sends it where it rightfully belongs..."

....to the people who actually created the wealth, not just acquired it.

In the U.S. the Gini coefficient has been rising steadily since the late 1960s (The higher, the more inequality).

The Gini coefficient for the U.S. is a higher than in many other countries. For example, this analysis from the Pew Research Center shows that the U.S. has one of the most unequal income distributions in the developed world, according to data from the Organization for Economic Cooperation and Development — even after taxes and social-welfare policies are taken into account.

The Gini for the U.S. tells us that inequality has been rising over the last several decades, and the graphical approach that looks at various slices of the income distribution over time allows us to determine that the change in inequality is mainly due to changes in income for the richest 0.1 percent of Americans. That’s valuable information for anyone trying to understand and address the growing inequality problem.

From Naked Capitalism: The REAL State of the Union (a must read):

"We have two states of the Union because we have two Unions, one of the many and one of the few, the haves and have-nots, the winners and the losers. We have one Union based on reality and hard work and another which feeds off it."