A reply to your Op-Ed article in the Wall Street Journal, May 21, 2015

An Open Letter to Warren Buffett

“No conspiracy lies behind this depressing fact: The poor are most definitely not poor because the rich are rich. Nor are the rich undeserving. Most of them have contributed brilliant innovations or managerial expertise to America’s well-being. We all live far better because of Henry Ford, Steve Jobs, Sam Walton and the like.” –Warren Buffett, WSJ, May 21, 2015

Dear Warren:

As much as I dislike taking issue with one of my favorite human beings, my better angels are kicking me and telling me to call you out for the quote above. And so, with great reluctance, I am yielding to them.

First, I agree that many wealthy people have contributed much to society, including the ones you named. But none of them acquired great wealth based only on their knowledge, skills, or contributions. To believe otherwise is to ignore the huge creative pool of abilities implicit in the other 99 percent, the contributions of all of our educational institutions, our health care system, family ties, social networks, friends, and neighbors, the inheritance laws, and the American workforce. The overwhelming majority of the rich inherited their wealth, and rode their inheritances to even greater wealth via the normal growth that flows to owners of stocks, bonds, and real estate. For example, Sam Walton died in 1992 and left an estimated $23 billion for his five children. Today, their net worth is $140 billion. What was their genius? They had the good sense to select their parents wisely, while leaving their investments in the hands of competent advisors where they have received an annual compound growth rate of 8.2 percent. They also hired tax experts that shielded every dime from taxation. Oh, I didn’t answer my own question—their contribution was close to zero.

I don’t know how much of Henry Ford’s wealth was earned by Henry, but his children and grandchildren had nothing to do with earning it. Like the Walton siblings, they inherited theirs. What about the Koch brothers? Inheritances. I don’t know much about Steve Jobs, but my guess is that among the 100,000 Apple employees you will find 10,000 to 20,000 who are smarter than Steve Jobs or Tim Cook. Somewhere in their employment contracts more likely than not is the condition that all inventions and breakthroughs from them become the property of Apple. You can go down the list of America’s richest families, and find that inheritance jumps up as the runaway #1 reason for their wealth.

But all of that is anecdotal evidence. The underlying fact about wealth is that 98 percent of it is passed on to individuals, while churches, schools, and charities receive 2 percent. That division has been in place for a very long time. Also the long term annual growth rate for wealth over the past 50 years has been roughly 7.2 percent. Also the average life expectancy for benefactors is 80 years, and the average age of beneficiaries is 50 when they receive their inheritances. Their inherited wealth doubles three times until their deaths at age 80. Someone who inherits $10 million at age 50 will live to see it grow to $80 million. Therefore, it is nearly a mathematical certainty that 98 percent of all wealth is inherited by individuals, and 98 percent of all new wealth is attributable to inherited wealth. It also follows that 96 percent of all wealth is inherited wealth, directly or indirectly (98 X .98 = .96). That remaining 4 percent currently amounts to about $300 billion annually, enough to produce a few new billionaires, and many new millionaires. But there are at least 100 million persons competing for that wealth, so it is not an easy task to grab and hold onto that small percentage that is there. Chance is probably the biggest factor after good health, good education, good family ties, and lots of good connections. Skills with throwing, kicking, catching, hitting, or slam dunking a ball is big also, followed by singing, acting, or selling drugs. All of my numbers come from the Fed’s Flow of Funds Reports, and are in the public domain. My analytical reasoning is my own, but I do give credit to the universities I attended, a little to my professors, and my readings, research (especially from the Internet), and my work experiences.

Now, the top 10 percent of households possess 90 percent of all wealth ($90 trillion), while the next 30 percent—the middle class—hold all the rest. They have $10 trillion, or 10 percent of all wealth. The bottom 50 percent of Americans (approximately 160 million) have an average net worth of zero.

It follows that if we were to enhance the incomes of the most needy among the bottom 50 percent via an altered EITC tax credit, such changes could help them today, but it would still leave them in the bottom half of the wealth curve. Hence it is not a long-term solution to the issue of either wealth or income inequality.

The long-term solution to income and wealth inequality consists of: 1) directing more new money from the Fed into M1 via smaller banks and credit unions so more gets into the hands of small businesses and individuals thus creating more jobs, more income, and more taxes; 2) limiting the size of banks and large corporations thus creating more competition the essential feature of a free market system; 3) imposing a transaction tax on large securities trades thus raising new tax revenues from the greatest pool of low-taxed wealth; 4) abandoning the concept of “too big to fail,” thus putting the brunt for bad decisions on those who make them; 5) limiting the inheritance laws so that financial dynasties are no longer possible. I have expanded on this solution at this location:

http://www.authorsden.com/visit/viewarticle.asp?id=73901

Thanks for your time and attention.

Ed Phillips
Bradenton, FL