THE ECONOMIST: American capitalism is run by millionaires, not billionaires

Entrepreneurs in Silicon Valley want to change the world. The ones profiled in The Everywhere Millionaire, a forthcoming book by Owen Zidar and Eric Zwick, are different. They find something boring, often catatonically so, then pursue it with star-spangled doggedness until they become rich.

A typical character sells gutters in Texas. Another distributes toilet paper in New Jersey. One woman in California began baking quiches for her own parties and simply did not stop. Two decades later she was making more than a million quiches a day and owned a yacht.

The authors are economists in the vein of their subjects. Messrs Zidar and Zwick, of Princeton and Chicago universities respectively, spend their days toiling in the thicket of America’s tax data. Much of their work involves untangling the effect of a 1986 law that cut the top rate of individual tax to below the corporate one.

As changes to the tax code are wont to do, this brought about a vast reorganisation of American business. Private corporations were reconstituted as partnerships, sole-proprietorships and other structures which “pass through” profits directly to their owners, who then pay income tax.

These firms receive far less attention than they ought to. Journalists, academics and investors spend most of their time thinking about public companies. Populists direct their anger at a handful of tech executives, because they are the richest and the strangest.

Yet for each member of the Forbes 400 list of America’s wealthiest people, the authors find there are more than 4000 owners of private businesses who are worth at least $US10 million ($14m) apiece.

The top private business owners are better off than public-company chief executives. A number of the characters in the book are millionaires in the same way Warren Buffett, the paragon of Main Street capitalism, is a millionaire — which is to say they are actually billionaires.

An unavoidable conclusion is that the very rich in some ways have it better than the very, very rich. Happier is the local hero with a bowling alley in his house than the national villain with a rocket on his ranch.

Often they travel in the same luxurious style. The authors used private-jet and yacht-ownership records to find the poultry and paper magnates who appear in the book. And plenty own sports teams.

These entrepreneurs benefit from many of the political privileges that titans of tech or finance enjoy, yet manage to avoid public opprobrium. Barrels of newspaper ink have, for instance, been spilled over the political influence of Elon Musk, who may soon become the world’s first trillionaire.

Far fewer have been dedicated to explaining why most American states ban or severely limit carmakers, including Tesla, from selling vehicles directly to customers.

Almost 10,000 coddled car dealerships, which are represented mightily in Congress, have at least one owner in the top 0.1 per cent of national income. Beer distributors are another protected species of wealthy and anonymous Mr Bigs.

This book will therefore be of great interest to those who think the rich have it rigged. These bosses certainly benefit from some of America’s more egregious tax rules, such as the “stepped-up basis”, which ignores historical capital gains when shares are passed on to heirs. (That said, an earlier paper by the authors and their collaborators found that the widely cited decline in the share of income going to workers rather than capital was less pronounced once pass-through firms were properly accounted for.)

The book will appeal even more to those who hope to join their ranks. The desire to get moderately rich slowly is less remarked upon than the impulse to get rich quick. But for every prediction-market gambler there is a “FIRE” fanatic (financial independence, retire early) salivating over the accumulation of moderate riches.

This is especially true at America’s top business schools, where employment through acquisition, which involves buying a small firm of the blue-collar kind rather than getting a job at a white-collar one, has grown in popularity in recent years.

A slightly awkward finding for capitalists hoping to rely on their wits alone is that lawyers — the apex predators of credentialism — earn the largest share of top pass-through incomes. Better news is that much of the private economy is in a state of permanent revolution. Death does the hard work. Messrs Zidar and Zwick found that in the four years after the unexpected death of a millionaire owner, profits at their firm typically fell by four-fifths compared with similar businesses, because it either shrank or went out of business.

Disappointing children are a gift to capitalist reinvention. Being exposed to business while young increases the likelihood of being good at making money in adulthood, but many firms learn the hard way that grit is not heritable.

The easiest way to cheat nature is to sell up, and the easiest way to sell up is to a private-equity fund. The private-equity investor is the risk-adjusted cousin of the entrepreneur. He, too, is primarily an American creature, though he bears a diversified portfolio and little of his own money. His role is vital: one man’s extractive villain is another’s exit liquidity. And if things go wrong, as they often do, another entrepreneur can step in.

A billion dollars isn’t cool. You know what’s cool?

Wannabe millionaires leafing through The Everywhere Millionaire may sometimes feel like they are preparing for drone warfare by studying the Battle of Waterloo. One tale of industrial espionage involves a hot-dog tycoon checking a rival’s relish before being booted out of the kitchen. A row of pale cheerleaders’ legs inspires a strategic pivot from selling sun beds to waxes.

All this might look parochial compared with the civilisational struggles under way in Silicon Valley. Yet that is exactly the point. Much of the spoils of capitalism are still won by those who roll their sleeves up. That is a great thing.