My Friend the Billionaire

Technically he's still in the 180 day lock up period after his company went public where he can't sell shares yet, but as long as the price doesn't drop by more than 25%, even after taxes he'll be a billionaire. 

We are high school friends. He wasn't my best friend in high school, but he was definitely on the short list of good friends. We spent a lot of time together way back in 2001-2003. But times change, he went to MIT, and I purposely did not even apply because I didn't want to follow exactly in his foot steps. Funny enough, he was the liberal one and I was the conservative one back then. Now I'm pretty liberal in many respects as I try to interpret Matthew 22:39. I wonder in what ways he's changed. We haven't kept in close touch. I think I only saw him twice in college and I didn't go to his wedding. I bet he doesn't ride the subway as much as he did in college. 

Once when we were in Spanish class I remember us having a discussion in English and he said that his older brother an engineer was rich, because he had a hot tub. I'll call my friend J. I think J was maybe trying to decide what he wanted to do and he wanted a good paying job. He ended up majoring in software, which definitely worked out for him. There are only approximately 740 USA billionaires, and now one of those is a good high school friend of mine. It's bizarre. All this talk of inequality... it puts the discussion in a new light. 

I'm in approximately the top 10% of Americans for income based on my age. After going to Africa in 2013, and reflecting on the many other international trips I have taken, it's hit me for years how fortunate I am. Even when I have a week like this one where my 4runner needs $1400 in various repairs. I'm very fortunate, I just go and pay the bill. $1400 is more than many people survive on for a whole year. Yet my dominate savings are locked up in my 401(k) like many Americans, not in a publicly traded company. How to put this another way, J is on the brink of having enough money to do more financial philanthropy than everyone that went to high school with him combined. His tax bill, even with just long term capital gains, will probably be greater this one year than all of the income, sales, and capital gains taxes I have ever paid combined. When I think of how much I donate to Give Directly, it pales in comparison to what he could do with 0.1% of his wealth in a single year.

Sometimes I think people think of billionaires are "others", as not normal people. As people with the capability to put microchips (with antennas and batteries) through a tiny needle into a human and have it capable of not corroding instantly and being able to transmit signals through human tissue. The reality is, if my friend was seated two tables away at a restaurant, I might not even see him. Guaranteed that basically no one would recognize him in Colorado, and he's not famous. He drove a little red Ford Focus in high school and didn't have a car the first part of college. While being very intelligent, and having a healthy dose of emotional intelligence even back in high school, he's just a guy. In some ways it scares me, because if he is the representation of the top .0002% of Americans, we're nowhere close to having a Star Trek warp drive to take us around the galaxy or tricorder to detect cancer. On the other hand, if he can do it, well, I might not be able to replicate that success, but I can definitely do something similar. 

I invited him to come out and ski sometime here in Colorado. I'm guessing he'll do his own thing and not take me up on the offer. It's strange, I have two friends with condos in Aspen, which I always think of as the peak of my kind of luxury, but my friend could go and buy a ranch there if he wanted and fly there in his private jet. (I can basically guarantee he doesn't have a private jet yet, that just wasn't his style, and he's probably still figuring out what to do with all that money.) I know that some of his high school memories were not pleasant, and for all I know I might remind him of some of that pain. I hope he's doing well and I'm excited to see what my 36 year old billionaire friend does the next 50 years.

Movie Review: On the Basis of Sex

I have the best life in the world.

I have the best life in the world…

I have the best life in the world, in large part because I was born in the United States as a white male to Christian parents who deeply valued education. (Most importantly because I am Christian, but I’m going to take an economic and financial bent to this article and more or less ignore the Christian part.)

I just finished watching the movie “On the Basis of Sex” and it’s a good movie. I’ve thought about men and women for years. Men and women are different. I’ve thought about this for hundreds of hours, and unfortunately, I can’t be any more specific than “men and women are different”, because every generalization I come up with, I have an anecdotal example to disprove. Importantly, being different does not mean the inability to do something, which is kind of the point of the movie.

In July 2013 when I went to Rwanda for a week I looked at poverty for the first time as something to be solved, not simply as the natural consequence of a person’s birth, as I had looked at poverty in 2009 when I went to Pakistan, or 2007 when I went to Costa Rica. It broke my heart. In the years since I donated to a pastor in South Sudan, and now Give Directly is my main charity. Point being, I've very much realized how fortunate I am to have my life. Privilege is something that accrues slowly and in small pieces. It's generally easier to be white than black. It's generally easier to be a man than a woman. It's generally easier to have two parents rather than one. 100 years ago women couldn't vote in the USA. 160 years ago we had slavery. It can be hard to see your privilege in the moment, but the vast majority of the world can be thankful they are alive today, when there is the least amount of war around the globe on record.

My company has been on a hiring spree lately, and in the next two months as all the new employees start we are about to have double the percent of female workers as the average aerospace company. There is one particular meeting that I lead, where currently it’s four men and one woman, and in two months it will be quite possibly two men and three women. (That’s based on two of the men deciding that they do not need to attend the meeting any more, which is not at all certain, although both have voiced that they would like to hand off their responsibilities. Although they have both expressed that they like this particular meeting, so they might keep coming just because we usually get things done.) I’ve been a part of hiring two of these new women. To me, in aerospace or technology in general, hiring women is a signal that we are an employer that is desired. In other words, the top 5% of employers have their choice of candidates regardless of how low the unemployment rate is. The less prestigious employers don’t have much choice. Having started to interview people, and interviewing two of these women, I can verify that we are attracting great people! Many of the people we don’t hire are going to have good strong careers.

One of the things briefly mentioned in the movie is that perhaps some jobs will be half men and half women. Frankly, I don’t think there are many jobs that will ever achieve that ratio. I think teaching, especially at the elementary school level, and nursing will be dominated by women for a long while, while things like engineering and and law enforcement will be male dominated. That being said, equality in every possible respect is not the point. The goal at the finish line of the Boston Marathon should not be the fastest 20 runners being ten men and ten women. Defining equality as half of each profession being male or female is quite short sighted, and by that I mean that what we define as masculine or feminine today could quite likely change in 100 years. For example, male grooming was not really a thing until somewhat recently while society seems to expect women to shave half of their bodies. I like cooking, and I would be glad in any romantic relationship to do the majority of the cooking.

As I seem to end up dating women that are almost as feminist as me, and a large number of engineers, it should be obvious that mentally women can do the things than men do. Katie Bouman was the instigator behind the first image of a black hole, and she’s not a man. I feel sorry for her because of all the negative feedback she has received for her great interferometry achievement. I look forward to her using that technology to take pictures of exoplanets! I know for a fact that female engineers can have a difficult time, by getting talked over and overruled when a male engineer might say the same thing and be listened to. Having seen that happen, and having a sister who used to be an engineer (but has gone over to the dark side of management and marketing) I try to make sure that the women I work with are heard and have the resources to do their jobs.

With all inequalities, we can't have a scarcity mindset that freedom and justice are limited things. A woman being in senior management at a company doesn't take away a spot from a man, it widens the pool of possible senior managers [from just men to men and women] so that the best can rise to the top. The goal is to have the most appropriate person in each role, not simply a person in each role. Listen, if you aren't capable enough to compete with everyone, maybe you shouldn't be in your position of authority.

Felicity Jones is amazing! Armie Hammer plays just enough of an egalitarian that you might not notice he’s not the typical 1950s New York lawyer. Kathy Bates… always good. It’s a good movie. If you haven’t seen it, it’s at Red Box.

The Aging United States

In my laid up state of a broken foot I’ve had too much time to read the news, specifically the politics, than is probably best for me. For those that I don’t get into these discussions with much, economics are always interesting to me, politics is generally just frustrating. In other words, I can geek about about tweaking marginal tax rates, or eliminating the payroll tax cap, or basic incomes, but listening to confirmation processes and gridlock turns me off. 

Today’s topic is the aging of the United States and a few effects that is having, and will continue to have. 

First, the birth rate for native born Americans is below replacement levels. The only reason the US is still growing is that we have immigration. This means a few things, it means that jobs that cater to the 65 and older crowd are only going to increase. It also means that jobs that cater to babies and infants will likely decrease. For jobs that cater to the middle there might be not a huge affect because of immigration again.

Second, changing subjects quite a bit, as it relates to the 2020 presidential election, I haven’t read any analysis about this and it’s a point worth mentioning, I think. Instead of looking at 2020 through a broad impersonal lens, let’s start with the 2016 and 2018 elections. People voted for Trump for a variety of reasons. Starting with these 2016 Trump voters, which are generally older and whiter than Clinton voters, I would assume that a larger percentage of Trump voters will die than Clinton voters, simply based on the 10+ point swing for Trump from voters over 65, and 10+ point swing for Clinton for voters under 30. So, with the addition of four years of 18 year olds, who will likely vote for the Democrat, for Trump to do exactly as well as he did in 2016, assuming the same number of people vote, there will have to be people, around middle age, that voted for Clinton in 2016 and plan to vote for Trump in 2020, and I’m not sure who that person is. Or third party voters in 2016 that become Trump voters in 2020. In other words, I have not heard anyone say, “I voted for Clinton in 2016 but Trump is doing such a great job he’s already got my 2020 vote.” I’m sure that person does exist, I just haven’t met that person.

Third, again a large subject change, I’ve read a few articles about housing lately, and it speaks very directly to me. Over the past 20 or so years as the baby boomers reached their peak earning years and started to retire, a wealth of large houses in the 2500+ square foot range were built. However, people are not getting married as young as their used to, and more importantly, not having as many kids as they used to. I’m a perfect example, I’m 32 and single, and I’m feeling my 950 square foot apartment is actually about 200 square feet more than I really want. Sure I would love to get married and have a few kids and live in a larger house, but with each passing year and failed romantic relationship attempt that seems more and more unlikely. Plus, while many call me minimalist, it’s really more of a utilitarian and practical view that I have. Who needs two guest bedrooms? As infrequently as most people have guests, does it make sense to have more bathrooms than people in a house? The upside to this is that as older people age out of houses with stairs, private airplanes, and driving little sports cars hopefully prices should be a little more attainable for those luxuries.

Fourth, social security. I propose two changes, first eliminating the payroll tax cap. Along with that change, there would be no cap on social security payments. Meaning, if you earned $10 million a year for 35 years, your social security benefits would end up being huge! The best part is that everyone would benefit, because of the three different rates of social security payout (90%, 32% and 15%), when you are above average earnings of about $5400 per month for 35 years, you only receive 15% of that in benefits, which essentially means the government is making something like 85% profit on those taxes. Or another way to look at it is, the taxes from that one person are funding multiple lower earners who end up living longer than their average life expectancy. (I know the math is way more complicated than assuming that $1 into social security for person X means $1 out of social security for person X.) The second change is raising the ages that social security pays out to better align with current life expectancies. I'm open to suggestions here, one year would make a big dent in the amount required to pay out. Perhaps part of that is not placing a cap on the age that benefits no longer increase. Instead of age 70.5 being when you max out your pay out, lets those benefits continue to increase at 5-8% per year until you want to collect. Only about 2-4% of people wait until age 70 to collect, might as well provide more incentive to let those people delay even more.

Fourth, as a whole, I don’t really know what the aging of the US, and also the world in general, means. My parents who are baby boomers lived in a time when there were kids everywhere. I live in a time where kids are now a bit rare, sort of a luxury item. In 30 years, I suppose kids will be even more rare? Are bars and loud restaurants going to close because the under 30 crowd is smaller? There will be a transfer of wealth from the dying older people to the younger people, which I have a feeling will accelerate inequality. I do think that service jobs, like the baristas standing in front of me, will see a pay increase because there will be people who are in their 70s who want services, but few people under 70 to provide those services. Although I could easily be wrong about that. 

I just wanted to share those thoughts with you, because whatever the effects, I’m sure that that there will be effects. 

A Concrete Example of Inequality

I’ve been investing in the stock market in individual companies since 2011, and one of the first companies I bought was John Deere. I only bought a little, but I still own it and it's increased in value quite a bit. They send out a nice annual report every year, and attempting to be the diligent investor, I’ve read most of it. One thing that caught my attention years ago was the major ownership. As of the 2018 annual report which was just sent out in January 2019, there is an organization called Cascade Investment L.L.C. that owns 9.8% of John Deere on page 22 of the annual meeting and proxy statement. Turns out, it’s one of Bill Gates investment firms. 

Bill Gates owns 9.8% of John Deere

So Bill Gates owns owns 31,423,573 shares. In 2018 Deere paid $2.58 in dividends per share of stock. That comes to $81,072,818.34 that Bill Gates made in dividends just for owning such a large share of the company. To the best of my knowledge, he’s basically all hands off and doesn’t really direct the company at all. However, I’m pretty sure that somewhere up the ladder phone conversations happen, and Microsoft will be used at Deere indefinitely. 

The CEO, who does a good job, made $18,525,667 from employment in 2018. In other words, the CEO who works hard, certainly ends up answering calls and emails on the weekends and at night, made less than 1/4 of what Bill Gates made, just for owning such a large portion of the company. That’s inequality! I’ll call that inequality #1 for the day. 

Top Five Employees Pay

Inequality #2 is between the CEO and the next four highest paid officers. The next four people made between $4,273,996 and $4,633,762. That’s less than a quarter of what the CEO makes. I am 100% a fan of CEOs being paid well, but is it really appropriate for the CEO to make over four times as much as the division directors? I mean, 50% more or double would still be a huge step up. I mean, for the average person, if they had a salary making $1.5 million a month I don’t think they would last very long, probably only a number of months, at the most a couple years. I just don’t really know what you do with that kind of money.

An aside, if the CEO was fired, for cause, meaning he did something wrong, he would still get over $42 million dollars. 

Inequality #3 is for the board of directors. While they certainly serve an important function, basically keeping the CEO and senior leadership from going off track, it is a part time job, something that probably takes 2-4 days per month on average. Let’s just say that it takes a total of two months of full time work per year. For the members that served a full year, they were paid $270,160 to $329,928. Hands down, I want that kind of job! You could sit on one or two boards, make half a million dollars a year, and work less than six months a year. 

I want to be on a board of directors!

The final inequality, #4, is between the median employee and the CEO. The median employee was a US based employee who made $76,083. That’s 1/243rd of what the CEO made. In other words, the CEO is doing the work of 243 median employees. What is interesting about this, is that as Deere expands outside the USA the current ratio of 29,152 employees in the USA and 42,946 outside the USA will become even more lopsided. Eventually the median employee may very well be an engineer in India, at which point the salary will be somewhat less than $76,083. As I’ve thought about financial inequality probably over a thousand hours I can’t see the reasoning to pay any one person more than 10 times any other person. Ten times the median USA income is a pretty large income. You can afford to fly first class wherever you go. You could live in a million dollar home. You could buy that fancy sports car. You could buy a vacation home. I don't see how you can really justify an income above $10,000,000 per year on a value added basis. I will say, I do think that founders of companies, like Steve Jobs and Bill Gates and Jeff Bezos deserve outsized rewards for the disruption and innovation they implemented. However, there is a difference between being a manager and being a founder. A manager likely took the safe route, at an established company and worked his or her way up. A founder risked going bankrupt to corner a market that likely didn't really exist when the company was started.

Median Pay to CEO Pay

In closing, Bill gates was paid by John Deere 1,065 times as much in dividends alone, not counting stock price appreciation, as the median employee and more than four times as much as the CEO at John Deere, simply because he owns the stock and not because he worked on those Saturdays when production was behind schedule, or did any work at all actually relating to Deere. That is inequality. 

Again, I am a shareholder of John Deere. I think Sam Allen is doing a really good job. Bill Gates is donating more money to charity than probably anyone in the world, which is great. I do think people in corporations responsible for making big decisions should be paid very well. I think founders of companies like Microsoft should be rewarded for their innovation. As for my politics, I'm a registered unaffiliated voter, I like to think I'm independent. I just look at these numbers and get frustrated, and want to go into politics to revise the tax code and lower the price of healthcare or at least make the prices more transparent. I'm privileged. My parents gave me opportunities when I was young, helped pay for a chunk of my college expenses, and (along with my extended family) bailed me out in 2010 when I couldn't find an engineering job. I'm good at what I do. I'm not the best configuration engineer in the world yet, but I'm good. Still, I expect that I will only make $3-5 million dollars in my entire working career. There are thousands of people that stand to inherit more than that. And my income is above the median and above the average, for whole households! So when I struggle to save money and pay all the medical bills after having a broken leg and pulmonary embolism in six months, how is the median person or family supposed to afford a safe place to live, a car, food on the table, and a little entertainment in this country?!