5 'Truths' About Business And The Economy That Are BS
Our lives are one long timeline of discovering everything thought we knew about money is wrong. Early on, we're shocked to learn fairies don't really hand out money for teeth but people do voluntarily exchange money for vegetables. And even once we start making our own money, we don't understand it nearly as well as we think we do. For starters, maybe you should reconsider ...
Everything People Think About What Companies/Billionaires Are Worth
Hey, did you hear about how Apple became a trillion-dollar company a few years back, and then became a two-trillion-dollar company seemingly right after that? Crazy, right? I mean, there are Apple stores here and there, but not twice as many as back when the company was worth a single lowly trillion. And what about those richest people in the world, going from net worths of $100 billion to more like $200 billion in no time at all. Where's all that money coming from?
"Ah!" people say. "They're taking it from you and me. The rich get richer and the poor get poorer." After all, wealth doesn't just get created out of nothing!
Well, actually, wealth can be created, it's created every time anyone does work ... but that's not what I'm going to talk about today. Money (which isn't the same as physical wealth) can also be created, created out of nothing ... but I'm not going to talk about that either.
That's because the headline above, and the headlines you keep seeing about tech companies and billionaires, aren't really about wealth or money. They're about stocks, and stocks are a special kind of made-up value. Like, you might say that all kinds of value are made-up, but stocks are super made-up, and a lot of people don't get this.
Let's imagine a company. We'll call it Dick Wigs Incorporated. Dick Wigs Inc. has a million shares, and its current stock price is $2. That means the shares are worth $2 million in total, so the company is valued at $2 million. Now, let's say you go and buy 1,000 shares at $2 each. Good for you. But when you're done, it seems no one is too keen on selling so cheaply anymore, and the lowest anyone is selling a share for is now $1,000. You say to yourself, "hey, YOLO," and you spend $1,000 to buy one more share.
Suddenly, something very exciting has happened to Dick Wigs Inc. Its new stock price is $1,000, and with a million shares each now valued at that price, the company is now valued at $1 billion. It doesn't actually have $998 million more in wealth than it did yesterday (wealth is measured in real, physical dick wigs). Nor did customers or investors hand over $998 million in cash—investors merely exchanged $3,000, among themselves, with the company getting none of it. And yet the company is now worth $1 billion.
"Dick wigs for women?"
"Dick wigs for women!"
More interesting to you, maybe: You are now worth over a million. Your bank account may be $3,000 lighter than it was yesterday, but you now own 1,001 shares that are each worth $1,000. Hooray, you're a millionaire! Just, don't go buying that new home quite yet. You might have some trouble selling all 1,001 shares to other investors at $1,000 each. In fact, you might have trouble selling even one share to anyone for $1,000.
Now, the numbers in that example weren't realistic; I exaggerated to make a point. So let me next give you a real example that's only slightly less ridiculous. At the start of this year, AMC's stock price was $2. The company was worth about a billion dollars. But then, thanks totally to speculation, its stock price rose to $60. The company therefore became valued at $30 billion. They didn't get an extra $29 billion from anyone, and they're actually on track to lose $1 billion this year. The $30 billion is not real money at all, and when they try to turn it into real money, they can expect a few setbacks.
CEO Adam Aron owns four million AMC shares. In January, these were worth $8 million. Today, they're worth $240 million. Definitely, he's had a nice year (thanks to events for which he deserves no credit at all). But if we calculate how much richer he got, we run into problems. Would you say he had an income of $232 million this year, and should pay a third of that in taxes? That'd be tricky, since he doesn't actually have $77 million in money to pay that tax bill. Should he sell a third of his shares to get the money? That's impossible—he's legally barred from selling that many. And even if he could, they'd fetch less than $77 million, as the price will drop as he sells them.
Similarly, Jeff Bezos doesn't really have $200 billion in money, and he has no way of converting his vast Amazon holdings into 200 billion actual dollars. You see factoids about the amount he makes every second or what his net worth's like next to yours, but those don't really give you a good picture of how much money he has. Oh, he can turn some of his net worth into money. He can make billions selling Amazon shares—just not the hundreds of billions that the stats say he has.
When he does sell, by the way, we tax the money he makes. We don't tax just his token salary and nothing else like some people claim; that would be stupid. Remember that bombshell report a few weeks ago about how billionaires pay "little to nothing" in taxes? It listed Bezos as paying $973 million in tax on an income of $4.22 billion, or an income tax rate of 23% (it listed income tax rates of 19%, 29%, and 29% for Warren Buffet, Michael Bloomberg, and Elon Musk).
And hey, maybe they should pay higher rates. Double, maybe more—I don't know how much makes sense. Or maybe we can create a new system to tax the hell out of some of their zaniest purchases. The true incomes here are themselves obscenely large, which gives us plenty to get worked up about. But you don't have to get extra worked up over the terrifying spectre of unrealized capital gains. You're worrying about money that doesn't actually exist.
"You Can't Pay Employees $15 An Hour And Profit!"
"We won't make money if we pay employees more!" say companies. And the general populist response to this is "lol, fine." Higher wages are about letting employees live better, not about keeping profits high, right?
And yeah, it's true that some companies can't afford to pay $15 an hour (just as some companies can't afford to pay $5 an hour). But as quite a few companies do start paying even their lowest-level service employees that much, we should realize that in the past decade, $15 an hour stopped being some grand redistribution scheme and just became the price of labor. Target pays a minimum of $15 an hour, and so does Best Buy. When Costco raised their minimum to $16, they outright declared that "this isn't altruism" because it's just how they compete.
Amazon pays a minimum of $15 an hour, and we know there's no chance they chose a pay rate for the sake of being generous. Amazon's policy may surprise you if you've heard tales of thousands of employees being on food stamps, but it is possible to be on food stamps when making $15 an hour. The minimum wage for individual earners is never going to be enough to support, say, a family of six.
Chipotle now pays an average wage of $15, and they've publicized this widely, informing us that these higher wages mean their meals are now more expensive. Not because of inflation, but because they personally are getting squeezed:
The general populist response to this is, also, "lol, fine." An extra 30 cents per burrito is no big deal and is a far cry from, say, the $25 Big Macs that some people claimed higher wages would doom us into eating. But even in not caring about the increase, we do seem to accept the idea that Chipotle were forced into raising their prices. Which is wrong of us. They weren't forced into anything.
Again: Yes, a higher minimum wage might ravage some companies, sapping all their earnings, and making them raise prices and pray customers don't flee. But when a company makes $350 million in annual profits like Chipotle does, they don't set prices by saying, "If costs go up by x, we have to raise revenues by x, and get the exact same profit as last year!" They pick whatever price gets the maximum profit, taking into account demand and competition.
So, Chipotle wouldn't sell a burrito for $25 no matter how high their labor costs, because few people would buy those pricey burritos. The company would earn less selling burritos at $25 than at $7. Evidently, people will buy burritos for $7.30, so Chipotle makes more money selling them for $7.30 than for $7. But that just means $7.30 was the smarter price for them whether or not wages went up. No, they didn't have to raise prices because they gave workers raises -- that was just a good excuse they put on the press release.
You see this misconception about pricing with other stuff too. "If Apple made iPads in America, they'd have to sell them to us at eleventy thousand dollars each!" says one famous factoid. And maybe it's impossible to profitably manufacture iPads domestically (it would be impossible to make them without international trade period), but no, Apple would never raise the price to $5,000. Because if they did, sales would drop so much that they'd make less than if they sold iPads for $500.
If a $5,000 iPad made them more money than a $500 one (enough to even cover all those crazy hypothetical American labor costs), Apple would be selling iPads for $5,000 right now. They set their own prices and already madly jack them up, going as high as they figure people will pay.
Back to fast food places, though: Yeah, chains probably are going to raise their prices given a higher minimum wage, but not because they have to. Chipotle has money to burn—they didn't have to raise executive pay by tens of millions or spend tens of millions on buying back their own stock this year. Oh, and their labor costs actually dropped 10 percent in the first quarter. Somehow, they didn't use that as a reason to lower burrito prices.
"All Of Our Tax Money Goes Into Defense"
Much like Cotton-Eyed Joe, government money is a mystery: Most of us aren't clear about where it comes from or where it goes. For example, would you believe that, until the recent round of tax cuts, 95.2 percent of income tax revenue came from the top 20 percent of earners? And that 24 percent of all income tax was paid by the top 0.1 percent? Not the 1 percent—the top 10 percent of the 1 percent.
That info doesn't really mean the rich are overtaxed, by the way. You might instead say it just reveals how high their incomes are, or how essential it is that we tax them because they're how we fund the government. But if you like thinking about tax in terms of people paying their “fair share," those stats feel wrong, and they're the opposite of what you'd expect. We all like to imagine that the government is taxing just us, and is spending money on everything but us.
With some people, the spending half of that idea translates as imagining the government burns most of its budget on foreign aid and welfare fraud, but with our readers, I figure you imagine something more like this:
"We'd have enough money to pay for health care for everyone and wiping out debt and universal basic income and more if we only trim that ridiculous defense budget," people say. And the US does spend a lot on defense, more than the next several countries combined. But did you realize that the government spends more on Medicare than on the entire Department of Defense? Going by 2020 numbers, it's $917 billion on Medicare and $714 billion on defense.
That's just Medicare. If you tally up all the federal government's health care spending (including Medicaid and discretionary spending), it comes to $1.6 trillion, over double what it spends on defense. Social security alone (over $1 trillion) is more than the entire defense budget. Money for the poor (food assistance, unemployment money, etc.) is also more than the entire defense budget—and that's excluding all the extra money spent on COVID relief in 2020, since we're trying to talk about what spending's like in general, not about The Weird Year.
Education? We fund schools locally, not federally, but with education too, more total tax dollars go toward public K-12 education than to the Pentagon. Plus, have you heard what a shame it is that we spend so little on our veterans but so much on war? And yet we actually spend ... well, not more on veterans than on defense, but about $280 billion on veterans versus $714 billion on defense, which is a hell of a lot more than you might expect going off how many vets are homeless.
Now, I'm not listing numbers to convince you we need to cut spending in a bunch of places. Some of the things I mentioned are actually funded in different ways, so you can't always pick and choose where to cut even if you wanted to. Here's the actual sobering takeaway: Extravagant projects cost plenty, but distributing to millions costs more, even if you help each person just a tiny bit.
So if you're wondering why Bruce Wayne wastes money on batarangs rather than solving crime by lifting all of Gotham out of poverty, maybe it's because his fortune can only go so far in a city of 10 million. Or, if you're wondering why Bill Gates doesn't just end world hunger tomorrow, well, we'd love to hear what your plan is for permanently feeding billions of people using only tens of billions of dollars. The government would probably like to hear that as well. They have tens of billions too.
"College Students Are So Narcissistic Today You Can't Hire Them"
"Kids today!" says Bob Boss, the hiring manager we just made up. "They're so self-obsessed, so full of themselves. Them with their apps and tattoos and selfie sticks ('selfie sticks' are what the current generation call dildos, I hear). In my day, we were humble and had a little something called respect. You could deal with us. This current crop? Pah! Not worth a brass farthing, the lot of them!"
But Bob Boss is wrong. The generation coming out of college right now harbors deep self-loathing. A constant need for approval doesn't signal a high opinion of oneself but rather the complete opposite. Many youngsters today don't even want to be alive. They're bitterly desperate to be hired and will even utterly debase themselves in the process.
Now, if you check the previous paragraph's links, you'll see they aren't actual sources but are instead just a list of popular social networks. If you want some real info on the subject, I could provide that too, I guess. Psychologists have a measure for narcissism, which they call the Narcissism Personal Inventory scale. No one's sure just how good it is at assessing mental health, but it seems good at measuring plain self-esteem. And after testing tens of thousands of students over the course of decades, psychologists have concluded that narcissism has been dropping, not rising.
So maybe young applicants don't need a scolding. Maybe they just need a hug. Uh, wait. Put down your greasy hands, Bob, forget we said that last part.
The Myth Of "Self-Made" Fortunes
Few things get our eyes rolling harder than hearing a newly rich entrepreneur described as a "self-made millionaire" or "self-made billionaire." Because outside of the very rare exception (say, Oprah), these people didn't start from humble beginnings at all, did they? "So," we tell ourselves, "it's nuts to describe Elon Musk as self-made when his father was rich enough to buy a share in an emerald mine. Or to call Kylie Jenner a self-made billionaire when she basically came from royalty." Dig in, and you learn that these people always started out wealthy, right?
Well, you're largely right about that last part ... but also, you're not really a detective for figuring that out. When Forbes declares someone a self-made billionaire, the company knows if they came from a rich family, and they aren't trying to convince you someone violated the law of conservation of matter by starting from nothing.
A self-made billionaire is someone who started their own business and grew their money to a billion, even if they had some money to begin with. If you start out with $1 million and grow it to a billion thanks to the company you start, you are a self-made billionaire. If you start out with $100 million and grow it to a billion thanks to the company you start—and that's still not easy to do, as few companies enjoy the runaway success of Dick Wigs Inc.—you may not be a self-made person, but you're a self-made billionaire.
The reason we bother with the "self-made" title is a large number of other billionaires are not self-made. They inherited an entire billion-dollar fortune, while Mark Zuckerberg or Carl Icahn or the brothers who founded something called Stripe did not. Have you heard of Alexandra and Katharina Andresen? They inherited a billion each as heirs to a Norwegian investment firm. Or what about another Norwegian billionaire, Gustav Magnar Witzoe? He inherited his Norwegian father's Norwegian salmon business. Then there's German media heir Elisabeth Furtwaengler, or Brazilian health care heir Pedro de Godoy Bueno, or Hong Kong real estate heir Jonathan Kwok.
We got all those names just from Forbes' list of billionaires under 30. If we expand our search to all ages, we'll see a ton more who inherited entire billion-dollar fortunes. The Waltons, worth $60 billion each, didn't found Walmart, they inherited it. The president of Fidelity, Abigail Johnson, inherited her stake in her grandfather's company. And then there are people who inherit billions and then choose to not even work at the family business, like Hyatt heir Daniel Pritzker, who prefers making music to running hotels.
It seems like we'd resent full-fledged heirs the most, rather than entrepreneur billionaires who—even if they never did a billion dollars' worth of labor—did some amount of labor and created something. But we don't. Maybe because most heirs wisely stay out of the spotlight. Or maybe because it's impossible to make a billion dollars without committing some vile acts of pure evil, while heirs can't help being billionaires, because they were just born that way. Either way, saying that a self-made billionaire had a nice home growing up may not be the dunk you think it is.
For what it's worth, if I inherited $500 million, I would never manage to grow it to $1 billion or more. I would immediately spend the bulk of it creating Robot Island, and I'd deliberately run the place using a nutty business plan that loses money, as I build ever more elaborate singing animatronics. What do I care about becoming a self-made billionaire? I'm rich.