President Obama said recently that high earners are just the winners in life's economic lottery. He called out fund managers as specific targets, however, I expect his policy would impact all high earners, a large part of whom are entrepreneurs. He argues that it's just fine to tax money away and use it to fund social programs because the money is won by chance and those who received it have more than they need.
This rhetoric is dangerous because it disrespects and demotivates people who make an enormous difference to the success of our economy. The case for the value of entrepreneurship is well made: small, entrepreneurial firms account for two-thirds of the job creation in the economy, venture-backed firms contribute 11% of U.S. private sector jobs and 21% of GDP, and high-tech firms are a mainstay of U.S. exports.
Most venture investors believe that the quality of the team is the #1 factor leading to the success of a venture; anything else is a distinct second. When you meet great entrepreneurs and great investors, you can tell that they are deeply smart and intensely driven. Luck plays a role, but for entrepreneurs and investors with long track records of success, it’s the person (or team) that makes the difference. Elon Musk is a recent example: he has been a founder, CEO, and chairman of five ventures including four important companies: PayPal, Tesla, SpaceX, and Solar City. Can you believe that was luck?
Surely some fund managers have become wealthy due mainly to luck [investors call this: “a blind squirrel that found a nut”], but those opportunities do not last long. Institutional investors, who manage most of the money, scrutinize fund managers carefully and keep their assets with the managers who succeed consistently over time.
Very few of us want to return to a medieval society where a few people have all the wealth, income, and access to education and social position. And, businesses need consumers with spending power. This argues for programs that invest in training, infrastructure, and quality job creation, and that provide broad access to education and healthcare. It argues for removal of barriers to upward mobility. It argues for social safety nets and transitional assistance to people displaced by economic change.
But, wealth creation is a key motivator for the rare, exceptionally talented people who drive a large part of the economic success of the U.S. economy. We all benefit from keeping this part of the market economy healthy.
Striking the right balance between incentives for success and a broadly prosperous society is the big challenge. That’s a tough problem that the political process needs to address. I urge our political leaders, including President Obama, to work on making the political process work better, so it can address tough issues like this one. Meanwhile, let’s stop taking cheap shots at some of our most productive citizens by calling them “lottery winners”.
