From Newborn to Millionaire — Saving Capitalism in America

Ackman’s Not So Crazy Idea on Wealth Inequality

I admit it, Bill Ackman gets under my skin. When I listen to him I get a snake-oil salesman vibe. Something about him seems slimy. Of course, I don’t know the guy and I’m sure we’d get along swimmingly if we had the chance to chat over dinner and a $20,000 bottle of vintage French wine (Ackman’s treat of course).

He’s clearly incredibly bright and has the marketing thing down pat (his investment management company Pershing Square has over $8B under management). But he can be a bit cringy. During the coronavirus selloff in March, he started crying on-air during an interview with CNBC, emotionally exclaiming that “hell is coming”. His over-the-top interview was so widely viewed that it actually moved the market and caused a mini sell-off. “So what? He’s in touch with his emotions, what’s wrong with that?” you ask. Nothing, nothing at all. Until it was discovered Pershing Square profited $2.6B from the credit markets on a little “hedge” he put in place not long before that interview.

I hate accusing someone of crying crocodile tears, and there’s a chance it was an honest display of passion during a trying time, but I can’t help but be a bit skeptical. Recently, however, he acknowledged an issue that people in his tax bracket often avoid at all costs, the wealth gap. Further, Ackman sees it for what it is, a threat to the future of capitalism.

In a letter to investors Ackman noted:

“One of the principal problems with capitalism, particularly as it has functioned over the last several decades, is that wage growth has not kept pace with long term wealth creation” — disproportionately excluding the middle and working classes.”

He went on to describe wealth inequality as a “black-swan type” risk to investors and I agree.

So what does he propose?

1. A government-funded investment account for every newborn child funded with $6,750
2. Assuming a growth rate of 8% per year the account would be worth over $1 million by age 65
3. It would cost the government $26 billion per year based on the current birth rate

According to Ackman, giving every American a little skin in the game will ensure all Americans have ownership in the success of capitalism and prevent turning to “potentially radical” alternatives.

A recent Gallup poll noted that 43% of Americans believe some form of socialism would be good for the country as a whole. That’s an increase of 18 percentage points from 1942. Ackman believes, and I agree, that investment accounts for all Americans could help reverse this trend and allow everyone to prosper from the great American tailwind.

Maybe I shouldn’t have been, but I was surprised to learn just how few people were investing. According to a 2020 Gallup poll only 55% of Americans own stock.

It becomes more clear why the wealth gap is growing when you look at stock ownership among major subgroups.

1. Education: 77% of college graduates and a whopping 85% with postgraduate degrees own stock, compared to only 33% of people with no college.
2. Race: 64% of Non-Hispanic white Americans own stock while only 42% of Non-Hispanic black Americans and 28% of Hispanic Americans.
3. Income: Of Americans earning over $100,000 per year, 84% own stock, while only 65% of Americans in the $40,000 to $99,999 do, and only 22% of those who make less than $40,000.

Stock ownership is strongly correlated with household income, level of education, and race. When the existing structure doesn’t support someone, they look to create one that does. I’m a firm believer in capitalism, and while I think our current version is too loaded with cronyism to truly be considered capitalism, I favor modifications over a vast shift to socialism.

Ackman’s acknowledgment of the wealth gap and his fiscally achievable idea are steps in the right direction. Pair that with financial education, closing tax loopholes, and removing regulations that make it difficult for the average American to start a business and we’re on our way. An improved brand of capitalism will allow for greater participation, a higher standard of living, and an increase in the pace of innovations that will benefit the global population.

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from James Vermillion, and all rights are reserved.

Originally published at https://www.vermillionprivatewealth.com on December 7, 2021.