Income Inequality And The $19 Billion WhatsApp Deal
The recent news cycle has been dominated by two very
different stories that fascinate us: Facebook’s eye-popping, $19 billion deal
for WhatsApp and the Obama administration’s growing concern about income inequality.
How can these seemingly disparate points-of-view reconcile
each other?
Through the Pareto Efficiency Criteria,
a well-respected economic theory about optimal economic growth.
A Rising Tide
The Pareto Efficiency Criteria states that as long as
economic growth happens without hurting
others, it’s good for an economy.
In the San Francisco Bay Area, in particular, this
concept is a hot topic. The explosion of IPO-driven wealth largely
from tech entrepreneurs is creating an economic boom in the region.
Some, though, argue there’s a downside. Prices for
everything are higher. No doubt, there’s some truth to that, but there’s also
the undeniable fact that when money is flowing, people spend more – a lot more.
That does help everyone.
To continue to be the land of opportunity, our
country needs to recognize the tremendous economic and societal benefits that
flow from entrepreneurial individuals and companies.
Avoiding The Dark
Side
Most people are not bothered by entrepreneurs who create
things like WhatsApp or Facebook. Nor are they miffed by professional athletes
or entertainers who come into wealth and fame because of their talent.
What bothers the President – and many other Americans – is
the following:
·
Wealth created by corporate executives through
outsized pay packages, especially when compared to the stagnant wages of the
average corporate employee.
·
Wealth generated by Wall Street professionals who were rewarded for taking risks that caused the
financial crisis.
Where Do We Go From
Here
So how do we continue to promote the benefits of
entrepreneurship without exacerbating income inequality?
First, let’s not throw the baby out with the bath water. America’s
entrepreneurial spirit is the source of its success and is the envy of the
world. Innovation will continue to improve our standard of living and propel
economic growth.
Second, we need sensible government regulation. Implemented correctly, Dodd-Frank can help prevent
the excesses that led to the financial crisis.
Third, while regulations are needed in the financial
services industry, we need to limit the regulations on small business. The
JOBS Act was a great start, but we can do more.
For its part, the wealth management industry needs to focus on
the innovators and entrepreneurial wealth creators.
The industry should also think carefully about pursuing
corporate chieftains and financial services professionals. Their earnings might
be in long-term jeopardy because of regulatory scrutiny and public disapproval.
One of the oldest and wisest investing strategies is, “Don’t
fight the Fed.” In the same vein, it’s probably smart not to fight the Oval
Office when it comes to income inequality.
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