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.