Updated: Jan 27
The number one economic law you need to understand is the snowball effect. Several systems in economics have snowball effects. A snowball effect describes how a small ball of snow rolling downhill will incorporate additional snow as it rolls, becoming ever-larger. A fist-sized snowball at the top of a mountain emerges as a building-sized snowball at the bottom. The hard work happens at the beginning when building the snowball. Edgar Bronfman illustrated this when he declared, "to turn $100 into $110 is work. To turn $100 million into $110 million is inevitable."
In the real world, we often observe the snowball effect attempted poorly within people's retirement plans. People save a bit of each paycheck and deposit it into safe 401k investments. This method is the equivalent of never letting the snowball roll. People succeed in making a slightly larger snowball, packing more snow by hand over the years and decades. It takes hard work the entire time, but the ball never grows very large. For this reason, we describe such retirement plans as "nest eggs." Eggs remain in one warm, safe place while snowballs roll downhill.
The wealthy, on the other hand, let their snowballs roll. When you realize Bezos, Buffett, and Gates have earned multiple billions during the pandemic, understand that this growth was inevitable. Those large snowballs are rolling. They did not achieve or grow their wealth from salaries. Their wealth derives from assets rolling downhill and incorporating more value as the ball grows. This wealth would have accumulated with or without the pandemic because time is on their side.
In his book Capital in the Twenty-First Century, French economist Thomas Piketty notes that as long as r > g (i.e., the return on capital (r) exceeds economic growth (g)), those with the biggest snowballs will continue to accrue wealth at a rate faster than the rest of us. The wealthy's returns on their assets exceed economic growth, so they obtain more prosperity and affluence than the average person will ever be able. In case you do not know, your paycheck tends to be tied to economic growth, often called the cost-of-living allowance. In the real world, this difference in wealth accumulation means that riches will concentrate in the hands of a select few people over time. The average person's wealth grows relative to their country's economic growth and their own efforts (e.g., working more hours or advancing one's skills, education, or both). Conversely, the wealthy grow richer due to economic growth, inflation, and the size of their snowballs, but not their own efforts.
In case you haven't put it together yet, this means the economic deck is stacked against you.
The answer to this quandary is to adjust your method. Start your snowball, then let it roll. It will grow slowly at first. It would be best if you kept adding snow as you walk alongside it. Once it becomes so big that it begins moving faster than you can run, let it go. Then sit back and watch your wealth expand. This method is designated FIRE or "Financial Independence, Retire Early."
When you observe wealthy families like the Waldens, Kochs, or Johnsons (of Johnson & Johnson fame), their wealth originates from snowballs that have grown faster over the years than the US economy. These families will never be poor and will always have more wealth than the average US citizen. These families are economic hoarders. The system is designed to support them, mainly because they preserve a system operating in their favor.
Remember these facts when anyone discusses progressive taxes. A 90% income tax on someone with tens of millions in income is merely shaving a gigantic snowball. Unchecked, that snowball will continue to grow larger year upon year. Yet, the wealthy aren't wealthy from their salaries but rather due to their asset snowballs. We won't ever solve income inequality with income taxes. We need wealth taxes, such as capital gains and estate taxes. If this seems unfair to you, remember: the wealthy aren't packing their snowball or running alongside it. Their snowball is growing because gravity has taken hold. Their hard work is not being taxed, and I assure you that the wealthy are not working hard. Wealth taxes tax the laws of nature to the benefit of society.
The next time someone spouts off about wealth inequality, you can tell them, "it's a feature, not a bug." And now, you understand why the most significant period of economic prosperity for the average US citizen was during the 1950s-1960s when taxes on wealth were the highest. Less snow in the snowballs of wealthy people meant more snow for everyone else.
In the end, please remember that the wealthy are not like you. Even if you do not recognize this, the wealthy do. An African proverb asserts, "a sheep spends its entire life fearing the wolves, only to be eaten by the shepherd in the end." Sheep believe that because the shepherd is out in the field protecting them from the wolves, the shepherd is on their side. The reality is that the shepherd denies the wolves a meal from the shepherd's kitchen. The sheeps' fates are sealed, regardless of whether the wolf or shepherd prepares the meal.
The rules that apply to the sheep do not apply to the shepherd. Remember that fact the next time anyone suggests raising taxes on the wealthy, forming a union, or subsidizing the working poor. When ordinary people fight against wealth taxes, it is suggested that these people are confident they will one day be wealthy. This delusion is as foolhardy as the sheep believing one day they will be shepherds. While the shepherd is making the rules, the sheep will always be sheared for their wool until one day joining the shepherd for dinner.
So you have a choice. Will you:
1. Never start your snowball.
2. Work 40+ years to make a nest egg that will never be large, but you also will not ever have to run.
3. Work ?? years to make a snowball that requires you to walk, then run, then rest.
The time to decide was yesterday. So get started now!