Wealthy People Are Hiding in Plain Sight (ft. Owen Zidar)

The Rational Reminder Podcast

The episode explores the phenomenon of 'everywhere millionaires,' focusing on how wealth is increasingly concentrated in unglamorous, private

Key takeaways

• The typical wealthy American is often an owner of mundane businesses like auto dealerships or distributors rather than a tech celebrity.
• At the top 0.1% of income, entrepreneurial share rose from 17% in 1960 to 43% in 2022.

Main topics

• Everywhere Millionaires
• Wealth Inequality

Notable quotes

The way you get rich is by owning, not earning.

Conclusion

The episode provides a data-driven perspective on how the landscape of

Transcript preview

Speaker 2 (0:00) The way you get rich is by owning, not earning. We have some of the coolest data that's ever been assembled on the rich in America. She told me for herself, she said, if I could give my daughter $40 million or zero, I would give her zero. Speaker 4 (0:18) Welcome to episode 428 of the Rastor Reminder Podcast. I'm Ben Felix, Chief Investment Officer at PWL Capital. And Speaker 3 (0:25) I'm Cameron Passmore, Chief Executive Officer at PWL Capital. Today, Ben, we are joined by Owens Adar, Professor of Economics, Financial Researcher, and co-author of the book, The Everywhere Millionaire. Speaker 4 (0:40) Owen's a professor of economics and public affairs at Princeton. In the episode, we talk about the unglamorous industries behind most fortunes, what the inequality debate misses, and how the rich spend their money and their time. Super interesting. Speaker 3 (0:54) Super interesting, as always. Stick around to the end to hear our thoughts about the conversation with Owen. But for now, let's get into the episode. Speaker 4 (1:06) Owen Zadar, welcome to the Rascal Reminder Podcast. Speaker 2 (1:09) Thanks for having me. Speaker 4 (1:10) Owen, what's wrong with the common perception of what it means to be wealthy? Speaker 2 (1:14) Most people think that the way you get rich is to be like Elon Musk or Jamie Dimon or Taylor Swift. When you look in the data, that's just not actually at all who the typical rich person is in America. They're often ordinary business owners who've gotten extraordinarily rich running unglamorous private businesses. So I have three young kids, and so I read a lot of kids' books. And we've half-jokingly talked about writing the ABCs of getting rich for the children's market. It's like A for auto dealer, B for beverage distributor, and C for contractor. They're pretty mundane businesses, but when you have the opportunity like us to work with the Treasury to the full map of wealth in America, it's just very different because people don't answer surveys unless you have investigative journalists or a celebrity following. you're just not going to see the vast majority of private companies that don't have to file quarterly to investors. Speaker 4 (2:08) Can you talk about why that's important for people to understand? Speaker 2 (2:11) Yes. There are two key reasons. One is if you want to get rich yourself, I think these everywhere millionaires provide a roadmap for success in America. And the second is if you want to understand the economy and influence, these folks are really central characters in the saga of rising inequality in America. Speaker 4 (2:30) So interesting. It makes me think about it. I listened to a podcast a while ago with Mike Rowe. Do you remember the show Dirty Jobs? Speaker 2 (2:37) No, but I know the title, but I think that's in the right vicinity. Speaker 4 (2:41) He did the show where he would go and kind of spend a day with people that did really dirty, like people cleaning sewers and stuff like that. And he talked about how a ton of those people you would never know from watching the show, but a ton of those people were very wealthy because they own these types of businesses. Speaker 2 (2:56) That's spot on. It's funny, our neighbor is like talking about turning this into a documentary and he puts the first clip together. And one of the things he shows of going from like the great Gatsby, Leonardo DiCaprio and a nice scene from the show Billions. And he goes right to Porter Potties. And it's just like this guy who owns a hundred Porter Potties. And, you know, think about all the big events, like all the races. Toronto has a big marathon. You name the thing and someone needs to get Porter Potties there and clean them. Turns out that's Speaker 3 (3:25) a Speaker 2 (3:25) pretty good business if you have it at some scale. Speaker 3 (3:27) Sure is. How was the source of income at the very top changed over the past century? Yeah, Speaker 2 (3:33) it's quite interesting to watch the rise of entrepreneurial income from private business. If you look at top 0.1 % of income, I'll give you a few numbers. So in 1960, 17 % of that income came from entrepreneurial income from business owners. almost twice that came from wages. Or if you go to 2022, 43 % came from private business and only 35 % came from wages. And so you've seen this big rise in the share of income, especially at the top from private business. So that's another reason why I think this is quite important. One way to quantify that is to think about one of the most famous graphs in economics. So Thomas Piketty and Emmanuel Saez have this famous U-shape top 1 % graph, where over the... 20th century, they plot the share of income going to the top 1%. And if you do that same plot, but hold fixed the contribution of private business, and mid 1980s, you only get half the rise in the top 1%. And so that's another way of accounting for how big this is. More than half of the rise of that famous top 1 % share. Speaker 4 (4:43) Why is the common discourse about inequality incomplete? I Speaker 2 (4:48) mean, some of it is we just have had bad data. If you can't measure it, it's just not going to be very salient. But that's completely at odds with what people see if you start to think about it. So go to any nice golf resort or a nice lake or a nice mountain town and ask who owns the big houses. And just go and ask them, what do you do? How did you make your money? And it's a lot of mundane things like, oh, this guy owns seven Jiffy Lube's or this guy. distributes toilet paper for regional restaurants, or this guy sells door handles. And it's some of those dirty jobs that you talked about that turns out to be what you see in the data. So some of it was just we had this really unique opportunity to get a decade of work with the Treasury where we could see every private business in America. And that's what really shined the light on this hidden world of everywhere millionaires. So cool. Speaker 3 (5:43) Is the typical millionaire more Main Street or Wall Street? Speaker 2 (5:48) It's definitely more Main Street. So we added up all top 0.1 % income of these private business owners and only about 20 % comes from finance and real estate. The majority come from every other industry, construction, healthcare, you name it. We're mostly a service economy. And another interesting thing is that it's in every town. So if you plot population, it does a pretty good job of predicting where you'll have a lot of the profits throughout the country. Whereas if you think it's just Wall Street, everything's happening in California, New York and Silicon Valley. In New York, this is not the case empirically. Speaker 4 (6:28) Can you talk more about the industries that typically make the mainstream millionaires? Speaker 2 (6:32) I told you the ABCs. So if we tabulated... by four-digit sector, all of the top industries. And there are some white-collar ones and some blue-collar ones. So the white-collar ones are like law firms. There are a ton of lawyers in America. Collectively, they make more than $100 billion in top-owned firms and dentists and doctors. You see that type. But then there's a lot of really niche things like miscellaneous parts manufacturing. Auto dealers show up pretty high in their construction, architects. a lot of skilled service providers. It's a range of really small things that you don't really see. But when you look at other data sets that we bought, so we bought private jet data, we bought private yacht data, and you see tons of interesting people coming, like people who own convenience stores. So there's this one guy that we talk about in the book, Beaver Applin, who owns a chain of convenience stores called Bucky's in the South. kind of in rural Texas. And so if you haven't been to Texas or Louisiana, you might not have heard about this guy. But these things are like football field sized. Everything's bigger in Texas. I went to high school in Texas. It's very much true of these convenience stores. There's people who make millions selling Bucky's merchandise like secondhand online. And that's just not the image that normally comes to mind when you think about who's really rich. Who is the typical business owner? One thing that emerges from the data is that it's typically a white male who's in their 60s. And one of the reasons why is it takes decades to earn that much money. The Silicon Valley, you gotta move fast and break things, make money, make some app and get rich insanely fast is just not the model. That's not the typical business owner. It often takes a lot of rolling up your sleeves, decades of... grinding it out, concentrated ownership, a few owners, reinvestment. And that's why you see them often in their 60s or 70s because they've been doing it their whole life. And they started with one store and then maybe two stores and they just did slowly growing over time. Speaker 4 (8:43) Yeah, the concentrated wealth thing is so interesting because we talked about this too. We talked about the benefits of diversification when you're investing, but to get to the next level of wealth, it really does often take that concentration. Speaker 2 (8:55) And it's riskier. Don't get me wrong. That's certainly an aspect to it. But one thing that's pretty interesting is that we not only in the series of research papers that the book is based on, tracked all the wealthy people, we also tracked everyone who's starting. So say like take every single entrepreneur, there's 10 million of them who started a business since 2000 and see how well they do accounting for the fact that this is risky, including all the people who flame out and get a zero. And on average, they make a lot more money. I think it's like 18K more. The median person also makes more money by 5K. And like often you see the people who fail don't actually fail in a sense that they'll get a job basically doing what they were doing before, but not that big of a hit financially. And so you get this big upside of the downside is actually not quite as bad just from a statistical point of view. It could be quite stressful, but the risk is a lot more upside when you look at the data on all entrepreneurs in America. Speaker 4 (9:51) Kind of makes sense, I guess, because if you go and start a business and you run it for a bit, even if it's not successful, you probably gain a lot of skills. You can go work for somebody else using that expertise. So you do have that sort of downside hedge from your human capital that you build as you're trying to run your business. Speaker 2 (10:05) Absolutely. In fact, one of my best friends, he had this great business. He raised tens of millions of dollars, had a great team, hired designers from Apple. They're building ready to deploy apartment buildings. And it just turned out that the macro factors worked against him and interest rates went up and no one was building large properties. And so like, even though he had a great team and a pretty good idea, it just wasn't going to happen. And it turns out he shifted. Now he's the COO of a very big private company because he learned how to run a complex organization. And it's exactly like you said. Speaker 4 (10:39) Yeah, it's a really interesting point. Who is on track to reach the 1 % of the income and wealth distribution? Speaker 2 (10:45) It depends on what trajectory you want to take. But I think one of the things that really jumped out in that entrepreneur work is that people who start out in an industry where you're likely to become an entrepreneur 10 or 15 years down the line are much better suited to make that jump into being rich in their life. You can imagine comparing two people, somebody who goes into auto repair or someone who goes into auto manufacturing. The auto repair guy, if you look at people who work in that industry early on in their career, they're way more likely to own something by the time they're 40 versus working for Ford or GM or one of these car companies, you're not likely to be an owner, even though they seem pretty similar from the perspective of a 20-something. So if you're thinking about that as a parent, what advice to give to your kids or someone early on in their career? This early labor market domain expertise is really quite important for putting you on the track to own. And then a second group is people mid-career who they're earning a salary. And the way you get rich is by owning, not earning, typically. So it's pretty hard to get rich getting a W-2, which is the tax form for wage payments. So that's kind of the more intermediate answer, depending on when you're answering the question. Can you talk about how the wealthy spend their money? It's really hard to measure consumption of the wealthy in a systematic way. That's something that we wanted to do really well for the book and ultimately couldn't nail it systematically. There's a lot of anecdotes and there's a lot of conventional wisdom. So one view is the Millionaire Next Door book, which is his bestselling book from a few decades ago that was based on marketing data. And it really emphasized kind of frugality of wealthy individuals. Like you can't tell that your neighbor is a millionaire because they're driving an ordinary car. They're kind of living within their means. They don't have a nice watch, et cetera. There's some truth to that in the stories that we collected by talking to people. Like there are periods in a lot of these everywhere millionaires' lives where they were just hustling, not really doing much. But then later in their life, they have a super yacht. So it depends a little bit on... when you're looking, and there's certainly a lot of these folks in the private jet data and the super yacht data. And so I don't think the case is quite as clear that everyone's really frugal all the time among the rich. I think there is a mix. Another reason why it's hard to know is that wealthy people don't answer surveys. And so it's just hard to measure this in a systematic way that we were comfortable saying, like, here's the bottom line empirically. But that's what I can tell you from some anecdotes and relative to the conventional wisdom. Speaker 4 (13:25) Yeah, that's interesting though. What about time use? How do the wealthy spend their time? Speaker 2 (13:29) A lot of them work and they don't like hobbies. There's several stories. One woman we talked to, she found herself and she's like, I don't want to spend the next 10 years of my life playing tennis. I want to do something. And she started a frozen quiche business that really grew to some serious scale. She's called the Queen of Quiche. Other people try to have hobbies. This guy named John Osher, he sold one of his businesses and tried to retire and just couldn't do it, couldn't sit still. And then finally started another business that kind of built on what he had done before. So I think the first business was Spin Pops. It's like suckers that kind of rotate so that the kid can eat it. And he had all these contacts with manufacturers in China. And then he realized that there's kind of this market by walking the halls of Walmart and figuring out there's this market for electric toothbrushes that don't cost $100. And he just used the same Spin Pop contacts in China to make a toothbrush that was affordable. He just has that itch. And so some of it, they work a lot. And most people are not inherited owners of their family business. That's like a quarter of the people we're talking about. And so most of them kind of grew this thing. And their stories of one of the people we talked to is like, oh, I confuse Tuesdays and Saturdays because that's all kind of the same to me. Now, not everyone is like that. You know, one guy we talked to in the book, he said, you can either have fun during the week or fun during the weekend. He's like, I ran a... paper storage business so I could have fun during the weekend. Paper storage business literally just stored important financial documents. We're going to make sure it doesn't burn. It's safe. And that's it. Speaker 4 (15:14) Can you talk a little bit about the data the book is based on? Like you mentioned some treasury data. You're talking about surveys. Can you, for the benefit of listeners, just talk a little bit about what the conclusions from the book are based on? Speaker 2 (15:24) We have some of the coolest data that's ever been assembled on the rich in America. So in 2014, myself and Eric Zwick, who wrote the book along with Danny Yegan. We were all just graduated from our PhDs and the treasury brought us in to try to answer a kind of narrow question, how much tax do private business owners pay? And in exchange, we started building research projects on the full set of businesses in America. Some of the foundation is kind of a decade of work on top incomes, top wealth, entrepreneurship that have the full population of every single firm in America and every single person in America who files a tax return. So that's like the underlying stuff. And then there are a bunch of insights that we've kind of put together through that. And for the book, we built on those findings to try to