Originally Posted 11/09/2013
Paul Allen, according to Forbes Magazine, had $15.8B and was the 26th richest US citizen as of April 2013. Concern about the roll-out of the Affordable Care Act has trumped, for the time being, worries about the wealth gap between the poorest and richest in this great country, but it is sure to come up again when attention returns to our federal spending and deficits. A look at Mr. Allen gives us a chance to put a face on those “millionaires and billionaires” accused of not paying their “fair share” and try to see how much damage they are doing to the rest of us.
The reason for this particular subject is that I found a copy of Paul Allen: Idea Man, Allen’s “memoir,” in a discount bin at a book store in Nova Scotia last week and figured it was worth $5 for entertainment during the punishing trip home. What a great story it is, two high school friends, Paul Allen and Bill Gates, both computer nerds, who happened to be at the right place at exactly the right time to drop out of college and play key roles in development of the information technology we all use and enjoy and depend on today. Allen gives Gates the credit for business acumen, and ruthlessness, and, as the title suggests, takes personal credit for the big ideas. Anyone with any interest at all in computers and information technology will enjoy Allen’s account of their role in the industry.
But the focus here is on his wealth and whether the rest of us are suffering because of it. Allen left Microsoft in 1983 to wage a successful war with recently diagnosed lymphoma. Ownership of Microsoft had always been a point of contention between Gates and Allen, and Gates had claimed 64%. At the time of Allen’s departure, Gates argued that it was unfair for Allen to retain an ownership position and made a low-ball offer for his shares in the still privately held company. Allen countered, and Gates turned him down. Had they made a deal, Allen wouldn’t be found on the Forbes list today, and Gates would be even further ahead of Warren Buffett than he is. Three years later, March 13, 1986, Microsoft went public and Allen sold about a fifth of his shares for $175M thereby achieving billionaire status. He resisted financial advice to sell more Microsoft shares and diversify his holdings. By 1990, just four years later, the value of his Microsoft shares had increased to $10B. Now, 23 years later, after numerous investments, some successes and some failures, in a wide variety of enterprises, significant charitable donations, and purchase of lots of expensive toys including a yacht with a submarine, his wealth has apparently increased to $15.8B. Life just isn’t fair, is it?
This is a good time to mention the increasingly popular mistake of lumping millionaires and billionaires together. A millionaire can spend $3000 a day for a year (on a suite at the Waldorf Astoria for example) and be flat broke on December 31. A billionaire, assuming a modest return of 3% on some safe investments, can spend $15M and pay $15M in taxes year after year just from earned interest without even touching the capital.
It is also a good time to point out that most of the billionaires and those with multiple millions didn’t get rich by earning and saving money. Most got rich by building and/or owning businesses that invented, designed, built, and sold products and services that we wanted, hiring thousands of us to participate in the process, contributing to the gross national product, helping fund the government, and, usually, offering us the opportunity to buy shares and participate with them in the increases in the values of their businesses. Many of us, for example, could have spent $2500 or so on a hundred shares of Microsoft in the 1980’s and watched it grow to three quarters of a million dollars today. And tens of thousands have had successful family-supporting and education-funding careers with Microsoft which currently has more than 90,000 employees. Such businesses are the engines which fuel the American economy, create opportunities for us all, and fund our government.
But, I digress. The question is whether Mr. Allen should have been allowed to achieve and retain such wealth, arguably gained by chance or by accident, and use it as he saw fit. Perhaps it would have been better if 90% of all his gains on Microsoft stock had been taxed away and turned over to the federal government to spend. Maybe he should not even have been able to defer taxes by just holding the stock. Maybe he should have been taxed on the increases in value annually whether he sold or not. He would have still been wealthy. He would have had all he needed. Maybe the government would have used the money more wisely than Mr. Allen. I’m not trying to be funny. There are folks who believe that!
Earlier this year, Reuters published a list of Mr. Allen’s investments in technology, energy, raw materials, entertainment, real estate, sports, culture, art, science, and aerospace. According to the article, he has also funneled about $1.5B to various charitable endeavors through the Paul G. Allen Family Foundation. Some of the investments were successful and some failed. In some cases, the companies he invested in were successful but Mr. Allen’s timing was wrong. He sold his America Online shares, for example, in 1994 for a $75M profit. Had he held them until late 1999, like he held on to his Microsoft shares, they would have been worth $40B, and he would be richer than Warren Buffett but not quite up to Gates’ level.
My point is that Mr. Allen’s wealth has not been out of circulation but has been put to use providing capital and jobs to the US economy and paying taxes in the process. The 441 foot yacht with a submarine may seem a frivolous waste to many of us, but I’m guessing that the thousands of people involved in designing and making all the parts and pieces and assembling them over a period of a few years into a beautiful work of art that currently employs a significant number of people are pretty happy to have had the work and got some satisfaction from it. At the other extreme, his $15B could have been confiscated and divided up among the population, giving each of us $50 to spend on a night out to dinner and a movie. Or it could have funded the federal government for about a day and a half.
So, we don’t need to bemoan the accumulation of wealth. We need to suppress our covetousness, celebrate the opportunity afforded by our capitalist system, and be thankful for the essential capital formation it allows. What we need is to free the system to create even more opportunities, through real growth in GDP, for everybody to have enough without worrying about somebody having too much. “Too much” always goes to opportunity-creating and job-creating investments, donations, and consumption. We need to be sure that our economic system motivates the wealthy to make those investments and donations and do that consuming within the USA. Then we can increase our foreign aid.