Money makes money for a few

How does wealth concentrate?

Alloporus has discussed whether or not it’s fair to give a 10% pay rise to every employee in a business.

It sounds dutiful and egalitarian, and it also suggests the company must be doing well to make such an intelligent investment in its workforce.

Breaking the numbers down, it is clear that 10% to the lowest-paid workers in the company and even those on the average salary in the company results in far fewer extra dollars in the paycheck received by the CEO; let’s call him Jerry, for his 10%.

The average worker gets, say, $200 extra a fortnight after tax. On his $750k a year, Jerry is looking at an additional $1,700 despite his heavier instalment to the tax office.

Justifications abound because the CEO is the boss and must make the decisions and wear the risk. He is worth the extra pay and has considerably more buying power in raw dollars from his 10% pay rise.

Jerry is an intelligent fellow — not a given — so he chose to put the money from his pay into a unit trust, nothing too fancy, just a rainy day option. He did this each month.

The shop floor worker, Tom, was in debt, and he decided to put the extra money into credit card repayments to bring his balance down. His kids wanted presents for Christmas, which took care of December’s extra pay. His eldest daughter was about to go to college, and Tom wanted to send her off with a small sum to get her through the first semester away from home and used January’s extra pay.

Tom consumed the extra money, and Jerry put it away in a modest investment.

After ten years, Jerry’s investment of $3,600 each month was worth $577,971, of which $132,328 was the result of compound interest at 5%.

He decided to cash out his units and made a hefty downpayment on a property south of Brisbane that he immediately rented to increase his net returns to 7.5% and convert his principle into a more stable asset class. The property doubled in value over the next decade, giving Jerry another $1.5 million property in his portfolio.

Now, you could say that Tom could have done the same thing and matured his salary increase by investing it. His $433 per month in the same unit trust would be worth $67,950 after a decade, including $15,500 of interest.

Making an investment choice might have been a clever play. Tom may have saved just enough through the investment to offer his daughter a deposit on a flat or maybe pay for her wedding that came ten years down the road.

But his material wealth would never reach the same levels as Jerry in his working lifetime.

As they say, money makes money.

But the point here is that wealth also concentrates.

The company has one CEO and a handful of executives with salaries large enough to easily invest their 10% but lots of workers, many struggling to make ends meet. The opportunity to make real money falls to a few.

Of course, the owners were happy too. The major shareholder in the business, Mr Hannah, also enjoyed a 5% share dividend each year. His 2.5 million shares were worth $5 million when the first instalment arrived, a handy $125,000.

Similar dividends were paid annually for a decade, with the money moved into various assets that yielded 5% interest. That initial $125,000 plus the annual instalments grew to $1.8 million in a decade, $400,000 of that in interest. Naturally, the shares rose on a buoyant market to be worth $10 million.

The owner’s wealth accumulated too.

Then there are the super owners. Here is one chosen at random. In June 2021, Bloomberg Billionaires Index listed Dieter Schwarz, a german businessman who built his fortune owning supermarket chains, as the 61st richest person globally with an estimated net worth of US$27.3 billion.

Should Mr Schwarz earn 5% interest on his assets, he receives $3.7 million a day before tax.

It is hard to figure out how to spend that kind of money.

Of course, most of the time, these people do not. They invest it after paying clever accountants to minimise their tax. Then, on occasion, they give some of it away.

Dieter Schwarz.	$13,500,000,000
Mr Hannah.	$1,800,000
Jerry.	$578,000
Tom.	$67,000

Annual returns after ten years on a 10% pay rise or 5% dividend compared to the cumulative returns from Mr Schwarz’ existing assets

The pattern is clear — capitalism creates wealth that concentrates into a few individuals or entities. Over time this opens a wide gap between those who have and those who do not.

None of this is new nor much of a revelation. Accumulation and concentration are how capitalism works. The reason for revisiting the basics is that there is a lot at stake should this pattern continue.

Poverty and excess make each other very uncomfortable, and history tells us that resolving such disparity is ugly for everyone.

Better not to let it get out of hand.

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