By Gary Shilling
An unprecedented number of Americans have received unprecedented incomes and accumulated unprecedented net worths in recent years. Sure, the gains are tempered by the reality that while the top tier is gaining, the income shares of the rest are falling. Many Americans have seen no purchasing power gains in decades, and they’ve only recently advanced because of the big fall in energy prices
While some wring their hands over income polarization, we’re more interested in how the rich get rich. There are many strategies. A number are far from new, but have been pursued much more vigorously and with much more spectacular results in an era when extraordinary liquidity is readily available due to low volatility and low perceived risks. We’ve identified 11 different strategies that have stood the test of time. None of these strategies are sure-fire. All of them have pitfalls, sometimes because they are so successful that they invite their own demise.
1. Government Subsidies
Perhaps the most time-honored and surest way to make big money is the old fashioned way–skill, brains, luck, clairvoyance, hard work–and so much government support you can’t miss. Benefiting directly from direct government spending is obvious. What’s more subtle and therefore more interesting are the vast government subsidies.
Petroleum remains heavily subsidized by tax measures such as the depletion allowance, accelerated depreciation and expensing of intangibles, making fortunes for oil tycoons for decades. Windmill farms would not exist without heavy government subsidies. Ditto for solar energy.
Ethanol is subsidized with a $0.51 per gallon tax credit, an import duty of $0.54 per gallon and the elimination of ethanol’s main oxygenate competitor, methyl tertiary butyl ether (MTBE). The Department of Energy plans to provide $385 million in subsidies to six companies to produce bio-fuel alternatives to ethanol that will cost $1 per gallon.
But despite the current zeal for ethanol, it cannot be shipped by pipeline due to its corrosiveness, and the needed trains, tracks, storage tanks and loading and unloading facilities will be expensive. Add in the current high price of ethanol’s main feedstock, corn, at $4 per bushel and the natural gas needed to convert corn into ethanol, and this fuel could not compete with gasoline profitably without huge government support.
Agriculture and Real Estate
U.S. agriculture has been heavily subsidized since the 1930s, with the prices of grains, wheat, corn, cotton, tobacco and even honey supported in one way or another and providing about a third of farm income. Some in Congress are trying to concentrate subsidy payments on small farmers and cut the gravy to larger, highly profitable operations that receive the bulk of revenues and government payments.
But despite the tiny and dwindling percentage of the nation’s workers in agriculture, sizable farm subsidies will persist as long as there are two Senators from every state.
Real estate is another large beneficiary of government largess. Commercial real estate investors enjoy tax-free exchanges that allow them to defer taxes by promptly buying a second property after selling a similar appreciated property. Full-time real estate professionals can deduct depreciation, interest costs and property taxes from their income. Individuals can deduct mortgage interest, and realize up to $500,000 of appreciation for a married couple on their primary residence every two years. Residential real estate has been in a speculative bubble, but how much of the recent leap in homeowner values would have occurred without these government goodies?