By Steve Sailer
05/16/2022
From the NYT opinion section, an extract from the book I reviewed for Taki’s Magazine last week Don’t Trust Your Gut by economist/ data scientist Seth Stephens-Davidowitz.
The Rich Are Not Who We Think They Are. And Happiness Is Not What We Think It Is, Either.
May 14, 2022By Seth Stephens-Davidowitz
Mr. Stephens-Davidowitz is the author of “Don’t Trust Your Gut: Using Data to Get What You Really Want in Life,” from which this essay is adapted.
We now know who is rich in America. And it’s not who you might have guessed.
A groundbreaking 2019 study by four economists, “Capitalists in the Twenty-First Century,” analyzed de-identified data of the complete universe of American taxpayers to determine who dominated the top 0.1 percent of earners.
This study is not by Raj Chetty, but is very Chetty-like in not using a sample but instead using the universe of tax-filers.
The study didn’t tell us about the small number of well-known tech and shopping billionaires but instead about the more than 140,000 Americans who earn more than $1.58 million per year. The researchers found that the typical rich American is, in their words, the owner of a “regional business,” such as an “auto dealer” or a “beverage distributor.”
… What are the lessons from the data on rich earners?
First, rich people own. Among members of the top 0.1 percent, the researchers found, about three times as many make the majority of their income from owning a business as from being paid a wage. Salaries don’t make people rich nearly as often as equity does.
And these are people who made at least $1.58 million in taxable income in a year, not untaxed capital gains on paper. Who knows how much they will leave to their heirs?
Second, rich people tend to own unsexy businesses. A different study, by the statisticians Tian Luo and Philip B. Stark, examined which businesses were most likely to fold fastest. The kind most likely to go out of business most quickly is a record store. The average record store lasts just 2.5 years. (For comparison, the average dentist’s office lasts more than 19.5 years.) Other businesses that fold quickly include toy stores (3.25 years), clothing stores (3.75 years) and cosmetics stores (4.0 years).
Bookstores, too.
Record and bookstores have the problem that they are being eaten alive by virtual technology, but this class has the general problem that a lot of people, e.g., rich men’s ex-wives, would kind of like to own a toy or cosmetics boutique. (Tom Wolfe drew a cartoon once of a rich man explaining to his children that they would be getting a beautiful new mother, while their old mother would be fine as she opened a boutique and sold yarn to her friends.) But you also don’t want to be in a business where some insanely rational multinational would like to crush you: e.g., Walmart and Target sell a whole lot of toys. And the truth is that kids like quantity in toys more than they like quality.
There are, however, plenty of unsexy businesses from which [only] a few people are getting rich. These include auto repair shops, gas stations and business equipment contractors.
Gas stations are pretty fungible, unless you own a great location, like, say, the last gas station on the right in Marin County before you drive over the Golden Gate Bridge.
The third important factor in gaining wealth is some way to avoid ruthless price competition, to build a local monopoly. The prevalence of owners of auto dealerships among the top 0.1 percent gives a clue to what it takes to get rich.
Comparing data from the appendix of the economists’ study with data from the SUSB Annual Data Tables put out by the Census Bureau, I estimate that more than 20 percent of auto dealerships in America have an owner making more than $1.58 million per year.
Auto dealerships have legal protections; state franchising laws often give auto dealers exclusive rights to sell cars in a territory.
That’s the central joke in John Updike’s award-winning 1981 novel Rabbit Is Rich, the third in the series about a high school jock hero turned adult screw-up. Rabbit Angstrom has inherited his late father-in-law’s Toyota dealership, and not even Rabbit can mess up making a bundle off owning a Toyota lot during the Energy Crisis.
I’ve been told that because Toyota was the first Japanese car company to export to America, Toyota signed a lot of extremely onerous deals with established American car dealers granting them exclusive deals in perpetuity with impunity. That helps explain why buying a Toyota was such an ordeal: good cars, but the dealers could abuse you without fear of getting their right to sell Toyotas taken away. (I’ve heard that Toyota has finally expensively bought back most of their dealerships, but I don’t know if that is true.)
A decade or so ago I asked a Costco lawyer why Costco didn’t sell cars. I’d much rather buy a fixed price compact SUV that Costco negotiated a great price on the top of the line trim package for 250,000 cars per year than play stupid games to see if I could outsmart malevolent car dealers on Van Nuys Blvd. He said that Costco had looked into the car market in vast detail, but state laws protected existing dealers so much that to enter the car business, Costco would first have to spend a fortune on lobbying state legislators to change the laws.
Same for many beverage distributors, which act as middlemen between alcohol companies and stores and supermarkets. Beverage distributors have long been protected by a system set up after prohibition that prevents beverage companies from distributing their products themselves.
Big time sports heroes often had beverage distributorships bestowed upon them: boxer Max Schmeling got a Coca-Cola distributorship and second baseman Joe Morgan, a Republican, got a beer distributorship from conservative Coors.
Of course, if upon learning this you try to buy someone’s auto dealership, you may not have much luck. Owners of auto dealerships know how good they have it.
I suspect much of the new blood in auto dealerships and beer distributorships gets in the Rabbit Way: marrying the owner’s daughter.
Is there any business that tends to make people rich that you might have a better shot at?
My data-driven advice for getting rich for someone with good analytical skills and deep experience in a field is to start a market research business. Use your specialized knowledge in the field to write up reports; sell them widely and charge a fortune to your contacts in the field. I have estimated that more than 10 percent of owners of market research businesses are in the top 0.1 percent.
In a niche big enough for 1.5 market research firms, you want to own the 1.0 market research firm. For example, Nielsen TV ratings has always been a lazy but lucrative business because there’s usually only Nielsen serving the whole TV industry. (Occasionally, Arbitron, the radio ratings firm, threatens to enter TV and/or Nielsen threatens to enter radio.) Sure, the networks know that Nielsen’s sample size is small and technology is a few generations behind, but their careers depend upon the Nielsen ratings so they have to pay what Nielsen asks.
Thirty years ago, I interviewed for a job at a tiny marketing research company in San Francisco that published reports on the Yellow Pages. There were only about five employees, but the owner was doing very well for herself, because this was the only Yellow Pages marketing research firm in America so they charged exorbitant amounts.
In contrast, I worked for the two market research firms that tracked the biggest market — consumer packaged goods sold in supermarkets and drug stores. By contrast to the Yellow Pages firm, these were big businesses, with about 1,000 times more employees. But they comprised 2.0 firms in a niche big enough for 1.5 firms, so they conducted an endless price war with each other and usually failed to meet Wall Street expectations.
Stephens-Davidowitz does a lot of the same methodological tricks as I do with data: e.g., rank order a big list and see what kind of explanation you can come up with for who is at the top and who is at the bottom. The answers are usually out of Competitive Strategy 101 from MBA school: find a business where you are sheltered from competition, both from countless little competitors (like gas stations) and from a handful of giant potential competitors like Google and Costco: e.g., marry the local Toyota dealer’s daughter.
This is a content archive of VDARE.com, which Letitia James forced off of the Internet using lawfare.