Felix Salmon

Silicon Valley hubris watch, TJ Rodgers edition

Felix Salmon
Jun 1, 2012 20:33 UTC

Chrystia Freeland has found a classic example of Silicon Valley hubris in TJ Rodgers, the CEO of Cypress Semiconductor. Rodgers reckons his taxes shouldn’t go up; his reasons are pretty simple. If that happened, he explains, he’d have less money to invest in Silicon Valley. And since “taking money from the investments, my investments, out of Silicon Valley, where they have been very, very good for the economy” is self-evidently a really bad idea, then raising his taxes can’t possibly make any sense.

The first problem with this is that Silicon Valley is not a place where TJ Rodgers’s money is magically transmogrified into growth and jobs. Yes, Silicon Valley is a very innovative place. But it would be a very innovative place even if it had significantly less money than it has right now. I actually lived in Palo Alto in the mid-80s, when Silicon Valley had long since matured as a vibrant technology center, and as I recall it cost about $500 a month to rent a nice family home. Since then, the amount of money in Silicon Valley has increased enormously, along with the price of Palo Alto real estate. But it’s far from clear that all that new money has made the Valley any more innovative.

In fact, we know exactly what would happen if a lot of the wealth in Silicon Valley suddenly got taken away: we know because it happened, when the dot-com bubble burst in 2000-01. The researchers kept on researching, the innovators kept on innovating, and the main effect of the dot-com bust was that bits of San Francisco looked, briefly, as though they might actually become affordable. That didn’t last for long.

But Chrystia herself provides the much stronger rebuttal to Rodgers, when she quotes Nandan Nilekani, the co-founder of Infosys, pointing out that huge amounts of Silicon Valley wealth are built on US government spending.

“It’s the role of governments to create public goods which are platforms for innovation. If you look at the U.S., the Internet was a government defense program on which today you have this huge innovation ecosystem. GPS is another example.” That system “was designed for military applications. But today it’s used for maps or car navigating systems or whatever. So the ideal is to create these global public goods or these national public goods that are platforms. And then make them open so that people can innovate.”

The big money in Silicon Valley these days is very much around anything that can credibly call itself a “platform”. Facebook might be worth a lot less than it was worth a couple of weeks ago, but it’s still worth vastly more than it would be if it were merely a media company making $1 billion a year selling ads. The bulk of Facebook’s value is embedded in the fact that it’s a platform: it’s the tool we use, all over the internet, to be ourselves and to have connections to our friends.

Innovation is in large part about building things on other things: build an iPad location tool on the GPS architecture, for instance, or build a social network using existing internet architecture. And underneath it all is a system of base-level infrastructure which needs to be carefully tended lest it all fall apart. One difference between Rodgers and Nilekani is that Rodgers has been living in Silicon Valley long enough that he takes a huge amount for granted: he has everything he needs to run a great business right on his doorstep. Nilekani, by contrast, needs to deal with obstructive Indian bureaucracy all the time: he knows that India, as a platform, is vastly inferior to the Bay Area.

Once you build a platform, you never know how you might be able to extract value from it. I was talking to the SecondMarket guys yesterday, for instance, and they talked a bit about what they’re calling their new marketing platform. They spent a lot of time building up a huge database of accredited investors interested in putting money into private companies — and now they’re looking to monetize that database by essentially renting it out to other shops looking for that kind of investor.

Art funds, diamond funds, wine funds, distressed-mortgage funds, tax-lien funds, you name it — somewhere in that SecondMarket database there’s a group of people who are likely to be very interested. And SecondMarket itself needs to do very little work, since they’re basically just acting as a high-tech dating agency, matching investors with fund managers. The investors came for the pre-IPO equity; they’ll stay for all the other goodies that SecondMarket can introduce them to.

And the USA is, in many ways, the ultimate platform — a massive market and currency zone, which can provide enormous demand for great products while also providing peace, prosperity, strong and stable institutions, and everything else that someone like Rodgers needs to be successful. It makes sense to invest in that platform — and it makes sense, too, that the people who get the most out of it should be asked to reinvest the most back into it.

You can call that reinvestment “stimulus” if you like, although that word seems to have gone out of favor these days. But what’s sure is that unless the USA keeps its infrastructure up to date, it’s going to lose a lot of competitiveness over the long term. We need a smart energy grid, we need a much better transportation network, we need to improve our educational system, and ultimately we need to have a much more constructive legislature than we have right now. If we fail in that, the whole country will decline, and it will take the likes of Rodgers down with it.

Nick Hanauer, another Silicon Valley multi-millionaire, uses the gardening metaphor: we need to maintain our garden if we’re going to reap abundant crops. So long as people like Rodgers think that the government is good for nothing but misguided cash-for-clunkers schemes, and that the best thing it can do is just get out of their way, they’re going to be the worst kind of free-rider: the kind who doesn’t even know they’re free-riding. Maybe we should tell him to try to build a great technology company in, I dunno, Greece, and see how that works. Only then might he appreciate just how much of his net worth he owes to his country.


The Life of Felix: after years of kvetching at undeserving rich guys who merely risked their capital to develop markets that didn’t exist before, he receives a stipend from the Gini Coefficient Rent Seekers’ Foundation their taxes funded. This allows him to volunteer at a community garden.

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Eduardo Saverin joins the stateless billionaires

Felix Salmon
May 17, 2012 22:31 UTC

The United States is the only country in the world which applies the same tax regime to all its citizens, regardless of where they live: nowhere else are nonresidents charged the same federal tax rate as residents. And this makes America’s plutocrats qualitatively different from every other country’s super-rich.

If you wanted to sum up Eduardo Saverin in three words, you could do a lot worse than Very Rich Eurotrash. He didn’t become a Facebook billionaire because of his hacking skills or because Mark Zuckerberg happened to be his roommate in college; he became a Facebook billionaire because he had cash, and Zuckerberg needed cash to get Facebook off the ground. Zuckerberg provided the valuable labor which went into creating Facebook; Saverin, for all the ideas he had, was basically needed for his money, and his ideas ended up going nowhere. Today, now that he’s dynastically wealthy, he says things like “it’s a misperception, especially the playboy. I do have a Bentley. I do go out.”

Saverin might have more money than the Italian boys with cashmere sweaters draped over their shoulders who flit from one global Cipriani outpost to the next. But when he talks of himself as “a global citizen”, he’s not lying: he’s just displaying a mindset which he shares with any number of well-heeled international jet-set types. They’re easy to find: just get on a plane to Cannes or Sao Paulo, turn left at the first Tyler Brûlé, and you’ll find them picking at a $30 salad while wearing shoes which cost substantially more than the waiter’s weekly income. They live a pampered and sheltered experience: they even have their own social network, to keep them from being forced to rub digital shoulders with the masses.

In January 2011, after moving to Singapore, Saverin decided that he wanted to give up his US citizenship. He didn’t live in the US, he was going to have lots of income going forwards, and he felt that there was no good reason for him — a citoyen du monde — to pay 35% of that income to the USA in particular. Not to mention estate and gift taxes for when he finally passes on his wealth to someone else.

If Saverin hadn’t been a US citizen, all of this would have been a non-issue: simply moving to another country suffices to relieve you of most of your tax burden in your country of nationality. But because he was a US citizen, he took the drastic step of renouncing that citizenship; the move became official in September. And then, in a fit of extraordinarily bad timing, from a PR perspective, the news came out just as Facebook was about to go public, and, faster than you can say “press conference”, Chuck Schumer decided that he was going to introduce something called the Ex-PATRIOT Act. (Geddit?) Under the act, people like Saverin renouncing their US citizenship for tax purposes would face fines so huge that they’d be better off not doing so at all.

The rhetoric, here, is that Saverin’s success is attributable to his American citizenship, and that therefore America deserves to be able to receive its condign tax revenues. And I half buy it, although frankly there’s nothing stopping any rich Brazilian kid from going to Harvard and funding a startup. Saverin didn’t need US citizenship to do what he did.

This is an issue which pops up occasionally: it’s already very onerous to give up US citizenship. Kathy Kristof had a good overview of the history of such laws in 2008: a 1996 law, for instance, forced former US citizens to continue paying taxes on their worldwide income for at least five years, and in 2004 that was extended to 10 years. In 2008, a new law forced people like Saverin to pay capital gains taxes on the assumption that they liquidated all their property the day before they renounced their citizenship. And indeed, that’s what he did.

Still, Saverin can still be considered to be saving taxes here, since Facebook now is worth substantially more than it was worth in September. At the same time, he’s facing a nightmare at US immigration — entering the country might well be impossible, and it could be extremely difficult just to change planes here. He’s not just another Brazilian any more: he’s the lowest of the low as far as US immigration is concerned, and they will never treat him with any respect at all. Since he doesn’t have much in the way of rights any more — he gave most of those up with his citizenship — he’d be well advised to avoid the USA pretty much for the rest of his life.

From a public-policy perspective, this is the kind of US exceptionalism I can get behind. There’s a corrosive class of global plutocrats, living by choice in tax havens like Singapore or Switzerland, and paying vastly less in taxes than Mitt Romney or any US billionaire. If you’re not an American citizen, and you become incredibly wealthy, there’s a good chance that you will choose to become a tax exile — thereby depriving your home country of the income taxes it should expect to be able to raise from its richest citizens. It’s a country-of-residence tax arbitrage which makes the ultra-rich feel no civic duty at all to their countries. And somehow the US has managed to avoid that problem: American billionaires, as a rule, remain American billionaires, as do their children and their children’s children. They — along with the Chinese — are pretty much the only billionaires in the world who don’t live a stateless existence. And even the Chinese ultra-rich are rapidly breaking free of their home country.

So yes, it’s a little bit unfair to Saverin that he’s suffering so much opprobrium right now when he would be getting none of this were it not for the accident of his US citizenship. But I can’t really feel sorry for him. And if the US succeeds in making an example of him, it will have managed to pull off something very important — which is to keep its billionaires part of the tax base. Very few other countries can say that.


There is no reason for the US Government or other Americans to throw their tantrum on the people willingly renouncing their citizenship. We make those problems to happen. We allow people voluntarily renounce their citizenship. In order to prevent this craziness we have to change the law or join 1954 UN Convention Relating to the Status of Statelessness. Eduardo Saverin had double citizenship and by law he had rights to renounce one of his citizenship. But when we have person who does not posses another nationality and by allowing him to renounce US citizenship, we leave him in limbo, which means we promote statelessness, and that is human rights issue. Person who does not posses any other nationality or residency status from another nation should not be allowed to renounce his citizenship in voluntary basis. Period.

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The plight of the 1%

Felix Salmon
Dec 20, 2011 15:19 UTC

Max Abelson has a fantastic column today from simply asking prominent members of the 1% about their embattled status. There’s Home Depot co-founder Bernard Marcus, who characterizes any potential critic of his wealth by asking the timeless question “who gives a crap about some imbecile?”. There’s BB&T‘s John A. Allison IV, who says that any rule requiring public companies to disclose the ratio between the compensation of their CEO and their median employee would constitute “an attack on the very productive”. And then there’s Steve Schwarzman, displaying his legendary deftness of touch in a TV interview:

Asked if he were willing to pay more taxes in a Nov. 30 interview with Bloomberg Television, Blackstone CEO Stephen Schwarzman spoke about lower-income U.S. families who pay no income tax.

“You have to have skin in the game,” said Schwarzman, 64.

This isn’t an “I see what you did there” moment so much as it’s a brazen decision to go on the attack against “the 47%”: Americans who earn so little money that they don’t pay federal income tax. (Of course, they still have “skin in the game”: they still pay sales tax and payroll taxes and local taxes.) 61% of these families — let’s call them the 29% — are earning less than $20,000 per year.

Let’s say that Schwarzman has been working for 40 years and is now worth $6 billion: that works out at $20,000 an hour, every hour of every day, even when he was sleeping, since the day he started working.

But never mind the fact that Schwarzman is earning more per hour than the people he’s criticizing make in a year. There are other billionaires just itching to weigh in. Like Paychex founder Tom Golisano:

“If I hear a politician use the term ‘paying your fair share’ one more time, I’m going to vomit,” said Golisano, who turned 70 last month, celebrating the birthday with girlfriend Monica Seles, the former tennis star.

Remember that, people. If you start agitating to reduce inequality, there might be vomiting in the neighborhood of Monica Seles. And we wouldn’t want that.

And then — just for comic relief — there’s Peter Schiff, who probably needs to bone up a bit on his medieval history:

Schiff, 48, disclosed assets of at least $64.7 million before losing the 2010 Republican primary for a Connecticut U.S. Senate seat, according to filings. He’s wealthier now, even though his taxes are “more than a medieval lord would have taken from a serf,” he said.

Abelson plays all of this for laughs, which is reasonable enough, given his Wall Street audience. But out there in real America, it isn’t funny, it’s tragic. And so it’s worth hearing from a multi-millionaire who can explain the class dynamics of America without trying to defend the indefensible. Here’s Bruce Springsteen, in his introduction to a new book by Dale Maharidge and Michael S. Williamson:

It is the story of the deconstruction of the American dream, piece by piece, literally steel beam by steel beam, broken up and shipped out south, east and points unknown, told in the voices of those who’ve lived it. Here is the cost, in blood, treasure and spirit, that the post-industrialization of the United States has levied on its most loyal and forgotten citizens, the men and women who built the buildings we live in, laid the highways we drive on, made things and asked for nothing in return but a good day’s work and a decent living.

It tells of the political failure of our representatives to stem this tide (when not outright abetting it), of their failure to steer our economy in a direction that might serve the majority of hard-working American citizens and of their allowing of an entire social system to be hijacked into the service of the elite. The stories allow you to feel the pounding destruction of purpose, identity and meaning in American life, sucked out by a plutocracy determined to eke out its last drops of tribute, no matter what the human cost.

A lot of the decline of industrial America was probably inevitable — although not all of it. But rather than sitting on their billions and gloating about their fat-cat status (I’m looking at you, Ken Langone), it surely behooves America’s plutocrats to remember the plight of people who actually produce stuff. I’d love to know how John A. Allison IV measures his own personal productivity and determines that it’s extremely high. Because, speaking as someone who earns a very healthy salary myself, I have no idea where I’d even start on such a quest. I could measure words written per day, I suppose, but how much is a word worth?

The fact is that the ultra-rich really aren’t productive, and instead mostly collect rents from people who are. This is what capital always does, of course: it buys labor (some people call that “job creation”, even if the jobs being created are mostly in China), and then extracts dividends from it.

So let’s not kid ourselves that the men with the billions (or, for that matter, the 22-year-old Monaco residents with $88 million pied-à-terre apartments in New York City) are in any way hard done by. Not when there’s so much real hardship in America.


I have no problems with the inflation tax or inheritance tax. :-)

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Adventures with the new plutocracy, wealth-beta edition

Felix Salmon
Dec 19, 2011 16:53 UTC

Robert Frank — the WSJ writer, not the Cornell economist — had a fascinating column about what he calls “wealth beta” this weekend. If you’re a member of the 1%, it turns out, you don’t just have a lot of money; you’re also likely to be seeing a huge amount of volatility in your wealth and your income. And this volatility has been measured according to the familiar scale where the broad stock market has a beta of 1:

The new rich have become the high-betas of our economy. With their dependence on financial markets, their leverage and their hyperspending, the top 1% have income swings that now are more than twice as high as those of the rest of the population.

A study by Jonathan A. Parker and Annette Vissing-Jorgensen of Northwestern University found that the beta of the top 1% nearly quadrupled between 1982 and 2007 to 2.39. The top 0.01% had a beta of 3.96, making even the riskiest tech stocks look safe by comparison. Economists and wealth managers say the betas of the rich have likely soared even higher in recent months as markets gyrated sharply.

Frank’s column is based pretty unquestioningly on the idea that this is a bad thing, and he quotes a few wealth-management executives talking about how very rich people can stay rich for decades, and avoid losing all their money.

But my feeling is that high-beta wealth is something to be celebrated — it’s one of the few silver linings to the current rise in inequality. People might become stupendously wealthy, but we’re not really creating a new class of dynasts here. Instead, the money comes, and then, almost as fast as it came, it goes.

One reason is just that the idea of preserving wealth in one’s own family for many generations to come has rather gone out of fashion. If you inherit a fortune which has been in your family for hundreds of years, then you do generally feel a responsibility for maintaining it and passing it on to future generations. But families are smaller now than they used to be, and self-made billionaires don’t necessarily consider multi-generational wealth preservation as a particularly top priority. Indeed, it’s more common to see billionaires swing the other way: Warren Buffett, for instance, likes to say that he wants to leave his children “enough money so that they would feel they could do anything, but not so much that they could do nothing”.

And some billionaires, of course, are childless, which means they can and should do exactly what they want with their money. They’re basically forced to give it away to charity, since it’s pretty much impossible to spend that kind of money.

The fact is that if you’re hugely wealthy, you’ll almost certainly live very well for the rest of your life no matter how much of your money you risk and lose. Short of going to jail, the rich very rarely find themselves completely impoverished. And in any case, self-made plutocrats tend to have extremely healthy egos: they’re confident that if they lose everything, they’d be able to pick themselves up by their bootstraps and do it all over again.

Wealth, at these stratospheric levels, is a way of measuring who’s winning the game; if it’s not rising, you’re not winning. And of course the things that Frank prescribes — like taking on less debt and diversifying your holdings — tend to go directly against the very strategies which created all that wealth in the first place.

We live in a world where millions of people are pursuing dreams and careers which have some small chance of being hugely successful. The number of people who have a chance of achieving such success has never been greater — and when it arrives, that success is increasingly lucrative for those who get there. That’s the game; its winners change from year to year and decade to decade. But the glory goes only to the person who makes the money, not to anybody who inherits it — unless they, too, display a similar knack.

So let’s not encourage the uber-wealthy to squirrel away their money and keep it in their families. It’s a good thing that today’s wealth has high velocity and that if it doesn’t get lost in the marketplace it’s more likely than ever to end up somewhere philanthropic. Even if that frustrates executives at private banks and wealth management companies.


Wouldn’t we expect the income of the top 1% to be extremely volatile because at higher income levels recognizing income is to some degree a voluntary act?

Many mechanisms for creating great wealth rely on creating assets of value. As such, there is no income realized until one chooses to do so.

Those pre-IPO Facebook shares don’t generate any income until they are actually sold.

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American plutocracy

Felix Salmon
Dec 5, 2011 15:08 UTC

Michael Lewis puts his finger on something important:

Ordinary Greeks seldom harass their rich, for the simple reason that they have no idea where to find them. To a member of the Greek Lower 99 a Greek Upper One is as good as invisible.

He pays no taxes, lives no place and bears no relationship to his fellow citizens. As the public expects nothing of him, he always meets, and sometimes even exceeds, their expectations. As a result, the chief concern of the ordinary Greek about the rich Greek is that he will cease to pay the occasional visit.

That is the sort of relationship with the Lower 99 we must cultivate if we are to survive. We must inculcate, in ourselves as much as in them, the understanding that our relationship to each other is provisional, almost accidental and their claims on us nonexistent.

I can’t help but remember that George Papandreou was born in Saint Paul, Minnesota, grew up with Greek as a second language, and was schooled in Canada, the US, Sweden, and England. He’s part of the Greek social compact entirely by choice; he arrived when he wanted to, and can leave for a comfy sinecure in some English-speaking country any time he wants. Meanwhile, for every Papandreou who was born in the US and made his career in Greece, there are many more highly successful people — think Pete Peterson or Arianna Huffington — who moved the other way.

Indeed, the elite of most countries in the world is there by choice rather than by any kind of necessity. Chrystia Freeland — herself a Canadian who has lived and travelled widely in Russia and who cemented her reputation by working for the New York bureau of a London newspaper — wrote a great story about the “new global elite” earlier this year which made the point that the very rich are, these days, largely stateless:

They are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home. Whether they maintain primary residences in New York or Hong Kong, Moscow or Mumbai, today’s super-rich are increasingly a nation unto themselves…

The business elite view themselves increasingly as a global community, distinguished by their unique talents and above such parochial concerns as national identity, or devoting “their” taxes to paying down “our” budget deficit.

Chrystia quotes Silver Lake’s Glenn Hutchins as saying of the super-elite that “we are much less place-based than we used to be”, which is true. But the US has, historically, been behind this particular curve. It tends to import talent rather than export it: I don’t have exact numbers, but I’m sure that there’s an order of magnitude more foreign-born billionaires living in the US than there are US-born billionaires living abroad. For all that hedge-fund managers, in particular, are constantly threatening to leave the country if they get taxed more, the fact is that the US is so big and so rich that it actually does an extremely good job of retaining its billionaires, roping them in to the social compact whether they like it or not.

This is why the Occupy movements are particularly American. The Russians can’t Occupy anything: all their billionaires are in London. And while there’s an enormous number of the global elite living in Switzerland, they’re not actually Swiss: they’ve already broken the bounds of national identity, and have basically created a stateless stratospheric sovereignty of their very own.

In a way it’s reassuring that America’s billionaires are still so civic-minded that they buy laws and political parties: it’s a sign that they’re invested in the country and are here for the foreseeable. And the one law they’re not going to repeal any time soon is the most important one — the one which says that US citizens have to pay US federal taxes on their global income, no matter where they live. (Or at least demonstrate that they’ve paid at least that much in taxes elsewhere.) American plutocrats, almost uniquely, are tied to their home country in a way that other members of the global elite can barely imagine.

If you live in London, you’re constantly aware of the contingency of residency: you know those multi-million-dollar Chelsea homes are occupied for maybe only a few weeks per year by their Saudi or African owners. In America, by contrast, the rich can buy their fourth or even tenth home without ever having bought property abroad. So while America’s rich might dream of a stateless existence, they don’t have it — not yet. And I don’t think it’s coming any time soon.

Update: Pete Peterson, the son of Greek immigrants, was actually born in Kearney, Nebraska.


The plutocrats are still here because America isn’t sucked dry yet. The money is all going in one direction. Everyone says it’s the top 1%(3M+people),the true power lies with the 0.1% how fast is their piece of the pie growing?

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Ego du jour, John Thain edition

Felix Salmon
Nov 8, 2011 21:42 UTC


David Dunlap took a visit to the Bronx, and came back with a 13-page slideshow of John Thain’s self-aggrandizement:

The generosity of John A. Thain and his wife, Carmen, in helping rehabilitate the forest has been rewarded with its renaming as the Thain Family Forest. The new name has also been worked into the text of almost every sign…

One expects donors’ names at entrance ways and on directional signs and maps. It’s more unusual to find donors’ names woven into the interpretive narration. At the garden, however, the words “Thain Family Forest” are slipped into signs about black oaks, hemlocks and hillside blueberries (“a favorite of birds and small mammals in the Thain Family Forest”); about vernal pools and great horned owls; about mound formations and forest layering; and even about snags, as standing dead trees are called, which help “reveal the Thain Family Forest’s great age.”

They turn up on prohibitory signs, too. “Please Stay on the Path: The Thain Family Forest is a fragile ecosystem.”

Indeed, by the time you reach the sign beginning, “When a tree falls in the Thain Family Forest —,” you may be tempted to finish the thought yourself, “— does it make a Thain Family Sound?”

A spokeswoman for the New York Botanical Garden tried to say, with a straight face, that the Thain family did not request that the forest be named at all; that the Garden “named it as a thank you for their gift”; and that the ubiquity of the Thain name was simply a function of a “scrupulous interpretive specialist”.

You’re welcome to believe her, if you want. But I’m quite sure that John and Carmen Thain could have declined the Garden’s generous offer to ensure their name was used on first mention every time the forest is mentioned. Or even to use their name at all.

After all, the whole point of this forest is that it dates back to the 17th Century. It’s being carefully managed with Thain funds, which I’m sure have been put to good use. But there’s something vulgarly presumptuous about a Wall Street plutocrat playing happily along with the idea that he and his family should get enormous amounts of public credit, in perpetuity, for what is essentially the same forest where Lenape Indians hunted.

But of course we’re talking about John Thain here. He of the $35,000 commode on legs, and the $87,000 office rug. You’d think he’d have learned his lesson about his displays of wealth having quite the opposite effect to that originally intended. But obviously not.


If a tree falls in the John Thain forest and nobody’s around to hear it, is it still a display of Thainian ego?

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