Beware of false prophets . . .(and profits)

by: Bob Desman

Ah! The Reagan years. So let's take a closer look. The business paradigm of the '70’s was focused on gaining and growing "market share." Because of shifts in economic conditions and theoretic contributions, emphasis on the consumer transitioned to the welfare of the producer. The new paradigm, "shareholder value," displaced the old. The metric for measuring corporate success was share value versus consumer aggregation. How could one maximize share value? Maximize profitability. There were only two options: 1) raise prices, or 2) reduce costs. Consequently, the '80’s became an era of downsizing, sale and leaseback of assets, automation, and off shoring. Yes, the degradation of the manufacturing sector started in the mid-1980’s not over the last eight years. The finance, insurance, and real estate sector (FIRE) led the rest of industry as the primary contributor to GDP, computer investment, and corporate profits. Manufacturing, transportation, communication, and utilities (TCU) moved in the opposite direction but led in business closings, decline in union membership, and layoffs. We had transitioned to a post-industrial, service based economy. The last revision of the tax code was 1986 and it favored the new paradigm.

The civilian labor force as a percent of the total population started to decline and has lagged population growth ever since. New job creation was principally in the lower paying services sector. In 1980, the working poor took home about 14.6% of all income, the middle class 31.8%, and the top 20% got the rest. By 2010, the working poor's share was 11.8%, the middle class 28%, and the top 20% had grown its share from 43% in 1980 to 50.2% with almost half of that going to the top 5%. The rich got richer, the poor got poorer, and the tax code never changed.

If you were doing business in the FIRE sector, the deck was stacked in your favor and you would really have to try in order to fail. If you were a real estate developer, you could buy a property, depreciate it, and if you held it for five years, sell it and only pay a reduced capital gains tax on the difference between the depreciated price and the sale price. If you held the property, you could keep accumulating the depreciation and use it as a loss against income. If you held the property to your death, you could will it to your heirs and all that depreciated value would be erased. If they sold it at the fair market value of the property at inheritance there would be no profit to be taxed. If they kept it, they could start depreciating it all over again. Further, if your company was in real estate and organized as an LLC, profits and losses would pass through to your personal tax return. You could shelter yourself from legal liability and simultaneously accumulate "tax losses" from interest payments, property taxes paid, depreciation and operating expenses. In short you could lose money on paper and still generate a handsome cash income. If you had multiple companies, you could develop complicated schemes to dodge tax liabilities and maximize cash flows (not always legally, but it would take a lot of time to unravel the interactions and detect the infractions. And, even then, the only penalty would be to pay the taxes and accumulated interest unless tax evasion could be proven. This is rare as the IRS just wants the uncollected taxes. In other words, the only crime is getting caught. And, if caught, the only penalty is paying what you should have in the first place. Have an army of tax accountants and tax attorneys and the whole affair is mitigated).

Donald Trump does not "understand the tax laws better than anyone else," his accountants and attorneys know how to deal with the IRS. He cannot even be credited with surrounding himself with the talent. Fred Trump, his father, was the architect of the Trump empire (and the safety net in the event of failure). Fred died in 1999 and left Donald with a pretty hefty inheritance. By that time, Donald was in the business of selling the "Trump" brand and collecting licensing fees and royalties. Since Fred's passing one need only to look at the "shyster businesses" Donald has participated in to measure his acumen—retailing water, steaks, perfume, and clothing; a modeling agency with questionable practices; Trump University. Before Fred died, Donald dabbled with professional sports and the Casino business. Both ventures failed and Fred was there to bail him out.

Why would a knowledgeable real estate mogul get distracted from his core business particularly since the profit potential was greater and the infrastructure was in place? Why would a hotshot developer waste his time trying to be a television performer or beauty pageant operator? Maybe the answer is that Trump's business acumen pales in comparison to his ego.

Have you ever heard of Michael Otto, Donald Bren, Simon and David Ruben, Gerald Grovenor, or Stephen Ross? Probably not, they are the Americans who are among the top ten real estate barons in the world. Trump does not make it into the top 20. All live quiet lives and have long histories of philanthropy. Bren is the richest among them and has grown his wealth 40 fold over the last 33 years (Trump's brilliance has kept him on par with the benchmark NAREIT index —his performance has been very average). "Beware of false prophets".

We learned the lesson early on and then forgot . . .

by: Bob Desman

Long ago in our misty past, our ancestors huddled together in cold dark caves to hold the dangers of the night at bay. By sharing their body heat, muscles, senses, and abilities they became a force with which to contend. They protected their weaknesses and leveraged their strengths. They encouraged, tended, and watched over each other. They had yet to harness fire, but they already learned that collectively they had a better chance of survival than if went their ways individually.

This was no mean feat. Our most primitive nature is to compete; cooperation must be learned. Cooperating without reservation is one of the most difficult leaps our hardwired systems must undertake. Yet, throughout our history cooperation has demonstrated itself to be the most critical element in achieving progress. Science stands on the shoulders of older science, art derives from what has been created before and both depend on their progenitors sharing their contributions. Thus, we can build a nuclear reactor but cannot replicate a Stradivarius violin. Collaboration enables ideas and initiatives to transcend lifetimes and physical space and to grow bodies of knowledge; it facilitates defense from the stronger and exploitation of the weaker; it allows us to spread risk and undertake specialization. There is no synergy in isolation.

Governments, unions, and gangs are vehicles for pursuing collaborative initiatives. They provide a collection point for the many and a forum for their ideas. They can organize collective energy, talent, and treasure and focus it on objective achievement. Formal organizations, by their nature, are the only mechanisms that can harness all the benefits of collaboration and pursue them effectively and efficiently. And, government is a formal organization. At its core, it is not the role of a government to facilitate personal autonomy it exists to promote collective welfare. One could argue that an emphasis on autonomy is diametrically opposed to effective collective action—a crowd of individuals simply cannot achieve what a committed collaboration can. And, collaboration cannot be achieved if individuals do not subordinate themselves to the common good. This is an unnatural yet necessary precondition. Our forebearers learned this lesson the hard way yet they abandoned their innate urges, pulled it off, survived, and left it for us (via collaboration) as a legacy.

So here are my questions. Who benefits from convincing us of the sanctity of the individual and autonomy? Who benefits from convincing us that our government is the enemy of ourselves? Who profits from discouraging us from using our collective strength to: provide healthcare as a basic right, secure equitable compensation, regulate those more powerful than the individual, provide equal protection before the law, ensure the cost of democracy is equitably shared, make a good education accessible and affordable, provide a safety net for those who fall on hard times, and secure our persons and property by means related to the specific threats against them? Who wants us to see ourselves as a country—a piece of real estate—versus a nation—a network of relationships—and why is it in their interest to so divide us?