Hunter Lewis is an unlikely candidate for questioning wealth in the world's pre-eminent bastion of capitalism. As co-founder of the 34-year-old global investment firm Cambridge Associates, he's achieved more than a modest helping of personal and professional success in the business of advising institutional and high-net-worth investors.
Lewis wouldn't be the first rich guy to turn on his class, but he does nothing of the kind. His new book--Are The Rich Necessary? Great Economic Arguments and How They Reflect Our Personal Values (Axios, 2007)--is far more nuanced than its provocative title suggests. This is no screed on the evils of wealth. Readers are given a brief but engaging tour of the by now familiar economic debates that radiate from both sides of the political spectrum. But that's only a prelude to the book's finale: Society has more to gain than lose by engaging wealthy individuals in the cause of economic growth for all--especially for those who need it most.
Dispensing with the usual prescriptions that bounce between free markets and socialism, Lewis asserts that America needs a new economic/political model--nothing radical, but an adjustment just the same. The fourth way, as he calls it, can be achieved with a modest tweaking of the tax code. The goal: Expanding the power and reach of the non-profit sector by drawing on the resources of wealthy individuals in a more enlightened, efficient way that's as oriented to results as it is mindful of economic history's lessons.
The book considers how values and ethics can partner with the cold, hard facts of the dismal science in the name of a greater good. That by itself is hardly a new idea, although Lewis manages to breathe some fresh air into the subject. He doesn't preach so much as reflect, using history as a guide. In the process, he remains a realist, admitting that his ideas may take time to resonate, if ever. But Lewis is a hopeful realist, and one with an eye on economics and its next generation of stewards.
Part of Hunter's motivation for writing the book springs from wondering how today's children will fare once they inherit what promises to be the greatest transfer of generational wealth in history. That includes his two young children, who were "very much in mind" when he put pen to paper.
In the end, economic theories can be studied, assets can be managed, and goals can be set, but the decisive variable for success or failure remains homo economicus. Economics "now and always, [is] an intellectual, moral, and material battlefield," he writes. And for 200-plus pages, Lewis is a general navigating the combat zone. When the rhetorical dust clears, he dispatches the spoils of his war. The rich, he concludes, are necessary after all.
Your book's title asks if the rich are necessary. What's the answer?
I acknowledge in the book that the Robin Hood argument is pretty effective. That is, the rich have so much money while others have almost nothing, and if we take money from those who have so much and give it to those who don't, things will be better for the poor. It's hard to argue with that as presented.
But then I explore all the reasons why the rich are necessary. And one that I emphasize is that the rich are able to save and invest. Poor people by definition can't save. Middle class people can save for a while but then they have to spend it eventually. The government certainly spends. That leaves rich people who have so much that they can't spend it all; they have to save, they have to invest. That's sort of the pivotal role for rich people.
What are you trying to accomplish with your book?
If we're going to make any progress as a country, we need to understand economics, and we need to work on developing some values that we can agree on. My number-one goal is to take economics, a subject that everyone thinks is very hard--and some people think it's boring because it's hard--and make it very easy to understand and to reveal how fascinating it really is. That has a bearing on the high-net-worth area particularly because if you have children, as I do, and if they're going to inherit any money, you want them to understand about money. You want them to understand the social role that money plays and you want them to develop their own values in terms of having money and how to be responsible about money. It's a big mistake if parents don't inoculate their children against economic ignorance.
What's your prescription?
The policy component to the book advocates what I call the fourth way. Capitalism and free markets are the first way. The second way is communism. Everyone's been trying to develop the third way, which tries to balance a government-controlled economy with one that's laissez-faire. We've been working on a third way for 50 years and haven't gotten very far. Mostly it's just been a lot of arguments and quarrels with very little agreement.
The fourth way is expanding the non-profit sector so that it becomes a full partner with private enterprise and government by taking on a lot of the tasks that the government is supposed to be doing now.
Sounds like a plan for cutting government services.
Cut back on services, but those services would be picked up by the charitable sector, which would do so without all the bureaucratic rules and so on. Welfare, Medicaid--all of these things can be provided by the non-profit sector instead of by government.
How would the fourth way be established?
It can be done very easily through some rather minor changes in the tax code by redirecting money straight to charities. It wouldn't go to the government in the first place; the government wouldn't be a grant maker. That's better because you could promote an entrepreneurial culture [in the world of charitable giving]. If the wealthy receive tax credits, they'll give a lot of money to charity. That's the policy proposal.
It's a change in the tax code, but it's a fundamental change in how government works. The non-profit sector would do a lot more of what government's doing with the money that would have otherwise gone, through graduated income taxes, to the government. We're only talking about [redirecting] the money the government takes from the upper tax brackets.
In the process, I'd also like to see entrepreneurs have more control over their own charities than the rules now permit.
Why is that important?
If you have a private foundation, the current tax rules don't want you to make the foundation a partner in your business. I think that's wrong. An entrepreneur should be encouraged to make a private foundation a major partner in his or her own business and therefore, in his or her own success.
For example, the rules don't allow a private foundation to own too much of an individual's business. But if I'm an entrepreneur, and I build a business, it would be better if I could give my own company's stock to my private foundation.
How would that make a difference?
First, the foundation would benefit from an entrepreneur's success. Second, the entrepreneur would think of the private foundation as part of what he's doing. He's making money; he's also giving away money. It's all part of the same process.
Another example: The IRS encourages as broad and diverse a board as possible in a non-profit foundation. But I don't think it's a bad thing to have a family controlled foundation. It gives the family an incentive to work hard at building up the assets of the foundation and giving away the money in the most intelligent and creative way possible.
How does the estate tax factor into your fourth way approach?
The estate is the accumulated savings of a lifetime. Instead of taxing that away to the government, which immediately spends the money, it could be given to a charitable organization and kept as an endowment. Then the savings would be preserved, and those savings and investments would continue instead of being completely dissipated.
What I'm saying with the fourth way is: If you can't agree on whether you want an estate tax or not, at least take the money that would have gone to the estate tax and let it be given to charity through a tax credit.
A critic might say that your proposals sound like Republican ideas that favor the rich.
Democrats believe in charitable giving just as much as Republicans do. Hopefully, I think that what distinguishes the book is that it's neither a Republican nor Democratic proposal. The idea is to get away from the incredibly unproductive arguments we've been having between Republicans and Democrats.
What's the message in all of this for wealthy individuals?
The most important point is offering a way to educate their children. If their children don't have some idea about money, and some sense that it's an interesting topic, then the kids aren't going to be very good stewards of the money they inherit.
Is it easier to find common ground these days on the issues you're talking about?
I think it's worse. There's less of a consensus now than there's almost ever been--other than, say, in the Civil War. That's a major problem, and a lot of it is just economic ignorance.One example: If you ask people in polls whether they'd like to have free health care, they say, "Yes, we'd like to have free health care." That reminds me of the P.J. O'Rourke joke: If you think health care's expensive now, just wait till it's "free," and then you'll see how expensive it can be. That's an example of how people don't understand economics. People can't be effective as voters and policy makers without a basic understanding of economics, which I hope the book starts to offer.
Presumably, you'll be passing on a fair amount of wealth to your children.
My children are 10 years old--I have twins. When I wrote the book, they were very much in mind. They were getting almost old enough to understand this, and I wanted them to have the book as a resource.
In the context of the issues we're discussing, what are the stakes in the years to come?
The United States is in real jeopardy of losing its pre-eminent position in the world through economic mistakes that aren't understood in any significant sense by the President, the Senate or Congress. They can't even evaluate the issues.
One issue that really concerns me right now is that the Federal Reserve has done a very bad job under Greenspan, and now under Bernanke. The Fed's been creating excessive amounts of new money, which has led to the bubbles--the dot-com bubble and now the housing bubble, the private equity bubble and so on. That's a major worry, and it's compounded when I hear President Bush say at a press conference, "I'm not an economist." It goes back to the primary purpose of the book, which is to teach economics. Policy makers need to understand economics just as our children do.
JAMES PICERNO (jpicerno@highlinemedia.com) is senior writer at Wealth Manager.
