How Wealth Is Created in America
Recent claims of the “Closing of the K” are wishful thinking. I have a longish piece on this that I plan to cut down to a manageable size soon. But before we can intelligently discuss “K” or “C” or “E,” we need to understand the two arms of the K. In particular, what is… Read More The post How Wealth Is Created in America appeared first on The Big Picture .
Creating wealth in America is a multifaceted process, but there are certain key avenues that stand out as primary sources. At the highest echelon of wealth, the top 0.1% of individuals, the primary driver is entrepreneurship. Founding and selling a business, often in mundane industries like HVAC, car dealerships, trash collection, beverage distribution, construction, or medical practices, is the most common route to this level of wealth.
Another significant source of wealth is equity in someone else's company. Early employees and executives at companies that go public or reach the Fortune 500 level can accumulate substantial wealth through RSUs, options, and performance shares. This form of wealth creation has gained prominence since the 1990s, and was virtually non-existent prior to that decade.
Inheritance accounts for 25% of UHNW wealth, though there is some skepticism around the size of the upcoming $105 trillion "great wealth transfer" due to market fluctuations since 1982. Real estate, with its tax advantages like 1031 exchanges and step-up in value at death, has been a long-standing wealth creator. The industry's reputation for multi-generational success is well-known.
Finance, including hedge funds, private equity, and venture capital, is also a major wealth creator, as are professional services such as medical centers, accounting, law, and consulting firms. The key difference is ownership of the enterprise, not just billable hours.
Investments in concentrated public-market positions held for decades, like buying Apple or Microsoft in the 80s-90s, can also lead to significant wealth. Even entertainment, media, and sports have become sources of wealth, with athletes and entertainers leveraging their fame to build businesses. Franchising, while unassuming, provides a systematic way to create predictable revenue over time and build wealth. Finally, windfalls and asymmetric bets, though rare, have also created wealth for a fortunate few.
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