Letter to a Young Person

Asceticism and Economies of Scale

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“Uncle Joe, are we getting another stimulus check!”

“I don’t know, bro!” said Uncle Joe.

I was at a surf break in Kona, Hawaii, floating on a board, waiting for a wave and listening to a conversation about money. Hot sun, yellow fish flitting below. The guy asking the question was roughly the age of my kids and a number of readers. I thought about what I’ve learned about money since I was in my 20s. Here is an abridged list that might be useful.  

1.     Almost all adults worry about money. Money is safety and safety is emotional. Generally, you will receive no training in either money or emotions related to money. 

2.     Focus on your state of mind first, money second. Learn the difference between feeling calm and agitated. Many things help calm an agitated mind––exercise, meditation, yoga, laughing with friends, therapy. I use all of them. Find what works for you.

3.   Young people face two big decisions––profession and partner. A profession means you are selling your labor, like tomatoes in a farmer’s market.

4. Some professions are structured, some are not.  In a structured profession––like medicine or the military––the work is hard but the path is clear. In a less structured career, the work is hard and you must feel your way down a foggy path. My best advice is to discern how your unique talents and curiosities are useful and relevant to others. 

5.     Separate social impact from selling your labor. There are lots of ways of having social impact and work may or may not be one of them. For instance, being a good parent and spouse has enormous social impact and is hard to do well (50% of marriages end in divorce).

6.     Generally, when you are young you have no dough. As one of my favorite poets recalled, “everything was too expensive.” Changing this condition requires pragmatism. 

7.     There are basically two sectors in today’s economy––a sector with enormous economies of scale and another without it. Economy of scale means costs are fixed and revenue isn’t. Microsoft has scale. Once they create software (a fixed cost) they can sell it globally. Last year, Microsoft made about $50 billion of profit. A barber is an essential profession and doesn’t have scale––you can only cut so much hair per day. Finance, entertainment, software and, when prices are high, energy and mining all enjoy economies of scale. The income inequality we are in the midst of is less a function of people being bad or good than whether one is in a sector with scale or not when potential scale is unprecedented.  

8.     There is a third sector that is, basically, cartels. Medicine and law, for instance, don’t have economies of scale but do operate like cartels via very strict admission qualifications that limit supply and drive-up salaries. That isn’t to say that doctors and lawyers aren’t valuable, they are. 

9.     When it comes to unequal incomes, the key question governments struggle with is how much to tax high earners relative to low earners. It’s not a simple decision. If the taxes are too high you dis-incentivize innovation; if they are too low you destroy social cohesion. Because the economy is always changing getting these levers right is inexact.

10.     Assume the government won’t help you. If they do, count that as an unexpected gift. When I was poor, I wondered why the government didn’t make it easier families like mine to obtain quality childcare at a reasonable price. Decades later, Biden may put in place policies that would have helped me back then.  My point: the government moves slow in addressing even obvious problems. 

11.  You need to save money to generate wealth. That means your spending must be less than your income. This is easier to do by boosting your income than cutting expenses. That said, most of the stuff you are offered, you don’t need, like dessert, alcohol, drugs, gym membership, a big wardrobe, junk food, plastic surgery and an SUV.

12.  Debt is a tool, like electricity. It can kill you or, if used properly, it can improve your circumstances. Don’t take on credit card debt. Taking on debt to buy shelter instead of paying rent CAN be a good idea, but there is no guarantee it is. It all depends on the price of the shelter you buy (a separate topic) relative to what you get.

13.  Once you have savings, invest it.  Don’t hoard cash. Capitalism is based on incentivizing investment, meaning a portfolio of assets must outperform cash. I’ve written previous posts about basic investment principles I use, but a first step is to aim toward a portfolio that has 1/3 in the stock market, 1/3 in long maturity (30 year) bonds and 1/3 in real estate.  See my February 23, post “Fathers, Sons and Money,” for more. 

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