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What Governments Can Learn From the Economic Behaviour of Their Wealthiest Citizens

Posted: 12/08/2012 09:42

Some individuals have achieved staggering levels of affluence compared to their peers. This is undeniably true. So is the fact that some countries have accumulated a stock of wealth that is by orders of magnitude larger than their competitors.

Some people must be doing something right, and, by extension, so must some countries. It seems plausible that the factors that determine the extent of private wealth accumulation could apply equally well at the state level, hence there may well be some useful information for policy makers to be gained from studying how certain individuals have come to be so very wealthy. And by developing the same characteristics as those private citizens who have managed to grow their stock of wealth year after year, governments can hope to achieve the same feat.

According to Thomas J. Stanley Ph.D. and William D. Danko Ph.D., authors of perennial bestseller The Millionaire Next Door: The Surprising Secrets of America's Wealthy, the secret to building great personal fortune lies not in what one spends, but in what one saves. The extensive research documented in their work reveals some interesting (and surprising) facts about those households with a net worth of over $1 million in the United States of America.

For starters, around half of all American millionaires don't actually live in 'upscale' neighbourhoods. The average American millionaire is in fact a compulsive saver, who meticulously plans and budgets for every eventuality. This is key to sustained increases in wealth, because, as the authors put it, "If you make a good income each year and spend it all, you are not getting wealthier. You are just living high". Typically, millionaires in America will have a "go-to-hell" fund, and so are able to live for ten or more years without income in many cases.

The virtues of economic and financial independence are espoused throughout the work; American millionaires have more often than not made their money on their own, with eighty percent of them being first-generation rich. They live well below their means, and they are proficient in targeting market opportunities. Only a minority of US millionaires ever leases their motor vehicle, and rarely do they own the flash sports cars we would imagine.

Essentially, the average American millionaire is a tightwad. The wealthiest Americans do invest heavily in one thing however: the education of their children.

What can governments learn from all of this? In short: a lot. Whereas the compulsion of the standard millionaire is to save as opposed to spend, Western governments have done the opposite, and have paid the price for racking up unsustainable levels of debt. We never had an adequate "go-to-hell" fund like wealthy individuals do because we were too busy living high. Governments did not live within their means as American millionaires often do, a trait which has been shown to be so conducive to long term wealth accumulation in Stanley and Danko's studies.

Governments were so desperate to live in upscale neighbourhoods with several flash sports cars that they forget that this is not what the majority of wealthy individuals in actuality do. At the very least, it is not conducive to staying rich (sports cars depreciate pretty rapidly if I recall). The leasing of a sports car at the individual level is in my mind equivalent to government borrowing to finance some unprofitable investment or other at the end of the day.

And on investing in education, it clear that governments are not emulating the successful behaviour of wealthy individuals. Education budgets are being eroded not augmented, slowing the path to prosperity.

The analogy between the characteristics of the millionaire individual and the millionaire government is surely a good one. Germany and China, with higher savings rates and lower debt burdens than otherwise economically similar economies have fared better during the current storm, maintaining impressive growth rates.

So say what you like about America's millionaires, and those in other countries for that matter. They can still give a desperately needed lesson in prudent finance to their politicians.

 

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