The Baby Dividend

A proposal for a new program that will help the next generation of Americans have financial ownership in the country.

When I was 15 years old, I got my first job working at McDonald’s in Rochester, Michigan. I was taking orders in the drive-through, helping stock inventory, making the fries, and taking orders at the front counter. I’d work from 5 pm - 8 pm during the week and 8-4 on the weekends. When I started I was getting paid a whopping $5.25 per hour. That comes out to about $160 pre-tax per week. Within the first month, I had met the owner three times. He was a young guy named Bill Junior had opened up a lot of McDonald’s stores across Michigan.

The first time I met Junior was during my first week when he had to come into the store because one of the managers had quit that morning. So he came in and was taking customer orders, helping put together meals, and also working the drive-through. I remember thinking, “man, this guy can do it all”. The second time I met Junior, he had come into the store and was just checking in to see how things were going. I had talked with him for a couple minutes and he said that he heard I was doing a good job and he wanted to give me a raise. That week, I remember seeing my paycheck had increased from $5.25 to $5.50. I was ecstatic. Not because I would about $8 more per week, but mainly because it felt good that the owner recognized me for my hard work and efforts.

Later that month, Junior came into the store again. I was on my break and just hanging around the front counter and he had left a clipboard on the counter. Because Junior was a larger than life figure for me, I was really curious to see what’s on the clipboard. So I cautiously took a look. At the top it said “Monthly Sales”. And then there was a table below it. Along the left hand side, it showed his store locations. Along the top it had the sales for each week. And on the right hand side it showed the sums for each location. At the very bottom, highlighted in yellow was how much revenue all of Junior’s locations had generated that month – $1 Million Dollars.

I was absolutely floored. The idea of someone making $1M a month to me was not even in my understanding of possibilities. My mental model of the world immediately was broken.

Looking back on this moment, This was my first real-world lesson in understanding Labor vs. Ownership. The only way that I could increase my income was in two ways: 1) I work more hours or 2) I increase my hourly pay. However, in both of these scenarios the money I made was directly tied to the hours I worked. My revenue was a function of my time. But for Junior, his revenue was tied to the quality of decisions that he made. If he made a great hire, opened up a location in a nice neighborhood, or implemented a process improvement, his revenue could increase exponentially. His revenue was not a function of the hours he worked, but rather the judgment of his decisions. While my revenue as an employee was always going to be capped, his was unlimited.

Owners vs. Employees

As an employee, you wake up everyday, go to work, put in your hours, and get paid every two weeks. If you have a great couple weeks vs. a bad couple weeks, you get paid the same amount. For most corporate employees who are paid a salary, if you work 40 hours a week vs. 80 hours a week, you’re still going to get paid the same amount at the end of that two weeks. This is the classic form of labor.

Owners, on the other hand, own businesses, properties, natural resources, or equity in a business. They do not get paid based on the hours they work. Instead, they get paid based on the outcome of their decisions and the amount of leverage they use to amplify those outcomes.

In school, we were never taught this. From an early age, we were asked “What do you want to be when you grow up?” I remember, I wanted to be a policeman, a firefighter, or a hockey player. As we progressed in school, we had to be more “practical” so I remember thinking I wanted to be a doctor or a CPA. But why were we never encouraged to start a business? Or told about the importance of ownership vs. labor? This lack of education has led us to a place where over half the country does not have ownership in the stock market.

The lack of Ownership in the U.S.

As I wrote about last summer in this newsletter, About 60% of individuals in the United States do not own any stocks. The stock market is one of the largest drivers of accumulating wealth in the world and in the most developed and greatest country in the world, over half of the country has not stepped onto the field to play the game of building wealth.

While one of the largest problems in the U.S. today is the growth of income inequality, one root cause of the problem is staring us in the face. The S&P500 has generated over a 3x return the past decade. So while those of us, who are participating in the stock market have seen our wealth increase because of these returns, over half the country hasn’t been playing the same game.

This is the root cause of our problem - half the country is sitting outside the stadium not knowing that the championship game is just a few steps away inside the arena!

The Solution: The Baby Dividend

We’re living through a time where trust in institutions is low and theres a large swath of people that don’t believe Capitalism is serving them well. If you’re one of the 60% of people who aren’t invested in the stock market, of course you will think this way.

It’s crucial to the success & stability of our country that we must not only teach these principles, but apply them from the first day a human being enters the world. On day 1, children should have an ownership stake in the U.S. The best way to do that is to give them the gear to start playing the game. And this is where we introduce The Baby Dividend, first introduced to me by Brad Gerstner.

For every baby that is born, we provide them with $5,000 invested into a low-cost ETF that can’t be withdrawn until age 65. Over time, they will understand first hand the principles of compound interest, the importance of savings, and what it means to be an owner of capital vs. labor. By the time, this child is 18 years old, that investment could easily be worth anywhere in the range of $30k to $150k. Most 18 year old kids, would dream to have $30,000 in their bank account right now. But the money is not what matters, it’s the understanding of these basic financial principles and having ownership in the the country’s economic future. The beauty of this idea is that it’s not even a large investment. There’s roughly 4 Million babies born in the U.S. each year, so this would translate to a $20 Billion annual expense, which would be less than 1% of our ~$4 Trillion+ budget.

There is no greater education than real-world experiences. What better way to teach personal finance and provide equity upside in our country to every one of our citizens?