TCS Daily

The Millionaire Next Door vs. the Politician in Washington

By Arnold Kling - February 18, 2005 12:00 AM

"Usually the wealthy individual is a businessman who has lived in the same town for all of his life. This person owns a small factory, a chain of stores, or a service company. He has married once and remains married. He lives next door to people with a fraction of his wealth. He is a compulsive saver and investor. And he has made his money on his own."
-- Thomas J. Stanley and William D. Danko, The Millionaire Next Door

The millionaire next door, as described in Stanley and Danko's book, is in a constant struggle with the politician in Washington. This is not a class war -- many of the politicians, lawyers, and academics on the left earn incomes that are in the top 10 or 20 percent of all Americans. Rather, it is a values war, between a group whose core values are thrift and self-reliance and a group whose core values are paternalism and redistribution.

The Decline of Materialism

One of the most important long-term economic trends is the declining cost and importance of material goods. I have frequently cited Nobel laureate Robert William Fogel, whose book The Escape from Hunger and Premature Death, 1700-2100 documents this phenomenon.

Fogel has an insightful way of allocating consumer resources. For one thing, he explicitly looks at leisure time, including retirement, as part of total consumption. For another, he lumps durable goods and housing together into the category of "shelter." One then can compare food/clothing/shelter with health care/education/leisure.

In 1875, food/clothing/shelter accounted for 74 percent of total consumption (including leisure). In 1995, they accounted for just 13 percent of total consumption. For material goods, productivity tends to grow faster than demand, so that a smaller fraction of resources is devoted to them. We see that in the ever-declining proportion of the work force engaged in agriculture, mining, and manufacturing.

On the other hand, the demand for leisure tends to rise with income, and demand grows faster than productivity in health care and education. Fundamentally, leisure-time activities, education, and health care are the sectors of the economy you want to gravitate toward if you want to go where spending is going to increase.


Politicians, along with their allies who value paternalism and redistribution, understand the trends, too. Many on the left are willing to allow the market to operate in the ever-declining portion of the economy that produces material goods. However, they insist that education, health care, and retirement are too important and complex to be left to the private sector. The Washington power-lusters are as savvy as any businessman in gravitating toward the growth industries.

The table below summarizes the way two value systems respond to the major trends driving the economy. On the one hand, there are what Stanley and Danko call the Prodigious Accumulators of Wealth (PAWs). On the other hand, there are the views of politicians and left-wing academics, making up what I call Power-Intoxicated Washington (PIWs).


PAW Response

PIW Response

Longer lifespan, more opportunity for leisure

Save a higher proportion of income and finance your own retirement

Extend the period of dependency on government and raise taxes to pay for it

Improved Health Care Technology

Save for future health care needs; obtain catastrophic coverage

Share health care costs communally, ration health care services

Conditions that require long-term care

Saving, insurance

Medicaid reimbursement for nursing homes

Importance of education

Private schools

Government schools

Importance of college

Save for childrens' college

Means-tested financial aid

Dynamic economy

Save for contingencies; self-educate; lifelong learning

Government programs to insure income, provide job re-training

In the article "Saving Freedom", I pointed out how increased longevity and more powerful health care technologies would affect someone with PAW values. I used a basic example to show that with a longer post-retirement lifespan and more spending on health care, the level of savings required at retirement today might be more than five times what it was 50 years ago. For someone with PIW values, on the other hand, these trends imply a need for government to collect five times as much in taxes as 50 years ago. Going forward, the amount of savings and/or taxes to fund post-retirement consumption and health care is going to rise further. The question is whether we are going to punish the PAWs to pay for the PIWs.

As more people live past 70, the chances of requiring long-term care increase. From a PAW perspective, this means having to take off work to care for an aging parent or to pay to put the parent into a nursing home. Either way, personal savings can take a big hit. From a PIW perspective, this means Medicaid reimbursement for nursing homes. However, because of means testing and the absence of reimbursement for family members who act as caretakers, the government gives the back of its hand to people with PAW values.

According to Stanley and Danko, a majority of millionaires send their children to private schools. Other studies show that politicians and schoolteachers also tend to steer their own children away from the government schools that they insist are so necessary for others to attend. School vouchers, which would be consistent with PAW values, would violate PIW values.

Stanley and Danko report that PAWs are reluctant to shower their children with consumer goods, but they are happy to invest in their human capital. Paying for college education is the way that millionaires next door prefer to pass on their wealth to the next generation. However, they pay a scholarship tax rate of 22 to 47 percent, because of all of the means-testing that takes place in granting financial aid.

The problem with college financial aid is that for two families with equal lifetime incomes, the one that consumes the most and saves the least gets the most financial aid. A PAW would want to remedy this feature of both the public and private financial aid systems. A PIW does not see it as an issue.

As I emphasize in my book, Learning Economics, the economy is becoming more dynamic. People can no longer expect to work for a single employer, or even have a single occupation, their entire working lives. Many people can expect to face layoffs, self-employment, retooling, and retraining. For PAWs, this provides yet another reason to be a saver rather than a spender. For PIWs, it provides another excuse to try to get Washington involved in personal economic matters.

Taken together, government policies provide hefty, across-the-board tax punishment for the wealth accumulators. These policies send a message to others that relying on your own savings to deal with life's contingencies is a sucker's game, because government will take care of the spendthrifts.

Conflict of Values

For those of us who value self-reliance and thrift, the economic trends suggest a need to increase saving and to invest heavily in human capital. For those who value paternalism and redistribution, those trends provide an excuse to "help" more people in more ways. This tends to exacerbate the conflict of values, because ultimately the redistribution policies require heavy taxes on those of us who save and try to educate ourselves.


TCS Daily Archives