Can Family-Owned Businesses Slow America’s Social Decline ?

Central Block

A Letter in the Sept 18th issue of The Economist magazine is the impetus of this post.  Professor Joachim Schwass, Professor of Family Business, IMD, Switzerland writes:

In the response to Schumpeter’s column(August 21st), beyond the public company, private partnership and the state-controlled company the other big survivor is the family-owned business.  Often forgotten and underestimated yet big GDP and employment contributors, family companies are driven by a very different type of reward: handing over a healthy, performing and sustainable business to the children.  The vast majority would not dream of an IPO.

My husband and I have never started a business from the ground up…not a real business with bricks and mortar.  As economists, we sell ideas.  However, we’ve known for quite awhile that if we want our children to stick around and raise their families near us, we need to provide them with some income opportunities so they don’t have to chase jobs all over the country.

If you walk back in history 100 years, most grew up in the family business: the farm.  Many feminists today would probably describe life on the farm using the Hobbesian state of existence as “nasty, brutish and short.”  However, there is no doubt that society, as a whole, was better off .  My feminist friends would have a field day with the lack of “any” women’s rights back then.

However, with the family intact and everyone having a valued role in the family’s survival, society and the economy prospered as a result of the farm.  Kids learned how to provide necessities like food and shelter.  Kids also learned what was most important to society’s advancement: how to take care of their own family instead of looking to someone else to assume their responsibilities.  What survival skills do people have today when life throws them a major curveball like hurricane Katrina:  looting or waiting for FEMA to rescue you ?

The Northeast where I live is a living breathing history museum of early American wealth.  Liberal states like Maine are still living off the great wealth built 100 years ago when family businesses were the norm.  Despite Maine’s lower per capita income (ranked 30th in the nation because of federal money coming into the state) compared to its New England neighbors in MA, CT and NH, it has one of the most lavish stock of housing compared to its New England counterparts.

It’s like a museum….mansion after mansion with ballrooms in towns that timber, farming and fishing built which are now turned into multi-family unit after multi-family unit filled with single mothers.  Visit most of the towns in Maine that aren’t located along the coast and the stark poverty is something you’d expect to see in third-world countries.  My friends, we are not better off and the answer is not more welfare.

The answer is what built these great towns: families with strong economic ties to their community.  Parents and children need to have a stake in their communities in the short- and long-run if the community is to be viable.  That “stake in the community” is not a property tax bill which pays for the town school but perhaps a business that provides for the family’s economic needs as well as provides a valuable service to the community.

Two Income Trap and 50-Percent Money

Spot-on book by Elizabeth Warren and her daughter about why families aren’t making it on two incomes.  If you’re reading this blog, you’re probably aware of some of the reasons, some of which lead to the nonsensical result of earning less than your outlays.  Failure to accurately account for taxes, a second car and gas, work clothing, etc. could have a working mom earning McDonalds wages after everything is netted out.

My husband, who is a tax policy economist, recently figured out that everything we earn for the rest of the year is 50% money.  What does that mean ?  Well, we’re in the child tax credit phaseout and have reached the level of income where our marginal rate is now 50% such that we keep 50% of everything we earn for the rest of the year and send the other 50% to our friends in Washington.  I’m no great economist but I did learn about the trade off between labor and leisure and this recent nugget has me thinking pina coladas.  Since we don’t have 9 to 5 jobs but instead are business owners who have to drum up our own business, I am feeling quite tired and think I’ll take a nap and tell Washington to shove it…..they’re not getting my 50% money.