In his book Shame: How America’s Past Sins Have Polarized Our Country, author Shelby Steele asserts that in the 1960s the political elite took it upon themselves to set aside values such as fair competition by merit, individual initiative, and equality of opportunity in an attempt to achieve racial parity. We traded these previous values for a “new post-1960s liberalism [that] screamed…[limited government] was not enough.” Steele notes that the politicians believed we “needed a proactive liberalism that could guarantee results, not simply refrain from discrimination.” Steele explicitly calls out policies like affirmative action and President Lyndon Johnson’s War on Poverty as misguided culprits and inhibitors of progress among minorities. Elizabeth Warren’s plan is guilty of many of these same flaws.
“If fire break out, and catch in thorns, so that the stacks of corn, or the standing corn, or the field, be consumed therewith; he that kindled the fire shall surely make restitution.” Exodus 22:6
“But what restitution can he make who casts abroad the fire-brands of error, or the coals of lasciviousness, and sets men’s souls on a blaze with the fire of hell? The guilt is beyond estimate, and the result is irretrievable. If such an offender be forgiven, what grief it will cause him in the retrospect, since he cannot undo the mischief which he has done! An ill example may kindle a flame which years of amended character cannot quench. To burn the food of man is bad enough, but how much worse to destroy the soul! The fire of strife is a terrible evil when it breaks out in a Christian church. Where converts were multiplied, and God was glorified, jealousy and envy do the devil’s work most effectually. Where the golden grain was being housed to reward the toil, the fire of enmity comes in and leaves little else but smoke and a heap of blackness. Woe unto those by whom offences come. May they never come through us, for although we cannot make restitution, we shall certainly be the chief sufferers if we are the chief offenders. Those who feed the fire deserve just censure, but he who first kindles it is most to blame. Discord usually takes first hold upon the thorns; it is nurtured among the hypocrites and base professors in the church, and away it goes among the righteous, blown by the winds of hell, and no one knows where it may end. O thou Lord and giver of peace, make us peacemakers, and never let us aid and abet the men of strife, or even unintentionally cause the least division among thy people.” Charles Spurgeon.
The Warren plan incorrectly uses the term “equity.” In reality, Warren is proposing a redistribution of wealth from one group to another. It’s a grant, or maybe even a subsidy, but not equity. According to private equity researcher Matthew Barch, equity is “the right to all residual cash flow of an entity after all other liabilities and debt have been satisfied; but it’s also the basic form of ownership. Equity equals ownership.” And debt, simply defined, is the “right to receive periodic payments of principal and interest, until the original amount borrowed is paid in full.” Whether it’s a venture capitalist or a private equity firm, successful investors provide capital in exchange for equity. Senator Warren has also proposed quelling private equity, which would further reduce the options available to entrepreneurs. Politics has been, for years now, the art of cultivating envy. The demi-ubiquitous rallying cry of envy is wealth inequality! I have written of this before and will not shut up about it. The wealthiest person in the world gave me a chance to be a multimillionaire in 1998. I owned 45 shares of Amazon in 1998, which I sold because I lacked the vision and accountability that Jeff Bezos had. Those shares would be worth millions today. Shall I console myself by stoking envy of his wealth?
Warren loves talking about accountability, but she means accountability to politicians and bureaucrats and fails to recognize the accountability built into private investments. The entrepreneur must be accountable to investors or lenders for the use of the borrowed/invested funds. Whether as debt or equity, investors will insist on investor rights or covenants that limit the “use of proceeds.” Founders of early-stage startups don’t get a payday when a venture capitalist injects $5 million into a business. Instead, the founder may essentially enjoy a bonus (and have back pay finally caught up), but the investor will insist the funds are used as growth capital.
The class of people Warren wants to tax to fund the program is often referred to as the investor class. They are experienced in making investments and allocating capital. The federal bureaucrats her plan would replace them with? Not so much. Investors are often close enough to the investee that they’re readily able to allocate capital based on the expected return on investment. Warren’s plan deprives entrepreneurs of this meaningful mentorship and oversight and instead places bureaucrats at the helm of capital allocation. To the extent that her plan can be called a plan, it’s a recipe for crony capitalism and abuse, teaching entrepreneurs that the path to dollars is merely a matter of satisfying bureaucrats, not actual customers. Regardless of whether Warren’s plan ever becomes law, an earnest hustle, a well-executed business plan, and flesh and blood relationships with investors, peers, and mentors would be a much more reliable path to long-term entrepreneurial success for Americans of every hue.