Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (2 page)

If you believe in capitalism—and nowadays pretty much the whole world does—the Kuznets curve was a wonderful theory. Economic progress might be brutal and bumpy and create losers along the way. But once we reached that Tocquevillian plateau of all being “very civilized men” (yes, men!), we would all share in the gains. Until the late 1970s, the United States, the world’s poster child of capitalism, was also an embodiment of the Kuznets curve. The great postwar expansion was also the period of what economists have dubbed the Great Compression, when inequality shrank and most Americans came to think of themselves as middle class. This was the era when, in the words of Harvard economist Larry Katz, “Americans grew together.” That seemed to be the natural shape of industrial capitalism. Even the Reagan Revolution rode on the coattails of this paradigm—trickle-down economics, after all, emphasizes the trickle.

But in the late 1970s, things started to change. The income of the middle class started to stagnate and those at the top began to pull away from everyone else. This shift was most pronounced in the United States, but by the twenty-first century, surging income inequality had become a worldwide phenomenon, visible in most of the developed Western economies as well as in the rising emerging markets.

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The switch from the America of the Great Compression to the America of the 1 percent is still so recent that our intuitive beliefs about how capitalism works haven’t caught up with the reality. In fact, surging income inequality is such a strong violation of our expectations that most of us don’t realize it is happening.

That is what Duke University behavioral economist Dan Ariely discovered in a 2011 experiment with Michael Norton of Harvard Business School. Ariely showed people the wealth distribution in the United States, where the top 20 percent own 84 percent of the total wealth, and in Sweden, where the share of the top 20 percent is just 36 percent. Ninety-two percent of respondents said they preferred the wealth distribution of Sweden to that of the United States today. Ariely then asked his subjects to give their ideal distribution of wealth for the United States. Respondents preferred that the top 20 percent own just 32 percent of total wealth, an even more equitable distribution than Sweden’s. When it comes to wealth inequality, Americans would prefer to live in Sweden—or in the late 1950s compared to the United States today. And they would like kibbutz-style egalitarianism best of all.

But the gap between the data and our intuition is not a good reason to ignore what is going on. And to understand how American capitalism—and capitalism around the world—is changing, you have to look at what is happening at the very top. That focus isn’t class war; it’s arithmetic.

Larry Summers, the Harvard economist and former secretary of the Treasury, is hardly a radical. Yet he points out that America’s economic growth over the past decade has been so unevenly shared that, for the middle class, “for the first time since the Great Depression, focusing on redistribution makes more sense than focusing on growth.”

The skew toward the very top is so pronounced that you can’t understand overall economic growth figures without taking it into account. As in a school whose improved test scores are due largely to the stellar performance of a few students, the surging fortunes at the very top can mask stagnation lower down the income distribution. Consider America’s economic recovery in 2009–2010. Overall incomes in that period grew by 2.3 percent—tepid growth, to be sure, but a lot stronger than you might have guessed from the general gloom of that period.

Look more closely at the data, though, as economist Emmanuel Saez did, and it turns out that average Americans were right to doubt the economic comeback. That’s because for 99 percent of Americans, incomes increased by a mere 0.2 percent. Meanwhile, the incomes of the top 1 percent jumped by 11.6 percent. It was definitely a recovery—for the 1 percent.

There’s a similar story behind the boom in the emerging markets. The “India Shining” of the urban middle class has left untouched hundreds of millions of peasants living at subsistence levels, as the Bharatiya Janata Party discovered to its dismay when it sought reelection on the strength of that slogan; likewise, China’s booming coastal elite is a world apart from the roughly half of the population who still live in villages in the country’s vast hinterland.

This book is, therefore, an attempt to understand the changing shape of the world economy by looking at those at the very top: who they are, how they made their money, how they think, and how they relate to the rest of us. This isn’t
Lifestyles of the Rich and Famous
, but it also isn’t a remake of
Who Is to Blame?
, the influential nineteenth-century novel by Alexander Herzen, the father of Russian socialism.

This book takes as its starting point the conviction that we need capitalists, because we need capitalism—it being, like democracy, the best system we’ve figured out so far. But it also argues that outcomes matter, too, and that the pulling away of the plutocrats from everyone else is both an important consequence of the way that capitalism is working today and a new reality that will shape the future.

Other accounts of the top 1 percent have tended to focus either on politics or on economics. The choice can have ideological implications. If you are a fan of the plutocrats, you tend to prefer economic arguments, because that makes their rise seem inevitable, or at least inevitable in a market economy. Critics of the plutocrats often lean toward political explanations, because those show the dominance of the 1 percent to be the work of the fallible Beltway, rather than of Adam Smith.

This book is about both economics and politics. Political decisions helped to create the super-elite in the first place, and as the economic might of the super-elite class grows, so does its political muscle. The feedback loop between money, politics, and ideas is both cause and consequence of the rise of the super-elite. But economic forces matter, too. Globalization and the technology revolution—and the worldwide economic growth they are creating—are fundamental drivers of the rise of the plutocrats. Even rent-seeking plutocrats—those who owe their fortunes chiefly to favorable government decisions—have also been enriched partly by this growing global economic pie.

America still dominates the world economy, and Americans still dominate the super-elite. But this book also tries to put U.S. plutocrats into a global context. The rise of the 1 percent is a global phenomenon, and in a globalized world economy, the plutocrats are the most international of all, both in how they live their lives and in how they earn their fortunes.

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Henry George, the nineteenth-century American economist and politician, was an ardent free trader and such a firm believer in free enterprise that he opposed income tax. For him, the emergence of his era’s plutocrats, the robber barons, was “the Great Sphinx.” “This association of poverty with progress,” he wrote, “is the great enigma of our times. . . . So long as all the increased wealth which modern progress brings goes but to build up great fortunes, to increase luxury and make sharper the contrast between the House of Have and the House of Want, progress is not real and cannot be permanent.”

A century and a half later, that Great Sphinx has returned. This book is an attempt to unravel part of that enigma by opening the door to the House of Have and studying its residents.

ONE

HISTORY AND WHY IT MATTERS

1,000,000 people overseas can do your job. What makes you so special?

—A 2009 billboard above Highway 101, the road that connects Silicon Valley with San Francisco

T
HE
S
ECOND
G
ILDED
A
GE

If you are looking for the date when America’s plutocracy had its coming-out party, you could do worse than choose June 21, 2007. On that day, the private equity behemoth Blackstone priced the largest American IPO since 2002, raising $4 billion and creating a publicly held company worth $31 billion at the time of the offering. Steve Schwarzman, one of the firm’s two cofounders, came away with a personal stake worth almost $8 billion at that time, along with $677 million in cash; the other, Pete Peterson, cashed a check for $1.88 billion and retired.

In the sort of coincidence that delights historians, conspiracy theorists, and book publishers, June 21 also happened to be the day when Peterson threw a party—at Manhattan’s Four Seasons restaurant, of course—to launch his daughter Holly’s debut novel,
The Manny
, which lightly satirized the lives and loves of financiers and their wives on the Upper East Side. The book fits neatly into the genre of modern “mommy lit”—
USA Today
advised its readers to take it to the beach—but the author told me that she was inspired to write it in part by her belief that “people have no clue about how much money there is in this town.”

Holly is slender, with the Mediterranean looks she inherited from her Greek grandparents—strong features, dark eyes and eyebrows, thick brown hair. Over a series of conversations Ms. Peterson and I had after that book party, she explained to me how the super-affluence of recent years has changed the meaning of wealth.

“There’s so much money on the Upper East Side right now,” she said. “A lot of people under forty years old are making, like, $20 million or $30 million a year in these hedge funds, and they don’t know what to do with it.” As an example, she described a conversation at a dinner party: “They started saying, if you’re going to buy all this stuff, life starts getting really expensive. If you’re going to do the NetJets thing”—this is a service offering “fractional aircraft ownership” for those who do not wish to buy outright—“and if you’re going to have four houses, and you’re going to run the four houses, it’s like you start spending some money.”

The clincher, Peterson said, came from one of her dinner companions. “She turns to me and she goes, ‘You know, the thing about twenty is’”—by this she means $20 million per year—“‘twenty is only ten [after taxes].’ And everyone at the table is nodding.”

Peterson is no wide-eyed provincial naïf, nor can she be accused of succumbing to the politics of envy. But even from her gilded perch, it is obvious that something striking is happening at the apex of the economic pyramid.

“If you look at the original movie
Wall Street
, it was a phenomenon where there were men in their thirties and forties making two and three million a year, and that was disgusting. But then you had the Internet age, and then globalization, and money got truly crazy,” she told me.

“You had people in their thirties, through hedge funds and Goldman Sachs partner jobs, people who were making twenty, thirty, forty million a year. And there were a lot of them doing it. They started hanging out with each other. They became a pack. They started roaming the globe together as global high rollers and the differences between them and the rest of the world became exponential. It was no longer just Gordon Gekko. It developed into a totally different stratosphere.”

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Ms. Peterson’s dinner party observations are borne out by the data. In America, the gap between the top 1 percent and everyone else has indeed developed into “a totally different stratosphere.” In the 1970s, the top 1 percent of earners captured about 10 percent of the national income. Thirty-five years later, their share had risen to nearly a third of the national income, as high as it had been during the Gilded Age, the previous historical peak. Robert Reich, the labor secretary under Bill Clinton, has illustrated the disparity with a vivid example: In 2005, Bill Gates was worth $46.5 billion and Warren Buffett $44 billion. That year, the combined wealth of the 120 million people who made up the bottom 40 percent of the U.S. population was around $95 billion—barely more than the sum of the fortunes of these two men.

These are American billionaires, and this is U.S. data. But an important characteristic of today’s rising plutocracy is that, as Ms. Peterson put it, today’s super-rich are “global high rollers.” A 2011 OECD report showed that, over the past three decades, in Sweden, Finland, Germany, Israel, and New Zealand—all countries that have chosen a version of capitalism less red in tooth and claw than the American model—inequality has grown as fast as or faster than in the United States. France, proud, as usual, of its exceptionalism, seemed to be the one major Western outlier, but recent studies have shown that over the past decade it, too, has fallen into line.