The Ballad Of Daisy And Jay, Part Two

Chrystia Freeland at The Atlantic:

If you happened to be watching NBC on the first Sunday morning in August last summer, you would have seen something curious. There, on the set of Meet the Press, the host, David Gregory, was interviewing a guest who made a forceful case that the U.S. economy had become “very distorted.” In the wake of the recession, this guest explained, high-income individuals, large banks, and major corporations had experienced a “significant recovery”; the rest of the economy, by contrast—including small businesses and “a very significant amount of the labor force”—was stuck and still struggling. What we were seeing, he argued, was not a single economy at all, but rather “fundamentally two separate types of economy,” increasingly distinct and divergent.

This diagnosis, though alarming, was hardly unique: drawing attention to the divide between the wealthy and everyone else has long been standard fare on the left. (The idea of “two Americas” was a central theme of John Edwards’s 2004 and 2008 presidential runs.) What made the argument striking in this instance was that it was being offered by none other than the former five-term Federal Reserve Chairman Alan Greenspan: iconic libertarian, preeminent defender of the free market, and (at least until recently) the nation’s foremost devotee of Ayn Rand. When the high priest of capitalism himself is declaring the growth in economic inequality a national crisis, something has gone very, very wrong.

This widening gap between the rich and non-rich has been evident for years. In a 2005 report to investors, for instance, three analysts at Citigroup advised that “the World is dividing into two blocs—the Plutonomy and the rest”:

In a plutonomy there is no such animal as “the U.S. consumer” or “the UK consumer”, or indeed the “Russian consumer”. There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the “non-rich”, the multitudinous many, but only accounting for surprisingly small bites of the national pie.

Before the recession, it was relatively easy to ignore this concentration of wealth among an elite few. The wondrous inventions of the modern economy—Google, Amazon, the iPhone—broadly improved the lives of middle-class consumers, even as they made a tiny subset of entrepreneurs hugely wealthy. And the less-wondrous inventions—particularly the explosion of subprime credit—helped mask the rise of income inequality for many of those whose earnings were stagnant.

But the financial crisis and its long, dismal aftermath have changed all that. A multibillion-dollar bailout and Wall Street’s swift, subsequent reinstatement of gargantuan bonuses have inspired a narrative of parasitic bankers and other elites rigging the game for their own benefit. And this, in turn, has led to wider—and not unreasonable—fears that we are living in not merely a plutonomy, but a plutocracy, in which the rich display outsize political influence, narrowly self-interested motives, and a casual indifference to anyone outside their own rarefied economic bubble.

Through my work as a business journalist, I’ve spent the better part of the past decade shadowing the new super-rich: attending the same exclusive conferences in Europe; conducting interviews over cappuccinos on Martha’s Vineyard or in Silicon Valley meeting rooms; observing high-powered dinner parties in Manhattan. Some of what I’ve learned is entirely predictable: the rich are, as F. Scott Fitzgerald famously noted, different from you and me.

What is more relevant to our times, though, is that the rich of today are also different from the rich of yesterday. Our light-speed, globally connected economy has led to the rise of a new super-elite that consists, to a notable degree, of first- and second-generation wealth. Its members are hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition—and many of them, as a result, have an ambivalent attitude toward those of us who didn’t succeed so spectacularly. Perhaps most noteworthy, they are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home. Whether they maintain primary residences in New York or Hong Kong, Moscow or Mumbai, today’s super-rich are increasingly a nation unto themselves.

Kevin Drum:

The super rich, she writes, “are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home.” Thus the fury of the financial elite at the suggestion that perhaps they were responsible for the crash of 2008 or that they owe it to the rest of the country to do anything about it:

When I asked one of Wall Street’s most successful investment-bank CEOs if he felt guilty for his firm’s role in creating the financial crisis, he told me with evident sincerity that he did not. The real culprit, he explained, was his feckless cousin, who owned three cars and a home he could not afford.

….A Wall Street investor who is a passionate Democrat recounted to me his bitter exchange with a Democratic leader in Congress who is involved in the tax-reform effort. “Screw you,” he told the lawmaker. “Even if you change the legislation, the government won’t get a single penny more from me in taxes. I’ll put my money into my foundation and spend it on good causes. My money isn’t going to be wasted in your deficit sinkhole.”

I don’t know if this attitude is truly new. Maybe not as much as Freeland suggests. Still, it certainly feels as if America is dominated more and more by an elite class that cares less and less about the public good because they don’t really feel like they have a stake in the public good anymore: they’ve never served in the Army or the Peace Corps, their kids never come within yelling distance of public schools, they donate their money exclusively to their own churches and their own global foundations, and they whine constantly about taxes even though their incomes have skyrocketed and tax rates have fallen dramatically over the past several decades. To them, taxes aren’t part of a social contract, they’re just pure welfare: they don’t care about education or infrastructure or unemployment or healthcare because they don’t have to. Within their own bubble, they don’t need to rely on the public versions of any of that stuff.

Jamelle Bouie at Tapped:

The whole thing is very good, though I have a small quibble with this passage:

What is more relevant to our times, though, is that the rich of today are also different from the rich of yesterday. Our light-speed, globally connected economy has led to the rise of a new super-elite that consists, to a notable degree, of first- and second-generation wealth. Its members are hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition — and many of them, as a result, have an ambivalent attitude toward those of us who didn’t succeed so spectacularly.

If “ambivalent” is code for disdain — passive or otherwise — then these nouveau riche aren’t so different from their predecessors; with few historical exceptions, the rich have always been ambivalent about the poor and less fortunate. Indeed, I wouldn’t be shocked if the presence of “meritocracy” (as if these people have no prior advantages) intensified feelings of disdain. After all, if you can succeed, why can’t these people (and as a corollary, “what right do they have to my wealth”)?

To be fair, disdain for the less fortunate is completely understandable as a response to visible disparities. On some level, we all know that our position is an accident of birth. For a lot of people, a sense of class superiority is a necessary part of the illusion that they are “deserving” of their good fortune.

Felix Salmon:

It’s not that these people are utterly bereft of noblesse oblige: Chrystia points out that “in this age of elites who delight in such phrases as outside the box and killer app, arguably the most coveted status symbol isn’t a yacht, a racehorse, or a knighthood; it’s a philanthropic foundation.” But those philanthropies don’t benefit the left-behind middle classes: they tend to follow a barbell distribution, with the money going either to the world’s poorest or else to well-endowed universities and cultural institutions. The US middle class is sneered at for being fat and lazy and unworthy of their wealth:

The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.

I heard a similar sentiment from the Taiwanese-born, 30-something CFO of a U.S. Internet company. A gentle, unpretentious man who went from public school to Harvard, he’s nonetheless not terribly sympathetic to the complaints of the American middle class. “We demand a higher paycheck than the rest of the world,” he told me. “So if you’re going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.”

This mindset is dangerous, but it’s not clear how dangerous it is.

The real threat facing the super-elite, at home and abroad, isn’t modestly higher taxes, but rather the possibility that inchoate public rage could cohere into a more concrete populist agenda—that, for instance, middle-class Americans could conclude that the world economy isn’t working for them and decide that protectionism or truly punitive taxation is preferable to incremental measures such as the eventual repeal of the upper-bracket Bush tax cuts.

Mohamed El-Erian, the Pimco CEO, is a model member of the super-elite. But he is also a man whose father grew up in rural Egypt, and he has studied nations where the gaps between the rich and the poor have had violent resolutions. “For successful people to say the challenges faced by the lower end of the income distribution aren’t relevant to them is shortsighted,” he told me. Noting that “global labor and capital are doing better than their strictly national counterparts” in most Western industrialized nations, ElErian added, “I think this will lead to increasingly inward-looking social and political conditions. I worry that we risk ending up with very insular policies that will not do well in a global world. One of the big surprises of 2010 is that the protectionist dog didn’t bark. But that will come under pressure.”

If this is true, then the members of the super-elite should be falling over each other to pay more in taxes out of simple enlightened self-interest—rather than saying that a perfectly sensible tax hike is “like when Hitler invaded Poland in 1939.”

But it seems to me that the inchoate anger of the masses shows no sign of cohering into anything at all, let alone protectionism, which seems to have been dying a slow death ever since the protests against Nafta. The Tea Party, which is the closest thing we have to a populist revolt, is bought and paid for by plutocrats and shows no protectionist tendencies whatsoever. If they keep on going on their present trajectory, they’re just as likely to continue unimpeded as they are to run into some kind of atavistic class warfare.

So I’m unconvinced that the plutocrats have any real incentive to restrain themselves, or to stop moaning around an Upper East Side dinner table that $20 million a year isn’t all that much—it’s really only $10 million a year, after taxes.

Matt Steinglass at DiA at The Economist:

Ms Freeland expresses the hope towards the end of her article that the global super-rich will at some point realise that in the long run, by refusing to pay the taxes that are needed to maintain the infrastructure of the countries they operate in or to educate the workers they expect to staff their businesses, they are courting a disastrous political reaction: protectionism, confiscatory taxes, or something worse and more violent. I’m not entirely sure the super-rich need fear such a reaction. Back in mid-2009, Barack Obama told the assembled plutocrats of Wall Street that they ought to be more grateful to him; he was “the only thing standing between you and the pitchforks.” The plutocrats smiled, and departed by helicopter. To the extent any pitchforks have been seen, they were applied to the Democrats’ behinds last November. Perhaps, rather than attempting to stand between Wall Street and any hypothetical pitchforks, Mr Obama should have gotten out of the way.

The other day I was on a Singapore Airlines flight in which every video feature on the inflight entertainment system was preceded by an advertisement for condominiums in a luxury beachfront apartment/shopping development with three canted, burnished-steel towers supporting a huge steel lintel with an artificial park on top, trees, lake, and all, 200+ metres up. It looked like the spoiler of some gigantic Formula 1 racecar. As the ad played, a chyron across the bottom of the screen repeated something along the following lines: “Republic of Singapore, zero capital gains tax, zero wealth tax, zero inheritance tax…” ad nauseum. I sort of think this is the world the super-wealthy are operating in, one in which every threat made by some puny government can be flicked away by the threat of moving to Singapore or some other principality slavishly devoted to wealth. Though given that I was watching this ad in economy class, it’s probably just some pathetic low-rent imitation of the real thing, which is in fact beyond the imagination of mere wage-earners like me. There’s a Victor Pelevin short story along these lines, in which a Russian neuro-physicist discovers that the possession of a certain quantity of dollars propels people’s consciousnesses into an alternative dimension; to all outward appearances such oligarchs seem to still function in our reality, but in fact they are experiencing a universe invisible and completely alien to us mortals. State security authorities promptly hook up a couple of money-nauts to a psychic imaging machine developed by the KGB and transfer billions of dollars to their accounts. It turns out that the universe, as they experience it, looks like a long corridor, lit with a faintly greenish light, with something unidentifiable just around the corner. It’s a strangely haunting, off-kilter story. As Ms Freeland says, the Russians always seem to be sharper at expressing these kinds of things.

Ryan Avent at Free Exchange at The Economist:

It’s always a little amusing (and, to me, still a bit stunning) to read about the really rich and how rich they are and what that level of really richness allows the really rich to do. But the interesting policy questions continue to be, first, what are the sources of the wealth and, second, what distortions result from it. On the first, it seems to me that we should obviously think differently about money earned from superstar effects and money derived from access and rent-seeking. Rich growth wealthy from the invention of Google or bets against an unsustainable housing bubble are in a different category from those who happened to know the people doling out government contracts or mineral rights.

But the second issue is actually the more important, and it’s the one for which we currently lack a firm grasp. What does this concentration of wealth mean? We read Ms Freeland and other similar stories, and it’s clear that the rich have strong opinions. And they channel their vast resources in support of their opinions, and they build institutions and hobnob with policymakers and opinionmakers and rotate through administrations, and one eventually asks: is the mass of non-rich people being hoodwinked? Are the elite systematically bending the rules to favour themselves and undermine a modern society based on broad improvements in living standards?

Well, are they? I don’t know. Part of the problem assessing the impact of the shadowy world of global billionaires on public policy is that it’s so shadowy. It does seem like the circuit of elite elbow-rubbing events is designed, in part, to help align the worldview of politicians and journalists with that of the very rich. And if that’s the main route through which the elite wield influence, then we could be in trouble, given the extent to which the media world’s economic troubles are pushing it toward models based on support from moneyed patrons.

Daniel Drezner:

Fifteen years ago Samuel Huntington coined the term “Davos Man” to describe the kind of globalized elite that jetted off from global conference to global conference. His point was that Davos man was an exceedingly rare bird, and that nationalism, religion, language and culture were still the most potent forces binding groups together in the world.

It’s in this context that I read Chrystia Freeland’s new cover story in The Atlantic. It’s well worth the read, but like Kevin Drum, I’m not sure that the phenomenon Freeland is identifying is all that new.

Furthermore, I’m not entirely convinced they’re as powerful as Freeland or Drum or Felix Salmon suggests. As Freeland pointed out, they fought a lot of the Obama administration’s first-half policies tooth and nail — and they actually lost a fair amount of the time. Indeed, nary a year ago some pundits were declaring the death of Davos man.

That said, there are three trends that are worth further consideration. First, as Freeland observes, the rich are now work much harder than they did a century ago. Second, more and more of the rich are coming from outside the OECD economies.

Third, the rich have attracted a lot of intellectual capital into their web. Indeed, the call for an economist code of ethics is based in no small part on the ways in which successful economists score moneymaking gigs as they move up the career ladder.

Again, I’m not sure if Freeland is right. I am sure that it’s an interesting argument however. So, in the interest of further research your humble middle-class blogger is headed off tonight to investigate the beliefs and activities of the super-rich from much closer than normal.

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