Plutocrats: The Rise of the New Global Super-rich and Fall of Everyone Else

Plutocrats: The Rise of the New Global Super-rich and Fall of Everyone Else by Chrystia Freeland, 2012

With no background on this book, I had been expecting a Naomi Klein-type of visceral rant against wealth and the wealthy. And the latter part of the title “and fall of everyone else” does nothing to dispel this boding.

But this Canadian business journalist's book is more like a Malcolm Gladwell or Nicholas Taleb analysis of what is happening and why. As such it takes the topic away from the roiling fires of value and ideology, currently surrounding wealth disparity, and places it under a kind of social/historical microscope. At least through two thirds of the book, that seems the case, but there are less noble insinuations later when she discusses “rent seeking”. And even then she is more cautionary that caustic in her comments.

So the book can appeal more to dispassionate inquiry than passionate evangelism toward any ideology.

She selects samples for her thesis from many areas in the world, but her default position, not unexpectedly, is the U.S.

One underlying theme of the book is that macro circumstances ebb and flow and micro circumstances are often the product of propitious events than of singular personal merit.

She does refer to the many who are falling behind economically, mostly in the middle ranges of developed economies. She doesn't blame or exhort them to greater effort, but also doesn't hold out much hope for redress.

While the book deals with complicated issues, demanding a slow read, her style makes the material quite palatable and compelling, not the bore it could be.

There is heavy reliance on personal interviews, much with plutocrats themselves, for material and little on statistical documentation, and that she does choose, is used with the storyteller's flare for the dramatic. The Mexican Carlos Slim is described as the world's wealthiest man based on the number of countrymen that his income could hire and that is 400,000 compared to lesser numbers for the top Russian or Indian oligarchs.

The first setting presented in the book is the wealth evidenced in New York's “upper east side”. We shortly learn that half a billion dollars is the base amount needed for the full slate of fringe wealth toys such as several opulent dwellings in major centres around the world, the yacht and the private jet.

Later in the book, when the terms “illegal” and “legal” corruption are presented some might perceive the tone changing. Some would inhale in horror, if not perish in a fit of apoplexy, to see the 2008 bailout described as “the biggest state intervention in a national economy, as a percentage of GDP, since Lenin's nationalization”.

Freeland refers to the historical fluctuations of income inequality starting with everybody equally poor and ignorant about 200 years ago trending toward a few gaining knowledge and great wealth to another leavening where many gain wealth and knowledge.

The latter is best exemplified by the U.S. post war “great compression” where income inequality came down and most thought of themselves as middle class. “Even the Regan revolution rode on the coattails of this paradigm, trickle-down economics, after all emphasizes the trickle.” Change began in the late 70s.

Referring to the recent uneven sharing of economic growth, Harvard economist Larry Summers said “for the first time since the Great Depression, focussing on redistribution makes more sense than focussing on growth”. This trend has been underlined by the disproportionate sharing of the income of the 2009-10 “recovery”.

“The feedback loop between money, politics and ideas is both cause and consequence of the rise of the super-elite,” says Freeland. Compounding this she says, is the human predisposition among the wealthy to believe that what is good for them is good for the economy.

She describes the wealthy of today as different from those of the past. “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 as a result have an ambivalent attitude toward those of us who haven't succeeded quite so spectacularly. They tend to believe in the institutions that permit social mobility, but are less enthusiastic about economic redistribution__ie., taxes___it takes to pay for those institutions.” In essence, regardless of where they live, they are a transglobal group or nation unto themselves, having more in common with each other than their fellow countrymen.

For those in the west this is the second “gilded age” the first came out of the industrial revolution in the 19th century. The second gilded age opportunity is a combination of opportunities from the poorer countries industrializing, globalization and the communications revolution, says Freeland.

Both processes produced 'winners and everyone else', many of whom were losers and a new kind of caste system, she adds. Then there are different perspectives in tallying up the net benefits. While people are happier in the wealthy countries than the poor, the 'creative destruction' during rapid growth makes those at all levels of income less happy.

Marxism was a product of the first gilded age and even where it didn't hold sway, communism effected the behaviour of government and business in North America and western Europe, as avoiding a communist revolution became a major concern.

At the macro level, the largest disequilibrium of the 20th century was the economic gap between the west and everybody else and the biggest catalyst for change, the collapse of the Soviet Union.

In her selection of sources, she suggests, that the U.S. started as the most egalitarian society, which even when including slavery, had the most balanced income distribution of the time.

Between the 1940s and 1970 the share of income of the top one per cent fell from 16 per cent to seven percent. This was the golden age of the middle class. Change was ushered in in the U.S. with Regan's huge cut in the marginal tax rate. There was a reduction in taxes on capital gains, the economy was deregulated, unions reined in and social welfare cut.

“Ideology helps to shape the argument. If you are a true believer in the Washington Consensus, you tend to believe the rising income inequality is the product of impersonal__and largely benign___economic forces, like the technology revolution and globalization. If you are a liberal and regret the passing of the Treaty of Detroit, you tend to attribute the changed income distribution chiefly to politics.”

To put the income and assets stuff in perspective, Freeland uses U.S. 2010 family income. For the top one percent it is a little over a million dollars annually, for those in the top 0.1 per cent it is nearly $3 million for those in the top 0.01 it is nearly $24 million. For the top 10 per cent it was slightly under $250,000. She refers to the massive fortunes accumulated right through 2008. Those would include the “ultra high net worth individuals” (UHNWIs) with more than $50 million in assets.

Supporting evidence for this is that the top 25 earning hedge fund managers earned an average of more than $1 billion each in 2009, which was more than the previous record year of 2007. In 2004 this group of 25 earned as much as all 500 S&P CEOs combined.

On the wealth side, Bill Gates and Warren Buffet's combined $88 billion is slightly less than the $95 billion combined wealth of the 120 million poorest in the U.S.

While it won't lead to widespread concern with the masses, the fastest growing income gap in between the billionaires and the mere, and frustrated, millionaires.

A strong early education is largely a precondition to making a lot of money. Helping the cause may be an affluent father in the professions. And the “bulk of the money is made through hustle, intelligence and a lot of luck,” says Freeland. They are economic meritocrats rather than aristocrats preoccupied with creating as well as consuming wealth. 'Self made' is central to their image. The archetypal is a man from middle or upper class, aggressive, intensely educated mathematician who made money young. In this era, big money earners are well on their way by 30 years old. In the past, it was more likely to be 50. Carlos Slim fits the mold in many respects.

Further the education with the most currency is U.S. Ivy league, plus Stanford and some in Europe. In this group the “provenance of the MBA” is more important than nationality. Making the right international friends may be more important than the quality of the schooling. Finance and management are the most lucrative fields.

Freeland cites one technocrat as recommending to children that they study statistics, since understanding data would be the most valuable skill in the 21st century.

“If you own a company in Dallas or Dusseldorf, the urbanizing peasants of the emerging markets probably work for you. That is good news for the plutocrats in the West, who can reap the benefits both of being 19th century robber barons and 21st century technology tycoons. But it makes the transition even harsher for the Western middle class, which is being buffeted by two gilded ages at the same time.”

She points out that, while the 2008 crisis was obviously a result of financial imbalances in the west, it was mightily contributed to by China's export driven growth model that inflated the credit bubble.

Freeland briefly addresses philanthropy “in addition to its moral rewards, can also serve as a pathway to social acceptance and even immortality. Andrew “The Man Who Dies Rich Dies Disgraced” Carnegie transformed himself from robber baron to secular saint with his hospitals, concert halls, libraries and universities.”

Now, she says, many wealthy, along with charities, are directing wealth to test new solutions to big problems. This transformation is also effecting emerging market plutocrats who started out buying the trappings and toys of wealth.

Some use their money to direct political agenda through think tanks, journals and political contributions.

Freeland comments on the trend to shift tax burden to the less wealthy, since income tax was introduced during the first world war. Millionaires, the super rich of the day, were hit with 77 per cent. Now that group is at about 15 per cent effective rate, while those with less income are paying a higher percentage.

She nods to those not making enough for the lifestyle they want. Most of us may not have so much sympathy for those with over-maxed credit cards trying to aspire to the life of the high rollers on an annual income of $5-10 million. There is a big income gap to the really high. The ultra rich are mostly men and the richer, the more patriarchal.

Traditionally the merely rich have identified with the very rich, but Freeland sees this solidarity breaking down with more resentment at the bottom of the one per cent, as the hoped for opportunities don't materialize.

Then there is the “superstar effect”. It is a “tendency of both technological change and globalization to create winner-take-all economic tournaments in many sectors and companies, where being the most successful in your field delivers huge rewards, but coming in second place, and certainly fifth or tenth, has much less economic value.”

She also describes the “triumph of intellectuals” worldwide but mostly in technology, science and math.

Magnifying the growth of superstars is the broader communication and awareness of talents. In entertainment, the film and recording reach have given performers much larger audiences from which to gain fame and celebrity. And celebrity, excluding talent, itself is another magnifier for the superstars, says Freeland. And superstardom is gaining in importance.

The rise of plutocrats has expanded the market for superstars in all professions. Freeland says often there is little difference between the superstar and several lesser performers. She suggested that the superstar CEO may be only marginally better than the 100th best candidate.

However, while the superstar phenomenon can be vastly enriching to the anointed, it is also depressing the incomes of others not so recognized in the profession. She cites the legal profession.

And the plutocrat's global village is enhanced by patronizing the same superstars, whether lawyer, dentist or performer.

Freeland suggests that the industrial revolution was characterized by tension between 'capital' and 'labour', now the tension is between 'capital' and 'talent' (knowledge worker with computer) in the knowledge-based post industrial capitalism. Capital won the first battle, she suggests, it may not win this one with talented labour.

Superstardom feeds on itself and fame begets more fame. “Celebrities are famous for being famous.” And this may exaggerate the talent that spawned it in the first place. There are fame generating reality TV shows that are much harder to get on than getting accepted to Harvard, she said. Film companies pay not just for the talent of stars, but for their fame.

Winning the Nobel Prize may magnify the accomplishment beyond the merits of the work that has been honoured. The future accomplishments of the laureate may be considered more important because of who made them.

A breakthrough during a comparable period may find the famous scientist getting credit and the less famous becoming a 'footnote'.

Albert Einstein, while a physicist of the first order, became a scientific legend later on because of his popular personal appeal in the United States. Few know the name of Niels Bohr whose contributions were comparable.

“Entertainers and athletes are the most visible superstars, but they are hugely outnumbered by the army of business managers who in the past four decades have been transformed from salarymen to multimillionaires,” says Freeland. However, between 1932 and 1976 their salaries went down. These incomes started rising in the 80s and have been accelerating since... 'company man' to free agent 'superstar'.

She points to the change incentives of the company owner versus the stewards of the company. “The hired managers can serve their own pockets better by profiting at the expense of the company than making profits for it.”

This prompted a change in compensation such that the interests of the company were more closely aligned to those of the stewards, hence more stock option compensation. One might now argue the managers pump the stocks while neglecting business fundamentals.

Most superstars are paid by “employers”, athletes by team owners, performers by audiences or companies, cooks by diners, hedge fund managers by their investors. CEOs are alone in being paid by the companies they run. It may be determined by a board of governors, of which they are frequently the chair.

Freeland points to the financial opportunities presented to people who early spot paradigm shifts or revolutions in the economy. In this area, she seems to have a soft spot for guru investor George Soros. And she adds there are a lot of shifts now with two gilded ages interacting. “Responding to revolution is how you become a plutocrat.” Silicon valley is an example of continuous revolution.

In the west, responding to and manipulating big data is the prime avenue. In developing countries, it is that plus economic revolution. This has led to a change in company evolution. It used to be 'big ate small', now it is 'fast eat slow'.

She characterized the ideal opportunists having the high priced education and privileged background, but not the whole upper class origins. They may be from the hinterlands and have a public school education. They have less vested interest in the current system and a perspective allowing them to take advantage of it. But a lot, she says, is about luck with the right combination of factors coming together...right skills, the right character, the right position in society and the right time.

Interestingly she also sees the hormone 'dopamine' playing a part in motivating people. Higher than average levels of 'dopamine' (two per cent of the population) is common in people who emigrate. Linked to it are curiosity, adventure and entrepreneurship.

Freeland characterizes the current times as an “age of triumphant capitalism” with the titans the heroes of our time.

“But, as experts in revolution, and the beneficiaries of them, the plutocrats sometimes miss the fact that for people in the middle and at the bottom, times of dramatic change are as likely to bring painful dislocation as they are to bring dazzling opportunity.”

A major change for many is the past career escalator that allowed people, after education and job preparation to, with faithful effort, loyalty and luck, to ascend to high level. Now advancement and even jobs may disappear in mid-career.

While imaginative software engineers and inventive manufacturers may deserve plaudets for the way they made their money, there is another large category of billionaires in developing countries. They have made their fortune by “rent seeking”(“sweetheart privatizations”), says Freeland. Their proximity to government has allowed them to gain control of natural resources, government contracts and licences. These opportunities were part of revolutions. The collapse of the Soviet Union saw national resources sold at fire sale prices to those in the position to take advantage.

A former chief economist of the IMF, says Freeland, claimed that financiers in the U.S. effectively did this with the bailouts post 2008. Another way is using political muscle to get a larger share of the preexisting pie rather than by adding value to the economy. It is this reallocation that is termed “rent seeking”.

Innovators may become rent seekers if they succeed in becoming a monopoly.

The Russian oligarchs may be the best example of the sell off kind of enrichment. The Chinese politburo, excelling with ongoing milking, and not far behind several wealthy Indians, close to government, are in the mix. Carlos Slim, sometimes called the richest man in the world, got a government licence for telecommunications and parlayed it into a monopoly. His $69 billion could buy six per cent of the Mexican economy.

Essentially he and a large crop of Mexican billionaires profited by the sell off of government resources and later influenced the rules of the economic gain, says Freeland.

Every so often the Chinese system severely punishes one of its oligarchs, for “corruption” to remind the rest that the CCP is still ultimately in charge. The oligarchs in response keep a low profile.

Many of the wealthy families have history with the party dating back to the Maoist era. Monopoly is part of the profile of wealth.

The American financial system is not immune from rent seeking through lack of bank regulation and regular traffic of expertise back and forth between government and the finance sector.

Freeland's nationality comes through in featuring comment from both Paul Martin as an oligarch and a Canadian prime minister and star public banker Mark Carney, with his tight control over banks and capital.

During this period, Canada opted out of the competition to be the most attractive haven for global capital. Banks were kept on a tight leash on levering capital. Britain's lack of bank regulation, at the other end, was the envy of U.S. bankers.

Those more fully participating favoured less regulation, more complexity and more risk. And these are important in why finance has become a more important segment of Western economies, she says, and why “financier's income has overtaken that of almost everyone else”. Financial deregulation has been crucial to the emergence of the plutocracy, she adds.

This income opportunity shift has led to a change in the priority of aspirations at the Ivy league schools which used to be academia, followed by government service then management and finance.

And for those who don't like “governments picking winners and losers” Freeland has this to say. “One telltale sign the state is deciding who gets rich is how much time and money plutocrats spend on selecting their government and influencing its decisions.” Among the heaviest lobbyers in Washington are finance and real estate and ensuring lack of regulation a primary goal.

Freeland differentiates between “legal” and “illegal corruption”. The former are attempts to influence government actions through lobbying and campaign contributions. “Illegal” is the directly paying of officials whether at low or high level. The U.S. is modestly low on “illegal”, but in the middle of the pack on “legal” corruption.

More legal corruption seems to correspond to high inequality in countries and seems to go along with a larger gap between the one percent and everybody else. So along with wealth is growth in political power.

What it also leads to, says Freeland, is a “revolving door” between the regulators and the regulated. Regulators are earning much less than the regulated and often switch sides, later in their careers, bringing inside knowledge to their new employer.

On one level there is concern that a rent-seeking oligarchy takes over a country, but of even greater concern is a rent-seeking global oligarchy.

She touches on the class/caste aspect of the oligarchs. “When you ascend to a certain level of the super-elite, you come to inhabit a world in which all your needs are catered to. That can lead to a dangerous sense of entitlement.”

She goes on to cite a study about how affluence affects how we treat others. “We reason that increased resources and independence from others cause people to prioritize self-interest over others' welfare and perceive greed as positive and beneficial, which in turn gives rise to increased unethical behaviour.”

“Carried interest”, a tax loophole issue important to the wealthy, is one she briefly touches on. Freeland describes it as offering a “clear insight into the power of self interest to shape ideology”. On a human level, she says, it is easy to have sympathy for people facing a 20 per cent tax increase. But intellectually “it is close to indefensible”.

Then there is the psychological element. The anger among the extremely wealthy is not just about greed “but by an affront to the plutocrats' armour propre, a wounded incredulity that anyone could think of them as villains rather than heroes.” To demonstrate this Bill Gates and Steve Jobs would be the examples of heroes pushed forth.

Freeland relates an anecdote about an acrimonious exchange between then governor of the Bank of Canada, Mark Carney and Jamie Dimon, CEO, J.P. Morgan (bank). The ultimate issue of the dispute was....”Are the interests of the state and its big businesses synonymous? If not, who decides? And if they clash, does the state have the right__and the might__to curb specific businesses for the collective good?”

She characterizes the finance industry as content to deal with cyclical ups and downs relying on market self regulation, where Carney, maybe with more sympathy for those farther down the wealth ladder, doesn't think it is good or necessary and is prepared to use regulation to that end.

American plutocrats fight or try to co-opt the state. Mexico's Carlos Slim may have too much power for the state. Vladimir Putin got a foot up to power by taking the plutocrats down a peg. Chinese plutocrats don't fight the state, because they are the state and they forget that at their peril.

On lobbying, she points out that it is not about levelling the playing field but tilting it. “Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition.”

And for those who remember the 60s “the left won the great culture wars of the 1960s, but the right has succeeded in setting the terms of the economic debate. A good outcome for the one percent.”

Of boding concern, she says, the finances of universities and mainstream media are flagging, particularly in comparison to the bank balances of the plutocrats.

She quotes a professor and Romney advisor saying that young people now are less concerned with social justice than their own concerns. He isn't harking back to the 60s, but the late 70s.

Many U.S. politicians are millionaires and most politicians (she calls them a branch of the New Class) are dependent on the super-elite for their ongoing success. And the political career is not fully monetized until they retire and take advantage of plutocrat connections built up. She cites the Clintons.

A French illustration of a “captured” political elite is the high percentage of leaders who are engineers, more specifically nuclear engineers, and the highest use of nuclear energy for electrical generation of any country in the world.

Much of the 'Left', think that the super-elite pursue self-interest with full knowledge that the underclass will suffer. Freeland says it is much less nefarious. The elites genuinely believe that policies that happen to serve their interest are also right for everyone else. F.D.R. gave industrialists credit for their accomplishments, but at the same time insisted that their interests differed from those of the nation as a whole.

She extrapolates that people will see a reality that they are paid to see. If there is financial incentive to see reality in a certain way, people will see it that way, “not because they are bad, but because they are human”. “People paid several million to believe something do believe it”.

While the rise of the plutocrats with its inequality effects civic values, crime rates, morality and maybe health, of greater concern is “the ability to tilt the rules of the game in their favour”.

She quotes Google billionaire Eric Schmidt “its very important to distinguish between rich people who got there by taking the economic rents of the country for their own benefit versus the people who, in fact, create a new corporation or a new source of wealth.”

Freeland favours this distinction whether the “wealthy in a country are rent seekers or value creators is a way to judge whether the economy is inclusive or extractive”. However, she cautioned, it is sometimes hard to distinguish one from the other.

In her conclusion, she refers to the Venetian 'Serrata' of the 14th century where the wealthiest people sought to close off opportunities to others. One goal was to pass oligarchic privilege to the next generation. The high concentration of wealth in the hands of the modern day robber barons, who are beneficiaries of an era of extreme economic change, increases the threat of one being imposed.

The succeeding generation, she said, could become more “rentier”. Reducing social mobility could be a consequence.

And a final twist on the part education plays. A degree from an elite university is better than a trust fund for getting into the new aristocracy. She said that statistics show that graduating from university is more correlated with having wealthy parents than good high school test scores. “Class matters more than going to class”. This seems inconsistent with her comments earlier about the most elite achievers.

Concluding, she says, “Low taxes, light-touch regulation, weak unions, and unlimited campaign donations are certainly in the best interests of the plutocrats, but that doesn't mean they are the best way to maintain the economic system that created today's super-elite.”