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.
The 1 percent is outpacing everyone else in the emerging economies as well. Income inequality in communist China is now higher than it is in the United States, and it has also surged in India and Russia. The gap hasn’t grown in the fourth BRIC, Brazil, but that is probably because income inequality was so high there in the first place. Even today, Brazil is the most unequal of the major emerging economies.
To get a sense of the money currently sloshing around what we used to call the developing world, consider a conversation I recently had with Naguib Sawiris, an Egyptian telecom billionaire whose empire has expanded from his native country to Italy and Canada. Sawiris, who supported the rebels on Tahrir Square, was sharing with me (and a dinner audience at Toronto’s Four Seasons hotel) his mystification at the rapacious ways of autocrats: “I’ve never understood in my life why all these dictators, when they stole, why didn’t they just steal a billion and spend the rest on the people.”
What was interesting to me was his choice of $1 billion as the appropriate cap on dictatorial looting. In his world, I wondered, was $1 billion the size of fortune to aim for?
“Yes, to cover the fringe benefits, the plane, the boat, it takes a billion,” Sawiris told me. “I mean, that’s my number for the minimum I want to go down—if I go down.”
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Meanwhile, the vast majority of American workers, who may be superbly skilled at their jobs and work at them doggedly, have not only missed these windfalls—many have found their professions, companies, and life savings destroyed by the same forces that have enriched and empowered the plutocrats. Both globalization and technology have led to the rapid obsolescence of many jobs in the West; they’ve put Western workers in direct competition with low-paid workers in poorer countries; and they’ve generally had a punishing impact on those without the intellect, education, luck, or chutzpah to profit from them: median wages have stagnated, as machines and developing world workers have pushed down the value of middle-class labor in the West.
Through my work as a business journalist, I’ve spent more than two decades shadowing the new global 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 put it, 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, 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 the economic redistribution—i.e., taxes—it takes to pay for those institutions. Perhaps most strikingly, 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.
The emergence of this new virtual nation of mammon is so striking that an elite team of strategists at Citigroup has advised the bank’s clients to design their portfolios around the rising power of the global super-rich. In a 2005 memo they observed 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.”
Within the investing class, this bifurcation of the world into the rich and the rest has become conventional wisdom. Bob Doll, chief equity strategist at BlackRock, the world’s largest fund manager, told a reporter in 2011, “The U.S. stock markets and the U.S. economy are increasingly different animals,” as the prior surged, while the later stagnated.
Even Alan Greenspan, the high priest of free markets, is struck by the growing divide. In a recent TV interview, he asserted that the U.S. economy had become “very distorted.” In the wake of the recession, he said, there had been a “significant recovery . . . amongst high-income individuals,” “large banks,” and “large corporations”; 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, Greenspan worried, was not a single economy at all, but rather “fundamentally two separate types of economy,” increasingly distinct and divergent.
Citigroup more recently devised a variation on the theme, a thesis it calls the “consumer hourglass theory.” This is the notion that, as a consequence of the division of society into the rich and the rest, a smart investment play is to buy the shares of super-luxury goods producers—the companies that sell to the plutocrats—and of deep discounters, who sell to everyone else. (As the middle class is being hollowed out, this hypothesis has it, so will be the companies that cater to it.)
So far, it’s working. Citigroup’s Hourglass Index, which includes stocks like Saks at the top end and Family Dollar at the bottom, rose by 56.5 percent between December 10, 2009, when it was launched, and September 1, 2011. By contrast, the Dow Jones Industrial Average went up just 11 percent during that period.
THE FIRST GILDED AGE
On February 10, 1897, seven hundred members of America’s super-elite gathered at the Waldorf Hotel for a costume ball hosted by Bradley Martin, a New York lawyer, and his wife, Cornelia. The New York Times reported that the most popular costume for women was Marie Antoinette—the choice of fifty ladies. Cornelia, a plump matron with blue eyes, a bow mouth, a generous bosom, and incipient jowls, dressed as Mary Stuart, but bested them all by wearing a necklace once owned by the French queen. Bradley came as Louis XIV—the Sun King himself. John Jacob Astor was Henry of Navarre. His mother, Caroline, was one of the Marie Antoinettes, in a gown adorned with $250,000 worth of jewels. J. P. Morgan dressed as Molière; his niece, Miss Pierpont Morgan, came as Queen Louise of Prussia.
Mark Twain had coined the term “the Gilded Age” in a novel of that name published twenty-four years earlier, but the Martin ball represented a new level of visible super-wealth even in a country that was growing used to it. According to the New York Times, the event was the “most elaborate private entertainment that has ever taken place in the metropolis.” The New York World said the Martins’ guests included eighty-six people whose total wealth was “more than most men can grasp.” According to the tabloid, a dozen guests were worth more than $10 million. Another two dozen had fortunes of $5 million. Only a handful weren’t millionaires.
The country was mesmerized by this display of money. “There is a great stir today in fashionable circles and even in public circles,” the Commercial Advertiser reported. “The cause of it all is the Bradley Martin ball, beside which the arbitration treaty, the Cuban question and the Lexow investigation seem to have become secondary matters of public interest.” Then as now, America tended to celebrate its tycoons and the economic system that created them. But even in a country that embraced capitalism, the Martin ball turned out to be a miscalculation.
It was held at a time of mass economic anxiety—in 1897, the Long Depression, which had begun in 1873 and was the most severe economic downturn the United States experienced in the nineteenth century, was just gasping to an end.
Mrs. Martin offered a trickle-down justification for her party: she announced it just three weeks beforehand, on the grounds that such a short time to prepare would compel her guests to buy their lavish outfits in New York, rather than in Paris, thus stimulating the local economy. The city’s musicians’ union agreed, arguing that spending by the plutocrats was an important source of employment for everyone else.
But public opinion more generally was unconvinced. The opprobrium—and, on the crest of the wider public anger toward the plutocracy the Martins had come to epitomize, the imposition of an income tax on the super-rich—the Martins faced as a result of the ball prompted them to flee to Great Britain, where they already owned a house in England and rented a 65,000-acre estate in Scotland.
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The Bradley Martin ball was a glittering manifestation of the profound economic transformation that had been roiling the Western world over the previous hundred years. We’ve now been living with the industrial revolution for nearly two centuries. That makes it easy to lose sight of what a radical break the first gilded age was from the rest of human history. In the two hundred years following 1800, the world’s average per capita income increased more than ten times over, while the world’s population grew more than six times. This was something entirely new—as important a shift in how societies worked as the domestication of plants and animals.
If you lived through the first gilded age, you didn’t need to be an economist to understand you were alive on one of history’s hinges. In 1897, the year, as it happens, of the Bradley Martin ball, Mark Twain visited London. His trip coincided with Queen Victoria’s Diamond Jubilee, the sixtieth anniversary of her coronation.
“British history is two thousand years old,” Twain observed, “and yet in a good many ways the world has moved farther ahead since the Queen was born than it moved in all the rest of the two thousand put together.”
Angus Maddison, who died in 2010, was an economic historian and self-confessed “chiffrephile”—a lover of the numbers he believed were crucial to understanding the world. He devoted his six-decade-long career to compiling data about the transformation of the global economy over the past two thousand years—everything from ship crossings to tobacco sales. He had a genius for crunching all those numbers together to reveal big global trends.
One of his most compelling charts shows just how dramatically the world, especially western Europe and what he called “the Western offshoots”—the United States, Canada, Australia, and New Zealand—changed in the nineteenth century: in the period between AD 1 and 1000, the GDP of western Europe on average actually shrank at an annual compounded rate of 0.01 percent. People in 1000 were, on average, a little poorer than they had been a thousand years before. In the Western offshoots the economy grew by 0.05 percent. Between 1000 and 1820—more than eight centuries—the average annual compounded growth was 0.34 percent in western Europe and 0.35 percent in the Western offshoots.
Then the world changed utterly. The economy took off—between 1820 and 1998 in western Europe it grew at an average annual rate of 2.13 percent, and in the Western offshoots it surged at an average annual rate of 3.68 percent.
That historically unprecedented surge in economic prosperity was the result of the industrial revolution. Eventually, it made all of us richer than humans had ever been before—and opened up the gap between the industrialized world and the rest, which only now, with the rise of the emerging market economies two hundred years later, can we start to imagine might ever be closed.
But wealth came at a tremendous social cost. The shift from an agrarian economy to an industrial one was wrenching, breaking up communities and making hard-learned trades redundant. The apotheosis of the Bradley Martins and their friends was part of a broader economic boom, but it also coincided with the displacement and impoverishment of a significant part of the population—the ball, after all, took place during the Long Depression, an economic downturn in the United States and Europe that endured longer than the Great Depression two generations later. The industrial revolution created the plutocrats—we called them the robber barons—and the gap between them and everyone else.
The architects of the industrial revolution understood this division of society into the winners and everyone else as an inevitable consequence of the economic transformation of their age. Here is Andrew Carnegie, the Pittsburgh steel tycoon and one of the original robber barons, on the rise of his century’s 1 percent: “It is here; we cannot evade it; no substitutes for it have been found; and while the law may be sometimes hard for the individual, it is best for the race, because it insures the survival of the fittest in every department. We accept and welcome, therefore, as conditions to which we must accommodate ourselves, great inequality of environment; the concentration of business, industrial and commercial, in the hands of a few; and the law of competition between these, as being not only beneficial, but essential to the future progress of the race.”
Carnegie was, of course, supremely confident that the benefits of industrial capitalism outweighed its shortcomings, even if the words he used to express its advantages—“it is best for the race”—make us squirm today. But he could also see that “the price we pay . . . is great”; in particular, he identified the vast gap between rich and poor as “the problem of our age.”
Living as he did during the first gilded age, Carnegie intuitively understood better than most of us today how remarkable that chasm was, compared to the way people had lived in previous centuries. “The conditions of human life,” he wrote, “have not only been changed, but revolutionized, within
the past few hundred years. In former days there was little difference between the dwelling, dress, food, and environment of the chief and those of his retainers. The Indians are to-day where civilized man then was. When visiting the Sioux, I was led to the wigwam of the chief. It was like the others in external appearance, and even within the difference was trifling between it and those of the poorest of his braves. The contrast between the palace of the millionaire and the cottage of the laborer with us to-day measures the change which has come with civilization.”
Carnegie, himself an immigrant who rose from bobbin boy to the top of America’s first plutocracy, understood that the distance between palace and cottage was merely the outward sign of the gap between rich and poor—the scoreboard, if you will.
The change in power relations started in the workplace, and that is where it was most intensely felt: “Formerly, articles were manufactured at the domestic hearth, or in small shops which formed part of the household. The master and his apprentices worked side by side, the latter living with the master, and therefore subject to the same conditions. When these apprentices rose to be masters, there was little or no change in their mode of life, and they, in turn, educated succeeding apprentices in the same routine. There was, substantially, social equality, and even political equality, for those engaged in industrial pursuits had then little or no voice in the State.”
Before the industrial revolution, we were all pretty equal. But that changed with the first gilded age. Today, Carnegie continued, “we assemble thousands of operatives in the factory, and in the mine, of whom the employer can know little or nothing, and to whom he is little better than a myth. All intercourse between them is at an end. Rigid castes are formed, and, as usual, mutual ignorance breeds mutual distrust. Each caste is without sympathy with the other, and ready to credit anything disparaging in regard to it.”
Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else Page 2
