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

by Chrystia Freeland

  Another peek into the dynamic within the 1 percent comes from inside one of America’s elite institutions. Claudia Goldin and Lawrence Katz, the Harvard economists, compiled a data set chronicling the family and career choices of twelve Harvard classes between 1969 and 1992. Their purpose was to understand the impact of gender on life and work, but their numbers turned out to tell a nuanced and unexpected story about the elite overall. One of the biggest surprises was how far, even among the gilded graduates of Harvard, the top had pulled away from everyone else—in 2005, median earnings for Harvard men were $162,000, comfortably in the top 10 percent of the national income distribution. But almost 8 percent of the men had labor market income above $1 million, putting them in the top 0.5 percent. An important driver of the gap was the split between the bankers and everyone else, with financiers earning 195 percent more than their classmates.

  For the 1 percenters who didn’t switch majors from art history to economics and find themselves moored at the bottom of the top, the experience can be surprisingly hard to bear. One force at work is Carol Graham’s paradox of happy peasants and miserable millionaires. In international research that grew out of findings for Russia and Peru, Graham found that “very poor and destitute respondents report high or relatively high levels of well-being, while much wealthier ones with more mobility and opportunities report much lower levels of well-being and greater frustration with their economic and other situations.”

  One source of that frustration, Dr. Graham told me, was when “the gains around them are much bigger than their own, and bigger than they can ever achieve in their lifetime.” Dr. Graham attributes this feeling of inadequacy vis-à-vis the 0.1 percent partly to greed. She points to work by economist Angus Deaton that shows the richer you are, the more covetous you become—the social science version of the biblical proverb about the eye of the needle. But she says crony capitalism is to blame, too. The middle-class achievers are the most frustrated in societies where getting to the top is seen as a function of connections rather than merit.

  A more sympathetic rationale, advanced most prolifically by Cornell economist Robert Frank, is the problem of positional goods. These are products and services whose value is derived in part from their scarcity and how much everyone else wants them. If you have them, I don’t. A place in the Harvard first-year class or a home in a desirable public school district is a positional good. An iPhone or a Gmail account is not. An appetite for some positional goods is easy to dismiss as part of the greed effect—a reservation at the hottest new restaurant, or buying a limited-edition handbag. But what about an organ transplant? Or the positional good that causes some of the greatest angst in the foothills of the 1 percent, an elite education?

  The gap between the 1 percent and the 0.1 percent could have serious political consequences. Even in America, there were just 412 billionaires in 2007, and 134,888 taxpayers in the 0.1 percent. The 1 percent is bigger—with 749,375 taxpayers—and, with an average annual income of $486,395, it is not that far away from the wider 10 percent, with its 7.5 million taxpayers earning an average $128,560. These people at the bottom of the top of the income distribution are financially essential to the country and politically essential to those at the very top. If the super-elite lose their loyalty, it could become very isolated indeed.

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  Historically, in America the merely rich have strongly identified with the very rich. The strivers at the bottom of the 1 percent were just one big idea or one big job away from the very top, and, anyway, everyone belonged to the same upper middle class. They might be struggling to support their middle-class lifestyles month to month, but the 1 percent have liked to think of themselves as “soon to be rich.” But there are a few signs that the nearly millionaires are starting to suspect the billionaires are getting an unfair deal. One sign is how “crony capitalism” has become the battle cry not just of Occupy Wall Street but also of Tea Party darling Sarah Palin and conservative intellectual Paul Ryan.

  This nascent split between probusiness, promoney Americans of the bottom of the 1 percent and the 0.1 percent is in many ways more potentially incendiary than the antiestablishment idealism of Occupy Wall Street. We always knew the left was suspicious of high finance. What is surprising is that Wall Street’s yeomen have become suspicious of their bosses.

  Here’s how Joshua Brown, a New York–based investment adviser to high-net-worth individuals, charitable foundations, and retirement plans responded to complaints by a number of Wall Street chiefs that they are being unjustly vilified in America today.

  Brown’s tirade, which he posted on his blog, The Reformed Broker, quickly went viral: “Not only do we not ‘hate the rich’ as you and other em-bubbled plutocrats have postulated, in point of fact, we love them,” Brown wrote. “We love the success stories in our midst and it is a distinctly American trait to believe that we can all follow in the footsteps of the elite, even though so few of us ever actually do. So, no, we don’t hate the rich. What we hate are the predators. . . . America hates unjustified privilege, it hates an unfair playing field and crony capitalism without the threat of bankruptcy, it hates privatized gains and socialized losses, it hates rule changes that benefit the few at the expense of the many, and it hates people who have been bailed out and don’t display even the slightest bit of remorse or humbleness in the presence of so much suffering in the aftermath.”

  In a democratic age, the super-elite can survive if every millionaire is convinced he has a billionaire’s baton in his knapsack. If that conviction breaks down, the battle of the millionaires versus the billionaires could move from Cairo and Kiev to London and New York.

  WHERE ARE THE WOMEN?

  For 47,745 of the 47,763 runners who competed in the New York Marathon in 2011, it was a co-ed race. Women ran alongside men, and as demanding sports such as endurance running have become socially acceptable for women, females formed an ever greater part of the pack. But for the first eighteen racers, the top 0.04 percent, the marathon is exactly as segregated as it was before 1971, when women were banned from racing more than ten miles on the theory that their delicate bodies weren’t up to the strain.

  Becoming a plutocrat is like being one of those eighteen men. This is not to suggest that women are somehow biologically precluded from breaking into the plutocracy, in the way that the female physique may never run a marathon as quickly as the male one. But the image is a way of illustrating a significant and rarely remarked-on aspect of the rise of the super-elite: it is almost entirely male. Consider the 2012 Forbes billionaire list. Just 104 of the 1,226 billionaires are women. Subtract the wives, daughters, and widows and you are left with a fraction of that already small number.

  What’s especially striking about this absence of women at the top is that it runs so strongly counter to the trend in the rest of society. Within the 99 percent, women are earning more money, getting more educated, and gaining more power. That’s true around the world and across the social spectrum. If you aren’t a plutocrat, you are increasingly likely to have a female boss, live in a household where the main breadwinner is female, and study in a class where the top pupils are girls. As the 99 percent has become steadily pinker, the 1 percent has remained an all-boys club. One way to understand the gap between the 1 percent and the rest is as a division of the world into a vast female-dominated middle class ruled by a male elite at the top.

  Another window into how the gender divide sharpens at the very top comes from the Goldin and Katz Harvard study. College is one of the arenas the women of the middle class are conquering—more than half of all U.S. undergraduates are now female, and their grade point average is higher than that of their male peers. Young women are more likely to get their BAs and go on to graduate school. The recession has exacerbated the gender divide, with young women responding to a tough job market by going back to school and improving their skills. Young men have not. At Harvard, which released women from the apartheid of Radcliffe only in 1973, the incoming first-year class
in 2004 included more women than men.

  But as soon as they graduate, Harvard women’s chances of getting to the very top decline because of the jobs they choose. Goldin and Katz found that finance and management were overwhelmingly the most lucrative fields, with financiers earning that whopping 195 percent premium. Men have responded to this incentive strongly—of the class of 1990, 38 percent of the men worked in management and finance fifteen years after graduating, compared to just 23 percent of the women. By 2007, the number of women starting off in finance or management had jumped to 43 percent, but a staggering 58 percent of the men had made that same choice. You can see the difference in their incomes: in 2005, 8 percent of Harvard men earned more than $1 million; just 2 percent of the women crossed that threshold.

  Not too many people talk about the absence of women at the very top. That’s partly because, in a fight that’s been going on since the famous debates between Lenin and Bolshevik feminist Alexandra Kollontai, the left has a history of bullying women who dare to talk about gender at the apex of power. Doing so has been framed as a selfish concern of upper-class women, who are urged to focus their attention on the more deserving problems of their sisters at the bottom. As for the right, it has historically preferred to avoid discussion of gender and class altogether.

  But the absence of women in the plutocracy is an important part of the culture of the 1 percent and a crucial way the very rich differ from everyone else. It is a powerful force in the workplace, where most plutocrats have no female peers. And it shapes their personal lives as well. The year 2009 was a watershed for the American workplace—it was the first time since data was collected that women outnumbered men on the country’s payrolls. In 2010, about four in ten working wives were the chief breadwinners for their families.

  The plutocracy, by contrast, still lives in the Mad Men era, and family life becomes more patriarchal the richer you get. In 2005, just over a quarter of taxpayers in the top 0.1 percent had a working spouse. For the 1 percent, the figure was higher, at 38 percent, but significantly lower than in the country as a whole. There’s not a lot of mystery to these choices of the wives of the 0.1 percent, as I discovered at a dinner party when I sat next to a private equity investor. He was in his late thirties with no children, and as we chatted I learned that he had met his wife when they were both students at Yale Law School. But when I asked which firm she now worked at, I realized I had committed a faux pas. If your husband is earning $10 million a year, choosing the treadmill of billable hours really is rather bizarre. (It turns out she spends her time investing part of the family portfolio, studying art history, and decorating their Upper East Side town house.)

  And it is graduates of Yale Law School and the like who are the housewives of the plutocrats. In 1979, nearly 8 percent of the 1 percent had spouses the IRS described as doing blue-collar or service sector jobs—governmentspeak for bosses married to their secretaries. That number has been falling ever since. What economists call assortive mating—the tendency to marry someone you resemble—is on the rise. But while the aggressive geeks of the super-elite are marrying their classmates rather than their secretaries, their highly educated wives are unlikely to work.

  My own suspicion is that most plutocrats privately believe women don’t make it to the top because something is missing. Most know better than to muse on this matter in public—they all remember, for instance, what that cost Larry Summers, who happens to have a sterling record of promoting the careers of his female protégés—but I can report an unguarded remark one private equity billionaire made to me. The problem, he said, wasn’t that women weren’t as smart or even as numerate as men; he had hired many women in starting positions who were as skilled as their male counterparts. But they still didn’t have the royal jelly: “They don’t have the killer instinct, they don’t want to fight, they won’t go for the jugular.” By way of evidence, he described a subordinate who had cried when he told her she had made a mistake. You can’t do that and win, he said.

  THREE

  SUPERSTARS

  A society in which knowledge workers dominate is under threat from a new class conflict: between the large minority of knowledge workers and the majority of people, who will make their living traditionally, either by manual work, whether skilled or unskilled, or by work in services, whether skilled or unskilled.

  —Peter Drucker

  It is probably a misfortune that . . . popular writers . . . have defended free enterprise on the ground that it regularly rewards the deserving, and it bodes ill for the future of the market order that this seems to have become the only defense of it which is understood by the general public. . . . It is therefore a real dilemma to what extent we ought to encourage in the young the belief that when they really try they will succeed, or should rather emphasize that inevitably some unworthy will succeed and some worthy fail.

  —Friedrich Hayek

  It is possible that intelligent tadpoles reconcile themselves to the inconvenience of their position by reflecting that, though most of them will live and die as tadpoles and nothing more, the more fortunate of the species will one day shed their tails, distend their mouths and stomachs, hop nimbly on to dry land, and croak addresses to their former friends on the virtues by means of which tadpoles of character and capacity can rise to be frogs.

  —R. H. Tawney

  THE INTELLECTUALS ON THE ROAD TO CLASS POWER

  When Shelley described poets as “the unacknowledged legislators of the world,” he was referring to the moral and imaginary power of the creative class, not suggesting that it actually controlled the machinery of the state or pulled the levers of the economy. But a samizdat manuscript written in 1973–74 and later smuggled out of communist Hungary asserted precisely that. The Intellectuals on the Road to Class Power, by novelist György Konrád and sociologist Ivan Szelényi, argued that Marx’s vision of a communist state run by the working class, or indeed of an eventual utopia in which the state withered away entirely, had been perverted. Instead, a new class had seized power: the class of engineers, economists, physicists, and, yes, even poets—which is to say, the intellectuals.

  Konrád and Szelényi’s book was a revolutionary act—its authors retreated to a village in the Buda Hills to write it in an effort to evade the secret police, and they buried their manuscript in the garden every night, to protect it from being seized in a feared early morning raid. The book caused a predictable splash when it was published in the West in 1979, five years after it had been written—this was, after all, the beginning of the final triumphant chapter of the cold war, the year Ronald Reagan was elected and Leonid Brezhnev was starting the fifteenth year of his reign as general secretary of the Communist Party of the Soviet Union. Anything that discredited the so-called workers’ paradise, particularly from the inside, was a geopolitical event.

  The Intellectuals on the Road to Class Power built on the arguments of an even more groundbreaking work smuggled out of Eastern Europe a generation earlier: Milovan Djilas’s The New Class. Writing in the seventies, Konrád and Szelényi were themselves members of the somewhat threadbare but socially cosseted socialist intelligentsia they described, though they were not members of the Communist Party. Djilas—Tito’s right-hand man during the partisan struggle and his emissary to Stalin’s Kremlin court—belonged to the earlier revolutionary generation. Djilas’s book, which earned its writer a seven-year prison sentence in the same jail he had been sent to for his revolutionary activities in the 1930s, was an instant international sensation, and rightly so. It was the first time a senior Soviet bloc official publicly condemned the system he had helped to create. Written thirteen years after George Orwell had made the same charge in his allegorical Animal Farm, Djilas made the ideologically devastating argument that the so-called workers’ state had simply replaced the old ruling bourgeoisie with a new class, the communist apparat. He even estimated the material gap between this new elite and the people it ruled, citing Soviet dissident Yuri Orlov’s report that a r
ayon secretary—the head of a provincial or city party organization—earned about twenty-five times more than the average worker.

  The important twist Konrád and Szelényi added to this analysis was that the rule of this new class actually amounted to a seizure of political and economic power by the intellectuals—heredity and military might determined power under feudalism; money and commercial acumen were the source of control under capitalism. Under communism, they asserted, technical skills and higher education were the most important defining characteristics of the new party elite.

  There was a lot of truth to their analysis, and it is one reason some members of the old Eastern European and Soviet intelligentsias, not to mention their friends in the West, are nostalgic for the old order. But if you read The Intellectuals on the Road to Class Power today, the most striking paradox about this dissident dissection of Warsaw Pact socialism is how powerfully it applies to twenty-first-century global capitalism. For the intellectual class Konrád and Szelényi studied, highly educated technocrats, the collapse of communism, and the emergence of a global market economy turned out to be the true road to class power.

  The language of twenty-first-century Western economists is rather less colorful than that of 1970s central European dissidents. That’s why you won’t find many references to the rise of the technocrats to class power in the American academic debate of the early twenty-first century. But there is intense study of the impact of “skill-biased technical change” on income distribution, particularly in the developed Western economies. The consensus, advanced most powerfully by MIT economist David Autor, is that skill-biased technical change has indeed brought the technocrats to class power. As Autor puts it, it has polarized the labor market, with huge rewards for those at the top, who have the skills and education to take advantage of new technologies, not much impact for those who do the low-paying “lousy” jobs at the bottom, and a hollowing out of the well-paying jobs in between that used to support the middle class.