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

by Chrystia Freeland

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  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. As before, the answer is hardly contrarian. But when IMF economists Deniz Igan, Prachi Mishra, and Thierry Tressel set out to document how powerful the influence of Wall Street was on Washington, their conclusion, framed in sober academic language, was as incendiary as any agitprop from the Tea Party or OWS. The killer fact was their finding that between 2000 and 2006 laws increasing regulation of the finance and real estate sectors had just a 5 percent chance of passing. Laws that deregulated were three times more likely to pass.

  One Russian oligarch told me that a pleasant surprise for him during the privatizations of the 1990s was that you didn’t have to bribe many of the country’s most senior technocrats. “Well, of course, I wrote the law myself, and I took special care with it,” Konstantin Kagalovsky told me, still, a couple of years later, delighted at the power of ideas. That was also true in the first decade of this century in Washington: Igan and Mishra found, predictably, that more conservative politicians, who were ideologically broadly in favor of less regulation, were more likely to back legislation that loosened the rules.

  But direct intervention played a key role, too. Igan and Mishra found that the finance and real estate sectors spent $2.2 billion lobbying Washington between 1999 and 2006, reaching a peak of $720 million in the 2005–2006 period. In keeping with the sector’s relatively increasing weight within the super-elite overall, its lobbying spending grew faster than that of business generally, and accounted for more than 15 percent of all lobbying spending in D.C. by 2006. Good news for Wall Street’s government relations officers—their money worked: “Lobbying expenditures by the affected financial firms were significantly associated with how politicians voted on the key bills.”

  What’s especially important about this study is that it documents the relationship between Wall Street and Washington before the 2008 financial crisis and subsequent multitrillion-dollar bailout. That rescue is what prompted populist anger on both right and left and claims, as Sarah Palin put it in an op-ed in the Wall Street Journal, that Washington had occupied Wall Street. But the real government capture actually happened in the three decades before 2008, with the long, steady, bipartisan rollout of financial deregulation.

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  Dani Kaufmann grew up in Chile. He was studying at Hebrew University when Pinochet seized power in a coup in 1973, and elected not to return, ending up instead at Harvard, where he eventually earned a PhD in economics. His next stop was the World Bank, where he worked on Africa and then, after the collapse of the Soviet Union, the transition to capitalism in what used to be the Warsaw Pact states. By the time Kaufmann returned to World Bank headquarters in Washington, he knew that his life’s project would be to study corruption and its opposite, good governance, two themes he knew well from his work in Africa and the former Soviet Union, and viscerally from his Latin American roots.

  But as Kaufmann looked further into rent-seeking around the world, the ways that it slowed economic development, and how it could be stopped, he discovered something that surprised him. The naked forms of corruption that development organizations and NGOs agonized over most—bribes demanded by government officials with coercive power, like policemen, or required for ordinary state services, like teaching, or even despots extracting their nation’s wealth and sending it to numbered Swiss bank accounts—were only part of the story.

  About $1 trillion, by Kaufmann’s estimate, was paid in outright bribes around the world every year. But orders of magnitude more money was being made thanks to what he dubbed “legal corruption”: “The cost to society of bribing a bureaucrat to obtain a permit to operate a small firm pales in comparison with, say, a telecommunications conglomerate that corrupts a politician to shape the rules of the game granting it monopolistic rights, or an investment bank influencing the regulatory and oversight regime governing it.”

  As he developed the idea, Kaufmann started to try to measure it. One idea he had was to ask global business leaders themselves, as identified by the World Economic Forum, to rate levels of both explicit corruption, such as bribery, and legal corruption, like campaign contributions and lobbying, in 104 countries. The results confirmed his hunch, especially when it came to the United States. Predictably, the United States was ranked one of the least nakedly corrupt countries in the survey, coming in at twenty-five, just below Canada and well above countries like Italy, Spain, and South Korea. But when it came to legal corruption, the business leaders put the United States at fifty-three, squarely in the middle of the global pack, and worryingly close to countries like Russia, in position seventy-four, and India, at seventy.

  Suggestively, the countries where the surge in income at the very top has been most marked—the United States, the United Kingdom, and fast-growing emerging markets like Russia, India, and China—also rank relatively high in Kaufmann’s legal corruption table. That connection is most marked when you compare the high-inequality countries with nations with comparable levels of GDP but less inequality. In most such pairs—Norway or the Netherlands compared to the United States or United Kingdom, for instance; or Estonia compared to Russia—less legal corruption goes along with a smaller gap between the 1 percent and everyone else.

  No one openly champions “legal corruption” as a good way to run a country, but one reason it is harder to denounce than it seems is that many of the reforms that enable legal corruption were actually intended to make economies more transparent, more fair, and more effective. That is true of the privatization drives that sometimes devolved into giveaways, and it is true of deregulation efforts in areas like finance or telecommunications. Liberalization doesn’t have to be legally corrupt, but because it is often about opening vast new economic opportunities, it can easily become so, especially if governance is weak.

  That’s why what looks, from the outside, as if it must be a nakedly corrupt decision—for instance, the Telmex privatization or Russia’s loans for shares—is at least sometimes the work of reasonably honest and genuinely well-intentioned market reformers. That was true, astonishingly, of Russian reforms at the outset and it is certainly true of financial deregulation.

  But legal corruption gets more complicated and more compromising once you start dividing the spoils. Eventually the material gap between the true-believing technocrats and the businessmen their reforms enrich becomes an obstacle and a temptation for even the most upright civil servant. The widening financial divide becomes even harder to tolerate as the reformers realize that the wealth their programs transferred has made the beneficiaries not only rich, but politically powerful, too. It was this heartbreaking epiphany that corrupted many of the Russian reformers and persuaded them to try to make themselves into oligarchs. Those who didn’t often regretted it. The Western-educated wife of a former Soviet leader who took significant personal risks to enact his reform plan told me, as her husband was leaving office, “I could have charged $100,000 for one-hour meetings with my husband. Now I wish I had.” Her plan, she hastened to add, would of course have been to donate all the money to her charitable foundation.

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  In Western countries with significant legal corruption, that financial gulf creates a revolving door between the regulators and the regulated. One study of the SEC found that, between 2006 and 2010, 219 former SEC employees had filed almost eight hundred disclosure statements for representing their new clients’ dealings with the agency, their former employer. Nearly half of these disclosures were filed by people who had worked at the sharp end of the SEC’s relationship with business, in its enforcement division.

  It is easy to understand the appeal of switching from gamekeeper to poacher—in 1980, the top regulators earned one-tenth the incomes of the leaders of the businesses they policed; by 2005 the ratio had jumped to one-sixtieth. Moreover, if the revolving door were locked, the gamekeepers might be even weaker. Given th
e income gap, how many members of the Harvard class of 2012 will choose government service, especially if there is no opportunity to switch to a more lucrative private sector role later on? And at a time of increasing economic complexity, what chance does government have of keeping up with business if the best and the brightest go to the private sector?

  Finally, the age of globalization has brought one more twist to the story of rent-seeking and how it has helped to create the super-elite: like so much else, rent-seeking has now gone global. That’s not entirely a new story—multinationals have long paid bribes to secure contracts abroad, and some of the most lucrative examples of historic rent-seeking have involved overseas concessions, like the East India Company’s right to trade in India granted by the British Crown, or the Hudson’s Bay Company’s rights to the Canadian fur trade.

  But the international ripple effect of rent-seeking is today even more extensive. A fortune created by rent-seeking in one country can have a powerful effect thousands of miles away. Britain’s football clubs and, increasingly, its newspapers are being bought up by emerging markets oligarchs, particularly Russians. Between 2008 and 2011 the second-largest shareholder in the New York Times was Carlos Slim.

  Even rent-seeking plutocrats who’ve made their fortunes the old-fashioned way—by being authoritarian despots—have been cheerfully courted by the global plutocracy. That was the case with Saif Gadhafi, who, just two years before protesters bloodily overthrew his father’s four-decade-long dictatorship, was courted by a private equity tycoon over Saturday lunch in his magnificent home on Park Avenue and gave speeches at Davos and at the Council on Foreign Relations. The London School of Economics accepted a £1.5 million gift from the Gadhafi family and awarded Saif a degree; the Monitor Group, one of the most respected and internationally minded consultancies, became a paid adviser to the regime for a yearly fee that reached a yearly peak of $3 million.

  Legal corruption is going global, too. The threat that business, particularly finance, might move to another country was one of the most powerful arguments in favor of deregulation, especially before 2008. Witness, for example, the 2007 McKinsey/Bloomberg/Schumer report prepared by McKinsey for Michael Bloomberg on the threat that other, less onerously regulated financial centers, particularly London, posed to New York’s pole position as the world’s preeminent financial capital. One of the key recommendations was that the United States shift to the British “light touch” regulatory philosophy.

  As rent-seeking wealth spills across borders from the country where it was granted to other parts of the world, as rent-seeking plutocrats do deals with one another, and as economic rules go global, the question Professor Rajan asked of the Bombay Chamber of Commerce may need to be adjusted. He asked his Indian audience if their country was at risk of political capture by rent-seeking national oligarchs. An equal, and probably greater, danger is the rise of an international rent-seeking global oligarchy.

  SIX

  PLUTOCRATS AND THE REST OF US

  If you really wanted to examine percentage-wise who was hurt the most on their income, it was Wall Street brokers.

  —Alan Greenspan, shortly after his appointment as chairman of Gerald Ford’s Council of Economic Advisers in 1974, explaining the impact of inflation

  He was remembering now why he didn’t like the rich: their self-pity. Persecution was the common ground of their conversation, like sport or the weather for everyone else.

  —Robert Harris, The Fear Index

  A stranger to human nature, who saw the indifference of men about the misery of their inferiors and the regret and indignation which they feel for the misfortunes and sufferings of those above them, would be apt to imagine that pain must be more agonizing and the convulsions of death more terrible to persons of higher rank than to those of meaner stations.

  —Adam Smith, The Theory of Moral Sentiments

  DELIVERING HAPPINESS

  If you ever have to work at a call center, make sure it is Zappos. The online retailer has built a business around the idea of, as founder Tony Hsieh put it in his bestselling advice book cum autobiography, Delivering Happiness, the unlikely premise that buying and selling stuff over the phone can be an emotionally nurturing experience for both parties. In pursuit of that goal, Zappos has created a corporate culture so widely admired that the online shoe seller now has a business sideline teaching others how to operate the Zappos way—for $5,000 and two days of your time, you and your top team can be trained on how to bring the Zappos culture back to your own cubicles.

  A cheaper option is to take one of the free company tours Zappos offers to anyone who wants one, including complimentary pickup and return on a bus driven by one of the characteristically upbeat members of what they call “the Zappos family.” When I stepped outside my hotel on the Las Vegas strip and got on board on a blisteringly hot day in August 2010, a vacationing family of three from Virginia were already seated. They had been recruited to make the visit the day before while hiking in one of the canyons outside the city. There they met an evangelical Zappos employee—there is no other kind—who urged them to visit.

  On the outside, Zappos’s headquarters in Henderson, Nevada, a suburb of Las Vegas, is a typically nondescript, low-rise building in a corporate park surrounded by desert and freeways. But inside you can start to see what all the fuss is about. Visitors are greeted by a popcorn machine, hula hoops, a take-what-you-like bookshelf, and badges with an array of colorful markers and the instruction “Pimp your name tag.” The mood is part self-improvement seminar—the bookshelf is heavy on the works of Jim Collins and Clay Christensen—part wacky college dorm, and part low-rent version of luxe Silicon Valley firms like Google and Facebook. Zappos, too, has free food and a concierge desk for employees, but neither is quite up to the swish standards of the Valley.

  When we meet for lunch at a steakhouse a five-minute drive away (this is one of those neighborhoods without sidewalks), Hsieh tells me he moved Zappos from San Francisco to Las Vegas because the city has “a call center population” and a twenty-four/seven culture. That’s a nice way of saying this is a place where you can find the lower-skilled, lower-paid workers you need for customer service. Within that universe, though, Zappos really does deliver on its promise of being “free from boring work environments, go-nowhere jobs, and typical corporate America!”

  Our tour guide—he proudly informs us that you need to know two hundred things about Zappos to be a certified host—says, “I was working at a call center that was kind of the opposite of this—kind of a sweatshop” before joining two and a half years earlier. A year and a half earlier he’d recruited his better half: “I was having great days and my wife wasn’t, so I got her a job here.”

  Part of the appeal is that Zappos—core value number three: create fun and a little weirdness—encourages its employees to let their freak flags fly: when you walk past the cubicles of the recruiting team, they blast you with music and wave barbells in time, brightly colored mullet wigs and feather boas are a favored work accessory, and the otherwise grim rows of cubicles and windowless meeting rooms are enlivened with homemade decor that includes bright balloons, streamers, and Chinese dragons.

  A lot of life at Zappos is about “WOW”—core value number one: deliver Wow through service—and that delight starts with making employees feel privileged to work at Zappos. In my two days in Henderson I was told a dozen times that “you have a better chance of getting into Harvard than getting a job here.” On a “WOW!” wall—writing on the walls is, of course, positively encouraged—someone had written, “I am WOW’ed that people want to tour my job.” There is a “Royalty Room,” complete with throne and crowns, because “when you see yourself as royalty, you will treat yourself and other people better.”

  Members of the Zappos family are taught to deliver WOW by going “above and beyond the average level of service to create an emotional impact on the receiver and give them a positive story they can take with them the rest of their lives.” Every
one at Zappos has a personal tale of WOW—our tour guide’s is sending flowers to a caller because her daughter had been in a car accident—and performing these small acts of kindness seems to be as delightful for the giver as it is for the receiver.

  “I’m completely happy answering the phones—and that sounds insane,” Michael Evon, a forty-year-old mother of two with braces, blond hair, and blue eyes, told me. “They really let me accommodate the customer. There are a lot of exceptions made and it gives you a great feeling—you are able to help someone.”

  Sometimes, that help is just having a good, long chat. Zappos employees pride themselves on marathon conversations with shoppers—an astonishing and humanizing goal in a line of work where getting off the phone as quickly as possible is usually the goal. Evon’s longest is six hours—a little short of the record seven and a half hours—with a customer who called to return a pair of shoes and ending up buying a bathing suit and bonding. “She was fifty and I just happened to be the same astrological sign as the guy she’s dating,” Evon said. “It was things I love—fashion, travel, and psychology.”