Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (7 page)

Mr. O’Neill’s empathy for the prospering people of China and India isn’t the only reason to be optimistic about the twin gilded ages. Another is that the experience of the past two centuries has taught us that, with time, the creative destruction of capitalism inevitably brings an overall improvement in everyone’s standard of living.

That was what John Baranowski, the general manager of accounting and operations at Greyhound Lines, the bus company based in Dallas, Texas, argued in reply to an essay by W. Brian Arthur, a professor at the Santa Fe Institute, about the computer revolution and the rise of a second economy in which most of the work is done by machines talking to other machines, with little intervention by humans. “Wealth will be created but also spent in some form we cannot imagine,” Mr. Baranowski wrote. “Past productivity eliminated millions of jobs and created millions more—and while it is highly disruptive, there is no precedent for a long-term negative impact on total jobs and no reason to expect that the future (and the second economy’s impact) will be different.”

Professor Arthur’s counterpoint was to hope that Mr. Baranowski is right, but to caution that we have no proof that today’s technology revolution really will eventually make all of us richer.

“I only hope you are right that the new prosperity will create new jobs,” Professor Arthur wrote. “The idea that this always happens is called Say’s law in economics, and it’s now held by economists to be a tenet of faith, not true in reality. Since the second economy began, in the early and mid-1990s, we’ve had wave after wave of downsizing and layoffs, and now we have ongoing structural joblessness. I hope jobs will be created, and maybe they will. More likely, the system, as so many times before in history, will have to readjust radically. It needs to find new ways to distribute the new wealth.”

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EASANTS AND
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ISERABLE
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ILLIONAIRES

Both the Western critics and the Western fans of globalization tend to agree about one thing: the emerging markets, particularly their rising middle classes, are among the big winners. As far as GDP goes, that is certainly true. But, just as the West’s first gilded age was not perfectly benign for everyone living through it, the developing world’s age of creative destruction is bumpy.

For one thing, international studies of the correlation between income and happiness have recently uncovered a counterintuitive connection. Until a few years ago, the reigning theory about money and happiness was the Easterlin paradox, the 1974 finding by Richard Easterlin that, beyond a relatively low threshold, more money didn’t make you happier. But as better international data became available, economists discovered that the Easterlin paradox applies only across generations within a single country—you are probably not happier than your parents were, even though you are probably richer. But across countries, what millions of immigrants have always known to be true really is: the people of rich countries are generally happier than the people of poor countries.

The latest contrarian finding, however, is that moving to that state of greater wealth and greater happiness is decidedly unpleasant. As Angus Deaton, in a review of the 2006 Gallup World Poll, concluded, “Surprisingly, at any given level of income, economic growth is associated with lower reported levels of life satisfaction.” Eduardo Lora and Carol Graham call this the “paradox of unhappy growth.” Two separate studies of China, for example, have found that peasants who move to the city are richer but more frustrated with their income than they had been back on the farm. Palagummi Sainath, an award-winning Indian journalist who made his name when he switched from covering the business titans of “India Shining” to the underclasses who were left behind, tells the same story: Indians who move from impoverished villages to urban slums have a better chance of finding work, but little social security comes with it. And Betsey Stevenson and Justin Wolfers have found that the paradox of unhappy growth is particularly true in the first stages of growth in “miracle” economies, such as South Korea or Ireland—the moment when the tigers take their first leap is also the time when their people are unhappiest.

No one has come up with a definitive explanation of the unhappy growth paradox, but the economists who study it speculate that the uncertainty and inequality of these periods of rapid economic change may be to blame. Even if our country’s economy overall is growing strongly and we are doing well ourselves, we know that we are living through a period of what Joseph Schumpeter called “creative destruction.” That volatility, and the painful consequences it has for the losers, makes even the winners anxious.

The tension in emerging markets isn’t only psychological. As in the West, a big part of the story of the developing world’s first gilded age is the “friction . . . between capital and labor, between rich and poor” that Carnegie identified more than a century earlier.

I caught a glimpse of it at a World Bank panel I moderated in Washington, D.C., in September 2011. Manish Sabharwal, the CEO of TeamLease, India’s leading supplier of temporary workers, said one of India’s big challenges was increasing the number of people in the formal economy (as opposed to the black-market economy) working in manufacturing. At just 12 percent of the labor force, low-wage India, astonishingly, has the same percentage of workers in manufacturing as the United States does.

Stella Li, the vice president of automaker BYD, one of China’s manufacturing stars, jumped into the discussion. “I have the answer,” she told Sabharwal. BYD, she said, had gone into India with high hopes. “We think India is a great place for our second-biggest manufacturing,” she explained, and BYD liked the quality of the Indian labor force: “The employee labor is good—they are working hard, very smart, and quite good.” The problem was political: “They have a strike . . . then they ask for money, it takes a long discussion, they have to stop manufacturing for like one month.” By contrast, she noted, “In China, we have no strike. If they have a strike, the government will get involved, tell workers, ‘I will help you, but go back to work.’”

At this point, I couldn’t resist asking whether in the authoritarian People’s Republic, harsh measures might be used to force protesters back to work. Strikers might even be sent to jail, I suggested.

“No,” Ms. Li replied instantly. “It is just the government nicely talking, ‘What do you need? I’m taking care of you. Don’t worry. But you should go back to work.’”

BYD’s response to India’s more aggressive unions, Ms. Li said, was to back away from its initial plan to make the country “kind of our backyard for manufacturing . . . So, we have five thousand to six thousand employees there. Initially we wanted to grow huge, like we can be over fifty thousand jobs over there.”

As in the West, moving production somewhere else is one response to bolshie unions. The other is technology. As Kiran Mazumdar-Shaw, India’s richest self-made woman entrepreneur, said to her employees: “If you join the union, I’m going to automate, and you’ll all be out of jobs.” And here’s the twist—she made this comment to a
New Yorker
journalist whose profile largely focused on Mazumdar-Shaw’s philanthropic commitment to improving the lives of India’s poorest people. The union didn’t listen, so Mazumdar-Shaw automated their jobs away.

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We do know one thing for certain—whether it is Indian entrepreneurs like Shaw, or Chinese executives like Li, or Western financiers like O’Neill, those at the top around the world are doing very well indeed in this era of the twin gilded ages. One of the most respected students of today’s surging income inequality is Emmanuel Saez, a lanky, curly-haired forty-one-year-old Frenchman who teaches economics at UC Berkeley and won one of his profession’s top prizes in 2009. Working with his colleague Thomas Piketty of the Paris School of Economics, Saez has documented the changing shape of income distribution in the United States over the past century.

From the mid-1920s to 1940, the share of income going to the top 10 percent was around 45 percent. During the Second World War it declined to around 33 percent and remained essentially flat until the late 1970s. Since then, it has been climbing dramatically. By 2006, the top 10 percent earned 50 percent of national income, even more than it did in 1928, at the height of the Roaring Twenties.

But the biggest shift in income isn’t between the top 10 percent and everyone else—it is
within
the top 10 percent, Saez and Piketty found. Almost all the gains are at the very apex of the distribution: during the economic expansion of 2002 to 2006, three-quarters of all income growth in the United States went to the top 1 percent of the population. The social gap isn’t just between the rich and the poor; it is between the super-rich and the merely wealthy (who may not feel quite so wealthy when they compare themselves with their super-successful peers).

Here’s how that translated into U.S. average family income in 2010, according to Saez: Families in the top 0.01 percent made $23,846,950; that dropped sharply to $2,802,020 for those in the top 0.1 to 0.01 percent. Those in the top 1 percent made $1,019,089; those in the top 10 percent made $246,934. Meanwhile, the bottom 90 percent made an average $29,840.

Even among the super-super-rich—the people on the annual
Forbes
rich list—the greatest gains have been at the tip of the pyramid. A recent academic study of the
Forbes
list of the four hundred richest Americans found that between 1983 and 2000 all of the wealthy prospered, but the very richest did best of all. In the course of those years, the top 25 percent of this group became 4.3 times wealthier, while the bottom 75 percent of them got “only” 2.1 times richer.

In 2011, in its annual report on the world’s rich, Credit Suisse, the international investment bank, noted that the number of super-rich—whom it delicately dubs “ultra high net worth individuals,” or UHNWIs, with assets above $50 million—surged: “Although comparable data on the past are sparse, it is almost certain that the number of UHNW individuals is considerably greater than a decade ago. The general growth in asset values accounts for some of the increase, along with the appreciation of other currencies against the U.S. dollar. However, it also appears that, notwithstanding the credit crisis, the past decade has been especially conducive to the establishment of large fortunes.”

Overall, Credit Suisse calculated that there were about 29.6 million millionaires—people with more than $1 million in net assets—in the world, about half a percent of the total global population. North Americans are no longer the largest group—they account for 37 percent of the world’s millionaires, slightly fewer than the 37.2 percent who are European. Asia-Pacific, excluding China and India, is home to 5.7 million (19.2 percent), while there are just over 1 million in China (3.4 percent). The remaining 937,000 live in India, Africa, or Latin America.

There were 84,700 UHNWIs in the world in 2011, of whom 29,000 owned net assets worth more than $100 million, and of whom 2,700 were worth half a billion dollars—nearly enough to maintain the level of perks Naguib Sawiris deems acceptable. A total of 37,500 UHNWIs are in North America (44 percent); 23,700 (28 percent) are in Europe; and 13,000 are in Asia-Pacific excluding China and India (15 percent).

When it comes to super-wealth, the United States is unassailably at the top. America is home to 42 percent of all UHNWIs, with 35,400. China is in second place, with 5,400, or 6.4 percent of the total, followed by Germany (4,135), Switzerland (3,820), and Japan (3,400). Russia has 1,970, India 1,840, Brazil 1,520, Taiwan 1,400, Turkey 1,100, and Hong Kong 1,030.

Given the underlying economic forces that are roiling the globe, Saez said he sees no reason that this trend won’t continue. The rapid emergence of the very rich from the financial crisis would seem to support that view: Saez has found that in the 2009–2010 recovery, 93 percent of the gains were captured by the top 1 percent. The plutocrats did even better than the merely affluent—37 percent of these gains went to the top 0.01 percent, the 15,000 Americans with average incomes of $23.8 million. Another example: in 2009, the country’s top twenty-five hedge fund managers earned an average of more than $1 billion each—or more than they had made in 2007, the previous record year.

“Probably if you had looked at the situation in the late nineteenth century, it would have looked like today. You would have said, ‘Look, those guys are also self-made,’” Saez told me when I visited him in his office in Berkeley. “The way I see it is first you have a wave of innovation that creates self-made wealth, and then that wealth is passed on to the next generation and then you have heirs. So really the big question for the new era is whether the new rich, the self-made rich, are going to pass their wealth to their heirs or whether it’s going to be given to charity and to what extent. It’s probably going to be both, but I think the wave of heirs should happen down the road, barring an extreme change in behavior in charitable giving.”

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On February 13, 2007, almost exactly 120 years after the Martin ball, a leader of a new, ascendant American plutocracy hosted another epoch-making gala, also on Park Avenue, this time at the Armory, less than a mile directly north of the grand hotel rooms where the Martins and their friends had frolicked.

The guests at Steve Schwarzman’s sixtieth-birthday bash didn’t come in costume, and they arrived at eight p.m., not ten thirty p.m., but in many other ways his celebration echoed New York’s most famous nineteenth-century entertainment. The ladies were bejeweled, many of the guests were moguls (Mike Bloomberg, John Thain, Howard Stringer), and the entertainment was lavish—its highlight was a half-hour live performance by Rod Stewart, for which he was reportedly paid $1 million.