The Atlantic Monthly
F. Scott Fitzgerald was right when he declared the rich different from you and me. But today’s super-rich are also different from yesterday’s: more hardworking and meritocratic, but less connected to the nations that granted them opportunity—and the countrymen they are leaving ever further behind.
If you happened to be watching NBC on the first Sunday morning in August last summer, you would have seen something curious. There, on the set of Meet the Press , the host, David Gregory, was interviewing a guest who made a forceful case that the U.S. economy had become “very distorted.” In the wake of the recession, this guest explained, high-income individuals, large banks, and major corporations had experienced a “significant recovery”; 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, he argued, was not a single economy at all, but rather “fundamentally two separate types of economy,” increasingly distinct and divergent.
This diagnosis, though alarming, was hardly unique: drawing attention to the divide between the wealthy and everyone else has long been standard fare on the left. (The idea of “two Americas” was a central theme of John Edwards’s 2004 and 2008 presidential runs.) What made the argument striking in this instance was that it was being offered by none other than the former five-term Federal Reserve Chairman Alan Greenspan: iconic libertarian, preeminent defender of the free market, and (at least until recently) the nation’s foremost devotee of Ayn Rand. When the high priest of capitalism himself is declaring the growth in economic inequality a national crisis, something has gone very, very wrong.
This widening gap between the rich and non-rich has been evident for years. In a 2005 report to investors, for instance, three analysts at Citigroup advised that “the World is dividing into two blocs—the Plutonomy and the rest”:
But the financial crisis and its long, dismal aftermath have changed all that. A multibillion-dollar bailout and Wall Street’s swift, subsequent reinstatement of gargantuan bonuses have inspired a narrative of parasitic bankers and other elites rigging the game for their own benefit. And this, in turn, has led to wider—and not unreasonable—fears that we are living in not merely a plutonomy, but a plutocracy, in which the rich display outsize political influence, narrowly self-interested motives, and a casual indifference to anyone outside their own rarefied economic bubble.
Through my work as a business journalist, I’ve spent the better part of the past decade shadowing the new 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 famously noted, 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 many of them, as a result, have an ambivalent attitude toward those of us who didn’t succeed so spectacularly. Perhaps most noteworthy, 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 Winner-Take-Most Economy
The rise of the new plutocracy is inextricably connected to two phenomena: the revolution in information technology and the liberalization of global trade. Individual nations have offered their own contributions to income inequality—financial deregulation and upper-bracket tax cuts in the United States; insider privatization in Russia; rent-seeking in regulated industries in India and Mexico. But the shared narrative is that, thanks to globalization and technological innovation, people, money, and ideas travel more freely today than ever before.
Peter Lindert is an economist at the University of California at Davis and one of the leaders of the “deep history” school of economics, a movement devoted to thinking about the world economy over the long term—that is to say, in the context of the entire sweep of human civilization. Yet he argues that the economic changes we are witnessing today are unprecedented. “Britain’s classic industrial revolution was far less impressive than what has been going on in the past 30 years,” he told me. The current productivity gains are larger, he explained, and the waves of disruptive innovation much, much faster.
From a global perspective, the impact of these developments has been overwhelmingly positive, particularly in the poorer parts of the world. Take India and China, for example: between 1820 and 1950, nearly a century and a half, per capita income in those two countries was basically flat. Between 1950 and 1973, it increased by 68 percent. Then, between 1973 and 2002, it grew by 245 percent, and continues to grow strongly despite the global financial crisis.
But within nations, the fruits of this global transformation have been shared unevenly. Though China’s middle class has grown exponentially and tens of millions have been lifted out of poverty, the super-elite in Shanghai and other east-coast cities have steadily pulled away. Income inequality has also increased in developing markets such as India and Russia, and across much of the industrialized West, from the relatively laissez-faire United States to the comfy social democracies of Canada and Scandinavia. Thomas Friedman is right that in many ways the world has become flatter; but in others it has grown spikier.
One reason for the spikes is that the global market and its associated technologies have enabled the creation of a class of international business megastars. As companies become bigger, the global environment more competitive, and the rate of disruptive technological innovation ever faster, the value to shareholders of attracting the best possible CEO increases correspondingly. Executive pay has skyrocketed for many reasons—including the prevalence of overly cozy boards and changing cultural norms about pay—but increasing scale, competition, and innovation have all played major roles.
Many corporations have profited from this economic upheaval. Expanded global access to labor (skilled and unskilled alike), customers, and capital has lowered traditional barriers to entry and increased the value of an ahead-of-the-curve insight or innovation. Facebook, whose founder, Mark Zuckerberg, dropped out of college just six years ago, is already challenging Google, itself hardly an old-school corporation. But the biggest winners have been individuals, not institutions. The hedge-fund manager John Paulson, for instance, single-handedly profited almost as much from the crisis of 2008 as Goldman Sachs did.
Meanwhile, the vast majority of U.S. workers, however devoted and skilled at their jobs, have missed out on the windfalls of this winner-take-most economy—or worse, found their savings, employers, or professions ravaged by the same forces that have enriched the plutocratic elite. The result of these divergent trends is a jaw-dropping surge in U.S. income inequality. According to the economists Emmanuel Saez of Berkeley and Thomas Piketty of the Paris School of Economics, between 2002 and 2007, 65 percent of all income growth in the United States went to the top 1 percent of the population. The financial crisis interrupted this trend temporarily, as incomes for the top 1 percent fell more than those of the rest of the population in 2008. But recent evidence suggests that, in the wake of the crisis, incomes at the summit are rebounding more quickly than those below. One example: after a down year in 2008, the top 25 hedge-fund managers were paid, on average, more than $1 billion each in 2009, quickly eclipsing the record they had set in pre-recession 2007.
If you are looking for the date when America’s plutocracy had its coming-out party, you could do worse than choose June 21, 2007. On that day, the private-equity behemoth Blackstone priced the largest initial public offering in the United States since 2002, raising $4 billion and creating a publicly held company worth $31 billion at the time. Stephen Schwarzman, one of the firm’s two co-founders, came away with a personal stake worth almost $8 billion, along with $677 million in cash; the other, Peter Peterson, cashed a check for $1.88 billion and retired.
In the sort of coincidence that delights historians, conspiracy theorists, and book publishers, June 21 also happened to be the day Peterson threw a party—at Manhattan’s Four Seasons restaurant, of course—to launch The Manny , the debut novel of his daughter, Holly, who lightly satirizes the lives and loves of financiers and their wives on the Upper East Side. The best seller fits neatly into the genre of modern “mommy lit”— USA Today advised readers to take it to the beach—but the author told me that she was inspired to write it in part by her belief that “people have no clue about how much money there is in this town.”
Holly Peterson and I spoke several times about how the super-affluence of recent years has changed the meaning of wealth. “There’s so much money on the Upper East Side right now,” she said. “If you look at the original movie Wall Street , it was a phenomenon where there were men in their 30s and 40s making $2 and $3 million a year, and that was disgusting. But then you had the Internet age, and then globalization, and you had people in their 30s, through hedge funds and Goldman Sachs partner jobs, who were making $20, $30, $40 million a year. And there were a lot of them doing it. I think people making $5 million to $10 million definitely don’t think they are making enough money.”
As an example, she described a conversation with a couple at a Manhattan dinner party: “They started saying, ‘If you’re going to buy all this stuff, life starts getting really expensive. If you’re going to do the NetJet thing’”—this is a service offering “fractional aircraft ownership” for those who do not wish to buy outright—“‘and if you’re going to have four houses, and you’re going to run the four houses, it’s like you start spending some money.’”
The clincher, Peterson says, came from the wife: “She turns to me and she goes, ‘You know, the thing about 20’”—by this, she meant $20 million a year—“‘is 20 is only 10 after taxes.’ And everyone at the table is nodding.”
As with the aristocracies of bygone days, such vast wealth has created a gulf between the plutocrats and other people, one reinforced by their withdrawal into gated estates, exclusive academies, and private planes. We are mesmerized by such extravagances as Microsoft co-founder Paul Allen’s 414-foot yacht, the Octopus , which is home to two helicopters, a submarine, and a swimming pool.
But while their excesses seem familiar, even archaic, today’s plutocrats represent a new phenomenon. The wealthy of F. Scott Fitzgerald’s era were shaped, he wrote, by the fact that they had been “born rich.” They knew what it was to “possess and enjoy early.”
That’s not the case for much of today’s super-elite. “Fat cats who owe it to their grandfathers are not getting all of the gains,” Peter Lindert told me. “A lot of it is going to innovators this time around. There is more meritocracy in Bill Gates being at the top than the Duke of Bedford.” Even Emmanuel Saez, who is deeply worried about the social and political consequences of rising income inequality, concurs that a defining quality of the current crop of plutocrats is that they are the “working rich.” He has found that in 1916, the richest 1 percent of Americans received only one-fifth of their income from paid work; in 2004, that figure had risen threefold, to 60 percent.
Peter Peterson, for example, is the son of a Greek immigrant who arrived in America at age 17 and worked his way up to owning a diner in Nebraska; his Blackstone co-founder, Stephen Schwarzman, is the son of a Philadelphia retailer. And they are hardly the exceptions. Of the top 10 figures on the 2010 Forbes list of the wealthiest Americans, four are self-made, two (Charles and David Koch) expanded a medium-size family oil business into a billion-dollar industrial conglomerate, and the remaining four are all heirs of the self-made billionaire Sam Walton.
Similarly, of the top 10 foreign billionaires, six are self-made, and the remaining four are vigorously growing their patrimony, rather than merely living off it. It’s true that few of today’s plutocrats were born into the sort of abject poverty that can close off opportunity altogether— a strong early education is pretty much a precondition—but the bulk of their wealth is generally the fruit of hustle and intelligence (with, presumably, some luck thrown in). They are not aristocrats, by and large, but rather economic meritocrats, preoccupied not merely with consuming wealth but with creating it.