April 1, 2013

Plutocrats by Chrystia Freeland

Plutocrats by Chrystia Freeland

The rise of the new global super-rich and the fall of everyone else.

Behavioral economist Dan Ariely discovered in a 2011 that the wealth distribution in the USA where the top 20% own 84 % of the total wealth and in Sweden where the share of the top 20 % is just 36 %. Larry Summers, the Harvard economist points out the “for the first time since the Great Depression, focusing on redistribution makes more sense than focusing on growth”.

Consider the America’s economic recovery in 2009-2010. For 99% of Americans income increased by a mere .2% and income of 1% increased by 11.6 %. There is a similar story behind the boom in the emerging markets. The ‘India Shining’ of the urban middle class has left untouched hundreds of millions of peasants living at subsistence levels as BJP discovered to its dismay when it sought reelection on the strength of that slogan. Likewise, China’ booming coastal elite is a world apart from the roughly half of the population who still live in villages in the country’s vast hinterland.

Wealth inequality is China is now higher than it in the US and is also surged in India and Russia. Citigroup calls the phenomenon the “Consumer Hourglass Theory” and since 2009 has urged investors to focus on companies best positioned to cater to the highest-income and lowest-income consumers. It created an index of 25 companies, including Estée Lauder Cos. and Saks at the top of the hourglass and Family Dollar Stores Inc. and Kellogg Co. at the bottom. The index posted a 56.5% return for investors from its inception on Dec. 10, 2009, through Sept. 1, 2011. Over the same period, the Dow Jones Industrial Average returned 11%.

In egalitarian America and even in aristocratic Europe, the industrial revolution eventually lifted all the boats, but also widened the social divide. With technology & globalization transformation, developing worlds like India and china are going through their own gilded ages. Between 1820 & 1950, both India’s & China’s per capita income was flat. From 1950 to 1973, it rose to 68%. But then Asia started to catch up, the per capita increased by 245 percent between 1973 & 2002 and it continues to grow despite global financial crisis.

Forbes classifies 840 of the 1,226 people on its 2012 billionaire ranking as self-made. In 2012 of the 1226 people on the Forbes billionaire list, 77 were financiers and 143 were investors.
Jeffrey Winters, a political scientist at Northwestern University believes America’s super-elite have been particularly effective at using the tools of a political democracy to protect its minority privilege. In 1918, the initial tax for the very rich was 77 % and in 2012, it came drastically down to 15%.

Raghuram Rajan, an economist said, “India risked becoming ‘an unequal oligarchy or worse perhaps far sooner than we think”. His assistant Sinha had calculated the number of billionaires per trillion dollars of GDP in a number of countries around the world. Russia, with 87 billionaires and a national GDP of 41.3 trillion, had the highest billionaire-to-GDP ratio. India, Rajan said, was number two, with 55 billionaires and $1.1 trillion o GDP. Most of India’s super-rich weren’t software pioneers or inventive manufactures. Instead, “too many people have gotten too rich based on their proximity to the government.... Land, natural resources, and government contracts or license are the predominant sources of the wealth of our billionaires and all of these factors come from the government”.

Rajan shared his concern: in an age of super-wealth, we need to be constantly alert to efforts by the elite to get rich by using their political muscle to increase their share of the preexisting pie, rather than by adding value to the economy and thus increasing the size of the pie overall.

Unlike Russia which is rich in oil & metal, China’s new rich got rich by real-estate and the capital which is closely controlled by the government.

In April 2010, MIT students asked Bill Gates how it felt to be the richest person in the world. Bill Gates suggested it wasn’t a very big deal. “Well, the marginal return for extra dollars does drop off. I have not found any burgers at any price that are better than McDonald’s”. He admitted there were some great perks, like flying on a private jet, but said that after a few million or something, it’s all about how you are going to give it back”.

Low taxes, light-touch regulation, weak unions and unlimited campaign donations are certainly in the best interests of the plutocrats, but that does not mean they are the right way to maintain the economic system that created today’s super-elite.

In 1343, La Serenissima petitioned the pope for permission to trade with the Muslim world. Here is how the city made its cause: “Since by the Grace of God, our city has grown and increased by the labors of merchants creating traffic and profits for us in the diverse parts of the world by land and sea and this is our life and that of our sons, because we cannot live otherwise and know not how except by trade, therefore we must be vigilant in all our thoughts and endeavors, as our predecessors were, to make provision in every way lest so much wealth and treasure should disappear:.

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