Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (14 page)

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The impact of the philanthro-capitalists on global health and U.S. education is occasionally controversial—not everyone believes in more testing in schools, or the particular approaches to AIDS care in Africa. But there is little debate about the aims—it is hard to find anyone who argues that U.S. schoolchildren need less education or that Africans deserve fewer doctors and less medicine. But some idea-driven plutocrats venture into more obviously contested terrain.

The plutocrat-as-politician is becoming an important member of the world’s governing elite, ranging from pragmatic problem solvers with a yen for the public stage, such as Mike Bloomberg or Mitt Romney, to emerging market billionaires whose wealth emboldens them to challenge authoritarian rulers, like Russia’s Mikhail Khodorkovsky or Egypt’s Naguib Sawiris. The plutocratic politician can use his own money to bankroll his campaign directly, and also to build a network of civic support through the less explicitly political donations of his personal foundation.

Some farsighted plutocrats try to use their money not merely to buy public office for themselves but to redirect the reigning ideology of a nation, a region, or even the world. Soros’s Open Society Foundations may not have toppled communism, but they had a powerful impact on the emergence of democracy and pluralism in much of Eastern Europe and the former Soviet Union. At the other end of the ideological spectrum, conservative billionaires like the Koch brothers have assiduously nurtured a right-wing intellectual ecosystem of think tanks and journals that has had a powerful impact on electoral politics and the legislative agenda in the United States and beyond.

Your own view of these explicitly political plutocratic ventures depends on your own politics. If you support drug legalization, you are probably a fan of the Soros millions dedicated to that cause. If you back gay marriage, you likely cheered Republican billionaire Paul Singer’s contribution to the campaign to legalize it in New York state.

Where things get really complicated is when the philanthro-capitalists use their money to finance a political agenda that dovetails with their personal business interests or with the interests of the plutocratic class as a whole. The Koch brothers, for instance, have pushed for less government regulation of industry, including state efforts to protect the environment. They are lifelong libertarians who are genuinely skeptical about climate change. They also happen to own a company whose assets include oil refineries, oil pipelines, and lumber mills—all businesses that would benefit from a weakened EPA.

Then there are the class interests of the plutocrats more generally. Balancing the budget isn’t an idea that belongs to a particular socioeconomic group or political party—the Germans, with their generous social safety net, are as hawkish about deficits as the U.S. Tea Party. But cutting so-called entitlement spending is a policy that would have a disproportionate impact on the poor, who depend most on these programs—and it is also an idea that plutocrat Pete Peterson has devoted $1 billion of his fortune to advance.

Jeffrey Winters, a political scientist at Northwestern University, believes America’s super-elite has been particularly effective at using the tools of a political democracy—where, in theory, the majority should rule—to protect its minority privilege. The first permanent federal income tax in the United States was explicitly devised as a tax on plutocrats. When it was first mooted in 1894, it was to be levied on the top 0.1 percent—eighty-five thousand of the sixty-five million Americans. Resistance in Congress, whose members included two millionaires, was predictably intense. One representative warned that this “was not Democracy, it was Communism.” Another fumed, “It is a shame that the successful should be made the legal prey of the unsuccessful.” It took nineteen years and an amendment to the Constitution, but the tax did eventually become law in 1913. This was, after all, the height of the Gilded Age and the dawn of the Progressive Era. America was getting rich, but it was also getting worried about the disproportionate wealth and power of its plutocrats.

Over the subsequent century, though, the 0.1 percent fought back. Driven up by the costs of World War I, the initial tax rate on the very rich was high, reaching a peak of 77 percent in 1918. By the early twenty-first century, the effective tax rate at the very top had fallen to less than a third of that level. Strikingly, as the tax rate at the top fell, it rose on those lower down the income distribution—in the political fight over tax rates, the plutocrats have outfoxed the merely wealthy. In 1916, millionaires—that era’s super-rich—were hit with a published income tax rate of 65 percent, nearly 35 points higher than the rate for the merely affluent. Capital gains were taxed at the same level as ordinary income, and most Americans paid no income tax at all. Today, that fiercely progressive curve has been reversed. Within the 1 percent, the richer you are, the lower your effective tax rate: in 2009, the top 1 percent paid over 23 percent of their income in tax, the top 0.1 percent paid just over 21 percent, and the top four hundred taxpayers paid less than 17 percent. Capital gains, an important source of income for the plutocrats but less significant the lower you go down the income distribution, were taxed at just 15 percent in 2012.

Winters argues that America’s oligarchs have achieved these low effective tax rates thanks to the services of a professional army of lawyers, accountants, and lobbyists. Collectively, he calls this group of courtiers the “income defense industry.” They certainly benefit from the intellectual antitax agenda elaborated over the past several decades at some of the think tanks financed by plutocrats.

But if America really is ruled by an oligarchy, it is a very badly disciplined clique indeed. After all, some of the most prominent plutocrats, most notably Warren Buffett, have highlighted the low effective tax rate they pay and have called on politicians to raise it. As he likes to put it, “There’s class warfare, all right. But it’s my class, the rich class, that’s making war, and we’re winning.”

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When Anders Aslund, a Swedish economist who has studied and advised most of the leaders in the former Soviet Union, visited Kiev in late 2004, at the height of the Orange Revolution, he returned to his home in Washington, D.C., with a surprising observation.

Most reports depicted the Orange Revolutionaries, with their determined, subzero encampment in the capital city’s central square, either as western Ukrainians rebelling against the government’s pro-Russian stance or as idealistic students who were unwilling to stomach political repression. Both characterizations were true, but Aslund saw a third dynamic at play. The Orange Revolution, he told me, was the rebellion of the millionaires against the billionaires. Ukraine’s crony capitalism worked extremely well for the small, well-connected group of oligarchs at the very top, but it was stifling the emerging middle class. This rising petite bourgeoisie was finally fed up and it was fighting for more equitable rules of the game.

That battle of the millionaires versus the billionaires has been playing out across the world. It was a decisive factor in the Tahrir Square protests, whose most visible organizer was Wael Ghonim, an MBA-trained Google executive based in Dubai, which quickly won the support of the country’s well-heeled military elite. It was on show in India, where veteran social activist Anna Hazare’s anticorruption hunger strike was hailed as the political awakening of the prospering Indian middle class. And it can be seen in Moscow, where the unexpected revolt against Vladimir Putin’s “party of crooks and thieves” was catalyzed by a blogging real estate lawyer and drew fur-clad professionals onto the streets.

In the United States, Occupy Wall Street has drawn the political battle lines somewhat differently—between the 99 percent and the 1 percent. But when you drill down into the data, you can see another, even steeper division inside the 1 percent itself. The ultrarich of the 0.1 percent have pulled far ahead of the merely rich, who make up the other 0.9 percent at the tip of the income pyramid. The divide is cultural and it is economic—and if it becomes political it could transform the national debate.

The wider public discussion about income inequality hasn’t much touched on the divisions within the 1 percent. That is partly because it can be a little stomach churning to consider the gradations of wealth at the very top at a time when unemployment is close to 9 percent and working-class families are being hammered. But within the 1 percent, the awareness of the different tiers of wealth is as keen as an Indian matchmaker’s sensitivity to the finer divisions of caste.

Holly Peterson, the daughter of Pete Peterson and herself a sly and eloquent chronicler of the 1 percent, tells a similar story of the tension at the very top.

“I think people making $5 million to $10 million definitely don’t think they are making enough money,” she told me. “‘Wouldn’t it be nice to fly private?’ There are so many things you can aspire to, even making $5 million a year. For the lower rung of this crowd, these people set up lives for themselves they can’t afford. These people are broke and maxed out on their credit cards in December, just like middle-class couples living on $100,000. I don’t think they feel that rich. They are trying to play with the high rollers and there are things they can’t do and they feel deprived, which is completely sick and absurd, but that’s the truth of the matter.”

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One way to understand what is happening at the top of the income distribution is to look at the numbers. Brian Bell and John Van Reenen, two economists at the Centre for Economic Performance at the London School of Economics, have done a careful study of Britain’s super-rich. Peering inside the top 1 percent, they found a distribution almost as skewed as that within the economy as a whole—the top 2 percent of the 1 percent took 11 percent of the wage share of that cohort in 1998 and 13 percent in 2008. Among financiers, who are disproportionately represented within the British and American 1 percent, the tilt toward the very top is even more pronounced.

Winters, the U.S. political scientist, has devised another way to appreciate the difference between the merely rich and the super-rich. He has created a “material power index,” which measures the income of the top 10 percent of Americans as a multiple of the average income of the bottom 90 percent. His material power index shows that, like a mountain whose cliffs become steeper as you ascend to the peak, income polarization in America gets sharper the richer you are: the top 10 percent have an MPI of 4—meaning their average income is four times that of the bottom 90 percent—while the top 1 percent have an MPI of 15. But when you get to the top 0.1 percent, the MPI jumps to 124. That is the line, in Winters’s view, that separates the affluent from the oligarchs. “There were about 150,000 Americans whose average annual incomes were $4 million and above in 2007,” Winters writes of the 0.1 percent. “This is the threshold at which oligarchs dominate the landscape.”

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?