Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (9 page)

Michael Lindsay, a professor at Rice University who has interviewed more than five hundred American leaders as part of the multiyear Platinum Study of the background and behavior of the nation’s bosses, has reached the same conclusion. Speaking at a Columbia University conference on elites in the fall of 2010, Lindsay said that nowadays most of America’s business, nonprofit, and academic chiefs hadn’t inherited their money or come from privileged backgrounds.

An October 2011 study of income inequality in the United States by the Congressional Budget Office, the nonpartisan government research unit, tells the same story of a shift at the top from income earned on capital—getting rich in your sleep—to income earned through wages. The contrast isn’t just between today’s super-elite and those of the Gilded Age; there has been a marked switch to wages since the end of the 1970s. As the gap between the top and everyone else has grown, so has the reliance of the 1 percent on wage income, rather than capital. Here’s how the CBO describes the transition:

Capital income excluding capital gains—in other words, interest, dividends and rents—has generally been a declining source of income among the highest-income households. Its share dropped from 42 percent of market income excluding capital gains in 1979 to 21 percent in 2002. . . . The changing composition of income for the highest-income households reflects a much longer trend. Over the entire twentieth century, capital income declined sharply in importance for high-income taxpayers. The labor share of income for the top income groups was higher in 2007 than before World War II, as highly compensated workers have replaced people whose income is from property or securities at the top of the income distribution.

This is true even at the very, very top. When three economists, one of whom works in the Office of Tax Analysis at the U.S. Treasury, crunched the numbers for 2005, they found that even among the top 0.01 percent—true plutocrats who earn at least $10 million a year—wages are far more important than rents. Salary income and business income accounted for 80 percent of their income excluding capital gains and 64 percent including capital gains. And, as with the 1 percent, the shift toward wages has coincided with the emergence of the winner-take-all economy. These figures were a quarter lower in 1979: 61 percent and 46 percent.

You can see that change in the life stories of today’s plutocrats. Pete Peterson, for example, is the son of a Greek immigrant who arrived in America at age seventeen and worked his way up to owning a diner in Nebraska; his Blackstone cofounder, Steve Schwarzman, is the son of a Philadelphia-area retailer. Leon Cooperman, a Goldman Sachs veteran and hedge fund billionaire who has become an outspoken critic of the White House, made a point of his own humble background in an open letter to the president that he circulated in the autumn of 2011: “While I have been richly rewarded by a life of hard work (and a great deal of luck), I was not to-the-manor-born. My father was a plumber who practiced his trade in the South Bronx after he and my mother emigrated from Poland. I was the first member of my family to earn a college degree. I benefited from both a good public education system (P.S. 75, Morris High School and Hunter College, all in the Bronx) and my parents’ constant prodding.”

Forbes
classifies 840 of the 1,226 people on its 2012 billionaire ranking as self-made. 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, and it is very useful to have a father who is an affluent professional—but the bulk of their wealth is generally the fruit of hustle, intelligence, and a lot of luck. They are not aristocrats, by and large, but rather economic meritocrats, preoccupied not only with consuming wealth but also with creating it.

Nor is this true only in America, with its national faith in the Horatio Alger story. The global capitalist boom has allowed some people at the bottom of even the most traditionally stratified societies to rise to the top. Consider the small but growing community of plutocratic Dalits, the Indian caste once known as the untouchables. In some parts of rural India, Dalits are still not allowed to drink from the village well, and Dalit children are segregated in a special corner of their schoolrooms, lest their spiritual taint contaminate their higher-caste classmates. But India now has Dalit multimillionaires, like Ashok Khade, owner of a company that builds and refurbishes offshore drilling rigs, and subject of a recent front-page profile in the
New York Times
. As one Dalit businessman told a reporter, “We are fighting the caste system with capitalism.”

Being self-made is central to the self-image of today’s global plutocrats. It is how they justify their luxuries, status, and influence. One way to eavesdrop on the way plutocrats talk to each other is to read the glossy limited-edition magazines written just for them. An example is the rather unimaginatively titled
Luxos
, which calls itself “Your local guide to global luxury” and can be found in the rooms of very fancy European hotels. One recent issue included an interview with Torsten Müller-Ötvös, the CEO of Rolls-Royce. Here is what he had to say about his buyers: “We have witnessed substantial changes over the last years. The Rolls-Royce generation of today has become much younger. Our youngest Rolls-Royce customer for example is a twenty-eight-year-old entrepreneur from India. We find that many of our customers have earned their success through their own work, and they want to reward themselves with a Rolls-Royce.”

Indeed, if you are looking to define the archetypal member of the super-elite, he isn’t Jane Austen’s Mr. Darcy, with his gorgeous acres of Pemberley. He—and they are almost all still men—is an aggressive, intensely educated mathematician, the son of middle- or upper-middle-class parents, who made his first fortune young.

T
HE
R
ISE OF THE
A
LPHA
G
EEKS

The rise of the alpha geeks is most obvious in Silicon Valley, a culture and an economic engine they created. But you can find them everywhere you find the plutocracy. The alpha geeks are the dominant tribe in Bangalore, the Indian city that invented technology outsourcing. In their incarnation as engineers, they overwhelmingly populate the Communist Party leadership in China, where political nous is a surer path to wealth than filing patents. The Russian oligarchs are a textbook example of crony capitalism, yet six of the original seven earned degrees in math, physics, or finance before becoming natural resource tycoons. Carlos Slim, who studied engineering in college and taught algebra and linear programming as an undergraduate, attributes his fortune to his facility with numbers. So does Steve Schwarzman, who told me he owed his success to his “ability to see patterns that other people don’t see” in large collections of numbers.

People inside the super-elite think the rise of the data geeks is just beginning. Elliot Schrage is a member of the tech aristocracy—he was the communications director for Google when it was the hottest company in the Valley and jumped to the same role at Facebook just as it was becoming a behemoth. At a 2009 talk he gave to an internal company meeting of education and publishing executives, Schrage was asked what field we should encourage our children to study. His instant answer was statistics, because the ability to understand data would be the most powerful skill in the twenty-first century.

The rise of the alpha geeks means the 1 percent is more fiercely educated and the returns on elite education are higher than ever before. One way to understand why we are living in a golden age of the nerds is with a metaphor invented by Jan Tinbergen, joint winner of the first Nobel Prize in economics: the race between education and technology. That idea is the title of and conceptual framework for a recent book by Larry Katz and Claudia Goldin, the Harvard pair who study how the interplay between new technologies and education shapes income distribution.

In the nineteenth century, as the first gilded age was reaching its peak, technology raced ahead of education. As a result, if you were what counted as highly educated in that age—which was finishing high school (remember, bestselling author Henry George left school at fourteen)—you could command a premium compared to unskilled workers. Over the next fifty years, as America invested massively in public high schools, education caught up with technology, and the nerd premium narrowed. For Americans born from the 1870s to about 1950, every decade was accompanied by an increase of about 0.8 years of education. As Goldin and Katz write, “During that 80-year period the vast majority of parents had children whose educational attainment greatly exceeded theirs.”

But about thirty years ago, that increase in education stopped while technology continued to race ahead. The result is the rise of the geeks. In one example, the wage premium earned by young college graduates compared to young high school graduates more than doubled between 1979 and 2005. Getting a college degree adds almost a full million dollars to your lifetime earnings. Economists Thomas Philippon and Ariell Reshef, who have studied the connection between deregulation and soaring incomes in finance, found that the wage premium for a college education increased from 0.382 in 1970 to 0.584 in 2005, an increase of more than 50 percent—a figure that goes a long way in explaining why income inequality has soared. As another economist, Thomas Lemieux, concluded in a 2006 study of the subject, “Most of the increase in wage inequality between 1973 and 2005 is due to a dramatic increase in the return to post-secondary education.”

Moreover, broad measures of the return on education understate the rise of the super-smart in one crucial respect. Just as the winner-take-all economy rewards those at the very top much more richly than those one rung beneath them, a super-elite education has outsize rewards.

Any middle-class parent living in a city that is home to a significant community of the 0.1 percent—and that means not just the obvious centers of New York, San Francisco, and London, but also emerging metropolises like Mumbai, Moscow, and Shanghai—knows that the perceived high value of an elite education has prompted a Darwinian pedagogical struggle that begins in nursery school. That contest has prompted absurdities like the story of Jack Grubman, the Citigroup tech analyst who made positive recommendations about companies he thought were weak in exchange for support from his boss, Sandy Weill, for his twin two-year-olds’ application to attend the 92nd Street Y, probably the most sought-after nursery school in Manhattan.

It is easy to dismiss these contortions as nouveau riche excess or a neurotic example of a child-centered culture run amok. But the reality is more disturbing. In a recent essay, University of Queensland economist John Quiggin calculated that the total first-year class of the Ivy League universities—around twenty-seven thousand—is just under 1 percent of the U.S. college-age population of around three million. And in our education-driven, winner-take-all economy, that 1 percent of eighteen-year-olds has a huge edge in forming the 1 percent as adults. “With those numbers in mind,” Quiggin writes, “the ferocity of the admissions race for elite institutions is unsurprising. Even with the steadily increasing tuition fees, parents and students correctly judge that admission to one of the ‘right’ colleges is a make-or-break life event, far more than a generation ago.”

To understand how hard it is to get into an elite university, the lengths students go to be admitted, and the extent to which the biggest perk of being born rich isn’t inheriting a trust fund—it is being expensively educated—consider this story from inside the Harvard admissions process. When he was president of the university, Larry Summers liked to drop in on the deliberations of the admissions committee.

He was struck by one particularly difficult case. He explained: “There’s a kid. You know, Harvard gets huge numbers of really strong applications. Kid comes from a good private school in a major city. Kid’s got good grades—not unbelievable grades, but really strong grades. Kid’s got test scores—really good test scores, but not remarkable test scores. So he looks like a kid that would do fine at Harvard. But we’ve got seven thousand kids like him and we’ve got two thousand slots. But the kid did have one thing that was really quite special. And that was this. Kid spoke Mandarin. The reason the kid spoke Mandarin was that he had done a really terrific and dedicated job working with his Mandarin tutor three days a week after school since he’d been in ninth grade. And he was serious about it and he had really worked at it and he was fluent in Mandarin. Not many people are. And he hadn’t done it as part of a school program, he’d done it as an activity that he had chosen himself. But what’s the right way to react to that? One way to react, which I think on balance in that particular case was probably the right one, was this really is an impressive achievement that counts for a lot. On the other hand, what fraction of families in the United States or Canada would have the wherewithal to get for their child a Mandarin tutor three days a week for four years? How do you think about that? And were we perpetuating privilege? Or were we recognizing merit?”

Getting into the “right” college is just a start. As the baby boomers aged into the commencement address generation, their standard advice to graduates was, as Steve Jobs memorably enjoined, to “have the courage to follow your heart and intuition,” to “love what you do,” and never to “settle.” Drew Faust, in her third commencement address as president of Harvard University, urged the graduating students to adopt her “parking space theory of life”: “Don’t park ten blocks away from your destination because you think you’ll never find a closer space. Go where you want to be. You can always circle back to where you have to be.” But the winner-take-all economy turns out to be unforgiving of people who spend too long finding themselves. A 2011 study by
Ad Age
, the advertising trade magazine, found that to break into the 1 percent in your lifetime, you need to be earning an annual income of $100,000 by the time you are thirty-five.