Opinion

Felix Salmon

How the middle class enables the ultra-rich

By Felix Salmon
June 6, 2012

If you want a three-sentence distillation of Adam Davidson’s latest column for the NYT Magazine, just ask Joe Schwenk, a/k/a @HamptonsBorn, what the biggest secret is about the Hamptons:

Many farm families can sell their land and rake in hundreds of millions. They don’t because they are more interested in maintaining their way of life than making cash. Farm-family-owned land provides the vistas that make this place so special. So when you see a tractor ramble by your backyard, dusting up your custom windows, be thankful — don’t throw a woman’s heel at the windshield.

Or, as Davidson puts it:

There are more than 27 million businesses in the United States. About a thousand are huge conglomerates seeking to increase profits. Another several thousand are small or medium-size companies seeking their big score. A vast majority, however, are what economists call lifestyle businesses. They are owned by people whose goal is to do what they like and to cover their nut. These surviving proprietors hadn’t merely been lucky. They loved their businesses so much that they found a way to hold on to them, even if it meant making bad business decisions. It’s a remarkable accomplishment in its own right.

The ironic thing about both the Hamptons and the West Village — the subject of Davidson’s column — is that they’re expensive and desirable precisely because they still have a significant quotient of these “lifestyle” denizens refusing to avail themselves of the seemingly-obvious property-price arbitrage. Which applies to rentals just as much as it does to farms: Davidson tells the story of Arleen Bowman, who signed a ten-year lease for the Arleen Bowman Boutique in 2002, and is going to lose her space next month. She could have sold that lease in 2007 to Marc Jacobs or some big brand, and made a lot of money by doing so — but she didn’t.

It’s people like Arleen Bowman and Joe Schwenk who make their neighborhoods highly desirable for the 0.1%: they lend charm and character to a place which without them would be just another soulless luxury enclave like Aspen or Palm Beach. John Paulson just spent $49 million for a 56,000 square foot house on 128 acres in Aspen — compare that to the $41.3 million he paid for a 15,000 square foot house on 10 acres in Southampton. Southampton’s more desirable, partly because it’s only a helicopter ride as opposed to a private-jet ride from NYC, but also because it has Mr Schwenk:

When the 0.1% — or, in Paulson’s case, the 0.001% — hire Schwenk to drive their poodle back to New York City because she won’t fit in the helicopter, what they’re really doing is lording their financial aggression over people who really just want to enjoy living in the place they call home. The ultra-rich believe in profit maximization just like America’s middle classes believe in God and apple pie. And so they phone the people who grew up on what are now multi-million-dollar farms, and order them to fix their ice machines.

America tends not to begrudge the ultra-rich their wealth — not until they see it in ugly, entitled close-up. Joe Schwenk and Arleen Bowman are the kind of people who built America, and who continue to make it the place the ultra-rich want to call home. What Davidson calls “bad business decisions”, I call keeping things in perspective — these are people who would be unlikely to be happier, and quite likely to be significantly unhappier, if they suddenly found themselves in possession of $35 million. And there is something a little depressing about the fact that it’s these middle-class strivers who pay the price for the gentrification they themselves are helping to turbo-charge.

Comments
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Every word you have written here is true, FS, but there is much more to middle-class enablement of the uber-rich than what you have stated.

Our Masters all play in a sandbox called “financial services”. And the proprietors of that playpen own the institutions of government as well as their jets, and houses and trophy-women. The middle-class “enable” them by covering their losses when they would have been otherwise wiped-out by virtue of their own mistakes; through inflationary monetary policy, preferential access to essentially free, essentially unlimited, government-source credit – and by always having one of their own, like another guy named Paulson, in charge of the keys to the national Treasury.

Bring rope.

Posted by MrRFox | Report as abusive
 

from Hank Paulson to Hang Paulson.

Posted by hansrudolf | Report as abusive
 

Good article, but the last paragraph seems to have been a bit rushed. There was a lot more you could have made out of this. In the end your surmise that the lifestyle businesses would be unhappy having $35 million in their pocket I’d say misses the point – they would happily accept it, but not as a replacement for their lifestyle, only as a means of maintaining it.

You missed how the ultra rich use the carrot of mega-riches to persuade the middle class to support policies that mostly favour the 1% with the mantra, “You too could be me,” (they can’t, really they can’t, not anymore) “and so when you get here you don’t want to have voted away all the benefits of being in the 1% do you? And you CERTainly don’t want to have voted away the possibility of getting there!” (Here followed by spurious claims, the frequent use of the word ‘socialist’ without really understanding the meaning of the word, and very often downright lies – or more and more these days, a fact used as support for a completely unrelated and nonsensical argument).

No, those landed Hamptonians have for generations known that land ownership is a protection against money, money is not a protection against land loss.

Posted by FifthDecade | Report as abusive
 

“A vast majority, however, are what economists call lifestyle businesses. They are owned by people whose goal is to do what they like and to cover their nut.”

Put well by Davidson. I could squeeze much more money out of my business (as my brother repeatedly tells me), but I would rather do a great job for a fair price and enjoy it.

Posted by TFF | Report as abusive
 

There’s a great scene in “Local Hero” where a frustrated oil executive offers to buy the local beachcomber any beach in the world in exchange for his Scottish beach. He shows the old man a bunch of pretty postcards, but Ben protests that he doesn’t know if there’s a living in any of them that could compare to the one he collects in the spot his family has owned for centuries (since an ancestor dispatched a relative for some long-forgotten king, proving that behind every fortune is a crime).

People like Schwenk stay where they are because you can make a damn good living collecting the crumbs of the idle rich. Proximity is power. Would you rather sell fresh berries to millionaires for ten bucks a pint or other farmers for 2?

Plus, if he were to cash out and get a few million, he’d probably have to hire one of those professional sharks to “invest” it for him, and as a muppet he’d end up with, well not enough to buy his own berries back on a weekend jaunt.

Posted by LadyGodiva | Report as abusive
 

There’s a mix of insight and blindness here. You’re absolutely right that “bad business decisions” is inapt — if the phrase was meant in earnest; perhaps it was intended to be ironic. Money is famously worthless except for what can be bought for it, and if you can’t buy a better lifestyle for the money you can sell your current lifestyle for, it would be a bad decision to trade down. Often these people “found a way to hold on” to a business by working for much less than they could have earned elsewhere, or hired someone else to do the same job; I would say they have the competitive advantage of cheap labor, and it is frequently a big one.

You seem to lose it, as usual, by layering a level of class tension on it that simply doesn’t exist. The only part of this post that grated more than “bad business decisions” was “… order them to fix…”. It’s a job, and the person who’s doing that job has also made a lifestyle choice, and may be grateful that there’s someone who may well be somewhat price-insensitive about the people they hire to fix their ice machines or drive their dogs down the island. I’ve known people who were very happy to earn professional wages for doing these kinds of services for wealthy and famous people, and I’ve known other people who have looked at those personal assistant jobs with envy.

Posted by dWj | Report as abusive
 

“Money is famously worthless except for what can be bought for it…”

…and the best things in life can’t be bought.

Posted by TFF | Report as abusive
 

“…and the best things in life can’t be bought.” I subscribe to the adage that while money cannot buy happiness, with enough of it you can buy a boat to dock next to it. I am also aware that the scripture quote is not “money is the root of all evil,” it is “for the love of money is the root of all evil.” And the banksters demonstrate that adage to be true every day in every way.

Posted by OnkelBob | Report as abusive
 

I was always taught that anybody who says that money can’t buy happiness has never bought a puppy.

Posted by FelixSalmon | Report as abusive
 

This piece could also be an attack on the downside of walmart/amazon, driving down prices at the expense of a commons we don’t value on business ledgers.

Posted by thispaceforsale | Report as abusive
 

Actually, I was thinking more of other values. “Self-worth”. “Honor”. “Satisfaction”. “Peace”.

This afternoon I was sitting with five girls, three different ethnicities, helping them study for their math and science finals. While it is easy to think that a million dollars would help me achieve greater things, it would also distance me from the accomplishment.

Posted by TFF17 | Report as abusive
 

I grew up in California’s central valley where most family farmers live a hardscrabble life and would be happy to sell their farms for a boatload of cash – except, of course, no there no buyers offering them staggering sums.

similarly most of the small shopkeepers in the central valley would be happy to reap a windfall by selling their stores to a well-heeled buyers but convenience stores and gas stations don’t bring in the big buck offers.

this, as far as i can tell, is true also of small businessmen in west texas (where I used to spend my summers as a kid) and in central indian (where I lived for a short while)

in short, I think farmers and shopkeepers in westchester are no more representative of small business in america than farmers and shopkeepers in napa valley or in martha’s vineyard or in hilton head are. I realize that this might be contrary to the worldview of felix and davidson and other adherents of bien pensant opinion, and apologize for any distress this might cause.

Posted by acrophobe | Report as abusive
 

ok. i should have proofread what i wrote. i meant central indiana

Posted by acrophobe | Report as abusive
 

Felix, two things.

1. You don’t have to buy a puppy. Let me introduce you to the Humane Society.

2. I suspect you don’t have a puppy. You don’t seem like the midday dog-walker type. And if you’re not walking your dog at lunchtime, shame on you.

Posted by Curmudgeon | Report as abusive
 

“if you can’t buy a better lifestyle for the money you can sell your current lifestyle for, it would be a bad decision to trade down”

That’s the point, exactly. In fact, if you already like your lifestyle, it usually would take a large increase in your income or wealth to buy a lifestyle you’d like even more. (Felix, you seem to like what you are doing. How much money would buy you a lifestyle you’d like even more?)

And that’s not even considering that you may believe that a lot of money might tempt you to make some bad long-term decisions. Richard Feynman famously rejected a much higher salary he was offered at another university, on the grounds that it would be enough to allow him to maintain a mistress, which he would very much like to do in the short term, but would probably ruin his life in the long term.

There must be a lot of truth in the idea that the ultra-rich are mostly people who are never satisfied, or they would have reached much sooner the point when they’d have refused to trade their lifestyle for more money. There are exceptions, like some celebrities that got very famous very fast. The Beatles always looked to me like guys that would have been perfectly happy if they had a lot less money, as long as they could continue doing music.

Posted by Doly | Report as abusive
 

if i was rich my time would be very valuable, but since i’am not i have a lot of free time

Posted by running | Report as abusive
 

@Doly I like your post. Good points. In a previous post I believe Felix said he earned about $150,000 a year, which I thought for a blogger was pretty good and no wonder he was quite happy doing what he does. I blog too, nowhere near as prolifically, but then I do it for fun and make no money from it. That buys me the freedom to blog about whatever I want, whenever I want, and I don’t have to worry about saying something that might upset advertisers.

Your example of the Beatles is another example of this phenomenon. Although music was always important, one can’t help thinking that for McCartney at least money was important, while for John it bought him freedom. Someone once asked Lennon how much he earned and he answered “I asked my accountant that once so he wrote it on a piece of paper; only trouble is I lost the paper”

At some level of income though, as in Maslow’s hierarchy of needs, the need to have money to buy things ends, and the need for recognition takes over; basic needs can be satisfied by remarkably small sums of money, but peer group recognition and respect can be expensive when the score is calculated in earnings. Perhaps banking would improve if instead of chasing dollars, other factors such as number of deals done, or companies saved, or jobs created could be used instead.

Posted by FifthDecade | Report as abusive
 

You might find this related story about the 389 year old oldest business in the US interesting:
http://www.bbc.co.uk/news/business-18261 045

Posted by FifthDecade | Report as abusive
 

I hate to crash the party with math but lets look at some of those big numbers a little more. 27 million businesses 10,000 or so of which are big greedy profit machines. Those 10,000 to 100,000 companies sent the goverment 10% of all receipts. They also honestly collect income and payroll tax on their millons of workers. Since most are publicly traded they allow for efficent valuation and tracking of dividends and capital gains and estate taxes.

The 20 millionish at the bottom are pass through entities which pay no income taxes. Walmart offers a weak benifits package, the corner hardware store offers none whatsoever.

The true middle class (of which I am a member) gets a nearly free ride (assume a mortgage, a 401k, health insurance, 2 IRA’s and 2 kids.)

Sure I pay FICA… big freaking deal, the goverment promises me $2 in benifits for every dollar I pay in.

Jeff Immelt’s 30 something years with GE have earned him a multi million dollar income for life pension which he is already eligible for. He’ll be in the office tomorrow figuring out how to sell more jet engines, gas powerplants.

Your free to think what you want Felix but the rich carry us.

Posted by y2kurtus | Report as abusive
 

“the government promises me $2 in benefits for every dollar I pay in”

You sure you aren’t confusing Social Security with your 401k? At a 2.5% real return, compounded for 30 years (roughly the average span between contributions and benefits, both spread over decades) you can withdraw twice as much in retirement as you contributed, adjusted for inflation. That’s a very manageable long-term investment target.

Social Security likely won’t pay you or I anything. Their cash flow only covers 75% of the promised payments, and the least painful way to close that gap is to eliminate benefits for the 25% of the households that have substantial other savings.

Moreover, you need to consider the rising national debt, over $50k per man/woman/child in the country. Under the present tax structure, the bulk of that cost falls on the middle class — $50k to $200k income.

I’m not complaining. I consider myself wealthy, even if I don’t have nearly as much money as Immelt (or likely most of the people who post here). In theory, we could quit work tomorrow and live off our savings indefinitely (mid-40s, two kids)… How much money does one need?

Posted by TFF | Report as abusive
 

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