Felix Salmon

If you’re Europe, and your struggling people are called “Greeks”, and your rich people are called “Germans”, then the World Economic Forum will spend pretty much limitless amounts of time and effort on attempts to understand the dynamics between the two and (doomed) plans to try to prevent it from turning into a fully-blown crisis.

On the other hand, if you’re a country — the USA, say — and your struggling people call themselves “the 99%” while your rich people are called “Davos delegates”, then your fundamental asymmetries will be studiously ignored — and, indeed, encouraged.

I went to one session on executive compensation yesterday, which was filled with global CEOs of various stripes. And a couple of questions that Lance Knobel would like to ask were, amazingly, raised: should there be some kind of cap on CEO compensation? Maybe in terms of the ratio between the CEO’s pay and that of the average employee? The answer came swiftly and unanimously: no.

The problem of CEO compensation, it turns out, is not really a problem at all: if you look at most companies, the amount they spend on executive compensation is not really a big part of their revenues. Of course there shouldn’t be any kind of regulation. And capping pay only makes sense if you cap corporate size, and no one wants to do that.

That said, there is one outstanding problem with CEO pay: the time when you most need executive talent is not when things are going great, but rather when things are going badly. And often, in that case, compensation structures linked to stock options and the like turn out to be largely worthless. We’re good at paying CEOs in good times, but we should probably come up with ways of paying them more in bad times, too. After all, that’s when they really prove their mettle.

That panel really helped me understand the general Davos attitude towards Occupy. The delegates here don’t feel threatened by it, so much as they just feel a bit indignant at how misguided it is. Obviously, in a big inchoate sense, inequality is a problem. And maybe Occupy is a manifestation of that problem. But the Davos crowd is not even close to listening carefully to what Occupy has to say: they’re evidence of the problem, but they’re not remotely helpful when it comes to solutions.

As Lance says, “an organization that is at heart a grouping of the world’s largest corporations isn’t necessarily in the best position to improve the state of the world, particularly in an era of the Arab Spring and Occupy”. It’s another way in which Davos feels past its prime. It’s not helping to change the big world problems, in Europe: the best it can do is identify them. And it’s utterly divorced from the movements which really might make a difference.

But hey, at least the skiing is good this year.

Ian Ayres has an excellent post at Freakononomics today, explaining some of the background thinking behind his inequality tax proposal:

An important goal of our op-ed was to suggest a new unit of measure, “medians” to help us think about what it means to be rich. In 1980, if you earned 3.8 medians, you were in the top 1 percent, but by 2006 even the poorest in the 1 percent club earned 6.9 medians.

What we call the “Brandeis Ratio,” the average income of the richest 1 percent (which includes the billions earned by the lucky few) has grown even more disproportionate. As shown in the chart below, in 1980, one-percenters on average made 12.5 medians, but in 2006 (the latest year in which data is available) the average income of our richest 1 percent was a whopping 36 medians.

Ayres makes a strong case that there’s a real societal interest in capping this ratio somewhere — “it would be bad for our democracy,” he writes, “if 1-percenters started making 40 or 50 times as much as the median American.” So let’s not tax income; let’s instead tax inequality, and increase taxes on the 1% if and only if inequality is going up rather than down.

But here’s the thing: 36 times median income corresponds to an annual income of $1,780,020. I think we can agree that anybody earning over a million dollars a year is rich: that’s just 20 times median income. The 1% on average hasn’t earned that little since 1995.

Meanwhile, what does it mean to be middle class? Here, Ayres found a fascinating survey from 1997, which I’ve put into chart form:

What’s fascinating here is that in a survey of Americans, fewer people think that a household earning $100,000 a year is middle class than think that a household earning $40,000 a year is middle class. (The actual question was “Would you consider a family of four making (INSERT AMOUNT) a year to be middle class?”)

Most people agree — although not by an overwhelming margin — that households earning somewhere in the $50k-$60k range count as middle class. But once you get to $80k, the number of people considering that to be middle class becomes a minority, and once income hits six figures, only one American in three still thinks that the household in question is middle class.

Now I can assure you that, to a first approximation, every household in America with an annual income of $100,000 considers itself to be middle class. But already those households are earning twice as much as the median family. And it turns out that from the perspective of the bottom 60% or so, an annual income of $100,000 is so big that it’s not even middle class any more.

Why doesn’t the bottom 60% of the US population seem to have any real political voice any more? As Ayres points out, even Barack Obama says that anybody earning less than $150,000 is “basically middle class”, while “rich” doesn’t kick in until $250,000 or more.

What does seem pretty clear is that there’s a gap, in the popular imagination, between “middle class” and “rich”. What do you call people earning $200,000 a year? If they’re not rich, they’re not really middle class, either. “Affluent”, perhaps? No one wants to raise taxes on this group. But they’re still winners in the modern economy, and they’re not struggling in the way that most Americans are.

Here’s Tim Harford, on the situation in the UK:

The Joseph Rowntree Foundation, which uses a thoughtful and innovative methodology to estimate the minimum income necessary to achieve a “socially acceptable” standard of living, reckons that a family of five with one breadwinner – my situation today and my father’s at the time – needs £690 a week before tax. Since 80 per cent of employees earn less than that, it is easy to see why many families require two incomes, and why many struggle at Christmas.

I’m sure that the situation in the US is even worse, given that inequality here is greater than it is over there. But let’s say that it’s the same: we’ve reached the point at which 80% of workers don’t earn enough to support a good-sized family. How much further can that ratio rise, before we say “enough”?

Max Abelson has a fantastic column today from simply asking prominent members of the 1% about their embattled status. There’s Home Depot co-founder Bernard Marcus, who characterizes any potential critic of his wealth by asking the timeless question “who gives a crap about some imbecile?”. There’s BB&T‘s John A. Allison IV, who says that any rule requiring public companies to disclose the ratio between the compensation of their CEO and their median employee would constitute “an attack on the very productive”. And then there’s Steve Schwarzman, displaying his legendary deftness of touch in a TV interview:

Asked if he were willing to pay more taxes in a Nov. 30 interview with Bloomberg Television, Blackstone CEO Stephen Schwarzman spoke about lower-income U.S. families who pay no income tax.

“You have to have skin in the game,” said Schwarzman, 64.

This isn’t an “I see what you did there” moment so much as it’s a brazen decision to go on the attack against “the 47%”: Americans who earn so little money that they don’t pay federal income tax. (Of course, they still have “skin in the game”: they still pay sales tax and payroll taxes and local taxes.) 61% of these families — let’s call them the 29% — are earning less than $20,000 per year.

Let’s say that Schwarzman has been working for 40 years and is now worth $6 billion: that works out at $20,000 an hour, every hour of every day, even when he was sleeping, since the day he started working.

But never mind the fact that Schwarzman is earning more per hour than the people he’s criticizing make in a year. There are other billionaires just itching to weigh in. Like Paychex founder Tom Golisano:

“If I hear a politician use the term ‘paying your fair share’ one more time, I’m going to vomit,” said Golisano, who turned 70 last month, celebrating the birthday with girlfriend Monica Seles, the former tennis star.

Remember that, people. If you start agitating to reduce inequality, there might be vomiting in the neighborhood of Monica Seles. And we wouldn’t want that.

And then — just for comic relief — there’s Peter Schiff, who probably needs to bone up a bit on his medieval history:

Schiff, 48, disclosed assets of at least $64.7 million before losing the 2010 Republican primary for a Connecticut U.S. Senate seat, according to filings. He’s wealthier now, even though his taxes are “more than a medieval lord would have taken from a serf,” he said.

Abelson plays all of this for laughs, which is reasonable enough, given his Wall Street audience. But out there in real America, it isn’t funny, it’s tragic. And so it’s worth hearing from a multi-millionaire who can explain the class dynamics of America without trying to defend the indefensible. Here’s Bruce Springsteen, in his introduction to a new book by Dale Maharidge and Michael S. Williamson:

It is the story of the deconstruction of the American dream, piece by piece, literally steel beam by steel beam, broken up and shipped out south, east and points unknown, told in the voices of those who’ve lived it. Here is the cost, in blood, treasure and spirit, that the post-industrialization of the United States has levied on its most loyal and forgotten citizens, the men and women who built the buildings we live in, laid the highways we drive on, made things and asked for nothing in return but a good day’s work and a decent living.

It tells of the political failure of our representatives to stem this tide (when not outright abetting it), of their failure to steer our economy in a direction that might serve the majority of hard-working American citizens and of their allowing of an entire social system to be hijacked into the service of the elite. The stories allow you to feel the pounding destruction of purpose, identity and meaning in American life, sucked out by a plutocracy determined to eke out its last drops of tribute, no matter what the human cost.

A lot of the decline of industrial America was probably inevitable — although not all of it. But rather than sitting on their billions and gloating about their fat-cat status (I’m looking at you, Ken Langone), it surely behooves America’s plutocrats to remember the plight of people who actually produce stuff. I’d love to know how John A. Allison IV measures his own personal productivity and determines that it’s extremely high. Because, speaking as someone who earns a very healthy salary myself, I have no idea where I’d even start on such a quest. I could measure words written per day, I suppose, but how much is a word worth?

The fact is that the ultra-rich really aren’t productive, and instead mostly collect rents from people who are. This is what capital always does, of course: it buys labor (some people call that “job creation”, even if the jobs being created are mostly in China), and then extracts dividends from it.

So let’s not kid ourselves that the men with the billions (or, for that matter, the 22-year-old Monaco residents with $88 million pied-à-terre apartments in New York City) are in any way hard done by. Not when there’s so much real hardship in America.

Jim Chanos claims not to understand why hedgies are so critical of Barack Obama: after all, they’ve done pretty well for themselves over the past three years. But maybe this chart, from Thomas Piketty and Emmanuel Saez, might help him out:

What we see here is the very strong correlation between tax cuts for the rich (on the x-axis) and increased wealth for the rich (on the y-axis). This correlation comes as no surprise, of course. But Obama doesn’t want tax cuts for the rich: he wants to roll their taxes back to Clinton-era levels. Instead, he wants lower taxes for the middle classes, which won’t help hedge fund managers at all.

As Piketty and Saez note, lower top marginal tax rates don’t translate into higher growth — which means that the extra wealth going to the 1% really is a zero-sum game, and being taken out of the pockets of the 99%.

But it’s hard for a gazillionaire to come out and say that he wants more of everybody else’s money. So instead we get this kind of thing, wherein Leon Cooperman pulls out every rhetorical trick in the book in an open letter to Barack Obama:

What I can justifiably hold you accountable for is your and your minions’ role in setting the tenor of the rancorous debate now roiling us that smacks of what so many have characterized as “class warfare”. Whether this reflects your principled belief that the eternal divide between the haves and have-nots is at the root of all the evils that afflict our society or just a cynical, populist appeal to his base by a president struggling in the polls is of little importance. What does matter is that the divisive, polarizing tone of your rhetoric is cleaving a widening gulf, at this point as much visceral as philosophical, between the downtrodden and those best positioned to help them. It is a gulf that is at once counterproductive and freighted with dangerous historical precedents. And it is an approach to governing that owes more to desperate demagoguery than your Administration should feel comfortable with.

The first thing to note, here, as Piketty and Saez show, is that the 1% are not actually the people “best positioned to help” the 99%. When the 1% do well, the 1% do well. But that rising tide is nowhere to be seen.

But there’s another question raised by Cooperman’s letter, and Andrew Ross Sorkin phoned up Cooperman to ask it. What, exactly, is he referring to when he talks about Obama’s “divisive, polarizing tone”? Go on, take a guess. Here’s the answer:

“What pushed me over the fence was the president’s dialogue over the debt ceiling,” Mr. Cooperman said, explaining that just when it seemed like a compromise was near, President Obama went on national television and pressed harder on “millionaires and billionaires,” a phrase that has stuck in the craw of many of the elite. For example, Mr. Cooperman zeroed in on what he described as the president’s belittling remarks about taxing the wealthy: “If you are a wealthy C.E.O. or hedge fund manager in America right now, your taxes are lower than they have ever been. They are lower than they have been since the 1950s. And they can afford it,” the president said back in June. “You can still ride on your corporate jet. You’re just going to have to pay a little more.”

This just doesn’t make sense. Cooperman supported Obama in the 2008 election, when he trotted out the line about “tax cuts for millionaires and billionaires” many times. And the corporate-jet line was a specific reference to a specific tax break which Obama wanted to abolish as part of the deal.

I think the real reason that Cooperman has started throwing his toys out of the pram right now is Occupy Wall Street — a movement which is more opposed to Obama than aligned with him. But saner heads, like venture capitalist Nick Hanauer, understand that higher taxes on millionaires and billionaires are a necessary part of any successful fiscal policy going forwards:

Without consumers, you can’t have entrepreneurs and investors. And the more we have happy customers with lots of disposable income, the better our businesses will do.

That’s why our current policies are so upside down. When the American middle class defends a tax system in which the lion’s share of benefits accrues to the richest, all in the name of job creation, all that happens is that the rich get richer.

And that’s what has been happening in the U.S. for the last 30 years.

Rich businesspeople like me don’t create jobs. Middle-class consumers do, and when they thrive, U.S. businesses grow and profit. That’s why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.

So let’s give a break to the true job creators. Let’s tax the rich like we once did and use that money to spur growth by putting purchasing power back in the hands of the middle class. And let’s remember that capitalists without customers are out of business.

Hanauer’s absolutely right: the idea that millionaires (that is, people with seven-figure incomes) are job creators simply isn’t borne out by any empirical evidence whatsoever. And I particularly like NPR’s idea of asking the GOP to point to a single business owner who would hire fewer people if the top marginal tax rate were to go up. Astoundingly, in a country of 300 million people, they couldn’t find a single one.

So while people like Cooperman are interesting as a political phenomenon, their rhetoric doesn’t stand up to scrutiny. I do, however, continue to wonder at the ability of the Republican Party to sell higher incomes for the 1% to the public as a whole. Is there any other country in the world where a major political party panders so cravenly to such a tiny base — and gets broad political support for doing so?

Michael Lewis puts his finger on something important:

Ordinary Greeks seldom harass their rich, for the simple reason that they have no idea where to find them. To a member of the Greek Lower 99 a Greek Upper One is as good as invisible.

He pays no taxes, lives no place and bears no relationship to his fellow citizens. As the public expects nothing of him, he always meets, and sometimes even exceeds, their expectations. As a result, the chief concern of the ordinary Greek about the rich Greek is that he will cease to pay the occasional visit.

That is the sort of relationship with the Lower 99 we must cultivate if we are to survive. We must inculcate, in ourselves as much as in them, the understanding that our relationship to each other is provisional, almost accidental and their claims on us nonexistent.

I can’t help but remember that George Papandreou was born in Saint Paul, Minnesota, grew up with Greek as a second language, and was schooled in Canada, the US, Sweden, and England. He’s part of the Greek social compact entirely by choice; he arrived when he wanted to, and can leave for a comfy sinecure in some English-speaking country any time he wants. Meanwhile, for every Papandreou who was born in the US and made his career in Greece, there are many more highly successful people — think Pete Peterson or Arianna Huffington — who moved the other way.

Indeed, the elite of most countries in the world is there by choice rather than by any kind of necessity. Chrystia Freeland — herself a Canadian who has lived and travelled widely in Russia and who cemented her reputation by working for the New York bureau of a London newspaper — wrote a great story about the “new global elite” earlier this year which made the point that the very rich are, these days, largely stateless:

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 business elite view themselves increasingly as a global community, distinguished by their unique talents and above such parochial concerns as national identity, or devoting “their” taxes to paying down “our” budget deficit.

Chrystia quotes Silver Lake’s Glenn Hutchins as saying of the super-elite that “we are much less place-based than we used to be”, which is true. But the US has, historically, been behind this particular curve. It tends to import talent rather than export it: I don’t have exact numbers, but I’m sure that there’s an order of magnitude more foreign-born billionaires living in the US than there are US-born billionaires living abroad. For all that hedge-fund managers, in particular, are constantly threatening to leave the country if they get taxed more, the fact is that the US is so big and so rich that it actually does an extremely good job of retaining its billionaires, roping them in to the social compact whether they like it or not.

This is why the Occupy movements are particularly American. The Russians can’t Occupy anything: all their billionaires are in London. And while there’s an enormous number of the global elite living in Switzerland, they’re not actually Swiss: they’ve already broken the bounds of national identity, and have basically created a stateless stratospheric sovereignty of their very own.

In a way it’s reassuring that America’s billionaires are still so civic-minded that they buy laws and political parties: it’s a sign that they’re invested in the country and are here for the foreseeable. And the one law they’re not going to repeal any time soon is the most important one — the one which says that US citizens have to pay US federal taxes on their global income, no matter where they live. (Or at least demonstrate that they’ve paid at least that much in taxes elsewhere.) American plutocrats, almost uniquely, are tied to their home country in a way that other members of the global elite can barely imagine.

If you live in London, you’re constantly aware of the contingency of residency: you know those multi-million-dollar Chelsea homes are occupied for maybe only a few weeks per year by their Saudi or African owners. In America, by contrast, the rich can buy their fourth or even tenth home without ever having bought property abroad. So while America’s rich might dream of a stateless existence, they don’t have it — not yet. And I don’t think it’s coming any time soon.

Update: Pete Peterson, the son of Greek immigrants, was actually born in Kearney, Nebraska.

The latest CBO report on income trends says nothing particularly surprising, although it does underline quite emphatically what we already knew about the 99% and the 1%. In particular, the key message, both in charts and text, is all about the 1% and how they’ve torn away from the rest of the population in the past 30 years.

And in the wake of the 99% getting tear-gassed in Oakland by their own municipal government, I’m going to get personal for a minute here: I am the 99%. I have an absolutely wonderful life in my favorite city in the world, protected by a large and prosperous centuries-old democracy. I have enough money to eat and to travel just about anywhere I want. My home is filled with fabulous art and features a small collection of equally fabulous wine; I suspect it might even be worth more than I paid for it. I love my job, which pays extremely well, and affords me a huge degree of professional freedom. I have the kind of transferable skills which are in demand by multiple potential employers. I get to wonk out with some of the most interesting people in the world, and I also get to ignore the bores. I have a gorgeous wife, we’re both in good health, and we’re blessed with wonderful friends. In short, I have the kind of life which would be the envy of well over 99% of anybody who’s ever lived, and well over 99% of anybody alive today.

And yet — I’m still in the (upper quintile of the) 99%, and if you boil things down to just their income and wealth numbers, the 1% is as far away from me as I am from a struggling working family with an onerous mortgage and a highly uncertain employment outlook. And there’s no need for them to shower themselves with that kind of money. From me on out, it’s pure avarice. Which is human, and natural, and probably even helps in terms of economic growth. But given the amount of misery and poverty in America, it’s simply unconscionable that I and the people earning vastly more than me — including all of the 1% — are getting such an enormous share of the income and wealth so desperately needed elsewhere.

All of which is to say that my taxes are too low. If my taxes went up and the money was used to reduce poverty and unemployment in America, my standard of living would still be glorious — and millions of lives would be improved. And as for the 1%, their taxes could double and they would still be fabulously well off. I’m not proposing that as a policy solution. But I am trying to put things in perspective here. I’m not in the 1%, and I can and should be giving back much more to the society which is supporting me and making my lifestyle possible. The people who are in the 1% are the most fortunate of the fortunate. The least they can do is pay as much in taxes as, say, I do.

Thanks largely to the NYT, the wealth-inequality survey by Michael Norton and Dan Ariely is back in the news. You might remember it from back in September. Here’s how it was reported in HufPo:

The respondents were presented with unlabeled pie charts representing the wealth distributions of the U.S., where the richest 20 percent controlled about 84 percent of wealth, and Sweden, where the top 20 percent only controlled 36 percent of wealth. Without knowing which country they were picking, 92 percent of respondents said they’d rather live in a country with Sweden’s wealth distribution.

Similarly, Tim Noah, in Slate, said the survey showed respondents favoring “a wealth distribution resembling that in Sweden”. And Chrystia Freeland has the same idea: “Americans actually live in Russia, although they think they live in Sweden”, she writes.

The Norton and Ariely paper is easy to misread in this way. Americans Prefer Sweden is one heading; the text does little to dispel that idea.

As can be seen in Figure 1, the (unlabeled) United States distribution was far less desirable than both the (unlabeled) Sweden distribution and the equal distribution, with some 92% of Americans preferring the Sweden distribution to the United States. In addition, this overwhelming preference for the Sweden distribution over the United States distribution was robust across gender, preferred candidate in the 2004 election and income.

If you look at the referenced Figure 1, it labels three different charts as “Sweden (upper left), an equal distribution (upper right), and the United States (bottom)”. It also comes with a note:

Pie charts depict the percentage of wealth possessed by each quintile; for instance, in the United States, the top wealth quintile owns 84% of the total wealth, the second highest 11%, and so on.

The clear implication is that in Sweden, the top wealth quintile owns 36% of the total wealth, as demonstrated in the “Sweden” pie chart. But that’s not true. Go back to footnote 2 (yes, a footnote), and you find this:

We used Sweden’s income rather than wealth distribution because it provided a clearer contrast to the equal and United States wealth distributions; while more equal than the United States’ wealth distribution, Sweden’s wealth distribution is still extremely top heavy.

This is an important point, which nearly all the discussion of the paper has missed. Mark Gimein has put together the charts showing what the truth of the matter is. The first two charts are reality, while the third is the fictional “Sweden” of the Norton-Ariely paper:

The point here is that wealth inequality is ever and always enormous. The US and Sweden are very far apart, when it comes to inequality, but if you look at wealth inequality rather than income inequality — which is the subject of the Norton and Ariely paper — then countries tend to look more alike than different. A huge part of the population of just about every country is going to have zero wealth — if you live paycheck to paycheck, for instance, or if you’re young and haven’t been earning money for long, or if you just spend a lot. That doesn’t mean you’re poor.

In countries like Sweden, indeed, the social safety net is strong enough that you don’t need to build wealth in the same way you do if you’re Chinese, say. Wealth is a form of insurance, and when insurance is nationalized, you need less wealth. As a result, people can enjoy the fruits of their money, instead of saving it up for emergencies or for retirement — and only a small percentage of the population really spends a lot of effort in a successful attempt at accumulating more.

Indeed, Sweden and the US are even closer together, in terms of wealth inequality, than the charts above suggest: as Gimein notes, the Swedish data exclude money held offshore, the value of family owned firms, and the considerable wealth of super-rich Swedes like Ikea founder Ingvar Kamprad, who left the country to avoid taxes.

Ariely told Gimein that “we created a more equal society than the most equal society in the world,” while calling it “Sweden”. Which might be interesting as an academic exercise, but the message was lost on most of the people who read the paper, and who thought that there really was a society where the lowest quintile owns 11% of the wealth.

Wealth inequality is a problem — but it’s one of those things, like homeownership rates, where public policy only makes a very small difference to some very large numbers. Norton told Gimein that he and his colleagues are now exploring “whether educating Americans about the current level of wealth inequality (by showing them charts and pictures) might increase their support for policies that reduce this inequality.” Well, it might. But it’s important not to mislead people about what’s possible.