Felix Salmon

The Piketty pessimist

Felix Salmon
Apr 25, 2014 20:08 UTC

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This chart comes from the World Economic Forum’s 2014 Global Risks Report, which came out just before Thomas Piketty’s book started becoming the topic of discussion in economic and plutocratic circles.* You can clearly see what you might call the rise of inequality-as-an issue: before 2012 it’s nowhere to be found, but since then it’s been consistently in the top spot. My prediction is that in 2015, thanks to Piketty, the WEF will start talking less about income inequality, and more about wealth inequality.

The big question, though, is whether inequality is really much of a risk at all. After all, from the point of view of the average billionaire WEF delegate, inequality would seem to look much more like a reward.

Chrystia Freeland has a hopeful thesis. “Piketty’s work,” she says, “and the wider shift it surely portends, poses a new, powerful, existential threat to the plutocrats.” Her argument in a nutshell: politicians across the political spectrum, but especially on the left, have historically used the language of criminality to rail against the rich. (See, for instance, how the WEF said that “corruption” was the third-most-likely global risk in 2011.) In other words, capitalism itself is generally assumed to be a pretty good thing, which works well for everybody so long as everybody plays by the rules. But Piketty has challenged that assumption, by showing that even if everybody plays by the rules, inequality is very likely to increase to obscene levels. It’s not the corrupt and venal robber barons who are the problem, it’s rather that unless we make a concerted effort to impede capitalism’s natural tendencies, the entire middle class is likely to get hollowed out.

Freeland limns this debate well: on the one side are the likes of Matt Taibbi and Michael Lewis, always on the hunt for villains; on the other side are people looking at a broader historical sweep, and saying that if you go around blaming individuals you are always going to miss the bigger picture. Piketty, of course, is in the latter camp, but so are people like Erik Brynjolfsson and Andrew McAfee, who see success in the future accruing increasingly to a small group of high-level “ideators”, while the jobs of much of the present middle class become automated.

If the broad public stops being angry at individuals and starts understanding that the entire system is constructed so that it benefits the few at the expense of the many, then that system itself will start looking unsustainable and ripe for dismantling.

Freeland herself concedes that this is unlikely to happen any time soon: “The only thing worse than having plutocrats is not having them,” she writes. “San Franciscans may be rising up against their tech billionaires, even blockading the Google bus, but the rest of the world, from Moscow to Malaysia, is trying to replicate Silicon Valley.” On top of that, as Paul Krugman explains in his masterful NYRB review, the forces described by Piketty are more likely to be self-reinforcing than they are to carry the seeds of their own destruction:

Falling tax rates for the rich have in effect emboldened the earnings elite. When a top manager could expect to keep only a small fraction of the income he might get by flouting social norms and extracting a very large salary, he might have decided that the opprobrium wasn’t worth it. Cut his marginal tax rate drastically, and he may behave differently. As more and more of the supersalaried flout the norms, the norms themselves will change.

Which means that ultimately I have to disagree with Freeland. Her syllogism runs something like this:

-Capitalism has survived this far because it delivered strong, widely-shared growth.
-If capitalism fails to continue to deliver strong, widely-shared growth, then it will fail and die.
-Thanks in part to Piketty, the leaders of the major western democracies — both the politicians and the plutocrats — now understand this.
-Therefore, they will, of necessity and of self-interest, alter the structure of society to preserve (what’s left of) the middle classes.

This starts off well, but becomes increasingly improbable as it goes on. As Piketty shows, capitalism can continue indefinitely with obscene levels of inequality. Politicians and plutocrats are not focused on what’s going to happen decades from now; instead, they’re engaged in a constant battle to maximize their own personal power, even — especially — if that means amassing enormous quantities of wealth for themselves. And finally, for all that it’s the job of politicians (including Freeland) to campaign on the basis that they can change the world in effective and predictable ways, there’s precious little evidence that really they can. Just as the forces of capitalism are bigger than any individual robber baron, so are they bigger than any individual politician or political party.

The many reviews of Piketty’s book are surprisingly unanimous on one point: that the weakest part of the book is the final part, where Piketty moves away from diagnosis and starts attempting to formulate a solution. Piketty’s rather French idea of a global wealth tax isn’t getting nearly the same amount of acclaim as the rest of the book is, and is very unlikely to happen: countries will always compete with each other to attract the stateless rich by not taxing them.

Which means that my reading of Piketty is ultimately pessimistic. The dynamics of the world economy are bad, and they’re getting worse; inequality is natural in human history, and right now we’re reverting to a state of affairs which is highly unfair but also both sustainable and, in its own way, unsurprising. Piketty has diagnosed a nasty condition. But I don’t think there’s a cure.

*Le capital au XXIe siècle was published in French in August 2013, and the WEF is based in francophone Geneva, so it was hovering in the background of Davos 2014 somewhere. Certainly there was some buzz about the book in the Alps this year, even among those of us who don’t read 970-page books in French, thanks to Branko Milanovic’s definitive 21-page review, which came out in October.


“so long as everybody plays by the rules”

but the rules are rigged

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Who is speaking for the poor?

Felix Salmon
Sep 6, 2012 22:31 UTC

After shocking you this morning with the news that people like to go out at weekends, I hope you’re sitting down for this one: people who aren’t good at numbers tend to be bad at looking after their money.

My professional life is largely spent in a world of highly-numerate and highly-intelligent people, many of whom blow up spectacularly in the financial markets. And looking at hedge funds in particular, it’s very easy to find genius-level investors who have lost astonishing amounts of money: there’s clearly more to getting and holding on to vast sums than simply being off-the-charts smart. But the fact is that if you zoom out from the tiny group at the top, there’s a very strong correlation between numeracy, or intelligence, or financial literacy, on the one hand, and having a solid financial footing, on the other.

Bear with me here, for a minute, because it’s worth reviewing the literature. Financially literate people are more likely to plan for retirement. And if you plan for retirement, you have more wealth: a 2006 paper showed the median person who was planning for retirement as being worth between $307,750 and $410,000, while the median person who isn’t planning for retirement was worth just $122,000.

IQ also helps. Check out this chart, for instance, from a very long and detailed paper about the likelihood that a person of given intelligence will be invested in the stock market.


The distribution is clear: the smarter you are (as measured by IQ), the more likely you are to be invested in the stock market. And this distribution is independent of wealth: it applies to the rich as much as it does to the poor. Or, as the paper puts it, “IQ’s role in the participation decisions of the affluent is about the same as it is for the less affluent. The definition of affluence—net worth or income—does not affect this finding.”

Most impressively, check out this paper from 2007. It asked just three “simple mathematical questions” of couples to judge the numeracy of each one. If neither got any questions right, the total wealth of the couple, on average, was $202,000. If they both got one question right, it was $505,000. If they both got two questions right, it was $853,000. And if they both got all three questions right, their average wealth on average was a whopping $1.7 million. (If they got different scores from each other, the wealth ended up somewhere in between.)

And similarly, at the other end of the spectrum, there’s huge amounts of research showing that if you’re particularly financially illiterate, or you’re not good at numbers, then you’re much more likely to be ripped off by predatory lenders or other scams, be they legal or otherwise.

There are various conclusions to be drawn here, one of which is that if we do a better job of financial education, then Americans as a whole will be better off. That’s true. But at the same time, financial illiteracy, and general innumeracy, and low IQs, are all perfectly common things which are never going to go away. It’s idiotic to try to blame people for having a low IQ: that’s not something people can control. And so it stands to reason that any fair society should look after people who are at such a natural disadvantage in life.

Which brings me to Nina Easton’s horrible new cover story for Fortune. Online, the headline is “Stop beating up the Rich”: even the capitalization grovels to the overclass. The magazine coverline is even worse: “In this political season,” it says, “the rich are an easy punching bag”.

But over the course of the story’s 2,700 words, Easton never really manages to give any examples of “people beating up the Rich”: she’s incredibly vague about the behavior she wants to stop. There’s a graphic, under the cute headline “Public Enemy No. 1%”, listing historical examples of Americans “taking shots at the wealthy”: it features things like the debut of Mr Burns in The Simpsons, and Enron’s Jeff Skilling getting pied.

By Easton’s own lights, that kind of thing is fair enough: there’s always a handful of evil rich people worthy of opprobrium. Her argument, quite explicitly, is that we shouldn’t tar all the rich with the same brush — but it’s precisely that kind of broad-based tarring which Easton has clearly failed to find. Yes, there are lots of impassioned pleas against rising inequality, but complaining about inequality is not at all the same thing as beating up on the rich.

So when Easton says that “it’s wrong to lump the 1% into a monolithic group of greedy, tax-avoiding, selfish capitalists”; when she complains of “diatribes against the 1%”; when she says those people are being vilified — what she’s actually doing is carefully constructing a straw man. She simply assumes that every time anybody stands up for the 99%, or complains that they’re not fully partaking in the fruits of America’s economic growth, that they’re vilifying the 1% who do partake in those fruits at the same time.

She’s also capable of writing highly mendacious stuff like this:

Obama’s tax proposal labels as “wealthy” households making more than $250,000 a year — a comfortable income in Indianapolis (where the median home price is $102,000) but barely enough to afford a studio apartment in Manhattan, where tax rates easily hit 50%.

This completely ignores how marginal tax rates work: to a first approximation, there are roughly zero people in Manhattan who pay 50% of their total income in taxes. It’s possible that marginal income ends up being taxed at that rate — but if you’re earning $250,000 a year, you’re not paying anything near $10,000 a month in taxes.

Even if you were having to suffer through life in New York on a post-tax income of a mere $125,000, you could still, quite easily, rent pretty much any studio apartment you wanted, with money to spare for nice meals and international holidays and the like. In Manhattan, the average studio apartment rents for $2,261 per month in non-doorman buildings, and $2,677 per month in doorman buildings. That’s just over $32,000 a year, or 12.8% of a $250,000 salary. I’d say that falls into the “easily afford” bucket, rather than the “barely afford” one.

The point here is that an income of $250,000 does, in fact, make you rich — and that if you increase marginal tax rates on people making more than that, then you’re only raising taxes on the income they make over and above a pretty hefty amount.

But Easton is too busy throwing out red herrings to notice: for instance, she says that “over the past four decades the global economy has left many behind, but it has also lifted tens of millions out of poverty”. Actually, the number of people lifted out of poverty, globally, over the past four decades is much bigger than that — but the number of Americans lifted out of poverty has been shamefully low for basically all this century.

“Raising taxes definitely won’t cure inequality,” says Easton, weirdly — if that’s the case, then the 1% really shouldn’t worry about higher taxes at all, since they’ll still be sitting happy, relatively super-rich, above everybody else.

In any case, the deep underlying problem with Easton’s article is the way in which she essentially says that the way to fix what ails us is for everybody to become intelligent and numerate and so on.

“Even if Occupy Wall Street’s wish came true and all the gains of the top 1% since 1979 were confiscated and redistributed to the 99%,” writes Easton, “household incomes would go up by less than half of what they would if everyone had a college degree.” She continues:

There’s a limit to what policymakers can do about the ravages on a middle-aged man’s job prospects after three decades’ worth of technological advances and global competition. But we can talk about education: College degrees, while not a panacea, not only carry huge salary premiums but also offer a measure of job protection.

This is true, but it also misses the crucial fact that not everybody can extract good value from college. There’s a reason that not everybody goes to college, and if you look at the predatory for-profit colleges pushing people into courses which they’re not remotely suitable for, it’s easy to see that the outcomes for people who do go to college are in large part a function of the fact that there’s a lot of self-selecting going on. The people who go to college are the literate and numerate and intelligent ones, and many of them would do well for themselves even if they had no college degree at all. Meanwhile, many of the people who don’t go to college would find it little more than a waste of time and money.

It seems to me that the current election campaign comes down in large part to a simple question: “who do you care about”? Do you care about the 1%, on the grounds that they are “job creators”? Or do you care about the bottom 40% — the people who have been left behind by US economic policy and who desperately need help and support? The Republicans clearly are the party of the 1%, and the Democrats are trying to paint themselves as the party of the middle class — of the 59%, you might say. But no one is standing up for the bottom 40%, the invisible poor, partly because they have a distressing tendency not to vote.

Easton concludes by saying that “mobility, in the form of equal opportunity rather than equal outcomes, is rooted in the very idea of America”. That’s true — and it’s also true that America has less equality of opportunity today than at any point in living memory. Once Easton has managed to provide the poor the same level of education afforded to the rich, then she can start talking about the open road to riches. But at that point, you might have a genuinely mobile society, where the people at the top know what it’s like to be at the bottom, and know that they might end up back down there themselves at some point. And in those societies, you tend to find much stronger safety nets, much more concern for people at the bottom, and many fewer tears shed for the plight of the 1%.


Seconding, Curmudgeon’s comment, the idea that nothing is done for the bottom 40% is over the top partisanship. To give two examples – Medicaid spending (federal plus state) is $400 billion per year and growing and food stamp spending is $76 billon and growing. There are, of course, other programs also focused on the bottom 40% of the population. Felix clearly thinks that more should be spent, but the idea that nothing is being done is preposterous

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You can’t blame legislation for inequality

Felix Salmon
Jun 12, 2012 19:36 UTC

In the NYT today, I review the new books from Paul Krugman and Tim Noah. Short version: these are both really smart people, whom you should pay attention to. But neither has produced a great read, a book which works really well qua book. Krugman and Noah have good reason to be upset at me for this, because the fact is that the overwhelming majority of the nonfiction books which pile up around me every day are just as dull as theirs are. To say that these books are a bit of a slog is not to say something mean about Krugman and Noah in particular, so much as it is to say a simple truth about virtually every popular book about economics. But these are the books I was asked to review, and if anybody asked me whether they should read either one of them, I would reply by pointing that person to Krugman and Noah’s online writing instead. Because that is much more digestible, and even fun to read.

I didn’t have a huge amount of space to go into the substance of the books’ arguments, but on Twitter today, Noah took exception to my characterization of how he presents the importance of the Taft-Hartley Act of 1947. In the review, I say that after giving us chapter and verse on the act, Noah’s ultimate point is that the act wasn’t actually all that important in terms of rising inequality. Noah responds that I’m wrong: Taft-Hartley was very important, he says, and that was actually “kind of the chapter’s point”.

Now I’m not one of those post-modernists who thinks that an author has no privileged access to his own work, and that my reading of the chapter is just as valid as Noah’s. If he says that he was saying that Taft-Hartley was very important, then I’ll take him at his word. But that’s not the impression I got, either from the chapter in particular or from the book as a whole.

The chapter in question is called “The Fall of Detroit”, and covers the decline of unions in the US. In terms of the number of union members, the decline began in 1979; in terms of the percentage of the population, it began much earlier, in 1954. And it’s possible to blame some amount of the rise in inequality to the decline in unions. Noah cites Berkeley’s David Card, who reckons that somewhere between 15% and 20% of the growth in male income inequality between 1973 and 1993 was attributable to the decline of unions, while among women the impact was minimal. Noah, of course, is talking about a divergence in inequality from 1979 to the present day, most of which took place after 1993, and it’s fair to assume that if unions had already pretty much declined by 1993, the effect of their further decline over the past 20 years is slim. So if you’re looking for causes of the Great Divergence, I don’t think you can reasonably make a case that the decline of unions is responsible for more than 10% of it.

And if the decline of unions as a secular trend is a minor but still important part of the reason why inequality has increased so much, the next question is the degree to which the Taft-Hartley Act was responsible for that decline.

Noah’s argument here is subtle. It has to be, because the 1950 Treaty of Detroit, a high point in the history of unions, came three years after the Taft-Hartley Act became law. Still, writes Noah, Taft-Hartley was a kind of ticking time-bomb:

Another reason unions fell fast and hard was that the Treaty of Detroit, formidable though it was when constructed in 1950, lay atop the fault line of an antilabor law whose passage big labor had been unable to prevent three years earlier. If the 1935 Wagner Act was labor’s Magna Carta, the Taft-Hartley Act was its Little Bighorn.

Are the unions represented by George Custer and the 7th Cavalry Regiment, in this metaphor? If so, it doesn’t really work: Custer died at Little Bighorn, while the unions’ best days — like the Treaty of Detroit — were still ahead of them when Taft-Hartley was passed. But in any case, Noah’s basically saying that Taft-Hartley allowed corporate management to undercut labor in the decades ahead, and that as a result the Treaty of Detroit was much less of a victory than it might otherwise have been:

The momentum enjoyed by the labor movement and the remarkable job-creating postwar prosperity that would emerge within a few years (and on which big labor would come to depend) obscured for a couple of decades what a powerful weapon Taft-Hartley placed in management’s hands. “After ten years of experience” with the law, the University of Buffalo economist Joseph Shister wrote in 1958, “this controversial piece of legislation can be viewed with considerably less emotion.” Shister concluded that while the law had made it somewhat more difficult for unions to organize, the power relationship between management and labor was essentially unchanged. That judgment was correct for 1958, but it didn’t remain so.

So Noah has to make the case that because of Taft-Hartley, a lot of bad things happened to unions in the decades after 1958 that wouldn’t have happened otherwise. And frankly it’s a hard case to make, because elsewhere in the chapter Noah quite convincingly explains that bad things were going to happen to unions no matter what:

Management and labor were more adversarial in the United States than elsewhere. Mechanisms for compromise, either public or private, were few, and there was little tradition of joint economic stewardship. The resultant conflict made old-line industrial unions appear, to much of the public, maddeningly intransigent as the Rust Belt fell into steep decline. Some unions, like the Teamsters, were blatantly corrupt, with extensive ties to organized crime. That didn’t help labor’s image either.

But an underlying reason for labor intransigence was that Reuther was never able to build on the Treaty of Detroit sufficiently to establish a partnership between labor, management, and government comparable to what western Europe achieved after the war. American management wouldn’t allow it. It was too socialistic, too impertinent. When a corporate leader believed that Reuther had an excellent idea about how to run his business, he still felt compelled to reject it, on principle.

That, it seems to me — and this was certainly the impression I got from reading Noah’s book — is the real heart of the reason why America’s unions declined. In Germany, union representatives were invited onto corporate boards; in the US, they were treated as the enemy.

More broadly, in the book, Noah explains that the ovewhelming majority of the rise in inequality cannot be attributed to any one cause, like the decline of unions: it’s a much broader and subtler political phenomenon. Here’s where Noah completely convinces me:

Economists and political scientists previously resisted blaming the Great Divergence on government mainly because it didn’t show up when they looked at the changing distribution of income taxes…

But recently a few prominent economists and political scientists have suggested looking at the question differently. Rather than consider only taxes and benefits, they recommend looking at what MIT’s Frank Levy and Peter Temin call “institutions and norms.” It’s a vague phrase, but in practice what it mostly means is “stuff the government did, or didn’t do, in more ways than we can count.” In Levy and Temin’s view, the Great Divergence was the product of “a shift in the political environment.” Great income inequality, they wrote, would be impossible to achieve “without government intervention and changes in private sector behavior.” The two were mutually reinforcing.

In his conclusion, Noah writes that:

Today it can feel as though we live in a society that’s the precise opposite of Rawls’s ideal. The first principle isn’t economic equality; it’s economic inequality. Any effort to minimize income differences is held politically suspect, an intrusion on individual liberty.

I think he’s right about this. If Taft-Hartley hadn’t already passed in 1947, it would have passed some time later: as we just learned again in Wisconsin, the anti-union sentiment that allowed Taft-Hartley to get a two-thirds majority in both houses, enough to override Harry Truman’s veto, never really went away. Taft-Hartley is a symptom of a much broader syndrome; it’s not a significant direct cause of today’s inequality. And that’s why repealing Taft-Hartley would be so ineffectual as a weapon in the war against inequality. The real problems are deeply embedded in American society, rather than being enshrined in some labor-relations law. Do what you like to Taft-Hartley: the rich still run this country. And will continue to extract as much as they can in the way of rents.


Wow, what a terrible review. It amounts to:

“Krugman and Noah’s books don’t answer some question they didn’t seek to answer, but that I want answered, so they stink.”

More Salmonian arrogant idiocy.

Posted by EconomistDuNort | Report as abusive

How the middle class enables the ultra-rich

Felix Salmon
Jun 6, 2012 04:44 UTC

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.


“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?

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Why Davos is ignoring Occupy

Felix Salmon
Jan 26, 2012 13:44 UTC

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.


y2kurtus, I looked at the figures provided and at the risk of defaming Wikipedia’s accuracy, I seriously doubt some of those figures. The only way they can even remotely come close to reality is if they are not including indirect government involvement – for instance knowing where the government ends and the IRGC and clerics start in Iran is a toughie.

Apart from NZ and possibly Japan, I can’t imagine living in any of the countries over 40%. Taiwan is very nice and so is Korea. Turkey used to be very nice but i would be concerned about the direction it is taking.

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Income distribution charts of the day, middle-class edition

Felix Salmon
Dec 20, 2011 19:54 UTC

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”?


I think the whole income discussion is misguided – it bundles together people on the make starting from the bottom – say an MD making 200k working 100hrs weeks with 400k in student loans vs wealthy making 200k of investment income on $5m in assets (who for that matter tend to pay less due to lower cap gain taxes, estate taxes etc). Tax system should support social mobility and meritocracy and not cement existing class structure as it seems to be doing and with some of the policies from both left (tax on “rich) and right (“no estate tax, low dividend taxes etc”) it would undermine mobility even more.

It would be great if someone for a change raised this issue – if a young ambitious person is trying to make it society should be helping not hindering the progress, on the other hand, someone with millions in assets can certainly afford to pay more tax than his income would indicate. Wealth tax anyone? Deductions phaseouts tied to wealth not income? Make taxes on capital higher than taxes on earned income?

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The plight of the 1%

Felix Salmon
Dec 20, 2011 15:19 UTC

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.


I have no problems with the inflation tax or inheritance tax. :-)

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Hedgies vs Obama

Felix Salmon
Dec 9, 2011 17:59 UTC

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?


I think this argument is basically about the value of different groups of people to the Nation as a whole. As a group, do the millions of people in the middle classes provide more economic value through their work and spending than that provided by the managers of the companies they work for and buy from?

At the rarified upper end, the 1%, things have become so dislocated from what happens lower down that I don’t think the same principles can necessarily be applied. In economic terms, yes, the 1% do sometimes create work – but in which country? More often the jobs would be created in China, not the US. In effect, their tax breaks subsidise the Chinese economy. Their tax breaks also subsidise the politicians who are complicit in moving the jobs to China by supporting all that the 1% want, and by blocking anything of benefit to the 99%.

Is this good for the US economy? On that I am not so sure, there must be some kind of small benefit from selling the products to US consumers, but since most consumers are over-indebted and use credit to pay for consumption, is the benefit real? At some point this borrowing money from future earnings that may not actually be there will reach a crossover point where it will be impossible to repay the credit.

To use an ecological analogy, successful parasites do not kill their host, just weaken it and make it more vulnerable to external threats (competitors, predators, disease). Far better for the 1% to act as a symbiont and gain self-benefit through allowing the 99% to benefit more. After all, who benefits from the activities of the 99% more than the 1%?

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American plutocracy

Felix Salmon
Dec 5, 2011 15:08 UTC

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 plutocrats are still here because America isn’t sucked dry yet. The money is all going in one direction. Everyone says it’s the top 1%(3M+people),the true power lies with the 0.1% how fast is their piece of the pie growing?

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