The billionaires next door
This is an excerpt from Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, published this week by Penguin Press.
Pittsburgh was one of the smelters of Americaâs Gilded Age. As the industrial revolution took hold there, Andrew Carnegie was struck by the contrast between âthe palace of the millionaire and the cottage of the laborer.â Human beings had never before lived in such strikingly different material circumstances, he believed, and the result was ârigid castesâ living in âmutual ignoranceâ and âmutual distrustâ of one another.
The twenty-seven-story Mumbai mansion of the Ambani family, rumored to have cost a billion dollars, is just seven miles away from Dharavi, one of the worldâs most famous slums, and the gap between these two ways of life is even wider than anything Carnegie could find in the Golden Triangle. So, for that matter, is the difference between Bill Gatesâs futuristically wired 66,000-square-foot mansion overlooking Lake Washington, which is nicknamed Xanadu 2.0 and whose library bears an inscription from The Great Gatsby, and the homes of the poor of Washington State, where unemployment in 2012 was slightly above the national average.
Even so, the correct etiquette in todayâs plutocracy, particularly among its most admired tribe, the technorati of the U.S. West Coast, is to downplay the personal impact of vast wealth. In April 2010, when MIT students asked him how it felt to be the richest person in the world, Bill Gates suggested it wasnât a very big deal. âWell, the marginal return for extra dollars does drop off,â Gates said. âI havenât found any burgers at any price that are better than McDonaldâs.â He admitted there were some great perks, like flying on a private jet, but said that after a âfew million or something, itâs all about how youâre going to give it back.â
If you traveled to Mountain View to visit Eric Schmidt when he was CEO of Google, you would have found him in a narrow office barely big enough to hold three people. The equations on the whiteboard may well have been scribbled by one of the engineers who works next door and is welcome to use the chiefâs office whenever heâs not in. And while it is okayÂ to have a private jet in the Valley, employing a chauffeur is frowned upon. âWhereas in other cultures, you can drive your Rolls-Royce around and just sort of look rich and have a really good time, in technology itâs not socially okay to have a driver who drives you to work every day,â Schmidt told me. âI donât know why, but youâll notice nobody does it.â
This egalitarian style can clash with the Valleyâs reality of extreme income polarization. âMany tech companies solved this problem by having the lowest-paid workers not actually be employees. Theyâre contracted out,â Schmidt explained. âWe can treat them differently, because we donât really hire them. The person whoâs cleaning the bathroom is not exactly the same sort of person. Which I find sort of offensive, but it is the way itâs done.â When he was CEO of Bain Capital and building his current net worth of about $200 million, Mitt Romney drove a Chevrolet Caprice station wagon with red vinyl seats and a beaten-up fender. Carlos Slimâs trademark look is slightly scruffy casual wear, and he loves to tell journalists he doesnât own any homes outside his native Mexico.
But even when he dresses down, a billionaire inhabits a world apart. A little more than a decade ago, I asked Mikhail Khodorkovsky, at that moment the richest man in Russia (and, as it happens, also someone who favored casual clothes and lived in a modest house), what he thought of the rest of us. âIf a man is not an oligarch, something is not right with him,â Khodorkovsky told me. âEveryone had the same starting conditions, everyone could have done it.â (Khodorkovskyâs subsequent experiences â his company was appropriated by the state in 2004 and he is currently in prison for fraud and embezzlement â have tempered this Darwinian outlook: in jail cell correspondence he admitted that he had âtreated business exclusively as a gameâ and âdid not care much about social responsibility.â)
This worldview is straight out of the pages of Ayn Rand, but Khodorkovsky told me his uncompromising position was based not on literature but on life experience. During the 1998 Russian financial crisis some of his non-oligarch minions had made mistakes that had cost Khodorkovsky hundreds of millions. With hindsight, he blamed himselfâthey werenât oligarchs, therefore something was wrong with them, therefore they shouldnât have been trusted to make such big decisions.
Remember the line about BjĂ¶rn Borg, of whom Ilie Nastase said, âWeâre playing tennis, heâs playing something elseâ? The extreme self-confidence you hear in Khodorkovskyâs comment is partly the product of believing you have an extreme aptitude for making money, one that is probably largely independent of time and circumstance.
The robber barons felt that way, too. âThat this talent for organization and management is rare among men is proved by the fact that it invariably secures enormous rewards for its possessor, no matter where or under what laws or conditions,â Carnegie wrote. âThe experienced in affairs always rate the man whose services can be obtained as partner as not only the first consideration, but such as render the question of his capital scarcely worth considering: for such men soon create capital; in the hands of those without the special talent required, capital soon takes wings.â
For the super-elite, a sense of meritocratic achievement can inspire self-regard, and that self-regard â especially when compounded by their isolation among likeminded peers â can lead to obliviousness and indifference to the suffering
Eric Schmidt, by then the chairman of Google, admitted to a journalist in December 2011 that no one in his world thought much about Occupy Wall Street and the discontent of the 99 percent. âWe live in a bubble,â he said. âAnd I donât mean a tech bubble or a valuation bubble. I mean a bubble as in our own little world. . . . Companies canât hire people fast enough. Young people can work hard and make a fortune. Homes hold their value.â What is striking about those remarks is that the unemployment rate in Santa Clara County, where Googleâs Mountain View campus is located, was 8.6Â percent, slightly higher than the national average. And some of the most violent and controversial Occupy demonstrations were in Oakland, a 45-minute drive from Schmidtâs office.
The plutocratic bubble isnât just about being insulated by the company of fellow super-elites, although that is part of it. It is also created by the way you are treated by everyone else. One financier, speaking about his friend who is one of the top five hedge fund managers in the world, said, âHeâs a good man â or as good as you can be when you are surrounded by sycophants.â
A recent family of academic studies suggests that there may in fact be a coarsening effect of privilege. Paul Piff, a psychologist at UC Berkeley, and four other researchers devised seven different experiments to test the impact of affluence on how we treat others. âIs societyâs nobility in fact its most noble actors?â the researchers ask. Their answer is a resounding no: âRelative to lower-class individuals, individuals from upper-class backgrounds behavedÂ more unethically. â Their explanation for the behavior of these ignoble nobles: âWe reason that increased resources and independence from others cause people to prioritize self-interest over othersâ welfare and perceive greed as positive and beneficial, which in turn gives rise to increased unethical behavior.â One of the experiments studied San Francisco intersections. The team found that the drivers of new, expensive cars were twice as likely to cut off other vehicles or pedestrians as the drivers of old, cheap cars. In another test, experimental subjects with higher real-world incomes wereÂ more likely to deceive a hypothetical job applicant in order to persuade him or her to accept a lower salary â an accomplishment that earned the manager in the experiment a bonus. Even imagining you were rich changed theÂ way experimental subjects behaved. In another study, participants were prompted to think of themselves as either very rich or very poor, and were then invited to take candy from a jar that afterward would be given to childrenÂ in a nearby lab. The subjects who had imagined they were very rich took more candy.
Or consider the view of some Western members of the plutocracy concerning the strains imposed on the American middle class by globalization. The U.S.-based CEO of one of the worldâs largest fund managers told me that his firmâs investment committee often discussed the question of who wins and who loses in todayâs economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing out of the American middle class didnât really matter. âHis point was that if the transformation of the world economy lifts four people in China and India out ofÂ poverty and into the middle class, and meanwhile one American drops out of the middle class, thatâs not such a bad trade,â the CEO recalled.
And even those plutocrats who are sympathetic to the plight of the U.S. middle class feel compelled to contribute to it. One private equity investor invited me to lunch at Michaelâs, the restaurant that is practically a canteen for the New York media set, to talk about income inequality. When we moved on to other subjects, he told me about a recent deal his firm had done to acquire an Indian outsourcing company. A fringe benefit was that he could now use it to outsource his own companyâs research. The result was better work, more motivated employees, and lower costs. âWe were payingÂ University of Connecticut BAs $120,000 a year to do dead-end jobs,â he told me. âNow we pay Indian PhDs $60,000 and they are thrilled to work for us.â
You wouldnât hear comments like these in many middle-class U.S. households. Whatâs striking, though, is how similar these views are to the perspectives of plutocrats in the emerging markets.
âYou know, historically, economic activities tend to migrate because people who donât have it have a lot more urge to have it, theyâre willing to work harder for less money, and thatâs part of life,â B. N. Kalyani, the chairman of Bharat Forge, Indiaâs largest exporter of motor parts, told me. âYou had your golden period; now, hopefully, weâll have ours.â
Kris Gopalakrishnan, the co-chair of Infosys, told me bluntly that the per capita consumption of the Western middle class would have to decline as the developed and developing worlds âmeet somewhere in the middle.â When I asked one of Wall Streetâs most successful investment bank CEOs if he felt guilty for his firmâs role in creating the financial crisis, he told me with evident sincerity that he did not. The real culprit, he explained, was his feckless cousin, who owned three cars and a home he could not afford.
One of Americaâs top hedge fund managers made a near identical case to me, though this time the offenders were his in-laws and their subprime mortgage. And a private equity baron who divides his time between New York and Palm Beach pinned blame for the collapse on a favorite golf caddy in Arizona, who had bought three condos as investment properties at the height of the bubble.
It is this not-our-fault mentality that accounts for the plutocratsâ profound sense of victimization in the Obama era. You might expect that American elites â and particularly those in the financial sector â would be feeling pretty good, and more than a little grateful, right now. Thanks to a $700 billion TARP bailout and trillions of dollars lent nearly free of chargeÂ by the Federal Reserve (a policy Soros himself told me was a âhidden giftâ to the banks), Wall Street has surged back to precrisis levels of compensation even as Main Street continues to struggle.
But instead, many of the giants of American finance have come to, in the words of a mystified administration economist, âhateâ the president and to believe he is fundamentally opposed to them and their well-being. In a much quoted newsletter to investors in the summer of 2010, hedge fund manager â and 2008 Obama fund-raiser â Dan Loeb fumed, âSo long as our leaders tell us that we must trust them to regulate and redistribute our way back to prosperity, we will not break out of this economic quagmire.â Two other former Obama backers on Wall Street â both claim to have been on Rahm Emanuelâs speed dial list â recently told me that the president is âantibusinessâ; one went so far as to worry that Obama is âa socialist.â
Indeed, within the private equity fraternity, which would be hardest hit by a change in the tax treatment of carried interest, this is very much the majority view. On a human level it is hard not to have at least a little sympathy for the fierce defenders of the current system â after all, a 20 percentage point tax hike is hard to stomach no matter how rich you are â but intellectually their position is close to indefensible. One piece of evidence came in a November 2011 speech Mike Bloomberg delivered in Washington. Bloomberg is, of course, himself both a plutocrat and one of the countryâs most prominent financial entrepreneurs. As New Yorkâs mayor, he has defended Wall Street with the hometown zealÂ of a Detroit politician supporting the carmakers or a prairie leader backing farmers.
Nonetheless, here was Bloomberg on carried interest: âSince fair is fair, tax loopholes in the financial industry that are outdated should be closed, too, such as taxing carried interest at ordinary income rates. And I say this even though many of the people who would be affected are my constituents â so I assume I will get some phone calls later this afternoon.â