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2013:  Tough Year for Workers, Great Year for HNWI’s

By Shlomo Maital

                      rich

                 Illustration by Avi Katz

  For most of us, 2013 was yet another hard year.  The U.S. and EU economies were either in recession or barely growing.  Unemployment remains high;  the job market, weak.   China faces slowing export growth and a housing bubble. 

  But it was a super-great year for HNWI’s, the Wall St. euphemism for the rich and super rich (High Net Worth Individuals), who are the focus of a huge and profitable industry known as ‘wealth management’.  And wow, is there ever a lot of wealth to manage.

    According to the Boston Consulting Group’s Global Wealth 2014 report, global private financial wealth grew by nearly 15 per cent last year and now totals $152 trillion, more than double world Gross Domestic Product.  Wealth multiplies with ease, even when the rich do not actively work at it.  Microsoft founder Bill Gates, 58, is the world’s wealthiest person, with net worth of $78 b., even though he has spent most of the past few years giving his money away.  His Microsoft shares continue to generate more and more billions in wealth for him, even though he resigned as Microsoft Board Chair in February.  

Capital has boomed because of urbanization and rising real estate prices,  rising share prices,  vast amounts of new money printed by central banks everywhere and loaned at low interest,  and new capital markets in emerging nations, creating assets where none existed before.  Global private wealth boomed last year because investors put money into the stock market and stock markets rose sharply.  Wall Street broke all records and closed the year 23.8 per cent higher.

    The wealthy have capital and so quickly accumulate more of it;  the poor do not. The capital of the rich grows exponentially. The income of the poor stagnates.  This is inherently unfair.   

       But can’t the poor rise to wealth, by hard work and saving?  

       The American “Horatio Alger” rags-to-riches myth is just that, according to the Equality of Opportunity Project, led by Harvard and Berkeley economists.  This study found that an American child born in 1971 to parents in the poorest fifth of the income distribution had an 8.4% chance of making it to the top quintile. For a child born in 1986 the odds were 9%, basically the same.  In other words, in the U.S. you have less than a one in 10 chance of rising from poverty to wealth, and it’s been that way for nearly two generations.  You need to be fairly rich to go to good schools and to be accepted to good universities.  In contrast, in Denmark, the probability of climbing from the bottom quintile to the top one is double that of America.  If you want rags to riches, you’d better be born in Scandinavia.

     If the democratic system cannot repair itself, because the super-rich control the system through high-paid lobbyists and donations to politicians —  what other solution is there?  The French Revolution, 1788-1804, used the guillotine; that did not work out too well for anyone and ultimately brought a dictator-emperor named Napoleon, who destroyed Europe.        

   The rich are different.  They have money, and when they invest it, it multiplies rapidly.  At 8 per cent compound interest, wealth doubles every nine years.  There is nothing wrong with being rich.   But when extreme wealth perpetuates itself in the manner now occurring worldwide,   poverty perpetuates itself too.  Trickle down?  It’s a myth, too. 

    The rich use their wealth to make a whole lot more of it, with ease.  That process does not seem to help working people much.   

    Unless people of good will everywhere, rich, middle-class and poor, get together to resolve this dilemma,  society is simply going to fracture, perhaps violently.  And that won’t be good for anyone, rich or poor.  

Piketty: The #1 Amazon Bestseller Nobody Really Reads

By Shlomo Maital    

  Piketty

  Can you believe a 696-page boring economics book,  Capital in the 21st C., is the #1 Amazon best-seller, and one of Harvard University Press’s (Belknap) all-time best-sellers?  And can you also believe very few people have actually ploughed through this tome?  And that people constantly mispronounce the author’s name:   He is French, and his name is   toh-MA  pi-ke-TTY, rhymes with bring me TEA!

    Bloomberg Business Week has devoted an entire issue to Piketty, his arguments and his criticics, including Chris Giles (Financial Times) and two respected macro-economists, Per Krusell and Tony Smith.    (See: http://www.businessweek.com/articles/2014-05-29/pikettys-capital-economists-inequality-ideas-are-all-the-rage ).

   As a service to my readers, and to prevent a widespread narcolepsy epidemic (the malady that causes people to fall asleep in daytime),  here is a very short summary of the ongoing debate.

    What does Piketty claim?  Simply – that “Beta” (the ratio of capital to income, for nations) initially fell, but in recent decades has risen.  This is because the fraction of income saved (which is what leads to capital accumulation) exceeds the rate of growth of income or GDP.

    So what?  People who own capital can earn high return on their wealth, averaging 8 %; this doubles their wealth every 9 years.  People who spend their income (most of us working people) fall into debt and fail to accumulate wealth.

    So what?    People with great wealth gain control of the democratic system, to perpetuate their wealth through tax breaks. 

     The growing concentration of wealth in fewer and fewer hands cannot be corrected by the democratic system (the vast majority, who have no wealth), because the super-rich use their wealth to manipulate the democratic system. 

     That last paragaph is NOT in Piketty.  It comes from an article by John Cassidy,  “Is America an Oligarchy?”, The New Yorker, April 18.  He quotes two political scientists, Gilens and Page,  who claim that:  “Our analyses suggest that majorities of the American public actually have little influence over the policies our government adopts”:   

Americans do enjoy many features central to democratic governance, such as regular elections, freedom of speech and association, and a widespread (if still contested) franchise. But  …in the United States, our findings indicate, the majority does not rule—at least not in the causal sense of actually determining policy outcomes. When a majority of citizens disagrees with economic elites and/or with organized interests, they generally lose. Moreover … even when fairly large majorities of Americans favor policy change, they generally do not get it.

On many issues, say the authors,  the rich exercise an effective veto. If they are against something, it is unlikely to happen.

     So here is where things stand.  Wealth grows faster than income.  Wealth concentrates in fewer and fewer hands.  Wealth corrupts democracy. 

     Marx predicted that the concentration of wealth would grow so intolerable, that the proletariat would revolt.   

      If the democratic system cannot repair itself – what other solution is there?

 

2013: Tough Year for Workers, Great Year for Billionaires

By Shlomo  Maital

Gates

       Last year, 2013, was not too great for the working people of the world. Unemployment remains high in most countries, especially the U.S. and Europe,  and is highest among the youth.  Economic growth is stagnant in the U.S. and EU.

   But guess what.  It was a GREAT great year for billionaires.  According to Forbes magazine, which carefully documents (and generally worships) the super-rich,  there are 1,645 dollar billionaires in the world —  268 more than the previous year, an increase of 17 per cent.  The world’s billionaires owned wealth totaling $6.4 trillion, up from $5.4 trillion a year ago, a 19 per cent rise!

   The total wealth held by only 1,645 persons, $6.4 trillion, is bigger than the GDP of any country, except the U.S. and China. 

    Who tops the list?  Well, it’s Bill Gates again, with personal wealth of $76 b. (mainly through Microsoft stock).  And here’s the point.  Bill Gates isn’t TRYING to make money any more. In fact, he’s working very hard, with his wife Melinda, to GIVE AWAY his money effectively and impactfully. 

     So, to those, like Financial Times’ Chris Giles, who want to refute Thomas Piketty’s findings —   answer this.  How can you deny, that great wealth perpetuates itself, and grows itself, at huge rates of increase, even when the owners of that wealth aren’t even trying to add to it? 

    America has the most billionaires, 492 of them;  China is a surprising second, with 152, and Russia, third, with 111.   America has   1.55 billionaires per million people;  China has  0.11  billionaires per million; and Russia has  0.77 billionaires per million. Most of Russia’s billionaires stole the assets that rightly belong to the Russian people. 

   So – dear Bill Gates:   It certainly is true that if you’re born poor, it’s not your mistake, or your fault.  And the way the world is, chances are very high, you are born poor.  But Bill,  if you die poor, which is what happens to most poor people, it definitely DEFINITELY is not your mistake.  Because the world is enormously tilted toward those who already HAVE money.    Fact.  And your wealth is proof.

    If you die poor, it is because those who control $6.4 trillion of the world’s wealth,  which they accumulated on the backs of hard-working people, are using it to generate more and more and more wealth, and hang onto it,  instead of using it to help others without money get more of it.  Bill Gates and Warren Buffett are exceptions that prove the rule.

     And Chris Giles?   What else would you expect from the Financial Times?

Piketty Is Alive & Well – in London:

Why the Billionaires Worry Me

By Shlomo  Maital

Usmanov 

Alisher Usmanov

  Chances are, you’ve never heard of a man named Alisher Usmanov.  He is an Uzbekistan-born Russian billionaire who lives in London.  His fortune is estimated at $18.6 b.  He built it through metal and mining operations and investments.  He owns, among other things, two football clubs, Arsenal and Dynamo Moscow.  Usmanov is Muslim, and is married to Irina, who is Jewish.  And despite his wealth, he is only London’s second richest billionaire (the richest are the Hinduja brothers, Sri and Gopa, who have interests in oil, banking, cars, property and media). 

   Why London?  Because London is home to more sterling (pound) billionaires than any other city in the world – 72 of them, in fact, ahead of Moscow, which has ‘only’ 48.    Why?  Because British tax laws are highly favorable to the super-rich, and because London, in many ways the world’s financial capital (huge forex trading volumes, for instance), attracts money like a magnet.  Prime Minister Cameron fails to loudly, clearly condemn Putin’s Crimea grab?  Two guesses why – Russian billionaires with piles of cash in London. 

    Thomas Piketty’s book (see my recent blog) has drawn attention to the enormous and growing gap between rich and poor.  London, and Britain, are an extreme case. According to the London think-tank NIESR  Britain’s per capita GDP is still well below its 2008 peak and won’t return to it before 2017.  Yet Britain’s 104 sterling billionaires now have a total wealth of ₤ 301 billion  (US $500 billion); last year there were only 88 British billionaires, and their combined wealth was ₤55 b. less.  The billionaires grow richer; the poor get poorer. Piketty explained why. Billionaires double their money every decade. The poor fall behind every decade.

     A British food bank network reports that nearly a million people approached it for emergency food aid in the year ending in March, more than double last year’s tally. 

    Why don’t the poor (whom, as the saying, God loves very much, because he made so many of them) rise up and take back their country politically, democratically, from the billionaires? 

     Here is why.    A new study by   scholars Martin Gilens (Princeton) and Benjamin Page (Northwestern) shows:  * 

   “…. rich people and organizations representing business interests have a powerful grip on U.S. government policy. After examining differences in public opinion across income groups on a wide variety of issues [1,779 cases, from 1982 through 2001] , the political scientists  Gilens  and   Page   found that the preferences of rich people had a much bigger impact on subsequent policy decisions than the views of middle-income and poor Americans. Indeed, the opinions of lower-income groups, and the interest groups that represent them, appear to have little or no independent impact on policy.”

     LITTLE OR NO INDEPENDENT IMPACT ON POLICY!   In America.   And doubtless, in Britain, too, and anywhere that billionaires park their yachts. 

     The rich are growing richer. And they are using their wealth to tilt policies in their favor, including tax breaks.   

      That is why the billionaires worry me.   Because they are taking control of our democratic system.   Perhaps it is too late – perhaps we no longer have true democracy anywhere. 

       Never has Edmund Burke’s dictum, “for evil to triumph, it is enough for good people to do nothing”  been more poignant.   We ordinary people have to take action.  

     But how?

     Readers —  ideas!    Action!   This is intolerable.

* See John Cassidy’s excellent New Yorker post,  “Is America an Oligarchy?”, April 18, 2014

Piketty: The Super-Rich Will Own Us

By Shlomo  Maital

Piketty

Thomas Piketty’s new book Capital in the 21st C. (Harvard/Belknap) should get him the Nobel Prize. It won’t because it is basically just carefully-built data.  But the data are shocking. And it took a French economist to do it; except for Paul Krugman it seems that the collective brains of the American economic establishment have shut down for good. 

  Piketty’s book is 700 pages long. Few will actually read it.  But the fierce and growing inequality he documents has already drawn huge media attention, and even the IMF is in on the act, with Christiane Lagarde (IMF Director-General) announcing that the IMF believes inequality is bad for growth, and pro-equality policies can actually stimulate economic growth.

    I will save my readers the time and effort of reading this huge book, by summarizing it.  Piketty says, there is “an oligarchic type of divergence, in which the rich countries would come to be owned by their own billionaires…or in which ALL countries would come to be owned by the planet’s multi-millionaires and billionaires…. All the ingredients are in place for the top centile and thousandth of the global wealth distribution to pull farther and farther ahead of the rest.”

    This has already happened, to a large degree.  Oligarchs run Russia.  They own the media in my country, Israel. They are powerful in America.  They are powerful in China.

     Why is this happening? Simple.  If you have great wealth, you can earn on average 6.8 per cent annual return (above inflation).  This doubles your wealth every decade, without your having to really do anything.  And you can keep the profits, because the wealthy easily find tax havens.  If you have little wealth, you earn maybe 1 per cent, and then you get taxed.    When the wealthy double their wealth every decade, in 30 years it is 8 times what it was at the start.  Great wealth confers huge political power. You can buy the media, you can buy lobbyists, and you can, yes, you can buy politicians. 

     Karl Marx got one thing right, and one thing wrong. He said that wealth would become more and more concentrated, under capitalism.  Right.  He said that the people (the government) should confiscate national assets and run them.  Wrong. Governments can’t run businesses.  

  Piketty’s solution is very French – perfect, optimal and utterly impractical. Impose a global wealth tax.  What are the chances this will happen, when the oligarchs already wield immense political power?  If one country does it, the money will flee to another, happy to welcome it by offering tax havens. 

   Either there will be enormous social upheaval, to bring the oligarchic wealth back to where it belongs, and decades of suffering and instability,  or we the people will find some clever way to deal with this ‘doom loop’, which is leading us to destruction.    The current situation cannot continue.  And Occupy Wall Street was largely ineffective, like the Arab Spring, because it brought passionate protest, it brought attention to a critical problem – but offered no creative solutions. 

     The solution?   To be presented in a future blog.  

     

Blog entries written by Prof. Shlomo Maital

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