1,000,000 people overseas can do your job. What makes you so special?
If you are looking for the date when America’s plutocracy had its coming-out party, you could do worse than choose June 21, 2007. On that day, the private equity behemoth Blackstone priced the largest American IPO since 2002, raising $4 billion and creating a publicly held company worth $31 billion at the time of the offering. Steve Schwarzman, one of the firm’s two cofounders, came away with a personal stake worth almost $8 billion at that time, along with $677 million in cash; the other, Pete Peterson, cashed a check for $1.88 billion and retired.
In the sort of coincidence that delights historians, conspiracy theorists, and book publishers, June 21 also happened to be the day when Peterson threw a party—at Manhattan’s Four Seasons restaurant, of course—to launch his daughter Holly’s debut novel, The Manny, which lightly satirized the lives and loves of financiers and their wives on the Upper East Side. The book fits neatly into the genre of modern “mommy lit”—USA Today advised its readers to take it to the beach—but the author told me that she was inspired to write it in part by her belief that “people have no clue about how much money there is in this town.”
Holly is slender, with the Mediterranean looks she inherited from her Greek grandparents—strong features, dark eyes and eyebrows, thick brown hair. Over a series of conversations Ms. Peterson and I had after that book party, she explained to me how the super-affluence of recent years has changed the meaning of wealth.
“There’s so much money on the Upper East Side right now,” she said. “A lot of people under forty years old are making, like, $20 million or $30 million a year in these hedge funds, and they don’t know what to do with it.” As an example, she described a conversation at a dinner party: “They started saying, if you’re going to buy all this stuff, life starts getting really expensive. If you’re going to do the NetJets thing”—this is a service offering “fractional aircraft ownership” for those who do not wish to buy outright—“and if you’re going to have four houses, and you’re going to run the four houses, it’s like you start spending some money.”
The clincher, Peterson said, came from one of her dinner companions. “She turns to me and she goes, ‘You know, the thing about twenty is’”—by this she means $20 million per year—“‘twenty is only ten [after taxes].’ And everyone at the table is nodding.”
Peterson is no wide-eyed provincial naïf, nor can she be accused of succumbing to the politics of envy. But even from her gilded perch, it is obvious that something striking is happening at the apex of the economic pyramid.
“If you look at the original movie Wall Street, it was a phenomenon where there were men in their thirties and forties making two and three million a year, and that was disgusting. But then you had the Internet age, and then globalization, and money got truly crazy,” she told me.
“You had people in their thirties, through hedge funds and Goldman Sachs partner jobs, people who were making twenty, thirty, forty million a year. And there were a lot of them doing it. They started hanging out with each other. They became a pack. They started roaming the globe together as global high rollers and the differences between them and the rest of the world became exponential. It was no longer just Gordon Gekko. It developed into a totally different stratosphere.”
Ms. Peterson’s dinner party observations are borne out by the data. In America, the gap between the top 1 percent and everyone else has indeed developed into “a totally different stratosphere.” In the 1970s, the top 1 percent of earners captured about 10 percent of the national income. Thirty-five years later, their share had risen to nearly a third of the national income, as high as it had been during the Gilded Age, the previous historical peak. Robert Reich, the labor secretary under Bill Clinton, has illustrated the disparity with a vivid example: In 2005, Bill Gates was worth $46.5 billion and Warren Buffett $44 billion. That year, the combined wealth of the 120 million people who made up the bottom 40 percent of the U.S. population was around $95 billion—barely more than the sum of the fortunes of these two men.
These are American billionaires, and this is U.S. data. But an important characteristic of today’s rising plutocracy is that, as Ms. Peterson put it, today’s super-rich are “global high rollers.” A 2011 OECD report showed that, over the past three decades, in Sweden, Finland, Germany, Israel, and New Zealand—all countries that have chosen a version of capitalism less red in tooth and claw than the American model—inequality has grown as fast as or faster than in the United States. France, proud, as usual, of its exceptionalism, seemed to be the one major Western outlier, but recent studies have shown that over the past decade it, too, has fallen into line.
The 1 percent is outpacing everyone else in the emerging economies as well. Income inequality in communist China is now higher than it is in the United States, and it has also surged in India and Russia. The gap hasn’t grown in the fourth BRIC, Brazil, but that is probably because income inequality was so high there in the first place. Even today, Brazil is the most unequal of the major emerging economies.
To get a sense of the money currently sloshing around what we used to call the developing world, consider a conversation I recently had with Naguib Sawiris, an Egyptian telecom billionaire whose empire has expanded from his native country to Italy and Canada. Sawiris, who supported the rebels on Tahrir Square, was sharing with me (and a dinner audience at Toronto’s Four Seasons hotel) his mystification at the rapacious ways of autocrats: “I’ve never understood in my life why all these dictators, when they stole, why didn’t they just steal a billion and spend the rest on the people.”
What was interesting to me was his choice of $1 billion as the appropriate cap on dictatorial looting. In his world, I wondered, was $1 billion the size of fortune to aim for?
“Yes, to cover the fringe benefits, the plane, the boat, it takes a billion,” Sawiris told me. “I mean, that’s my number for the minimum I want to go down—if I go down.”
Meanwhile, the vast majority of American workers, who may be superbly skilled at their jobs and work at them doggedly, have not only missed these windfalls—many have found their professions, companies, and life savings destroyed by the same forces that have enriched and empowered the plutocrats. Both globalization and technology have led to the rapid obsolescence of many jobs in the West; they’ve put Western workers in direct competition with low-paid workers in poorer countries; and they’ve generally had a punishing impact on those without the intellect, education, luck, or chutzpah to profit from them: median wages have stagnated, as machines and developing world workers have pushed down the value of middle-class labor in the West.
Through my work as a business journalist, I’ve spent more than two decades shadowing the new global super-rich: attending the same exclusive conferences in Europe, conducting interviews over cappuccinos on Martha’s Vineyard or in Silicon Valley meeting rooms, observing high-powered dinner parties in Manhattan. Some of what I’ve learned is entirely predictable: the rich are, as F. Scott Fitzgerald put it, different from you and me.
What is more relevant to our times, though, is that the rich of today are also different from the rich of yesterday. Our light-speed, globally connected economy has led to the rise of a new super-elite that consists, to a notable degree, of first- and second-generation wealth. Its members are hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition—and, as a result, have an ambivalent attitude toward those of us who haven’t succeeded quite so spectacularly. They tend to believe in the institutions that permit social mobility, but are less enthusiastic about the economic redistribution—i.e., taxes—it takes to pay for those institutions. Perhaps most strikingly, 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 emergence of this new virtual nation of mammon is so striking that an elite team of strategists at Citigroup has advised the bank’s clients to design their portfolios around the rising power of the global super-rich. In a 2005 memo they observed that “the World is dividing into two blocs—the Plutonomy and the rest”: “In a plutonomy there is no such animal as ‘the U.S. consumer’ or ‘the UK consumer’ or indeed ‘the Russian consumer.’ There are rich consumers, few in number but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the non-rich, the multitudinous many, but only accounting for surprisingly small bites of the national pie.”
Within the investing class, this bifurcation of the world into the rich and the rest has become conventional wisdom. Bob Doll, chief equity strategist at BlackRock, the world’s largest fund manager, told a reporter in 2011, “The U.S. stock markets and the U.S. economy are increasingly different animals,” as the prior surged, while the later stagnated.
Even Alan Greenspan, the high priest of free markets, is struck by the growing divide. In a recent TV interview, he asserted that the U.S. economy had become “very distorted.” In the wake of the recession, he said, there had been a “significant recovery… amongst high-income individuals,” “large banks,” and “large corporations”; the rest of the economy, by contrast, including small businesses and “a very significant amount of the labor force,” was stuck and still struggling. What we were seeing, Greenspan worried, was not a single economy at all, but rather “fundamentally two separate types of economy,” increasingly distinct and divergent.
Citigroup more recently devised a variation on the theme, a thesis it calls the “consumer hourglass theory.” This is the notion that, as a consequence of the division of society into the rich and the rest, a smart investment play is to buy the shares of super-luxury goods producers—the companies that sell to the plutocrats—and of deep discounters, who sell to everyone else. (As the middle class is being hollowed out, this hypothesis has it, so will be the companies that cater to it.)
So far, it’s working. Citigroup’s Hourglass Index, which includes stocks like Saks at the top end and Family Dollar at the bottom, rose by 56.5 percent between December 10, 2009, when it was launched, and September 1, 2011. By contrast, the Dow Jones Industrial Average went up just 11 percent during that period.
On February 10, 1897, seven hundred members of America’s super-elite gathered at the Waldorf Hotel for a costume ball hosted by Bradley Martin, a New York lawyer, and his wife, Cornelia. The New York Times reported that the most popular costume for women was Marie Antoinette—the choice of fifty ladies. Cornelia, a plump matron with blue eyes, a bow mouth, a generous bosom, and incipient jowls, dressed as Mary Stuart, but bested them all by wearing a necklace once owned by the French queen. Bradley came as Louis XIV—the Sun King himself. John Jacob Astor was Henry of Navarre. His mother, Caroline, was one of the Marie Antoinettes, in a gown adorned with $250,000 worth of jewels. J. P. Morgan dressed as Molière; his niece, Miss Pierpont Morgan, came as Queen Louise of Prussia.
Mark Twain had coined the term “the Gilded Age” in a novel of that name published twenty-four years earlier, but the Martin ball represented a new level of visible super-wealth even in a country that was growing used to it. According to the New York Times, the event was the “most elaborate private entertainment that has ever taken place in the metropolis.” The New York World said the Martins’ guests included eighty-six people whose total wealth was “more than most men can grasp.” According to the tabloid, a dozen guests were worth more than $10 million. Another two dozen had fortunes of $5 million. Only a handful weren’t millionaires.
The country was mesmerized by this display of money. “There is a great stir today in fashionable circles and even in public circles,” the Commercial Advertiser reported. “The cause of it all is the Bradley Martin ball, beside which the arbitration treaty, the Cuban question and the Lexow investigation seem to have become secondary matters of public interest.” Then as now, America tended to celebrate its tycoons and the economic system that created them. But even in a country that embraced capitalism, the Martin ball turned out to be a miscalculation.
It was held at a time of mass economic anxiety—in 1897, the Long Depression, which had begun in 1873 and was the most severe economic downturn the United States experienced in the nineteenth century, was just gasping to an end.
Mrs. Martin offered a trickle-down justification for her party: she announced it just three weeks beforehand, on the grounds that such a short time to prepare would compel her guests to buy their lavish outfits in New York, rather than in Paris, thus stimulating the local economy. The city’s musicians’ union agreed, arguing that spending by the plutocrats was an important source of employment for everyone else.
But public opinion more generally was unconvinced. The opprobrium—and, on the crest of the wider public anger toward the plutocracy the Martins had come to epitomize, the imposition of an income tax on the super-rich—the Martins faced as a result of the ball prompted them to flee to Great Britain, where they already owned a house in England and rented a 65,000-acre estate in Scotland.
The Bradley Martin ball was a glittering manifestation of the profound economic transformation that had been roiling the Western world over the previous hundred years. We’ve now been living with the industrial revolution for nearly two centuries. That makes it easy to lose sight of what a radical break the first gilded age was from the rest of human history. In the two hundred years following 1800, the world’s average per capita income increased more than ten times over, while the world’s population grew more than six times. This was something entirely new—as important a shift in how societies worked as the domestication of plants and animals.
If you lived through the first gilded age, you didn’t need to be an economist to understand you were alive on one of history’s hinges. In 1897, the year, as it happens, of the Bradley Martin ball, Mark Twain visited London. His trip coincided with Queen Victoria’s Diamond Jubilee, the sixtieth anniversary of her coronation.
“British history is two thousand years old,” Twain observed, “and yet in a good many ways the world has moved farther ahead since the Queen was born than it moved in all the rest of the two thousand put together.”
Angus Maddison, who died in 2010, was an economic historian and self-confessed “chiffrephile”—a lover of the numbers he believed were crucial to understanding the world. He devoted his six-decade-long career to compiling data about the transformation of the global economy over the past two thousand years—everything from ship crossings to tobacco sales. He had a genius for crunching all those numbers together to reveal big global trends.
One of his most compelling charts shows just how dramatically the world, especially western Europe and what he called “the Western offshoots”—the United States, Canada, Australia, and New Zealand—changed in the nineteenth century: in the period between AD 1 and 1000, the GDP of western Europe on average actually shrank at an annual compounded rate of 0.01 percent. People in 1000 were, on average, a little poorer than they had been a thousand years before. In the Western offshoots the economy grew by 0.05 percent. Between 1000 and 1820—more than eight centuries—the average annual compounded growth was 0.34 percent in western Europe and 0.35 percent in the Western offshoots.
Then the world changed utterly. The economy took off—between 1820 and 1998 in western Europe it grew at an average annual rate of 2.13 percent, and in the Western offshoots it surged at an average annual rate of 3.68 percent.
That historically unprecedented surge in economic prosperity was the result of the industrial revolution. Eventually, it made all of us richer than humans had ever been before—and opened up the gap between the industrialized world and the rest, which only now, with the rise of the emerging market economies two hundred years later, can we start to imagine might ever be closed.
But wealth came at a tremendous social cost. The shift from an agrarian economy to an industrial one was wrenching, breaking up communities and making hard-learned trades redundant. The apotheosis of the Bradley Martins and their friends was part of a broader economic boom, but it also coincided with the displacement and impoverishment of a significant part of the population—the ball, after all, took place during the Long Depression, an economic downturn in the United States and Europe that endured longer than the Great Depression two generations later. The industrial revolution created the plutocrats—we called them the robber barons—and the gap between them and everyone else.
The architects of the industrial revolution understood this division of society into the winners and everyone else as an inevitable consequence of the economic transformation of their age. Here is Andrew Carnegie, the Pittsburgh steel tycoon and one of the original robber barons, on the rise of his century’s 1 percent: “It is here; we cannot evade it; no substitutes for it have been found; and while the law may be sometimes hard for the individual, it is best for the race, because it insures the survival of the fittest in every department. We accept and welcome, therefore, as conditions to which we must accommodate ourselves, great inequality of environment; the concentration of business, industrial and commercial, in the hands of a few; and the law of competition between these, as being not only beneficial, but essential to the future progress of the race.”
Carnegie was, of course, supremely confident that the benefits of industrial capitalism outweighed its shortcomings, even if the words he used to express its advantages—“it is best for the race”—make us squirm today. But he could also see that “the price we pay… is great”; in particular, he identified the vast gap between rich and poor as “the problem of our age.”
Living as he did during the first gilded age, Carnegie intuitively understood better than most of us today how remarkable that chasm was, compared to the way people had lived in previous centuries. “The conditions of human life,” he wrote, “have not only been changed, but revolutionized, within the past few hundred years. In former days there was little difference between the dwelling, dress, food, and environment of the chief and those of his retainers. The Indians are to-day where civilized man then was. When visiting the Sioux, I was led to the wigwam of the chief. It was like the others in external appearance, and even within the difference was trifling between it and those of the poorest of his braves. The contrast between the palace of the millionaire and the cottage of the laborer with us to-day measures the change which has come with civilization.”
Carnegie, himself an immigrant who rose from bobbin boy to the top of America’s first plutocracy, understood that the distance between palace and cottage was merely the outward sign of the gap between rich and poor—the scoreboard, if you will.
The change in power relations started in the workplace, and that is where it was most intensely felt: “Formerly, articles were manufactured at the domestic hearth, or in small shops which formed part of the household. The master and his apprentices worked side by side, the latter living with the master, and therefore subject to the same conditions. When these apprentices rose to be masters, there was little or no change in their mode of life, and they, in turn, educated succeeding apprentices in the same routine. There was, substantially, social equality, and even political equality, for those engaged in industrial pursuits had then little or no voice in the State.”
Before the industrial revolution, we were all pretty equal. But that changed with the first gilded age. Today, Carnegie continued, “we assemble thousands of operatives in the factory, and in the mine, of whom the employer can know little or nothing, and to whom he is little better than a myth. All intercourse between them is at an end. Rigid castes are formed, and, as usual, mutual ignorance breeds mutual distrust. Each caste is without sympathy with the other, and ready to credit anything disparaging in regard to it.”
That shift was particularly profound in America—one reason, perhaps, that even today the national mythology doesn’t entirely accept the existence of those “rigid castes” of industrial society that Carnegie described a hundred years ago. The America of the national foundation story—the country as it was during the American Revolution—was one of the most egalitarian societies on the planet. That was the proud declaration of the founders. In a letter from Monticello dated September 10, 1814, to Dr. Thomas Cooper, the Anglo-American polymath (he practiced law, taught both chemistry and political economics, and was a university president), Thomas Jefferson wrote, “We have no paupers…. The great mass of our population is of laborers; our rich, who can live without labor, either manual or professional, being few, and of moderate wealth. Most of the laboring class possess property, cultivate their own lands, have families, and from the demand for their labor are enabled to exact from the rich and the competent such prices as enable them to be fed abundantly, clothed above mere decency, to labor moderately and raise their families…. The wealthy, on the other hand, and those at their ease, know nothing of what the Europeans call luxury. They have only somewhat more of the comforts and decencies of life than those who furnish them. Can any condition of society be more desirable than this?”
Jefferson contrasted this egalitarian Arcadia with an England of paupers and plutocrats: “Now, let us compute by numbers the sum of happiness of the two countries. In England, happiness is the lot of the aristocracy only; and the proportion they bear to the laborers and paupers you know better than I do. Were I to guess that they are four in every hundred, then the happiness of the nation would to its misery as one in twenty-five. In the United States, it is as eight millions to zero or as all to none.” Alexis de Tocqueville, visiting America two decades later, returned home to report that “nothing struck me more forcibly than the general equality of conditions among the people.”
America, in the eyes of Jefferson and Tocqueville, was the Sweden of the late eighteenth and early nineteenth centuries. Data painstakingly assembled by economic historians Peter Lindert and Jeffrey Williamson have now confirmed that story. They found that the thirteen colonies, including the South and including slaves, were significantly more equal than the other countries that would also soon be the sites of some of the most vigorous manifestations of the industrial revolution: England and Wales and the Netherlands.
“If one includes slaves in the overall income distribution, the American colonies in 1774 were still the most equal in their distribution of income among households, though by a finer margin,” Professor Lindert said.
In addition to seeing America as egalitarian, contemporary visitors and Americans believed the colonists were richer than the folks they had left back home—that was, after all, part of the point of emigrating. Lindert and Williamson have confirmed that story, too, with one important exception. Egalitarian America was richer, apart from the super-elite. When it came to the top 2 percent of the population, even the plantation owners of Charleston were pikers compared to England’s landed gentry. Indeed, England’s 2 percent were so rich that the country’s average national income was nearly as high as that of the United States, despite the markedly greater prosperity of what today we might call the American middle class.
“The Duke of Bedford had no counterpart in America,” Professor Lindert said. “Even the richest Charleston slave owner could not match the wealth of the landed aristocracy.”
In egalitarian America, and even in aristocratic Europe, the industrial revolution eventually lifted all boats, but it also widened the social divide. One reason that process was traumatic was that it was pretty dreadful to be a loser—from their personal perspective, the Luddites, skilled weavers who wrecked the machines that made their trade unnecessary, had a point. But, as in all meritocratic 1 percent societies, the creative destruction of the industrial revolution was also traumatic for the many who made a good-faith effort to join the party but failed. Indeed, it was the pathos of these would-be winners that inspired Mark Twain to write the novel that gave the era its name.
As Twain and coauthor Charles Dudley Warner explained in a preface to the London edition of their novel, The Gilded Age: “In America nearly every man has his dream, his pet scheme, whereby he is to advance himself socially or pecuniarily. It is this all-pervading speculativeness which we tried to illustrate in The Gilded Age. It is a characteristic which is both bad and good, for both the individual and the nation. Good, because it allows neither to stand still, but drives both for ever on, toward some point or other which is ahead, not behind nor at one side. Bad, because the chosen point is often badly chosen, and then the individual is wrecked; the aggregations of such cases affects the nation, and so is bad for the nation. Still, it is a trait which is of course better for a people to have and sometimes suffer from than to be without.”
The paradox was that even as Carnegie, America’s leading capitalist, acknowledged that the country’s economic transformation had ended the age of “social equality,” political democracy was deepening in the United States and in much of Europe. The clash between growing political equality and growing economic inequality is, in many ways, the big story of the late nineteenth century and early twentieth century in the Western world. In the United States, this conflict gave rise to the populist and progressive movements and the trust-busting, government regulation, and income tax the disgruntled 99 percent of that age successfully demanded. A couple of decades later, the Great Depression further inflamed the American masses, who imposed further constraints on their plutocrats: the Glass-Steagall Act, which separated commercial and investment banking, FDR’s New Deal social welfare program, and ever higher taxes at the very top—by 1944 the top tax rate was 94 percent. In 1897, the year of the Bradley Martin ball, incomes taxes did not yet exist.
In Europe, whose lower social orders had never had it as good as the American colonists, the industrial revolution was so socially wrenching that it inspired the first coherent political ideology of class warfare—Marxism—and ultimately a violent revolutionary movement that would install communist regimes in Russia, eastern Europe, and China by the middle of the century. The victorious communists were influential far beyond their own borders—America’s New Deal and western Europe’s generous social welfare systems were created partly in response to the red threat. Better to compromise with the 99 percent than to risk being overthrown by them.
Ironically, the proletariat fared worst in the states where the Bolsheviks had imposed a dictatorship in its name—the Soviet bloc, where living standards lagged behind those in the West. But in the United States and in western Europe, the compromise between the plutocrats and everyone else worked. Economic growth soared and income inequality steadily declined. Between the 1940s and 1970s in the United States the gap between the 1 percent and everyone else shrank; the income share of the top 1 percent fell from nearly 16 percent in 1940 to under 7 percent in 1970. In 1980, the average U.S. CEO made forty-two times as much as the average worker. By 2012, that ratio had skyrocketed to 380. Taxes were high—the top marginal rate was 70 percent—but robust economic growth of an average 3.7 percent per year between 1947 and 1977 created a broadly shared sense of optimism and prosperity. This was the golden age of the American middle class, and it is no accident that our popular culture remembers it so fondly. The western Europe experience was broadly similar—strong economic growth, high taxes, and an extensive social welfare network.
Then, in the 1970s, the world economy again began to change profoundly, and with that transformation, so did the postwar social contract. Today two terrifically powerful forces are driving economic change: the technology revolution and globalization. These twin revolutions are hardly novel—the first personal computers went on sale four decades ago—and as with everything that is familiar, it can be easy to underestimate their impact. But together they constitute a dramatic gearshift comparable in its power and scale to the industrial revolution. Consider: in 2010, just two years after the biggest financial and economic crisis since the Great Depression, the global economy grew at an overall rate of more than 6 percent. That is an astonishing number when set alongside our pre-1820 averages of less than half a percentage point.
Indeed, even compared to the post–industrial revolution average rates, it is a tremendous acceleration. If the industrial revolution was about shifting the Western economies from horse speed to car speed, today’s transformation is about accelerating the world economy from the pace of snail mail to the pace of e-mail.
For the West and the Western offshoots, the technology revolution and globalization haven’t created a fresh surge in economic growth comparable to that of the industrial revolution (though they have helped maintain the 2 percent to 3 percent annual growth, which we now think of as our base case, but which is in fact historically exceptional).
What these twin transformations have done is trigger an industrial revolution–sized burst of growth in much of the rest of the world—China, India, and some other parts of the developing world are now going through their own gilded ages. Consider: between 1820 and 1950, nearly a century and a half, per capita income in India and China was basically flat—precisely during the period when the West was experiencing its first great economic surge. But then Asia started to catch up. Between 1950 and 1973, per capita income in India and China increased by 68 percent. Then, between 1973 and 2002, it grew by 245 percent, and continues to grow strongly, despite the global financial crisis.
To put that into global perspective: The American economy has grown significantly since 1950—real per capital GDP has tripled. In China, it has increased twelvefold. Before the industrial revolution, the West was a little richer than what we now call the emerging markets, but the lives of ordinary people around the world were mutually recognizable. Milanovic, the World Bank economist, surveyed the economic history literature on international earnings in the nineteenth century. He found that between 1800 and 1849 the wage of an unskilled daily laborer in India, one of the poorest countries at the time, was 30 percent that of the wage of an equivalent worker in England, one of the richest. Here’s another data point: in the 1820s, real wages in the Netherlands were just 70 percent higher than those in China’s Yangtze Valley. Those differences may seem large, but they are trivial compared to today’s. UBS, the Swiss bank, compiles a widely cited global prices and earnings report. In 2009 (the most recent year in which UBS did the full report), the nominal after-tax wage for a building laborer in New York was $16.60 an hour, compared to $0.80 in Beijing, $0.50 in Delhi, and $0.60 in Nairobi, a gap orders of magnitude greater than the one in the nineteenth century. The industrial revolution created a plutocracy—but it also enriched the Western middle class and opened up a wide gap between Western workers and those in the rest of the world. That gap is closing as the developing world embraces free market economics and is experiencing its own gilded age.
Professor Lindert worked closely with Angus Maddison and is a fellow leader of the “deep history” school, a movement devoted to thinking about the world economy over the long term—that is to say, in the context of the entire sweep of human civilization. He believes that the global economic change we are living through today is unprecedented in its scale and impact. “Britain’s classic industrial revolution is far less impressive than what has been going on in the past thirty years,” he told me. The current productivity gains are larger, he explained, and the waves of disruptive innovation much, much faster.
Joel Mokyr, an economist at Northwestern University and an expert on the history of technological innovation and on the industrial revolution, agrees.
“The rate of technological change is faster than it has ever been and it is moving from sector to sector,” Mokyr told me. “It is likely that it will keep on expanding at an exponential rate. As individuals, we aren’t getting smarter, but society as a whole is accumulating more and more knowledge. Our access to information and technological assistance in going through the mountains of chaff to get to the wheat—no society has ever had that. That is huge.”
This double-barreled economic shift has coincided with an equally consequential social and political one. MIT researchers Frank Levy and Peter Temin describe the transformation as a move from “The Treaty of Detroit” to the “Washington Consensus.” The Treaty of Detroit was the five-year contract agreed to in 1950 by the United Auto Workers and the big three manufacturers. That deal protected the carmakers from annual strikes; in exchange, it gave the workers generous health care coverage and pensions. Levy and Temin use “The Treaty of Detroit” as a shorthand to describe the broader set of political, social, and economic institutions that were established in the United States during the postwar era: strong unions, high taxes, and a high minimum wage. The Treaty of Detroit era was a golden age for the middle class, and a time when the gap between the 1 percent and everyone else shrank.
But in the late 1970s and early 1980s, the Treaty of Detroit began to break down. This was the decade of Ronald Reagan and Margaret Thatcher. They both sharply cut taxes at the top—Reagan slashed the highest marginal tax rate from 70 percent to 28 percent and reduced the maximum capital gains tax to 20 percent—reined in trade unions, cut social welfare spending, and deregulated the economy.
This Washington Consensus was exported abroad, too. Its greatest impact, and its greatest validation, was in communist regimes. The collapse of communism in the Soviet bloc and the adoption of market economics in communist China ended that ideology’s seventy-year-long intellectual and political challenge to capitalism, leaving the market economy as the only system anyone has come up with that works. That red threat was one reason the plutocrats accepted the Treaty of Detroit, and its even more generous European equivalents. The red surrender emboldened the advocates of the Washington Consensus and helped them to create the international institutions needed to underpin a globalized economy.
These three transformations—the technology revolution, globalization, and the rise of the Washington Consensus—have coincided with an age of strong global economic growth, and also with the reemergence of the plutocrats, this time on a global scale. Among students of income inequality, there is a fierce debate about which of the three is the most important driver of the rise of the 1 percent. Ideology helps to shape the argument. If you are a true-faith believer in the Washington Consensus, you tend to believe rising income inequality is the product of impersonal—and largely benign—economic forces, like the technology revolution and globalization. If you are a liberal and regret the passing of the Treaty of Detroit, you tend to attribute the changed income distribution chiefly to politics—a process Jacob Hacker and Paul Pierson have powerfully described in Winner-Take-All Politics.
This is an important argument, with real political implications. But, viewed from the summit of the plutocracy, both sides are right. Globalization and the technology revolution have allowed the 1 percent to prosper; but as the plutocrats have been getting richer and more powerful, the collapse of the Treaty of Detroit has meant we have taxed and regulated them less. It is a return to the first gilded age not only because we are living through an economic revolution, but also because the rules of the game again favor those who are winning it.
“The bottom line: we may not be able to reverse the trend, but don’t make it worse,” Peter Orszag, President Barack Obama’s former budget chief, told me. “Most of this is coming from globalization and technological change, not from government policy. But instead of leaning against the wind, we have been putting a little more wind in the sails of rising inequality.”
On a bitter evening in mid-January 2012, a group of bankers and book publishers gathered on the forty-second floor of Goldman Sachs’s global headquarters at the southern tip of Manhattan. The setting could not have been more American—the most eye-catching view was of the skyscrapers of midtown twinkling to the north, and a jazz ensemble played softly in one corner.
But the appetizers were an international mishmash—thumb-sized potato pancakes with sour cream and caviar, steaming Chinese dumplings, Indian samosas, Turkish kebabs. That’s because the party was in honor of the Goldman thinker who served notice to the Western investment community a decade ago that the Internet revolution wasn’t the only economic game in town. The world was also being dramatically transformed by the rise of the emerging markets, in particular the four behemoths that Jim O’Neill, then chief economist at Goldman Sachs, dubbed the BRICs: Brazil, Russia, India, China.
In the book Mr. O’Neill launched at his January party, The Growth Map: Economic Opportunity in the BRICs and Beyond, he argues that the BRIC concept “has become the dominant story of our generation” and introduces readers to “the next eleven” emerging markets, which are joining the BRICs in transforming the world.
The group of Goldman executives who toasted Mr. O’Neill in New York are in the vanguard of one of the consequences of the powerful economic forces he describes—the rise, in the developed Western economies, of the 1 percent and the creation of what many are now calling a new gilded age. In the nineteenth century, the industrial revolution and the opening of the American frontier created the Gilded Age and the robber barons who ruled it; today, as the world economy is being reshaped by the technology revolution and globalization, the resulting economic transformation is creating a new gilded age and a new plutocracy.
But this time around, it really is different: we aren’t just living through a replay of the Gilded Age—we are living through two, slightly different gilded ages that are unfolding simultaneously. The industrialized West is experiencing a second gilded age; as Mr. O’Neill has documented, the emerging markets are experiencing their first gilded age.
The resulting economic transformation is even more dramatic than the first gilded age in the West—this time billions of people are taking part, not just the inhabitants of western Europe and North America. Together, these twin gilded ages are transforming the world economy at a speed and a scale we have never experienced before.
“It is structurally much more extreme now in multiple dimensions,” said Michael Spence, a Nobel Prize–winning economist, adviser to the Chinese government’s twelfth five-year plan, and author of The Next Convergence: The Future of Economic Growth in a Multispeed World, a book exploring the interaction of these twin gilded ages. “Now that the emerging economies are pretty big, this is just a harder problem. It is so different from previous economic change that I think these are issues that we have never wrestled with before.
“In the two hundred years from the British industrial revolution to World War Two there were asymmetries in the world economy, but the entire world wasn’t industrializing and it wasn’t interacting in the same way,” Professor Spence told me. “These are complex phenomena and we should approach them with humility.”
The gilded age of the emerging markets is the easiest to understand. Many countries in Asia, Latin America, and Africa are industrializing and urbanizing, just as the West did in the nineteenth century, and with the added oomph of the technology revolution and a globalized economy. The countries of the former Soviet Union aren’t industrializing—Stalin accomplished that—but they have been replacing the failed central planning regime that coordinated their creaky industrial economy with a market system, and many are enjoying a surge in their standard of living as a result. The people at the very top of all of the emerging economies are benefiting most, but the transition is also pulling tens of millions of people into the middle class and lifting hundreds of millions out of absolute poverty.
Going through your first gilded age while the West goes through its second one makes things both harder and easier. One reason it is easier is that we’ve seen this story before, and we know that, for all the wrenching convulsions along the way, it has a happy ending: the industrial revolution hugely improved the lives of everyone in the West, even though it opened the vast gap in standard of living between East and West that we still see today.
We didn’t know that for sure during the first gilded age—remember that it was the dark, satanic mills of the industrial revolution that eventually inspired the leftist revolt against capitalism and the bloody construction, by those revolutionaries who succeeded, of an economic and political alternative. But today, the evidence that capitalism works is clear, and not only in the wreckage of the communist experiment.
The collapse of communism is more than a footnote to today’s double gilded age. Economic historians are still debating the connection between the rise of Western democracy and the first gilded age. But there can be no question that today’s twin gilded ages are as much the product of a political revolution—the collapse of communism and the triumph of the liberal idea around the world—as they are of new technology.
The combined power of globalization and the technology revolution has also turbocharged the economic transformation of the emerging markets, which is why Mr. O’Neill’s BRICs thesis has been so powerfully borne out.
“We are seeing much more rapid growth in developing countries, especially China and India, because the policies and technologies in the West have allowed a lot of medium-skilled jobs to be done there,” said Daron Acemoglu, professor of economics at the Massachusetts Institute of Technology and a native of one of O’Neill’s “Next 11,” Turkey. “They are able to punch above their weight because technology allows us to better arbitrage differences in the world economy.”
This means, Professor Acemoglu argues, that the first gilded age of the developing world is proceeding much faster than it did in the West in the nineteenth century.
“In the 1950s, labor was cheap in India, but no one could use that labor effectively in the rest of the world,” Professor Acemoglu said. “So they could only grow going through the same stages the West had done. Now the situation is different. China can grow much faster because Chinese workers are much better integrated into the world economy.”
Yet the successes of this economic revolution can also make living through your own first gilded age in the twenty-first century harder to endure. Once television, the Internet, and perhaps a guest-worker relative reveal to you in vivid real time the economic gap between you and your Western peers, growth of even 4 or 5 percent might feel too slow. That will be especially true when you see your own robber barons living a life of twenty-first-century plutocratic splendor, many of whose perks (a private jet, for instance, or heart bypass surgery) would have dazzled even a Rockefeller or a Carnegie.
Meanwhile, as emerging economies go through their first gilded age, the West is experiencing its second one. Part of what is happening is a new version of the industrial revolution. Just as the machine age transformed an economy of farm laborers and artisans into one of combine harvesters and assembly lines, so the technology revolution is replacing blue-collar factory workers with robots and white-collar clerks with computers.
At the same time, the West is also benefiting from the first gilded age of the emerging economies. If you own a company in Dallas or Düsseldorf, the urbanizing peasants of the emerging markets probably work for you. That is good news for the plutocrats in the West, who can reap the benefits of simultaneously being nineteenth-century robber barons and twenty-first-century technology tycoons. But it makes the transition even harsher for the Western middle class, which is being buffeted by two gilded ages at the same time.
A survey of nearly ten thousand Harvard Business School alumni released in January 2012 illustrated this gap. The respondents were very worried about U.S. competitiveness in the world economy—71 percent expect it to decline over the next three years. But this broad concern looks very different when you separate the fate of American companies from the fate of American workers: nearly two-thirds of the Harvard Business School grads thought workers’ wages and benefits would be in jeopardy, but less than half worried that firms themselves would be in trouble.
“When a company is stressed and has issues, it has a much greater set of options than a U.S. worker does,” said Michael Porter, the professor who led the study. “Companies perceive that they can do fine and they can do fine by being one of the 84 percent that moved offshore, and they can also do fine by cutting wages.”
“Although the overall pie is getting bigger, there are plenty of people who will get a smaller slice,” said John Van Reenen, head of the Center for Economic Performance at the London School of Economics. “It is easy to say, ‘Get more education,’ but if you are forty or fifty, it is hard to do. In the last fifteen years, it is the middle classes who have suffered.”
“The China Syndrome,” a 2011 paper on the impact of trade with China by a powerful troika of economists—David Autor, David Dorn, and Gordon Hanson—underscored what is going on. The empirical study is particularly significant because it marks a shift in consensus thinking in the academy. In the debate about the causes of growing income inequality, American economists have tended to opt for technology as the driving force. But, drawing on detailed data from local labor markets in the United States, the authors of “The China Syndrome” argue that globalization, and in particular trade with the mighty Middle Kingdom, are today also having a huge impact on American blue-collar workers: “Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment.”
The deleterious effects go beyond those workers who lose their jobs. In communities hit by the China Syndrome, wages fall—particularly, it turns out, outside the manufacturing sector—and some people stop looking for work. The result is “a steep drop in the average earnings of households.” Uncle Sam gets hit, too, especially in the form of increased disability payments.
Messrs. Autor, Dorn, and Hanson are no protectionists. But, in a challenge to the “one nation under God” view of the world, they offer a sharp reminder that the costs and benefits of trade are unevenly shared. As they put it, their finding does not “contradict the logic” of arguments favoring free trade; it just “highlights trade’s distributional consequences.”
That distributional impact is, in the term of art used by economists, to polarize the labor market: there are better and more highly paid jobs at the top, not much change for the low-skill, low-income jobs at the bottom, but a hollowing out of the jobs in the middle, which used to provide the paychecks for the American middle class. Maarten Goos and Alan Manning, writing about the same phenomenon in the UK, call it the division into “lousy and lovely” jobs.
A recent investigation of the direct employment impact of the iPod is a case study in these lousy and lovely jobs—and shows where some of what used to be the jobs in the middle have gone. The research is the work of Greg Linden, Jason Dedrick, and Kenneth Kraemer, a troika of scholars who in a pair of recent papers have examined how the iPod has created jobs and profits around the world. One of their findings is that in 2006 the iPod employed nearly twice as many people outside the United States as it did in the country where it was invented—13,920 in the United States and 27,250 abroad.
You probably aren’t surprised by that figure, but if you are American, you should be a little worried. That is because Apple is the quintessential example of the Yankee magic everyone from Barack Obama to Rick Santorum insists will pull this country out of its jobs crisis, evidence of America’s remarkable ability to produce innovators and entrepreneurs. But today those thinkers and tinkerers turn out to be more effective drivers of job growth outside the United States than they are at home.
You don’t need to read the iPod study to know that a lot of those overseas workers are in China. But given how large that Asian behemoth currently looms in the U.S. psyche, it is worth noting that less than half of the foreign iPod jobs—12,270—are in the Middle Kingdom. Another 4,750 are in the Philippines, which, with a population of just 92 million compared to China’s 1.3 billion, has in relative terms been a much bigger beneficiary of Steve Jobs’s genius. This is a point worth underscoring, because some American pundits and politicians like to blame their country’s economic woes on China’s undervalued currency and its strategy of export-led growth. In the case of the Apple economy, that is less than half the story.
Now come what might be the surprises. The first is that even though most of the iPod jobs are outside the United States, the lion’s share of the iPod salaries are in the United States. Those 13,920 American workers earned nearly $750 million. By contrast, the 27,250 non-American Apple employees took home less than $320 million.
That disparity is even more significant when you look at the composition of America’s iPod workforce. More than half the U.S. jobs—7,789—went to retail and other nonprofessional workers (office support staff, freight and distribution workers, etc.). Those workers earned just $220 million.
The big winners from Apple’s innovation were the 6,101 engineers and other professional workers in the United States who made more than $525 million. That’s more than double what the nonprofessionals in the United States made, and significantly more than the total earnings of all of Apple’s foreign employees. The other jobs are lousy; these are the highly paid lovely ones.
Here in microcosm is why America is so ambivalent about globalization and the technology revolution. The populist fear that even America’s most brilliant innovations are creating more jobs abroad than they are at home is clearly true. In fact, the reality may be even grimmer than populist critics realize, since more than half of the American iPod jobs are relatively poorly paid and low skilled.
But America has winners, too: the engineers and other American professionals who work for Apple, whose healthy paychecks are partly due to the bottom-line benefit the company gains from cheap foreign labor. Apple’s shareholders have done even better. In the first of their pair of iPod papers, published in 2007, Linden, Dedrick, and Kraemer found that the largest share of financial value created by the iPod went to Apple. Even though the devices are made in China, the financial value added there is “very low.”
Rich countries can hold on to some manufacturing jobs, of course, but doing so often means making those jobs a little lousier. Consider, for example, the argument Caterpillar used in a 2012 labor dispute with workers at a locomotive assembly plant in London, Canada. Workers at a Caterpillar plant south of the border in La Grange, Illinois, where they produce rail equipment, earn less than half of what their Canadian brethren make in wages and benefits. You could call that a victory for Canadian unions, and a sign that the country’s political culture has done a better job of protecting its workers. But Caterpillar’s response to that success has been to lock out its better-paid Canadian workforce and move some of the production to a newly opened plant in Muncie, Indiana. There is a similar story behind GE’s much ballyhooed return of some manufacturing jobs to the United States. Workers at the North Carolina factory GE opened in 2011 earned an average hourly wage of eighteen dollars, barely half of what unionized workers in older GE plants make.
This is the downside of the triumph of Western workers over the past century and a half that Milanovic documented. In his paper, Milanovic predicted the gap between Western workers and those in developing countries would mean huge migratory pressure as people moved to higher-wage countries. But in an age when goods and capital flow more freely around the world than people, the more likely outcome may be the jobs moving to them.
This tension of our second gilded age was familiar to Andrew Carnegie during the first one, and plays into the division of society into the rich and the rest, which he, too, perceived: “Under the law of competition, the employer of thousands is forced into the strictest economies, among which the rates paid to labor figure prominently, and often there is friction between the employer and the employed, between capital and labor, between rich and poor. Human society loses homogeneity.” Capitalism, Carnegie believed, required employers to drive the hardest possible bargain with their workers.
When I raised the issue with Joe Stiglitz, the Nobel Prize–winning economist and longtime Cassandra about the downsides of globalization, he practically crowed with vindication. “The economic theory is very clear,” he said. “What happens when you bring together countries which are very different, like the United States and China—what happens is that the wages in the high-wage country get depressed down. This was predictable. Full globalization would in fact mean the wages in the United States would be the same as the wages in China. That’s what you mean by a perfect market. We don’t like that.”
The truth is we are no longer living in “one nation under God”; we are living in one world under God. Globalization is working—the world overall is getting richer. But a lot of the costs of that transition are being borne by specific groups of workers in the developed West.
We are accustomed to thinking of the left as having an internationalist perspective. Liberals are the sort of people who worry about poverty in Africa or the education of girls in India. The irony today is that the real internationalists are no longer the bleeding-heart liberals; they are the cutthroat titans of capital.
Here, for instance, is what Steve Miller, the chairman of insurance giant AIG and one of Detroit’s legendary turnaround bosses (he wrote a bestselling memoir called The Turnaround Kid), had to say to me at Davos about globalization and jobs: “Well, first off, as a citizen of the world, I think everyone around the world, no matter what country they’re in, should have the opportunities that we have gotten used to in the United States. Globalization is here. It’s a fact of life; it’s not going away. And it does mean that for different levels of skill there’s going to be something of a leveling out of pay scales that go with it, particularly for jobs that are mobile, if the products can be moved, which is not everything.”
No matter what passport you hold, if you run or own a global company, that is not really a big deal. But, as Autor, Dorn, and Hanson show, if you are an American worker, that “leveling out” can be painful indeed.
Professor Van Reenen said these tensions have been building for years but have been laid bare by the financial crisis. That, he believes, has sparked a wave of populist protest, ranging from the Tea Party on the right to the Occupy movement.
“These things have been going on for a couple of decades,” he said. “What has happened is, with the rise of the financial crisis, all of these things are coming into sharp relief.”
The twin gilded ages are speeding each other up: The industrialization of the emerging economies is creating new markets and new supply chains for the West—iPhones are produced in China, and also sold there. The new technologies of the West’s second gilded age, meanwhile, have accelerated the developing world’s first gilded age—it is a lot easier to build a railway or a steel mill in an age of computers and instant communication than it was in the nineteenth century—and the developed economies, too, offer a rich market for the industrializing developing world.
“India’s gilded age is going to be a combination of America’s first gilded age and the second gilded age,” Ashutosh Varshney, a professor of political science at Brown University who was born in India and now spends half his time in Bangalore, where his wife and son live full-time, told me at a meeting of the World Economic Forum in Mumbai in November 2011. “India is going through this phenomenon in the twenty-first century…. The pace at which information traveled in the nineteenth century was very different. Today eight hundred million Indians are connected through mobile phones.”
The two gilded ages can also get in each other’s way. As good an explanation as any for the 2008 financial crisis is that it is the result of the collision between China’s gilded age and the West’s—the financial imbalances that are an essential part of China’s export-driven growth model also played a crucial role in inflating the credit bubble that burst with such devastating consequences in 2008.
The two gilded ages have a lot in common, and they are reinforcing each other. But both transformations are creating intense political and social pressures, partly because change is always hard, and partly because the rewards of this sort of convulsive shift are so unequal.
Moreover, this time around, the whole world no longer has the escape valve that, at least for a time, released some of the pressures of the original industrial revolution—the frontiers of North and South America. When the strain of urbanization became too tough, or too unfair, Europe’s huddled masses could emigrate. Even with that option, it is worth remembering, the conflicts and inequities created by industrialization and urbanization were ultimately resolved in the West only after a half century of revolution and war.
“In the long run, we are in good shape,” said Professor Van Reenen. “It depends on your time horizon. After all, the Great Depression and World War II were a massive cost to humanity. Eventually, humanity will prosper. Capitalism does work, but over the medium term, thirty or forty years, there could be incredible dislocations. I am very worried about what happens over the next year or so.”
Looked at from the international, Olympian perspective of the super-elite, the cost of these short-term “dislocations” pales in comparison with the transformative power of the twin gilded ages.
Mr. O’Neill concludes his book with a heartfelt rebuttal of the gloomsters, with their emphasis on rising national income inequality and the hollowing out of the Western middle class:
This is an exciting story. It goes far beyond business and economics. We are in the early years of what is probably one of the biggest shifts of wealth and income disparity ever in history. It irritates me when I hear and read endless distorted stories of how only a few benefit and increase their wealth from the fruits of globalization, to the detriment of the marginalized masses. Globalization may widen inequality within certain national borders, but on a global basis it has been a huge force for good, narrowing inequality among people on an unprecedented scale. Tens of millions of people from the BRICs and beyond are being taken out of poverty by the growth of their economies. While it is easy to focus on the fact that China has created so many billionaires, it should not be forgotten that in the past fifteen or so years, 300 million or more Chinese have been lifted out of poverty…. We at Goldman Sachs estimate that 2 billion people are going to be brought into the global middle class between now and 2030 as the BRIC and N-11 economies develop…. Rather than be worried by such developments, we should be both encouraged and hopeful. Vast swaths of mankind are having their chance to enjoy some of the fruits of wealth creation. This is the big story.
Mr. O’Neill’s empathy for the prospering people of China and India isn’t the only reason to be optimistic about the twin gilded ages. Another is that the experience of the past two centuries has taught us that, with time, the creative destruction of capitalism inevitably brings an overall improvement in everyone’s standard of living.
That was what John Baranowski, the general manager of accounting and operations at Greyhound Lines, the bus company based in Dallas, Texas, argued in reply to an essay by W. Brian Arthur, a professor at the Santa Fe Institute, about the computer revolution and the rise of a second economy in which most of the work is done by machines talking to other machines, with little intervention by humans. “Wealth will be created but also spent in some form we cannot imagine,” Mr. Baranowski wrote. “Past productivity eliminated millions of jobs and created millions more—and while it is highly disruptive, there is no precedent for a long-term negative impact on total jobs and no reason to expect that the future (and the second economy’s impact) will be different.”
Professor Arthur’s counterpoint was to hope that Mr. Baranowski is right, but to caution that we have no proof that today’s technology revolution really will eventually make all of us richer.
“I only hope you are right that the new prosperity will create new jobs,” Professor Arthur wrote. “The idea that this always happens is called Say’s law in economics, and it’s now held by economists to be a tenet of faith, not true in reality. Since the second economy began, in the early and mid-1990s, we’ve had wave after wave of downsizing and layoffs, and now we have ongoing structural joblessness. I hope jobs will be created, and maybe they will. More likely, the system, as so many times before in history, will have to readjust radically. It needs to find new ways to distribute the new wealth.”
Both the Western critics and the Western fans of globalization tend to agree about one thing: the emerging markets, particularly their rising middle classes, are among the big winners. As far as GDP goes, that is certainly true. But, just as the West’s first gilded age was not perfectly benign for everyone living through it, the developing world’s age of creative destruction is bumpy.
For one thing, international studies of the correlation between income and happiness have recently uncovered a counterintuitive connection. Until a few years ago, the reigning theory about money and happiness was the Easterlin paradox, the 1974 finding by Richard Easterlin that, beyond a relatively low threshold, more money didn’t make you happier. But as better international data became available, economists discovered that the Easterlin paradox applies only across generations within a single country—you are probably not happier than your parents were, even though you are probably richer. But across countries, what millions of immigrants have always known to be true really is: the people of rich countries are generally happier than the people of poor countries.
The latest contrarian finding, however, is that moving to that state of greater wealth and greater happiness is decidedly unpleasant. As Angus Deaton, in a review of the 2006 Gallup World Poll, concluded, “Surprisingly, at any given level of income, economic growth is associated with lower reported levels of life satisfaction.” Eduardo Lora and Carol Graham call this the “paradox of unhappy growth.” Two separate studies of China, for example, have found that peasants who move to the city are richer but more frustrated with their income than they had been back on the farm. Palagummi Sainath, an award-winning Indian journalist who made his name when he switched from covering the business titans of “India Shining” to the underclasses who were left behind, tells the same story: Indians who move from impoverished villages to urban slums have a better chance of finding work, but little social security comes with it. And Betsey Stevenson and Justin Wolfers have found that the paradox of unhappy growth is particularly true in the first stages of growth in “miracle” economies, such as South Korea or Ireland—the moment when the tigers take their first leap is also the time when their people are unhappiest.
No one has come up with a definitive explanation of the unhappy growth paradox, but the economists who study it speculate that the uncertainty and inequality of these periods of rapid economic change may be to blame. Even if our country’s economy overall is growing strongly and we are doing well ourselves, we know that we are living through a period of what Joseph Schumpeter called “creative destruction.” That volatility, and the painful consequences it has for the losers, makes even the winners anxious.
The tension in emerging markets isn’t only psychological. As in the West, a big part of the story of the developing world’s first gilded age is the “friction… between capital and labor, between rich and poor” that Carnegie identified more than a century earlier.
I caught a glimpse of it at a World Bank panel I moderated in Washington, D.C., in September 2011. Manish Sabharwal, the CEO of TeamLease, India’s leading supplier of temporary workers, said one of India’s big challenges was increasing the number of people in the formal economy (as opposed to the black-market economy) working in manufacturing. At just 12 percent of the labor force, low-wage India, astonishingly, has the same percentage of workers in manufacturing as the United States does.
Stella Li, the vice president of automaker BYD, one of China’s manufacturing stars, jumped into the discussion. “I have the answer,” she told Sabharwal. BYD, she said, had gone into India with high hopes. “We think India is a great place for our second-biggest manufacturing,” she explained, and BYD liked the quality of the Indian labor force: “The employee labor is good—they are working hard, very smart, and quite good.” The problem was political: “They have a strike… then they ask for money, it takes a long discussion, they have to stop manufacturing for like one month.” By contrast, she noted, “In China, we have no strike. If they have a strike, the government will get involved, tell workers, ‘I will help you, but go back to work.’”
At this point, I couldn’t resist asking whether in the authoritarian People’s Republic, harsh measures might be used to force protesters back to work. Strikers might even be sent to jail, I suggested.
“No,” Ms. Li replied instantly. “It is just the government nicely talking, ‘What do you need? I’m taking care of you. Don’t worry. But you should go back to work.’”
BYD’s response to India’s more aggressive unions, Ms. Li said, was to back away from its initial plan to make the country “kind of our backyard for manufacturing… So, we have five thousand to six thousand employees there. Initially we wanted to grow huge, like we can be over fifty thousand jobs over there.”
As in the West, moving production somewhere else is one response to bolshie unions. The other is technology. As Kiran Mazumdar-Shaw, India’s richest self-made woman entrepreneur, said to her employees: “If you join the union, I’m going to automate, and you’ll all be out of jobs.” And here’s the twist—she made this comment to a New Yorker journalist whose profile largely focused on Mazumdar-Shaw’s philanthropic commitment to improving the lives of India’s poorest people. The union didn’t listen, so Mazumdar-Shaw automated their jobs away.
We do know one thing for certain—whether it is Indian entrepreneurs like Shaw, or Chinese executives like Li, or Western financiers like O’Neill, those at the top around the world are doing very well indeed in this era of the twin gilded ages. One of the most respected students of today’s surging income inequality is Emmanuel Saez, a lanky, curly-haired forty-one-year-old Frenchman who teaches economics at UC Berkeley and won one of his profession’s top prizes in 2009. Working with his colleague Thomas Piketty of the Paris School of Economics, Saez has documented the changing shape of income distribution in the United States over the past century.
From the mid-1920s to 1940, the share of income going to the top 10 percent was around 45 percent. During the Second World War it declined to around 33 percent and remained essentially flat until the late 1970s. Since then, it has been climbing dramatically. By 2006, the top 10 percent earned 50 percent of national income, even more than it did in 1928, at the height of the Roaring Twenties.
But the biggest shift in income isn’t between the top 10 percent and everyone else—it is within the top 10 percent, Saez and Piketty found. Almost all the gains are at the very apex of the distribution: during the economic expansion of 2002 to 2006, three-quarters of all income growth in the United States went to the top 1 percent of the population. The social gap isn’t just between the rich and the poor; it is between the super-rich and the merely wealthy (who may not feel quite so wealthy when they compare themselves with their super-successful peers).
Here’s how that translated into U.S. average family income in 2010, according to Saez: Families in the top 0.01 percent made $23,846,950; that dropped sharply to $2,802,020 for those in the top 0.1 to 0.01 percent. Those in the top 1 percent made $1,019,089; those in the top 10 percent made $246,934. Meanwhile, the bottom 90 percent made an average $29,840.
Even among the super-super-rich—the people on the annual Forbes rich list—the greatest gains have been at the tip of the pyramid. A recent academic study of the Forbes list of the four hundred richest Americans found that between 1983 and 2000 all of the wealthy prospered, but the very richest did best of all. In the course of those years, the top 25 percent of this group became 4.3 times wealthier, while the bottom 75 percent of them got “only” 2.1 times richer.
In 2011, in its annual report on the world’s rich, Credit Suisse, the international investment bank, noted that the number of super-rich—whom it delicately dubs “ultra high net worth individuals,” or UHNWIs, with assets above $50 million—surged: “Although comparable data on the past are sparse, it is almost certain that the number of UHNW individuals is considerably greater than a decade ago. The general growth in asset values accounts for some of the increase, along with the appreciation of other currencies against the U.S. dollar. However, it also appears that, notwithstanding the credit crisis, the past decade has been especially conducive to the establishment of large fortunes.”
Overall, Credit Suisse calculated that there were about 29.6 million millionaires—people with more than $1 million in net assets—in the world, about half a percent of the total global population. North Americans are no longer the largest group—they account for 37 percent of the world’s millionaires, slightly fewer than the 37.2 percent who are European. Asia-Pacific, excluding China and India, is home to 5.7 million (19.2 percent), while there are just over 1 million in China (3.4 percent). The remaining 937,000 live in India, Africa, or Latin America.
There were 84,700 UHNWIs in the world in 2011, of whom 29,000 owned net assets worth more than $100 million, and of whom 2,700 were worth half a billion dollars—nearly enough to maintain the level of perks Naguib Sawiris deems acceptable. A total of 37,500 UHNWIs are in North America (44 percent); 23,700 (28 percent) are in Europe; and 13,000 are in Asia-Pacific excluding China and India (15 percent).
When it comes to super-wealth, the United States is unassailably at the top. America is home to 42 percent of all UHNWIs, with 35,400. China is in second place, with 5,400, or 6.4 percent of the total, followed by Germany (4,135), Switzerland (3,820), and Japan (3,400). Russia has 1,970, India 1,840, Brazil 1,520, Taiwan 1,400, Turkey 1,100, and Hong Kong 1,030.
Given the underlying economic forces that are roiling the globe, Saez said he sees no reason that this trend won’t continue. The rapid emergence of the very rich from the financial crisis would seem to support that view: Saez has found that in the 2009–2010 recovery, 93 percent of the gains were captured by the top 1 percent. The plutocrats did even better than the merely affluent—37 percent of these gains went to the top 0.01 percent, the 15,000 Americans with average incomes of $23.8 million. Another example: in 2009, the country’s top twenty-five hedge fund managers earned an average of more than $1 billion each—or more than they had made in 2007, the previous record year.
“Probably if you had looked at the situation in the late nineteenth century, it would have looked like today. You would have said, ‘Look, those guys are also self-made,’” Saez told me when I visited him in his office in Berkeley. “The way I see it is first you have a wave of innovation that creates self-made wealth, and then that wealth is passed on to the next generation and then you have heirs. So really the big question for the new era is whether the new rich, the self-made rich, are going to pass their wealth to their heirs or whether it’s going to be given to charity and to what extent. It’s probably going to be both, but I think the wave of heirs should happen down the road, barring an extreme change in behavior in charitable giving.”
On February 13, 2007, almost exactly 120 years after the Martin ball, a leader of a new, ascendant American plutocracy hosted another epoch-making gala, also on Park Avenue, this time at the Armory, less than a mile directly north of the grand hotel rooms where the Martins and their friends had frolicked.
The guests at Steve Schwarzman’s sixtieth-birthday bash didn’t come in costume, and they arrived at eight p.m., not ten thirty p.m., but in many other ways his celebration echoed New York’s most famous nineteenth-century entertainment. The ladies were bejeweled, many of the guests were moguls (Mike Bloomberg, John Thain, Howard Stringer), and the entertainment was lavish—its highlight was a half-hour live performance by Rod Stewart, for which he was reportedly paid $1 million.
Schwarzman’s friends evoked the same economic stimulus defense of the lavish celebration Martin’s supporters had voiced a century earlier. “This is good for the entire economy,” argued Julian Niccolini, a co-owner of the Four Seasons restaurant (where both Schwarzman and Peterson père keep a running tab) and a guest at Schwarzman’s party. “People spend money on champagne, they spend money on flowers, they spend money on music, and that creates jobs for all of us.”
As in 1897, public opinion didn’t buy it. Unlike the Martin ball, Schwarzman’s party took place in a generally roaring economy. But seven months later, the bubble began to burst with a freeze in the global credit markets, and within eighteen months America was suffering its worst financial and economic crisis since the Great Depression. Schwarzman didn’t leave the country for good—though he did move to Paris for six months in 2011—but he did admit that had he been able to foresee the consequences of his $3 million birthday extravaganza, he would have reconsidered.