Jul 10th 2014

A Class of Its Own

PRINCETON – The very rich, F. Scott Fitzgerald famously wrote, “are different from you and me.” Their wealth makes them “cynical where we are trustful,” and makes them think “they are better than we are.” If these words ring true today, perhaps it is because when they were written, in 1926, inequality in the United States had reached heights comparable to today.

During much of the intervening period, between the end of World War II and the 1980s, inequality in the advanced countries was moderate. The gap between the super-rich and the rest of society seemed less colossal – not just in terms of income and wealth, but also in terms of attachments and social purpose. The rich had more money, of course, but they somehow still seemed part of the same society as the poor, recognizing that geography and citizenship made them share a common fate.

As the University of Michigan’s Mark Mizruchi points out in a recent book, the American corporate elite in the postwar era had “an ethic of civic responsibility and enlightened self-interest.” They cooperated with trade unions and favored a strong government role in regulating and stabilizing markets. They understood the need for taxes to pay for important public goods such as the interstate highway and safety nets for the poor and elderly.

Business elites were not any less politically powerful back then. But they used their influence to advance an agenda that was broadly in the national interest.

By contrast, today’s super-rich are “moaning moguls,” to use James Surowiecki’s evocative term. Exhibit A for Surowiecki is Stephen Schwarzman, the chairman and CEO of the private equity firm the Blackstone Group, whose wealth now exceeds $10 billion.

Schwarzman acts as if “he’s beset by a meddlesome, tax-happy government and a whiny, envious populace.” He has suggested that “it might be good to raise income taxes on the poor so they had ‘skin in the game,’ and that proposals to repeal the carried-interest tax loophole – from which he personally benefits – were akin to the German invasion of Poland.” Other examples from Surowiecki: “the venture capitalist Tom Perkins and Kenneth Langone, the co-founder of Home Depot, both compared populist attacks on the wealthy to the Nazis’ attacks on the Jews.”

Surowiecki thinks that the change in attitudes has much to do with globalization. Large American corporations and banks now roam the globe freely, and are no longer so dependent on the US consumer. The health of the American middle class is of little interest to them these days. Moreover, Surowiecki argues, socialism has gone by the wayside, and there is no need to coopt the working class anymore.

Yet if corporate moguls think that they no longer need to rely on their national governments, they are making a huge mistake. The reality is that the stability and openness of the markets that produce their wealth have never depended more on government action.

In periods of relative calm, governments’ role in writing and upholding the rules by which markets function can become obscured. It may seem as if markets are on autopilot, with governments an inconvenience that is best avoided.

But when economic storm clouds gather on the horizon, everyone seeks shelter under their home government’s cover. It is then that the ties that bind large corporations to their native soil are fully revealed. As former Bank of England Governor Mervyn King aptly put it in the context of finance, “global banks are global in life, but national in death.”

Consider how the US government stepped in to ensure financial and economic stability during the global financial crisis of 2008-2009. If the government had not bailed out large banks, the insurance giant AIG, and the auto industry, and if the Federal Reserve had not flooded the economy with liquidity, the wealth of the super-rich would have taken a severe blow. Many argued that the government should have focused on rescuing homeowners; instead, the government chose to support the banks – a policy from which the financial elite benefited the most.

Even in normal times, the super-rich depend on government support and action. It is largely the government that has financed the fundamental research that produced the information-technology revolution and the firms (such as Apple and Microsoft) that it has spawned.

It is the government that enacts and enforces the copyright, patent, and trademark laws that protect intellectual property rights, guaranteeing successful innovators a steady stream of monopoly profits. It is the government that subsidizes the higher-education institutions that train the skilled work force. It is the government that negotiates trade agreements with other countries to ensure that domestic firms gain access to foreign markets.

If the super-rich believe that they are no longer part of society and have little need of government, it is not because this belief corresponds to objective reality. It is because the prevailing story line of our time portrays markets as self-standing entities that run on their own fuel. This is a narrative that afflicts all segments of society, the middle class no less than the rich.

There is no reason to expect that the super-rich will act less selfishly than any other group. But it is not so much their self-interest that stands in the way of greater equality and social inclusion. The more significant roadblock is the missing recognition that markets cannot produce prosperity for long – for anyone – unless they are backed by healthy societies and good governance.



Copyright: Project Syndicate, 2014.
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