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Income Inequality and the Rise of the Alpha Geek 'Working Rich' Class


Author Chrystia Freeland discusses the rise of the new class of super-rich.

MINYANVILLE ORIGINAL Is income inequality necessarily problematic for a country? There's clearly no consensus answer to this question. For example, Kip Hagopian and Lee Ohanian at the right-leaning Hoover Institution argue that a more important measure of national well-being is the equality of economic opportunity, not income.

While the faults of income inequality are disputed by some, there can be little doubt that it exists today. "In the 1970s, the top 1% [of income earners] accounted for roughly 10% of the national income. Today, that number has jumped to above 20%. Even more strikingly, the top 0.1% is getting close to 8% of national income," pointed out Chrystia Freeland, editor of Thomson Reuters Digital, at a recent panel discussion of her new book, Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else in New York.

In her book, Freeland notes that the rise of the super-rich was a global phenomenon and that it is different today than it had ever been. She cites a study by Serbian economist Branko Lilanovic, who sought to find out who the richest person that ever lived was. Looking across history at the likes of patricians (aristocratic families in ancient Rome), pharaohs, the House of Medici, and the robber barons, Milanovic calculated that the richest person ever in the history of the world was Carlos Slim. That "gives you a sense of how rich is really different today," Freeland said.

"So what are the drivers of this phenomenon? The Right tends to favor the economic drivers – the power of the technology revolution, globalization, the spiral of the winner-takes-all economy. On the Left, there tends to be a favor for the political arguments: changes in taxation policies, deregulation, privatization, the weakening of unions, a cultural shift that has made it more acceptable to pay a CEO 400 times, rather than 50 times, what the average worker earns," she explained.

For her part, Freeland said that it was important not to de-emphasize the role of the technology revolution. "That's the scariest thing. I think the technology revolution is great! We have an iPad (NASDAQ:AAPL) and iPhone here on the table. I have a BlackBerry (NASDAQ:RIMM) but that's just because I'm Canadian. I'm a fan of globalization as well," she said.

"The fact that these generally benign, positive, and powerful economic forces are creating, at least in part, an outcome that is, from my standpoint, politically and socially undesirable -- that makes it worse. It's easy to criticize bad that creates bad. Good that creates bad is a lot harder to deal with," Freeland elaborated.

Freeland described the new class of global super-rich plutocracy as "the rise of the alpha geeks." These new wealthy individuals could also be characterized as "the working rich," although "that is not to say these are guys who rose up from the gutter to extreme wealth."

Mitt Romney, a prototypical Alpha Geek
"A good example is someone like Mitt Romney. No one would claim he was born into poverty. But he can quite fairly, I think, say about Bain Capital that he built it. He didn't inherit it. And that is characteristic of these guys. They didn't inherit businesses that made their great fortunes. They built them," explained Freeland.

What makes these guys alpha geeks? Freeland said they were geeks because numeracy was the key to success in many areas. The world of finance and Wall Street immediately comes to mind, though she highlighted that it was also apparent in emerging markets such as Russia, China and India.

"When you think of a Russian oligarch, you probably imagine some guy with a bevy of supermodels on one side and a bunch of bodyguards with Kalashnikov rifles on the other. And this is correct. But – I know a lot of them – that guy probably also has a PhD in math or physics. It turns out that even with the accumulation of wealth in Russia that is largely about political clout, being extremely numerate helped," Freeland shared.

This new group of super-rich alpha geeks is also extremely global, Freeland mentioned, adding that Glenn Hutchins, founder of Silver Lake Capital, told her, "An African businessman with an MBA from Harvard who is a multimillionaire – he has more in common with me and I have more in common with him than we do with people in our home communities and we probably spend more time with each other." The new elites were all part of "the tribe of the Four Seasons," because of how much time they spent in the hotel chain's many different locations.

Even if the new class of super-rich, including Silicon Valley leaders like Microsoft's (NASDAQ:MSFT) Bill Gates or Facebook's (NASDAQ:FB) Mark Zuckerberg, are members of the so-called "working rich," that does not mean that they can better relate to the rest of the population compared to how aristocrats in the past related to the peasants, Freeland observed.
Young Alpha Geek Mark Zuckerberg
When she asked her wealthy interview subjects about how globalization has caused the hollowing out of the middle class in the US, she said that one hedge fund manager told her, "The truth is that the low-paid American worker is the most overpaid worker in the world. It gives me no comfort to say it but that's the truth. [Americans] demand a higher paycheck than the rest of the world. So if you demand 10 times the pay, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to take a pay cut."

Another interview subject, "the CEO of one of the biggest money managers in the world," told Freeland that his co-worker said to him, "Look, if three or four people in India or China rise into the middle class, and one American is pushed out of it, is that really such a bad thing? Isn't that a good trade?"

Why is it the new "working rich" still cannot relate to the average American? Another panelist at the discussion, Robert H. Frank, a management and economics professor at Cornell University, argued that it is the very fact that the new plutocrat class became rich through earning paychecks that creates the divide. There is no longer a capitalists vs. labor divide today like there was in the past between the rich and the poor since the former now 'work' for a living. Ostensibly, that would mean the rich could better relate to the middle class. However, Frank asserted, the opposite occurs because the rich justifies their much-bigger paychecks by thinking that they were superior to the rest of the population.

"At the tail end of the gilded age, the richer you were, the more likely you were to rely on capital -- that is ownership of something like a factory -- for your social position, so that your position in a market was fundamentally different from other people because workers don't own factories," explained Frank. "Today… nobody really owns a factory anymore. What rich people do for their wealth is primarily earning… Culturally, the experience of thinking you are rich because you have a paycheck rather than because you own something means that you're not different from anyone else. You're actually just like them. You get up in the morning, you go to work, and you earn a paycheck. Your paycheck is higher not because you're different from other people but because you're better than other people. That explains your paycheck."

Of course, what's a discussion about the rise of the super-rich without a mention of the tax hikes for the wealthy that President Obama has been advocating for in the past year? Freeland mentioned that many of the super-rich she spoke to on the issue had a "profound sense of victimization" that was "directed chiefly at the president and his comments about millionaires and billionaires who need to contribute more."

The most egregious case she cited was when, in 2010, Stephen Schwarzman, chairman and CEO of Blackstone Group (NYSE:BX), compared Obama's plan to raise the carried tax rate to Hitler invading Poland. She added that TJ Rodgers, founding CEO of Cypress Semiconductor (NASDAQ:CY), told her as well that "to be rich [in America] is like being a member of an ethnic minority."

Foster Friess, Freeland said, perhaps best exemplified the way the plutocrats thought about raising taxes on the wealthy. "People don't realize how wealthy people self-tax… In Phoenix, [the former CEO of Target (NYSE:TGT), Bob Ulrich,] created a museum of music. He put in around $200 million of his own money. I have another friend who gave $400 million to a housing facility in Nebraska or South Dakota, or some place like that. You look at Bill Gates, [who] just gave $750 million to fight AIDS. I think we should get rid of taxes as much as we can. Because you get to decide how to spend your money rather than the government," Friess said in February, according to Freeland.

"If you look at what Steve Jobs has done for us, what Bill Gates has done for society, the government ought to pay them," Friess continued. "It's that top 1% that probably contributes more to making the world a better place than the 99%. I've never seen any poor people do what Bill Gates has done. I've never seen poor people hire many people. So I think we need to honor and uplift the 1% who have created value."

Twitter: @sterlingwong
No positions in stocks mentioned.
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