I’ve just finished reading Chrystia Freeland’s new book, Plutocrats, which comes out on October 15. She ascribes the rise of the new global super-elite to the twin gilded ages of rapid development in the BRIC nations, plus the technology revolution. But at the book’s end, she warns about the vulnerability of capitalism in a period where the few benefit greatly and the vast majority of people have stagnating or declining standards of living.
I spoke to Freeland (disclosure: a friend as well as professional acquaintance in her job at Thomson Reuters) today. She said, “I grew up in a family that immigrated to Canada from the Ukraine, from the rigid controls of Communism to the wonders of the free market. That makes me inclined to believe in capitalism. But I am very much concerned about the attitude of some of the newly rich that the present disparity of income is more than deserved and that the system operates just fine for all who work hard.”
Here is the statistical back-drop: There are 29 million millionaires, an equal percentage (37 percent) in North America and Europe, plus 23 percent in Asia. There are 85,000 Ultra High Net Worth Individuals, says Credit Suisse, of whom 29,000 have over $100 million in investable assets. The U.S. is home to 44 percent of them, Europe 28 percent and most of the balance in Asia. Professor Emmanuel Saez of the University of California, Berkeley, found that in the 2009-10 recovery, 93 percent of the gains went to the top 1 percent and 37 percent of the gains to the top .01 percent, those 15,000 people with incomes of over $24 million that year.
The vast majority of these wealthy individuals are self-made, or what Chrystia calls the “working rich.” According to the U.S. Treasury, two-thirds of the income of the wealthy comes from wages (not Mitt Romney as he was in a private equity firm and gets capital gains treatment). They tend to be men; only 104 of the 1,226 billionaires in the recent Forbes list are women, most often “wives, widows and daughters,” Freeland wrote.
Freeland is very concerned about the CEO who is a manager, not a founder, getting confused about appropriate levels of compensation. She writes, “The surge in CEO salaries coincides with the rise in bosses hired from outside the firm. In the 70s and 80s, 85 percent of CEOs were company men; this has risen substantially in the past two decades.” In the 70s, CEOs earned 30 times the average worker’s wage; today, it is 110 times more. The author contends that the finance sector accentuates this differential.
The U.S. presidential campaign has brought to the fore the question of taxes, the slow economic growth and fairness (most recently, the comment by Mitt Romney about the 47 percent of Americans who do not pay taxes). Many of my acquaintances from Wall Street feel fervently that President Obama is anti-business, a man devoted to wealth redistribution instead of wealth creation, by suggesting that tax rates return to the Clinton-era level for the highest income earners. As Freeland notes, “The rage in the C-suite is driven not merely by greed but by…a wounded incredulity that anyone could think them villains rather than heroes. Aren’t they the ones whose financial and technological innovations represent the future of the American economy?”
The author and I agree on the virtues of capitalism, its ability to transform economies, to catapult the poor into middle class comfort, the incentive to innovate and flexibility to change. And while I do not believe it is in business’ interest to take onto itself the burden of the greater good, which is the proper role of a democratically elected government, it must go beyond talking about profitability. Business needs to make the case that it contributes to the betterment of society and creates jobs. Its role must be to remain profitable while being a responsible corporate citizen to the communities in which it operates and beyond.
For more information on Chrystia Freeland’s new book, Plutocrats, see here.
Richard Edelman is president and CEO.