Reflections on the Upper Crust
By Darrell M. West
Brookings Institution Press Copyright © 2014 The Brookings Institution
All rights reserved.
The Controversy over Billionaires
AT THE TIME of his reelection campaign, several conservative billionaires were unhappy with the job performance of President Barack Obama. The economy was not doing well. There was uncertainty in foreign policy. Many of them believed that Obama was a poor leader. Irate about how things were going, they decided to devote several hundred million dollars to defeating the president. Individuals such as Sheldon Adelson, David and Charles Koch, and the late Harold Simmons and a group of wealthy donors assembled by Republican strategist Karl Rove felt that they needed to speak out to ensure that the country had stronger leadership and moved in what they considered a better direction.
But they were not the only super-wealthy people who were politically active. In recent elections, there has been an explosion of activism by the rich. Billionaires such as Michael Bloomberg, George Soros, and Tom Steyer have poured extensive resources into supporting their favored candidates and causes. In addition, wealthy individuals have bankrolled advocacy campaigns at the state level—for example, in support of same-sex marriage and marijuana legalization or in opposition to Obama's health care reform and higher taxes on the wealthy. Aided by friendly Supreme Court rulings and the rising cost of election campaigns, affluent people have discovered that they are in a strong position to affect a variety of different issues.
In researching this subject, I discovered that it is not just an American development but something that is happening globally. Billionaires have run for office in Austria, Australia, France, Georgia, India, Italy, Lebanon, the Philippines, Russia, Thailand, Ukraine, and the United Kingdom as well as the United States. Most of them have won. Oligarchs in Russia, so-called "princelings" in China, and tycoons in many other countries are becoming politically active and affecting public policy. Their political involvement raises important questions about excessive influence, especially in places where there is weak rule of law, overt corruption, and limited opportunities for social or economic advancement. The activism of the super rich is taking place against a backdrop of poor transparency, weak news coverage, accountability problems, and performance challenges on many different fronts in political systems around the world. With the "wealthification" of politics, those in the upper echelon, who as a group hold policy views that differ significantly from those of the general population, have access to many ways to influence the political process.
Wealth—its uses and its abuses—is a subject that has intrigued me since my youth in the rural Midwest. I was born on a dairy farm and grew up poor. When asked what our house was like when my parents moved to Ohio in 1947, my mother said, "There was no running water in it or hot water of any kind. No bathroom." Water was carried in from the barn. It was not until 1952, two years before I was born, that the house got cold running water. Indeed, because of the cows, the barn had running water before our house did. To do the laundry, Mom heated water on a gas stove, washed the clothes in a manual washer, ran them through a hand-cranked wringer, and then hung them on a line outside to dry. She didn't have an automatic dryer until much later in her life. Hot running water and an indoor bathroom were added in 1960, when I was six years old; the bathroom replaced the outhouse that the family had used before. In 1965, we got a furnace to replace the coal stoves in the kitchen and living room.
The contrast between the poverty of my youth and the privilege of my adulthood makes me very attuned to the role that wealthy people play in the United States and around the world. Not only has it made me curious about the lives of the rich, it has led me to ask questions regarding their political impact. The world's billionaires have had a major influence on other people. They have created new businesses, launched new products, and altered how people live, work, play, and communicate.
Yet much of the current debate regarding the political role of billionaires suffers from ideological short-sightedness. Progressives fear political activism when it is undertaken by conservative billionaires yet applaud it when liberal billionaires swing into action. Conservatives get worried when left-leaning billionaires dump a lot of money into elections but appreciate the advocacy efforts of their own billionaires and pro-business special interest groups. What each side misses are the challenges raised by billionaire activism for the system as a whole. Billionaires' extensive resources and advocacy efforts provoke questions about political influence, transparency, and accountability. At a time of high income concentration and dysfunctional political institutions, it is important to understand the impact that the ultra rich have on national life and the need for policies that promote better disclosure, governance, and opportunity.
Here, too, I have a personal perspective. From my perches in both the Ivy League, at Brown University, and the Brookings Institution, I have seen Americans of great wealth do positive things with their money and improve the lives of other people. Most of those that I know personally display admirable traits—vision, innovativeness, and entrepreneurship. Moreover, having received research grants from leading foundations as well as people of great wealth over a number of years, I have benefited professionally from their philanthropy. Some of those discussed in this book are or have been benefactors of Brown and others of Brookings, and they are identified as such. Their careers and practices illustrate different themes and observations, but what they have in common is a respect for institutional independence, academic freedom, and public transparency regarding sources of funding.
It is possible to admire individual billionaires but also fear their overall influence on elections, governance, and public policy. According to Forbes magazine, there are 1,645 known billionaires around the world, 492 of whom live in the United States. In this book, I study their political efforts in the United States and other countries and describe how they have pioneered more activist forms of politics and philanthropy. I argue that such activism presents major challenges in the areas of political influence, accountability, transparency, and system performance. Countries everywhere need policies that promote better disclosure and governance and preserve opportunities for a broader range of people.
The assets of the U.S. super wealthy—as reported on the Forbes list of billionaires—have more than doubled over the past decade. Ten years ago, these individuals controlled around $1 trillion; now their wealth has risen to more than $2 trillion. Economists Marco Cagetti and Mariacristina De Nardi show that 1 percent of Americans now own about one-third of the country's wealth.
Economists Thomas Piketty and Emmanuel Saez document how income concentration has risen over the past century. Figure 1-1 charts the share of pre-tax income accounted for by the top 1 percent of earners from 1913 to 2012. In 1928, the year before the Great Depression, that group garnered 21.1 percent of all income in the United States. Over the next 50 years, that percentage dropped to a low of 8.3 percent in 1976, then rose to 21.5 percent in 2007. It dropped to 18.8 percent in 2011 following the Great Recession, then rose again to 19.6 percent in 2012. Those figures show that income concentration today is similar to what it was in the 1920s and is more than double the degree during the post–World War II period.
More detailed statistics demonstrate that after-tax income stagnated for most workers from 1979 to 2009 but rose dramatically for the top 1 percent. Charting the percent change in real after-tax income for four groups of workers shows that during those 30 years, earnings rose 155 percent for the top 1 percent of earners, 58 percent for the next 19 percent of earners, 45 percent for the middle 60 percent, and 37 percent for the bottom 20 percent. And if a recent book by Thomas Piketty, Capital in the Twenty-First Century, is correct, money is likely to become even more concentrated in the future. Drawing on data from several countries over the past 200 years, he argues that the appreciation of capital outpaces that of the economy at large and of wages in particular. That benefits the people who already hold a lot of financial resources and increases the overall concentration of wealth.
Still another way to look at the income gap relies on the Gini coefficient, an economic measure developed in 1912 by the Italian sociologist Corrado Gini that is used to express inequality among different income levels. It runs from 0 to 1; 0 indicates that everyone has the same income, and 1 indicates that one person has all the income. The Gini coefficient for the United States was around .38 in 1950, dropped to .35 around 1970, and rose to .45 in 2010, demonstrating that financial inequality has increased substantially over the past 60 years.
Alex Cobham and Andy Sumner of the Center for Global Development have proposed a new metric that they call the Palma ratio, after economist Gabriel Palma, who argues that it is important that the "middle 50 percent" remain stable to ensure a society's social, economic, and political well-being. The Palma ratio compares the share of national income held by the top 10 percent of households with the share held by the bottom 40 percent. The authors find that the United States ranks forty-fourth among 86 countries in terms of inequality, a rank that makes U.S. inequality worse than that of virtually every other developed nation.
As a sign of how profound income divisions have become, increasing inequality has widened the gaps between different social groups. Over the past 25 years, the financial gulf between whites and blacks has nearly tripled. In 1984, the difference in wealth between the races was $85,000; by 2009, it had increased to $236,500. The gaps in homeownership, education level, and financial inheritance are responsible for most of these differences; for example, according to researchers, the "home ownership rate for whites is 28 percent higher than that of blacks." As Jennifer Hochschild and her collaborators at Harvard University point out, policymakers need to think seriously about the impact of these trends on social cohesion and political representation.
Financial concentration has increased not just in the United States but in many other countries around the globe. Research by Thomas Piketty and Gabriel Zucman finds that wealth has risen much more rapidly than incomes in eight developed nations: the United States, Britain, France, Germany, Italy, Canada, Australia, and Japan. They find that "wealth-to-income ratios in these nations climbed from a range of 200 to 300 percent in 1970 to a range of 400 to 600 percent in 2010"—a doubling of the wealth concentration over that time period.
The reality of inequality has generated considerable attention in many countries. In Russia and Eastern Europe, the super wealthy, who profited enormously from the cheap sell-off of state-owned enterprises following the fall of communism, are derided as "oligarchs." In China, the children of prominent Communist Party leaders, who are able to accumulate extensive wealth by using their family connections, are known as "princelings." A study undertaken by the China Family Panel Studies program at Peking University that examined 14,960 households in five leading Chinese provinces found that the top 5 percent earned 23 percent of the nation's total income. In addition, the top 25 percent in those provinces earned 59 percent of total income while the bottom quarter earned only 3.9 percent. That gave those areas a Gini coefficient of .49.
Despite those numbers, one Chinese billionaire downplays the dangers of income differentials. "We don't need to solve the problem of the rich-poor gap, we need to solve the problem of common prosperity," said Zong Qinghou, one of the richest men in China. He has a great fortune, which he earned from companies that sell soft drinks, milk for babies, and children's clothing. "If we had egalitarianism, we wouldn't have enough to eat," he said. In an argument that would resonate with many conservative politicians in the United States, he claimed that the best way to create wealth in China is to lower taxes in order to stimulate financial investment and economic growth. However, at least one migrant worker in China did not take kindly to his remarks. Shortly after they were publicized in the media, Zong was attacked by a knife-wielding jobseeker in Hangzhou. Some tendons in one of Zong's hands were cut, but otherwise the billionaire was not seriously harmed.
Looking at the world as a whole, the United Nations World Institute for Development Economics Research showed that in 2008, the top 1 percent of earners owned a total of 40.1 percent of overall global wealth, a share that is larger than the one-third of national wealth owned by the top 1 percent in the United States. As shown in figure 1-2, the Gini coefficient for global income has increased substantially over the past two centuries. According to World Bank economist Branko Milanovic, inequality rose from .43 in 1820, .53 in 1850, and .56 in 1870 to .61 in 1913, .62 in 1929, .64 in 1960, .66 in 1980, and .71 in 2002.
Political Activism of the Wealthy
The wealthy are much more politically active than the general public. In a "first-ever" public policy survey funded by the Russell Sage Foundation of "economically successful Americans," political scientists Benjamin Page, Larry Bartels, and Jason Seawright measured the activism and beliefs of the rich. They worked with the Wealthfinder "rank A" list of the top 2 percent of American households based on wealth and supplemented it with an Execu-Reach list of high-level business executives of major companies. In order to reach their intended population, they screened for the top "1% of wealth-holders" and completed interviews with those individuals. In talking with them, the researchers found that 99 percent of the wealthy said that they voted in presidential elections, almost double the rate of the general public. Most (84 percent) also reported paying close attention to politics. Two-thirds (68 percent) made campaign contributions to politicians; in stark contrast, only 14 percent of the general public does.
The reason is clear. Wealthy people know that political engagement matters. Being involved in politics yields benefits and enables them to express their views and influence results. Unlike the general public, which tends to be cynical about politics, believing that there is no difference between Republicans and Democrats and that politics is not a very good way to produce change, many affluent people seem to believe that politics matters and represents a way to affect national and international affairs. Indeed, a study by political scientist Lee Drutman of the top 1,000 campaign donors from 2012 (those who gave at least $134,000) found that two-thirds favored Republicans and the largest number of them came from the financial sector. (Continues...)
Excerpted from Billionaires by Darrell M. West. Copyright © 2014 The Brookings Institution. Excerpted by permission of Brookings Institution Press.
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