by Rob Horning

4 January 2011


I didn’t see Michael Moore’s Capitalism: A Love Story but apparently in the documentary he references this memo, written by some global-equities analysts at Citigroup, in which they describe the U.S., U.K. and Canada as “plutonomies”—economies in which income inequality is so vast, the spending propensity of nonrich people is statistically insignificant. The memo has cropped up again in this Atlantic article by Chrystia Freeland about the “new global elite.” Guess what: there are actual people behind those statistics about the top 1% earners, and reading about their lives will probably make you sick. Freeland notes (as the Citi memos also point out in graphs) that these wealthy people didn’t inherit their wealth and grow it from rents and asset appreciation; thus she suggests they are “economic meritocrats, preoccupied not merely with consuming wealth but with creating it.” How much merit has to do with it is debatable, but i does seem inarguable that the recentness of their rise has made them more actively concerned with adjusting the playing field to protect their wealth—keeping finance deregulated, securing tax cuts, etc. They had to earn their money by aggressively leveraging inequities and asymmetries in the economy, and thus learned how to create new opportunities along the same lines. This is what makes them the “working rich”—they work to make capitalism more unfair and generally less efficient and productive so that inequality can become even more obscene. Since they are internationally oriented and are loyal only to profit, not any country or people, they thrive on regulatory arbitrage schemes and other global shell games and are heedless of the damage their activities cause to the little people in local economies. (It helps, as Freeland notes, that the plutocrats’ sense of having to work to rise to the top makes them have no sympathy for those little people.) Of course, this doesn’t prevent governments from bailing their companies out or protecting the value of their bond holdings. The lesson, Freeland suggests, is that helping out Big Business and finance is basically helping them gut U.S. middle-class prosperity.

The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.

That sounds almost egalitarian and certainly utilitarian, but hedge funds don’t particularly care about the greatest happiness for the greatest number. That you can make poor people in developing economies slightly less poor for far less than it costs to keep middle-class Americans at the standard of living they’re used to is just an excuse to distract from the greater proportion they are raking out from economies everywhere.

In short, the new global elite sound a lot like the old “power elite” described by Wright Mills in the 1950s, only more horrible and with less a sense of responsibility for the damage they do from their position at the commanding heights. I am with Felix Salmon: “If the angry bankers went off to destabilize some other financial system, they wouldn’t actually be missed.”

Anyway, the Citi memo is definitely worth reading. It lays out the conditions of neoliberalism with no-nonsense aplomb:

we postulated a number of key tenets for the creation of plutonomy. As a reminder, these were: 1) an ongoing technology/biotechnology revolution, 2) capitalist-friendly governments and tax regimes, 3) globalization that re-arranges global supply chains with mobile well-capitalized elites and immigrants, 4) greater financial complexity and innovation, 5) the rule of law, and 6) patent protection…. The wave of globalization that the world is currently surfing, is clearly to the benefit of global capitalists, as we have highlighted. But it is also to the disadvantage of developed market labor, especially at the lower end of the food-chain… In general, on-going globalization is making it easier for companies to either outsource manufacturing (source from cheap emerging markets like China and India) or “offshore” manufacturing (move production to lower cost countries).

They assess the risk of a backlash against plutonomy but decide it is unlikely in the short term: “So long as economies continue to grow, and enough of the electorates feel that they are benefiting and getting rich in absolute terms, even if they are less well off in relative terms, there is little threat to Plutonomy in the U.S., UK, etc.” The memo dates from before the 2007 crash, but nothing that has happened since seems to have threatened it either. The U.S. has elected a rabidly pro-business Congress, and the financial regulation bill that passed did little to change the playing field, and in fact fits the analysts’ contention that “the cleaning up of business practice, by high-profile champions of fair play, might actually prolong plutonomy” by creating a broader-based illusion of systemic fairness.

I don’t know if the arch tone of the Citi document is or isn’t typical of analyst memos, but it’s not any kind of smoking gun. If you want to see evidence that the economy is skewed toward the wealthy and the plutocrats are pleased with that arrangement, just watch CNBC or read any day’s edition of the Wall Street Journal, where the ideology that capital matters and laborers don’t underwrites just about everything there. Controlling labor costs and increasing companies’ share of profits is always good and almost always described as if no people are affected adversely by those developments. And then there are the abhorrent lifestyle sections (like the FT’s How to Spend It), which detail the glories of luxury spending and facilitate the sort of heedless consumption that supports the investment strategy the Citi memo details—namely, buy stocks of luxury-goods companies, because given the political climate in the U.S., the rich will continue to get richer and this makes them comfortable with wasting money on yachts and things.

The Citi analysts gleefully track a Forbes “Cost of Living Rich” index, which shows how the cost of a basket of ridiculous luxury goods are rising faster than a basket of staples for ordinary people. Apologists for income inequality like to cite this sort of data as proof that inequality is overreported because it costs more to be rich, as though the lifestyle of outrageous wealth was an inescapable burden to be upheld. The Citi analysts at least have the intellectual honesty to present the data for more straightforward purposes, not to argue that inequality isn’t as bad as it might seem, but to suggest that inequality is a plain fact, a boon for the wealthy that expresses itself in their positional goods’ jumping in price. (The analysts go so far as to label luxury items “Giffen goods,” the demand for which increase as the cost of them rises). The wealthy spend more because they are making more; this doesn’t diminish the reality of income inequality; it’s a consequence of it.

The analysts also have an interesting explanation for the negative savings rate of the pre-recession mid-decade period. Many commentators (me included) would read into that the idea that too many ordinary Americans were spending beyond their means. The Citi memo argues that in a plutonomy, the flush and confident rich cut their savings and spend more on the increasingly expensive luxury goods, and their lack of savings skews the averages.

when the top, say 1% of households in a country see their share of income rise sharply, i.e., a plutonomy emerges, this is often in times of frenetic technology/financial innovation driven wealth waves, accompanied by asset booms, equity and/or property. Feeling wealthier, the rich decide to consume a part of their capital gains right away. In other words, they save less from their income, the well-known wealth effect. The key point though is that this new lower savings rate is applied to their newer massive income. Remember they got a much bigger chunk of the economy, that’s how it became a plutonomy. The consequent decline in absolute savings for them (and the country) is huge when this happens. They just account for too large a part of the national economy; even a small fall in their savings rate overwhelms the decisions of all the rest.

But of course if ordinary consumers are regarded as the problem, as being spendthrift and spoiled, then that’s all the better. Economic hard times can be made to seem like its their fault, a result of their alleged irresponsibility, and not the result of malfeasance by the superwealthy.

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