June 29, 2009 Edition
G R E E D R A G E S O N
So how much wealth have the world’s wealthy lost since the global economy oozed into meltdown mode last September? And how has that meltdown impacted how average people feel about the fabulously wealthy? Good questions. Last week brought some answers.
The first set came from two corporate pillars of the financial “wealth management” community. They’ve just released the first comprehensive survey of grand fortune in the post-meltdown global economy.
The second comes courtesy of a top foundation that last year commissioned a massive study to figure out just what’s driving public attitudes on inequality. In that mission, amazingly enough, the study seems to have actually succeeded.
In this week’s Too Much, we explore all this welcome wisdom and the enlightening numbers behind it.
Corporate boards of directors, whenever bashed for lavishing excessive pay on their top execs, have a standard rejoinder. We only pay, the boards insist, for performance. What they don’t say: Every exec “performs” well at something. Take Gregg Steinhafel, the CEO of retail giant Target. In 2008, the company failed to meet its annual financial goals. But Target handed Steinhafel $12.9 million for the year anyway, including a $447,680 bonus. The company’s directors credited that reward to “the strength” of Steinhafel’s “leadership during a period of significant economic challenges and his focus on greater strategic alignment, transparency, and clarity throughout the organization.”
The windfalls that go to CEOs like Gregg Steinhafel, one outspoken former CEO charged last week, lie “at the root of all corporate crimes and misbehavior.” In a Financial Times op-ed, ex-AT&T Broadband chief Leo Hindery called on Congress to cap executive pay at “a reasonable multiple of average employee compensation — say, 35 times — and then penalize through tax policies those companies that elect to pay anyone in excess of this multiple.” CEOs today, Hindery noted, make 400 times what their workers make. Added the business leader: “We are now far past the point where extreme disparity in compensation is primarily an ethical embarrassment: it has become a 30-year-old flesh-eating bacterium that is gnawing away at our economy.”
The Asian Development Bank is using a different metaphor to ring out a warning against extreme inequality. India’s massive “concentration of wealth and influence,” contends a new report from the bank published last week, could become “a hidden time bomb under India’s social fabric.” That intense concentration, says the bank-funded study, is leaving South Asia’s biggest nation “vulnerable” to the corruption and oligarchic political pressures that trap developing countries in economic stagnation. India’s 50 billionaires last year reportedly held 80 percent of the nation’s corporate stock . . .
Larry MullenThe drummer who pounds the beat for the world’s top rock band last week blasted his native Ireland’s “new resentment of rich people.” Getting in and out of the Emerald Isle, railed U2’s Larry Mullen, has become “more difficult than it should be — not only for us, but for a lot of wealthy people.” It’s all about, he vented, “the better-off being sort of humiliated.” One possible source of the “resentment” Mullen is feeling: Almost half of Ireland’s richest 50, news reports revealed in April, “have registered their operations or themselves in overseas havens” to avoid Irish taxes. Still, as one Irish commentator noted last week, Ireland’s super rich do indeed have reason to feel put upon: “Their Rolls-Royces and Bentleys are often held up in traffic because of the congestion caused by people pointlessly driving around to answer a help-wanted ad.”
Meanwhile, in Switzerland, officials at the canton of Obwalden have been doing everything imaginable to make rich people feel wanted. Three years ago, the canton chopped corporate taxes and cut the personal income tax down to a flat 1.6 percent. Millionaire CEOs who’ve established legal residence in the canton now pay taxes at the same rate as the poorest locals. But this generosity toward grand fortune hasn’t paid off. Few rich are actually moving in. They’re merely establishing post office box presences to reap the canton’s tax benefits. Disappointed Obwalden officials have now gone to Plan B. They’ve designated spectacularly scenic local land previously off limits to development as “special living zones” for millionaires. Locals fighting the designation have Swiss environment chief Moritz Leuenbergeran for an ally. Charges the government minister: “These special living zones are nothing less than a form of apartheid.”
Quote of the Week
“They just don’t get it.”
Senator Christopher Dodd
(D-Connecticut), after bailed-out banking giant Citigroup revealed plans to double salaries, to offset lost bonus dollars, for power suits not subject to bailout pay restrictions, June 24, 2009
For the World’s Wealthy, A Slight Setback
Thirteen years ago, two firms that manage the wealth of the world’s wealthy — New York’s Merrill Lynch and the Paris-based Capgemini — began publishing an annual scorecard that tracks just how many wealthy people inhabit our globe and just how many trillions these wealthy have at their ready, available to invest.
Year after year, the two firms tracked these trillions piling ever higher and higher. At 2007’s close, their World Wealth Report last year pronounced, our globe’s “high net worth individuals” held a combined $40.7 trillion — and that total didn’t include the value of the primary homes where these “HNWIs” lived or the art they hung on their walls or the jewelry they hid away in their safes.
Last week, the good news ended. In 2008, Merrill Lynch and Capgemini informed the world Wednesday, the global population of high net worth individuals — people with at least $1 million in investable assets — fell by 14.9 percent. The combined wealth of these individuals sunk even further, dropping 19.5 percent.
The super rich, notes the 2009 edition of the annual World Wealth Report, did even worse. The ranks of “ultra” high net worth individuals — people worth at least $30 million — fell by just under 25 percent. These ultras, as a group, lost nearly 24 percent of their financial wealth.
The new Merrill Lynch/Capgemini world wealth scorecard dubs these declines “unprecedented,” and media reports have been echoing that message around the world. “Credit crunch takes toll on super-rich,” headlined one international business daily last week. “Rich list shrinks,” read another.
But these headlines — and the new World Wealth Report — miss the more fascinating story in the latest numbers on global fortunes. Last year’s meltdown of the global financial system certainly did put a dent on grand fortunes. Yet despite that meltdown, the worst economic collapse since the 1930s, the holders of the globe’s grandest fortunes remain incredibly fortunate.
The world’s high net worth individuals turn out to have ended 2008 with $32.8 trillion in wealth, not much less than the $33.4 trillion they held at the end of 2005. In other words, 2008’s great meltdown cost the world’s wealthy the gains they registered in 2006 and 2007 — and nothing more.
These wealthy, especially those individuals who fall into the World Wealth Report “ultra” high net worth category, continue to hold a stunningly disproportionate share of the world’s wealth.
About 80,000 individuals worldwide qualify as ultras. These super rich make up roughly 0.001 percent of the world’s population. They hold, even after the 2008 economic collapse, 10 percent of our planet’s entire wealth.
These wealthy did “scale back” some on their personal consumption in 2008. In the United States, home to 28.7 percent of the world’s high net worth individuals, fine art auction sales totaled only $2.9 billion in 2009, “down $1 billion from 2007,” the new World Wealth Report relates, and U.S. sales of Lamborghini luxury cars dropped 21 percent last year.
But the amount of cash sloshing in wealthy pockets, meltdown notwithstanding, remains enormous. In December 2008, the new World Wealth Report observes, one historic diamond gaveled off in London for $24.3 million, “the highest price for any diamond or jewel ever sold at auction.”
The analysts at Merrill Lynch Global Wealth Management and Capgemini see more records ahead. They note that the last bump on the wealth accumulation road, the 2001 bursting of the tech bubble, proved only a temporary brake on the concentration of global wealth. Between 2002 and 2007, the value of the world’s high net worth individual fortunes soared a blistering 9 percent per year.
The World Wealth Report analysts aren’t anticipating that the world’s global political leaders will do anything that might jeopardize a repeat of this uptick. Capgemini and Merrill Lynch, the report sums up, “expect the recovery in HNWI wealth to be similarly robust this time around.”
But these analysts, in their previous World Wealth Reports, failed to see last year’s global financial meltdown coming. If a global movement to more equally distribute the world’s wealth were on the way, they’d likely be among the last to see that coming, too.
Rethinking the Undeserving Rich
Louise Bamfield and Tim Horton, Understanding attitudes to tackling economic inequality. Joseph Rountree Foundation, June 2009.
Sometimes researchers just get lucky. They spend months plotting out a strategy for conducting their research. They head out “into the field” to start their work. But then something happens, something entirely unexpected, that makes their research far more important — and fascinating — than they could have ever imagined.
Count Louise Bamfield and Tim Horton among the lucky ones. A while back, the Joseph Rountree Foundation, a respected British nonprofit that focuses on fighting poverty, asked these two veteran researchers to explore “the apparent contradiction” between widespread public unease about inequality and the much more limited public support “for measures to address it.”
Bamfield and Horton readied a major investigatory effort to do just that, complete with a series of face-to-face focus groups and broader public opinion surveys that would quiz a cross-sampling of over 5,500 British adults.
Last July, Bamfield and Horton began their field research. Three months later, in mid-September, the global economy collapsed. Bamfield and Horton suddenly had a “before” and an “after,” a totally serendipitous opportunity to study whether the worst economic calamity of modern times has altered public attitudes toward inequality — and those who benefit from it.
The two have seized, to the fullest, that opportunity. And what they’ve found should excite those of us who worry about inequality on both sides of the Atlantic. Their findings, to be sure, cover only British public opinion, but the British people, over the last 30 years, have lived through a growing inequality that mirrors almost exactly what Americans have experienced.
The grand meltdown that heated up last September, Bamfield and Horton have found, has had a definite public opinion impact. Attitudes towards inequality have changed, and substantially so.
Before the collapse, the two researchers found many people of modest means willing to justify, as deserved, the rich rewards that go to society’s most fortunate. That finding didn’t surprise them. Over the years, a substantial body of attitudinal research has shown that most of us have a need, as social creatures, to believe we live in a just and orderly world.
Psychologically, we almost have to believe this. If we believed otherwise, if we believed we lived in a deeply unjust world, then the daily pressure on us to resist and “do something” would, over time, become almost soul-crushing.
So to live life on a daily basis, we adapt “coping strategies” to justify the inequality around us. We ascribe unfavorable character traits, like laziness, to the poor. We ascribe positive character traits, like industriousness, to the rich.
In their research before September, Bamfield and Horton found this “coping” dynamic widely at work. But that changed after the collapse. People were no longer going “to great lengths to justify pay at the top as deserved.” A willingness to give the rich the benefit of the doubt had given way “to anger at perceived reward for failure and greed.”
“The credit crunch,” note Bamfield and Horton, “has effectively expanded the size of the ‘undeserving rich’ in the public’s mind.”
And with that expansion has come expanded support for measures that would significantly reduce inequality. The shifts in public attitudes since September, the two investigators observe, have “opened up new space for action on corporate pay and the taxation of high earnings.”
One example: 70 percent of British adults now believe that “ordinary employees should be represented on the compensation committees that decide how much executives get paid.” Only 6 percent disagree. Another: By a 56-to-20 percent margin, people want executives at failed companies to “pay back their bonuses from the last two years.”
Even considerably bolder antidotes to inequality now have significant public support. Nearly four in ten of British adults, 39 percent, now support the idea of setting a “maximum wage,” with £250,000, the equivalent of around $400,000, the most favored level. Less than half, 49 percent, oppose this notion.
The most intriguing insight from this remarkable research: Even those people most willing to accept inequality in the philosophical abstract — because they believe, for instances, that anyone willing to work can better their lot in life — can become willing to support policies that narrow gaps in income and wealth.
This willingness became particularly pronounced when Bamfield and Horton shared with survey participants evidence that extreme inequality has consequences on society as a whole, that levels of interpersonal trust and mental health, for instance, tend to sink as inequality increases.
Most people, the researchers note, find these linkages “intuitively plausible.” A more equal society, we might add, has now become eminently achievable.
Stat of the Week
How much do CEOs of major American corporations have to worry about getting fired? Not much. So far this year, note new figures from Booz & Co. analysts, 12.1 percent of major U.S. companies have replaced their CEOs. But only one-third of these replacements came after a force-out.
About TOO MUCH
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