Economic Policy for the Worried Wealthy

Frank Pasquale

Why is the austerity movement so powerful in the US? Many people are hurting, and corporate, CEO, and finance sector gains since 2008 have been enormous. Why not expect a little more from the wealthy? Why are states from Arizona to New York going after poor Medicaid patients and schools instead? We know the economic case for austerity in a deep recession is bunk. Why its enduring appeal?

Perhaps voters have lost faith in the ability of the state to do anything competently, including redistribution. The always-insightful Elisabeth Young-Bruehl suggests as much, noting:

[Americans] have been led to believe that their well-being and their democracy depend upon the success of capitalism, with its limitless growth ideology; but this very capitalism is taking over their state. They have been promised that if America has a strong, competitive, innovative economy, the benefit of that will trickle down to all, just as Ronald Reagan promised it would. Even Barack Obama speaks this language. But it is becoming obvious that there is not going to be any trickle down. . . . [The system] is a closed loop, which is not designed to trickle anything much down to support those who are not in the loop[.]

As plutonomy advances, buying power is being segregated by the very wealthy into closed circuits of spending and investment. Young-Bruehl makes a similar case about political power in a post-Citizens United world. As Martin Gilens has shown, in the US, "actual policy outcomes strongly reflect the preferences of the most affluent but bear virtually no relationship to the preferences of poor or middle income Americans."

Yet that still leaves a puzzle. The wealthy in the US may have extraordinary influence over the political process, but they could use it in many different ways. Warren Buffett complained about being taxed less than his secretary, and Bill Gates's father has fought for the estate tax. Progressive thinkers like Bruce Judson, Robert Reich, and David Callahan have all hoped for the rise of a conscientious superclass. At some point the marginal value of money diminishes; why not spread it around a bit?

Anxious at the Top

I think Reich, Callahan, and Judson have failed to take into account the enduring anxietes of of America's rich. Consider two studies, and an anecdote, reflecting worry at the top of the income scale:

1) Millionaires: In the world, there are about "10.1 million people worth more than $1m excluding the value of their main homes." Roughly 8 million of them live in the U.S.. Among those, about a million ultra-high-net-worth households are worth $5 million or more, 120,000 have more than $25 million, and 10,000 have over $100 million.

Given that company, the mere millionaire has a lot of upward comparison to do. “Wealth is relative, and to some extent the more you have the more you realize how much more you need,” according to the President of Boston-based Fidelity Investments' National Financial Group. His team found that, among "more than 1,000 households surveyed [that] had an average of $3.5 million in investable assets[,] [a]bout 42 percent said they don’t feel wealthy, saying they would need about $7.5 million to feel rich." For these worried wealthy, the Obama-Boehner tax cut deal must have been particularly comforting. There might be some collateral damage from the resulting budget cuts, but who can really care about such matters with a mere one or two million dollars in the bank?

2) Decamillionaires: Unfortunately for those outside (or on the bottom end) of the "ultra-high-net-worth" winners circle, the more money one has, the more problems that might arise. Consider the research of BU sociologists on the lives of "people with fortunes in excess of $25 million." It is featured at The Atlantic, which, in between ads for Goldman Sachs and planning for its Aspen Ideas festival, earlier this year informed us that "we need a creative, dynamic super-elite more than ever." But that super-elite is worried:

[T]hey are frequently dissatisfied even with their sizable fortunes. Most of them still do not consider themselves financially secure; for that, they say, they would require on average one-quarter more wealth than they currently possess. (Remember: this is a population with assets in the tens of millions of dollars and above.) One respondent, the heir to an enormous fortune, says that what matters most to him is his Christianity, and that his greatest aspiration is “to love the Lord, my family, and my friends.” He also reports that he wouldn’t feel financially secure until he had $1 billion in the bank.

The sociologists also found that for many of the respondents, their single greatest aim in life was to give a good life to their children, whom they hoped would find meaning, purpose, and charitable outlets for their great fortunes. I imagine that when these children are surveyed in 20 years or so, we will find that their single greatest aim in life is to give a good life to their children, whom they hope will find meaning, purpose, and charitable outlets for their great fortunes.

3) Hectomillionaires: Finally, consider this exchange between an associate of Rajat Gupta, a Mr. Kumar, and Raj Rajaratnam:

Rajaratnam speculates on Gupta’s motive in joining KKR: “My analysis of the situation is he’s enamoured with Kravis, and I think he wants to be in that circle. That’s a billionaire circle, right? Goldman is like the hundreds of millions circle, right? And I think here he sees the opportunity to make $100 million over the next five years or 10 years without doing a lot of work.”

“At some point, what I worry about is that there can be this massive implosion in him,” Kumar adds, to which Rajaratnam responds: “He didn’t seem comfortable. He seemed like he was tormented, right?”

The mental agony of being so close to the billionaire's circle, but just not quite there, must be enormous. Those in the upper echelons of industry may well be looking at the 400 persons who own more wealth than half the country, and say, “why not me?”

So a pattern emerges. The "fear of falling" Barbara Ehrenreich diagnosed among middle class households in the 1990s has infected the very wealthy today. In a gentler age, perhaps they could rely on programs like TANF, Medicare, Social Security, home heating aid, and Medicaid to set a floor, some subsistence level of experience for them (or, more likely, the family they are apparently working so hard to keep secure). But the process of cutting taxes for the very wealthy (and campaigns among some of their number, like Pete Peterson and the Kochs) have rendered all those programs precarious. Many millionaires will need to pay a lot less taxes to join the ultra-high-net worth crowd, which in turn envies a finance elite. And why not---given the extremely low tax rates on "carried interest," hedge funders are getting quite a deal.

Exit, Voice, Royalty

In his moving book Lament for America, Brigham Young Professor of Political Science Earl H. Fry details the "indebtedness and inequalities" that crippled America's future. He contrasts our third "Gilded Age" with America's "very thin safety net:" "many live within one or two paychecks of financial disaster" (41). Perhaps the US would have more money for a robust safety net (and the infrastructure investment that Fry also calls for) if so much of our time and talent weren't plowed into the "guard labor" necessary to preserve present inequalities.

The "worried wealthy" can choose to create a more equal society, where no one could fall too far, or to build a fortress of personal wealth designed to keep generations secure from the vicissitudes of market driven "creative destruction." With so many choosing the latter course, we should not be surprised by Paul Mattick's prediction that:

[E]xistence on or over the edge of survival experienced today by the urban masses of Cairo, Dhaka, São Paulo, and Mexico City will be echoed in the capitalistically advanced nations, as unemployment and government-dictated austerity afflict more and more people, not just in the developed world's Rust Belts but in New York, Los Angeles, London, Madrid, and Prague.

Apart from further squeezing those in the middle and lower classes, there may be no other way to ensure that those on each of the levels of wealth mentioned above can continue their climb to higher income, status, and security.

X-Posted: Concurring Opinions.
Posted 3:47 PM by Frank Pasquale [link]