Plutocrats

understand how American capitalism—and capitalism around the world—is changing, you have to look at what is happening at the very top. That focus isn’t class war; it’s arithmetic.

Larry Summers, the Harvard economist and former secretary of the Treasury, is hardly a radical. Yet he points out that America’s economic growth over the past decade has been so unevenly shared that, for the middle class, “for the first time since the Great Depression, focusing on redistribution makes more sense than focusing on growth.”

The skew toward the very top is so pronounced that you can’t understand overall economic growth figures without taking it into account. As in a school whose improved test scores are due largely to the stellar performance of a few students, the surging fortunes at the very top can mask stagnation lower down the income distribution. Consider America’s economic recovery in 2009–2010. Overall incomes in that period grew by 2.3 percent—tepid growth, to be sure, but a lot stronger than you might have guessed from the general gloom of that period.

Look more closely at the data, though, as economist Emmanuel Saez did, and it turns out that average Americans were right to doubt the economic comeback. That’s because for 99 percent of Americans, incomes increased by a mere 0.2 percent. Meanwhile, the incomes of the top 1 percent jumped by 11.6 percent. It was definitely a recovery—for the 1 percent.

There’s a similar story behind the boom in the emerging markets. The “India Shining” of the urban middle class has left untouched hundreds of millions of peasants living at subsistence levels, as the Bharatiya Janata Party discovered to its dismay when it sought reelection on the strength of that slogan; likewise, China’s booming coastal elite is a world apart from the roughly half of the population who still live in villages in the country’s vast hinterland.

This book is, therefore, an attempt to understand the changing shape of the world economy by looking at those at the very top: who they are, how they made their money, how they think, and how they relate to the rest of us. This isn’t Lifestyles of the Rich and Famous, but it also isn’t a remake of Who Is to Blame?, the influential nineteenth-century novel by Alexander Herzen, the father of Russian socialism.

This book takes as its starting point the conviction that we need capitalists, because we need capitalism—it being, like democracy, the best system we’ve figured out so far. But it also argues that outcomes matter, too, and that the pulling away of the plutocrats from everyone else is both an important consequence of the way that capitalism is working today and a new reality that will shape the future.

Other accounts of the top 1 percent have tended to focus either on politics or on economics. The choice can have ideological implications. If you are a fan of the plutocrats, you tend to prefer economic arguments, because that makes their rise seem inevitable, or at least inevitable in a market economy. Critics of the plutocrats often lean toward political explanations, because those show the dominance of the 1 percent to be the work of the fallible Beltway, rather than of Adam Smith.

This book is about both economics and politics. Political decisions helped to create the super-elite in the first place, and as the economic might of the super-elite class grows, so does its political muscle. The feedback loop between money, politics, and ideas is both cause and consequence of the rise of the super-elite. But economic forces matter, too. Globalization and the technology revolution—and the worldwide economic growth they are creating—are fundamental drivers of the rise of the plutocrats. Even rent-seeking plutocrats—those who owe their fortunes chiefly to favorable government decisions—have also been enriched partly by this growing global economic pie.

America still dominates the world economy, and Americans still dominate the super-elite. But this book also tries to put U.S. plutocrats into a global context. The rise of the 1 percent is a global phenomenon, and in a globalized world economy, the plutocrats are the most international of all, both in how they live their lives and in how they earn their fortunes.

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Henry George, the nineteenth-century American economist and politician, was an ardent free trader and such a firm believer in free enterprise that he opposed income tax. For him, the emergence of his era’s plutocrats, the robber barons, was “the Great Sphinx.” “This association of poverty with progress,” he wrote, “is the great enigma of our times…. So long as all the increased wealth which modern progress brings goes but to build up great fortunes, to increase luxury and make sharper the contrast between the House of Have and the House of Want, progress is not real and cannot be permanent.”

A century and a half later, that Great Sphinx has returned. This book is an attempt to unravel part of that enigma by opening the door to the House of Have and studying its residents.

ONE HISTORY AND WHY IT MATTERS

1,000,000 people overseas can do your job. What makes you so special?

—A 2009 billboard above Highway 101, the road that connects Silicon Valley with San Francisco

THE SECOND GILDED AGE

If you are looking for the date when America’s plutocracy had its coming-out party, you could do worse than choose June 21, 2007. On that day, the private equity behemoth Blackstone priced the largest American IPO since 2002, raising $4 billion and creating a publicly held company worth $31 billion at the time of the offering. Steve Schwarzman, one of the firm’s two cofounders, came away with a personal stake worth almost $8 billion at that time, along with $677 million in cash; the other, Pete Peterson, cashed a check for $1.88 billion and retired.

In the sort of coincidence that delights historians, conspiracy theorists, and book publishers, June 21 also happened to be the day when Peterson threw a party—at Manhattan’s Four Seasons restaurant, of course—to launch his daughter Holly’s debut novel, The Manny, which lightly satirized the lives and loves of financiers and their wives on the Upper East Side. The book fits neatly into the genre of modern “mommy lit”—USA Today advised its readers to take it to the beach—but the author told me that she was inspired to write it in part by her belief that “people have no clue about how much money there is in this town.”

Holly is slender, with the Mediterranean looks she inherited from her Greek grandparents—strong features, dark eyes and eyebrows, thick brown hair. Over a series of conversations Ms. Peterson and I had after that book party, she explained to me how the super-affluence of recent years has changed the meaning of wealth.

“There’s so much money on the Upper East Side right now,” she said. “A lot of people under forty years old are making, like, $20 million or $30 million a year in these hedge funds, and they don’t know what to do with it.” As an example, she described a conversation at a dinner party: “They started saying, if you’re going to buy all this stuff, life starts getting really expensive. If you’re going to do the NetJets thing”—this is a service offering “fractional aircraft ownership” for those who do not wish to buy outright—“and if you’re going to have four houses, and you’re going to run the four houses, it’s like you start spending some money.”

The clincher, Peterson said, came from one of her dinner companions. “She turns to me and she goes, ‘You know, the thing about twenty is’”—by this she means $20 million per year—“‘twenty is only ten [after taxes].’ And everyone at the table is nodding.”

Peterson is no wide-eyed provincial naif, nor can she be accused of succumbing to the politics of envy. But even from her gilded perch, it is obvious that something striking is happening at the apex of the economic pyramid.

“If you look at the original movie Wall Street, it was a phenomenon where there were men in their thirties and forties making two and three million a year, and that was disgusting. But then you