Economic inequality is coming to the forefront of the national agenda, and while the Democrats believe that this issue gives them an edge, both political conservatives and business leaders are voicing concern and are seeking solutions to the income gap. Lloyd Blankfein, CEO and chairman at Goldman Sachs, told CBS News recently that income inequality could destabilize and divide the country, threatening economic growth and personal success.
In 1982, when Forbes magazine created its list of 400 richest Americans, those who made it were scandalized and some even fought to be removed from it. Now, people sue Forbes for underestimating their fortunes, whereas the Forbes list of global billionaires is updated daily, with 33,000 fans following the daily fluctuations of their net worth on Facebook.
Those fortunes have gotten pretty large indeed. In 1982, there were just 13 billionaires in the entire country, and the other 387 super-wealthy were mere multimillionaires . Now, a billion bucks won’t even get you a place among the top 400. To make it to the top 10 last year, New York Mayor Mike Bloomberg needed $31 billion, or $13 billion in 1982 dollars. That’s six times more than shipping magnate Daniel Keith Ludwig, then the richest man in the United States, was worth. By other measures, such as ownership of GDP and the gap between the wealthiest 5% and the rest of the nation, wealth and income distribution has become even more skewed.
New Gilded Age
The issue of inequality has come to the fore most recently thanks to a book by French economist Thomas Piketty titled, with an eye on Karl Marx’s magnum opus, Capital in the 21st Century. But the emergence of the super-rich—global, highly mobile and linked by business and personal ties—is not a new concern. What has grown is alarm at how this class, which concentrates so much economic power, owns so many financial and real assets and is increasingly powerful politically, will impact the future of the world economy and America’s democratic system.
Piketty believes that the new economic reality brings us back to the late 19th and early 20th century, which is known in French as La Belle Époque and which Americans more sarcastically call the Gilded Age. It was an era when huge American industrial fortunes were built. In fact, in 1982 the list of wealthiest Americans was still dominated by descendants of robber barons and captains of industry. Of the 400 richest Americans back then, 53 came from just three families, the Hunts, the Rockefellers and the Du Ponts. More than half of people on the list had family money.
But it was also a period of considerable social unrest in the U.S. And in Europe the emergence of a class of super-rich industrialists was followed by a world war, revolutions, rise of dictators, economic collapse and another, even bloodier war.
The great fortunes of today are very different from those of the Gilded Age—and even from the early post-World War II decades. Prior to the recent florescence of financial markets and spread of financial capitalism, wealth was determined mainly by real estate, commercial networks, railroads, coal, oil, steel, factories and other brick-and-mortar, tangible assets. Even in 1982, oil and manufacturing fortunes represented nearly 40% of those who made it to the Forbes’ 400 list. Productive assets, moreover, were still assessed more by their book value rather than market value.
Wealth in the late 19th century grew out of the industrial revolution, and the riches of the day came from various parts of heavy industry as well as products for consumers, manufactured in large quantities at large industrial plants. Today’s new fortunes grew out of the IT revolution, and Bill Gates, Larry Ellison and Jeff Bezos are the Rockefellers and Du Ponts of today, the richest among a slew of high-tech entrepreneurs who dot the list of the super-wealthy. Another well-represented group are financiers, starting with such household names as Warren Buffett, Carl Icahn and George Soros and down to hedge fund managers and private equity wizards with $1–2 billion fortunes.
Wall Street Success
The fortunes of most of the super-wealthy class that came into being over the past three decades are very closely linked to the stock market. The net worth of most of these individuals is determined mainly by the collective wisdom of the stock market.
Take Jeff Bezos, whose stake in Amazon, worth $28 billion, puts him in 12th place on this year’s 400 list. Amazon shares trade at a price-to-earnings ratio of over 500. Whether or not this is justified, consider that the average for the S&P 500 is 20, which itself is elevated by historical standards since the average over the last 100 years was closer to 15. If Amazon’s share price were to come down to match the current average P/E, Bezos’ fortune would diminish by a factor of 25. A return to a historic average would drop Bezos from billionaire ranks altogether.
On a Forbes website you can now track the daily reversals of fortune of your favorite billionaire. As stock prices fluctuate, everyone’s net worth goes up or down. Usually this is by no more than a mere dozen millions, but sometimes there is a huge rise or fall thanks to an IPO, acquisition or profit warning.
In fact, the stock market can be fickle. The previous two presidents discovered at the end of their respective second terms that the prosperity the country had enjoyed with them at the helm was nothing but a flash in a pan. In 2000–02, the Dow Jones industrial average lost more than a quarter of its value, peak to through, and then more than half in 2008.
The Dow and the broad-based S&P 500 are now at records, and the Nasdaq Composite index is inching close to its 2000 record just above 5,000. Valuations, as measured by P/E ratios, are also quite rich. On the other hand, profits are healthy, the global economy continues to chug along and U.S. consumers are starting to turn on their pent-up demand.
The current economic recovery has been sustained by unprecedented financial stimulus. The Federal Reserve boosted reserves in the banking system by around $3.5 trillion since 2007. For the past seven years money effectively has been free. Savers have been, in effect, paying borrowers interest in real terms for the privilege of lending them their money. Over the same period, the federal debt ceiling has been raised by over $7 trillion, to more than $17 trillion.
The extra liquidity from very loose monetary and fiscal policy not only inflated a speculative bubble in the stock market but sustained consumption in the U.S. and contributed to much stronger growth in the global economy. U.S. aggregate demand was maintained, imports continued to grow and the country as a whole kept consuming more than it produced. All these factors also boosted profits at U.S. companies to record levels, making the stock market appreciation seem justified on fundamentals and helping further inflate the bubble.
Just as there has been a “benign” cycle of price increases on Wall Street, the eventual withdrawal of liquidity—and the reduction of the Fed’s balance sheet to more sustainable levels—could create a vicious cycle. Liquidity in the stock market could dry up at the same time as profits deteriorate. Many billion-dollar fortunes could go up in smoke—just as they did when the dot-com bubble burst.
Those people who are not so directly connected to the stock market—for example, those who still hold their companies privately—may not have seen their wealth inflate so dramatically in recent years. Thus, their overall net worth may be better protected in the event that the Fed finally takes away the punch bowl.