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Questions for Chrystia Freeland

Interview by: Karen Christensen

The award-winning journalist talks about the infamous ‘one per cent’ and the winner-takes-all environment of global business.



How do you define the term ‘plutocrat’?


The people I’m writing about in my book [Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else] are part of the infamous one per cent, but my focus is really on the very top of the income distribution — the 0.1 per cent, whose average income is US$ 23.8 million. University of California, Berkeley economist Emmanuel Saez has found a way to get at this very narrow slice of earners by looking at income tax data. What he has uncovered is that the most extreme change is happening not in the top one per cent, but in the top 0.1%. This is where we are seeing an exponential growth of inequality, which is driving broader statistical measures.

Who are these people? The top 0.1% are hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough global economic competition. They tend to believe in the institutions that permit social mobility, but are less enthusiastic about the economic redistribution — i.e., taxes — it takes to pay for those institutions. In a global economy, plutocrats are the most international of us all — both in how they live their lives and in how they earn their fortunes. In some ways, they are becoming a nation unto themselves. 

What is the ‘consumer hourglass theory’?


People at Citigroup came up with the term. This is the notion that, as a consequence of the division of society into ‘the rich and the rest’, a smart investment play is to buy the shares of super-luxury goods producers — who sell to the plutocrats — and of deep discounters, who sell to everyone else. As the middle class is hollowed out, this hypothesis holds, so will the companies that cater to it. Citigroup’s Hourglass Index includes stocks like Saks Fifth Avenue at the top end and Family Dollar at the bottom. So far, the approach is working: the index rose by 56.6 per cent between December 2009 and September 2011, while the Dow Jones Industrial Average went up just 11 per cent.

You have said that three societal transformations have heralded the emergence of plutocrats. Please touch briefly on each.


The first is the technology revolution, which most of us are all too aware of, but I actually think we have only just begun to see the ways in which technology will reshape the way we work and live. The second driver is globalization, which is hollowing out the middle class in Western industrialized countries, even as the middle class rises in emerging markets, creating new segments to capitalize on. When globalization works hand-in-hand with the technology revolution, we start to see these ‘winner-takes-all’ scenarios: if you are the winner in a particular space — if you are Google, the world’s leading search engine — you can truly dominate the globe with a remarkably small number of workers. Take Facebook, for instance, which is massive in its impact, but has less than 6,000 workers. Compare that to the giants of 20th-century industrialization like General Motors, which had hundreds of thousands of employees to support.

The third driver is the Washington Consensus. In the post-war world of the last century, there was a business elite in Western industrialized countries that broadly bought into the idea that labour unions were here to stay and should have a seat at the decision-making table. There was an understanding of how big the gap should be between what a CEO makes and what the average worker makes, and a sense that the state was important and needed to be funded.

Starting in the mid-to-late 70s, this way of thinking was replaced with what became known as the Washington Consensus. This neo-liberal view was that you needed deregulation and privatization to shrink the state and give business more of a free hand to operate, and limit the power of trade unions. Over time, a shift in social attitudes around CEO compensation occurred, in 1980, the average CEO made 42 times as much as the average worker; but by 2012, that ratio had skyrocketed to 380. It became okay to have these really huge multiples.

I would add a fourth driver to this list: crony capitalism. Alongside the first three phenomena, certain people have been able to tilt the rules of the game in their own favour. One example would be the Russian oligarchs, with the selloff of the vast majority of Russia’s natural resources to a really small group of people — basically seven or eight guys. Another example is the great wave of financial deregulation, which created the opportunity to reap super-high returns and, in hindsight, imposed a great cost in terms of risk and instability in the financial system. As it turned out, the guys who were reaping the high returns weren’t the ones who had to pay the bills when things went downhill. I also think a lot of the Chinese wealth falls in the crony capitalism camp. We’re seeing that in order to get super-rich in China, it helps to be born into a family that has a history of (or is currently in) the leadership of the Party.

 

Describe what is happening at the very top of the pyramid — with the 0.1% vs. the rest of the one per cent.


The four forces I mentioned are enabling the 0.1% to break away from the pack, creating a real winner-take-all phenomenon. As I indicated earlier, being the very best in the world at something is much, much better than being number two. People in the technology sector call this ‘power laws’, and they become mutually reinforcing because globalization provides a much bigger market. If you can capture that, you can take the lion’s share of the rewards.

The Washington Consensus and deregulation feed into it, too. In some ways you can think of regulation as ‘speed bumps’ on the road of capitalism: when the speed bumps are removed in a winner-take-all race, the car at the very front of the pack can pull away from the others that much faster. 

 

You make a distinction between ‘white hat Plutocrats’ and ‘black hat Plutocrats’. Please explain.


A common response to soaring inequality has been to try to sort the plutocrats into ‘white hats’ and ‘black hats’: Steve Jobs is viewed as a hero; Lloyd Blankfein is a villain; big business and private equity are bad; small business and community banks are good; Wall Street banks didn’t deserve their bailouts; Detroit carmakers did. While there is some truth to this, this approach only takes you so far, because the difference between the ‘good guys’ and the ‘bad guys’ is smaller than we like to think. It is true that alongside rising income inequality, we are also seeing rising self-made wealth; but it is also true that a lot of that wealth is coming not from inventing the iPhone, but from playing the lobbying and regulation-making game in such a way that you benefit. Even if you are a pure meritocrat, the natural human tendency — and one of the driving propulsive forces in business — is to seek a monopoly position. Warren Buffett is one of the most revered people in the business community, and one of his great lines is that he looks to invest in “companies that have a moat.” That’s a polite way of saying, ‘companies that are monopolies’. You’re not a bad business person if you do that; you’re a good business person.

Everyone I talk to thinks he’s a white hat. I talk to the Silicon Valley guys and they say, “Yes! Income inequality is terrible, especially those guys on Wall Street, they are such crony capitalists. It is outrageous what they get away with.” Then I go to Wall Street and talk to the hedge fund and private equity guys and they say, “Yes! Income inequality is a problem. Crony capitalism is a problem and those guys who run the big banks who were bailed out, they are outrageous.” No one is taking responsibility.

Looking ahead, do you think we’ll see even more income inequality, or do you see it being curbed?


No one has a crystal ball — and particularly not a journalist such as myself. But on this issue, there is strong reason to believe that this trend is accelerating. I really do see the power of the technology revolution snowballing and accelerating as technology spreads around the world.

The other reason is just the data. I sold my book in September 2008, which was the month that the financial crisis hit. I was sad about the collapse of Lehmann, but I was really, really sad because I thought it meant I couldn’t write my book. I was convinced that the crisis indicated that we had hit the high-water mark of plutocracy, and that it was all going to fall apart after that.

But then a funny thing happened: nothing really changed. Data started coming out from people like Prof. Saez on incomes during the 2009 to 2010 ‘economic recovery’. I refer to this as ‘the one per cent recovery’, because he showed that 93 per cent of the gains in that period went to the one per cent. And proportionately, most of that money went to the 0.01% — not even the 0.1%, but the 0.01%. More than a third of it went to this group. When Prof. Saez updated his data for 2009 through to 2011, over this longer period he showed that more than 100 per cent of the recovery went to the one per cent. You might say, “How is that possible?” It’s possible because over that longer period, the income of the 99 per cent actually shrank.

Unfortunately, this is not a good news story. The bright spot is that globalization is working: overall, the world is getting richer. But the downside is that a lot of the costs of that transition are being borne by specific groups of workers in the West.

 


Chrystia Freeland is the Managing Director and Editor of Consumer News at Thomson Reuters, following years of service at the Financial Times in New York, London, Moscow and Kiev. Born in Peace River, Alberta, her most recent book is Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (Doubleday Canada, 2013), winner of the Lionel Gelber Prize, which is awarded to the world’s best non-fiction book in English on foreign affairs that seeks to deepen public debate on significant issues. Her book was also named the Canadian Business Book of the Year. She was a member of the Rotman Dean’s Advisory Board throughout Roger Martin’s tenure.

 

This interview originally appeared in 'The Legacy Issue' (Fall 2013).

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