10/28/2011 01:03 PM

The Second Gilded Age

Has America Become an Oligarchy?

By Thomas Schulz


The Occupy Wall Street movement is just one example of the sudden outbreak of tension between America's super-rich and the "other 99 percent." Experts now say the US has entered a second Gilded Age, but one in which hedge fund managers have replaced oil barons -- and are killing the American dream.
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At first, the outraged members of the Occupy Wall Street movement in New York were mainly met with ridicule. They didn't seem to stand a chance and were judged incapable of going up against their adversaries, Wall Street's bankers and financial managers, either intellectually or in terms of economic knowledge.
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"We are the 99 percent," is the continuing chant of the protestors, who are now in their seventh week of marching through the streets of Manhattan. And, surprisingly, they have hit upon the crux of America's problems with precisely this sentence. Indeed, they have given shape to a development in the country that has been growing more acute for decades, one that numerous academics and experts have tried to analyze elsewhere in lengthy books and essays. It's a development so profound and revolutionary that it has shaken the world's most powerful nation to its core.

Inequality in America is greater than it has been in almost a century. Those fortunate enough to belong to the 1 percent, made up of the super-rich, stand on one side of the divide; the remaining 99 percent on the other. Even for a country that has always accepted opposite extremes as part of its identity, the chasm has simply grown too vast.

Those who succeed in the US are congratulated rather than berated. Resenting other people's wealth is viewed as supporting class struggle, which is something very frowned upon.
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Still, statistics indicate that the growing disparity is genuinely overwhelming. In fact, the 400 wealthiest Americans now own more than the "lower" 150 million Americans put together.

Nearly two-thirds of net private assets are concentrated in the hands of 5 percent of Americans. In comparison, the upper 5 percent of Germany hold less than half of net assets. In 2009 alone, at the same time as the US was being convulsed by mass layoffs, the number of millionaires in the country skyrocketed.

Indeed, if you look at the reports it compiles on every country in the world, even the CIA has concluded that wealth disparity is greater in the US than in Tunisia or Egypt.
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A New 'Gilded Age'
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In a book published in 2010, American political scientists Jacob Hacker and Paul Pierson discuss how this "hyperconcentration of economic gains at the top" also existed in the United States in the early 20th century, when industrial magnates -- such as John D. Rockefeller, Andrew Carnegie and J. P. Morgan -- dominated the upper stratum of society and held the country firmly in their grip for years.
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Writer Mark Twain coined the phrase "the Gilded Age" to describe that period of rapid growth, a time when the dazzling exterior of American life actually concealed mass unemployment, poverty and a society ripped in two.
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Economists and political scientists believe the US has entered a new Gilded Age, a period of systematic inequality dominated by a new class of super-rich. The only difference is that, this time around, the super-rich are hedge fund managers and financial magnates instead of oil and rail barons.
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A Threat to the World Economy
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The academics fear this change could have serious consequences for the country's economic future. As they see it, this extreme inequality threatens to dramatically slow growth in the world's largest economy. This is part of a development, they argue, that has been under way for years but remained largely hidden in the years of cheap credit, rising real estate prices and excessive consumption -- when it seemed everyone was on the way up. And the problems only came to light with the arrival of the financial crisis.
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Through the 1970s, income for Americans across all social classes rose nearly in lockstep, by an annual average of roughly 3 percent. Starting in the 1980s, however, this trend underwent a fundamental transformation. Granted, the economy continued to grow -- but almost exclusively to the benefit of the country's top earners. The major economic expansion under President Ronald Reagan benefited only a few, and the problem only grew worse under George W. Bush.
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At least since the beginning of the millennium, it has no longer been a simple matter of two societal extremes drifting further apart. Instead, the development is also accelerating. In the years of economic growth between 2002 and 2007, 65 percent of the income gains went to the top 1 percent of taxpayers. Likewise, although the productivity of the US economy has increased considerably since the beginning of the millennium, most Americans haven't benefited from it, with average annual incomes falling by more than 10 percent, to $49,909 (€35,184).
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The Winner-Take-All Economy
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Even for a country that loves extremes, this is a new and unprecedented development. Indeed, as Hacker and Pierson see it, the United States has developed into a "winner-take-all economy."

The political scientists analyzed statistics and studies concerning income development and other economic data from the last decades. They conclude that: "A generation ago, the United States was a recognizable, if somewhat more unequal, member of the cluster of affluent democracies known as mixed economies, where fast growth was widely shared. No more. Since around 1980, we have drifted away from that mixed-economy cluster, and traveled a considerable distance toward another: the capitalist oligarchies, like Brazil, Mexico, and Russia, with their much greater concentration of economic bounty."
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This 1 percent of American society now controls more than half of the country's stocks and securities. And while the middle class is once again grappling with a lost decade that failed to bring increases in income, the high earners in the financial industry have raked in sometimes breathtaking sums. For example, the average income for securities traders has steadily climbed to $360,000 a year.
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Still, that's nothing compared to the trend in executives' salaries. In 1980, American CEOs earned 42 times more than the average employee. Today, that figure has skyrocketed to more than 300 times. Last year, 25 of the country's highest-paid CEOs earned more than their companies paid in taxes.
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By way of comparison, top executives at the 30 blue-chip companies making up Germany's DAX stock market index rarely earn over 100 times the salaries of their low-level employees, and that figure is often around 30 or 40 times.

'The Result of Policy Choices'

Hacker and Pierson are far from the only economists and political scientists to recognize a fundamental societal distortion. Larry Bartels, one of America's leading political scientists, also believes America has entered a new Gilded Age. Bartels' 2008 book on the subject, "Unequal Democracy: The Political Economy of the New Gilded Age," has drawn a great deal of attention and even been quoted by President Barack Obama.
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"The really dramatic economic gains over the past 30 years have been concentrated among the extremely rich," Bartels writes, "largely bypassing even the vast majority of ordinary rich people in the top 5 percent of income distribution." He doesn't see this fundamental shift in the distribution of wealth as having resulted from market forces or drastic events, such as the financial crisis. Instead, he believes they are "the result of policy choices."
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As Bartels explains, much as the economic giants of the Gilded Age developed such enormous influence that they could dictate basic political conditions, today's Wall Street bosses and CEOs have successfully arranged extensive deregulation for their industries. Indeed, he argues that this is the only thing that can explain how hedge fund managers suddenly started making billions of dollars a year. Former Citigroup CEO Sanford Weill, for example, kept a framed pen in his office as a symbol of his influence. It was the pen President Bill Clinton -- at Weill's instigation -- used in 1999 to sign into law legislation repealing the provisions in the Glass-Steagall Act of 1933 that separated the transactions of investment and commercial banks.
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At the same time, Bartels writes, the wealthy receive enormous tax breaks worth hundreds of billions of dollars. In the 1970s, capital gains tax was 40 percent, and the highest income tax bracket paid a rate of 70 percent.
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Under George W. Bush, these rates dropped to 15 percent and 35 percent, respectively. For example, it emerged a few weeks ago that legendary investor Warren Buffett earned $63 million last year but was only required to pay 17 percent in taxes.

Did Inequality Cause the Crisis?

In a medium-term, the consequences of this societal divide threaten the productivity of the entire economy. Granted, American economists in particular have long espoused the view that inequality is simply a necessary side effect of above-average growth. But that position is now being called into question.
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In fact, recent research indicates that the economies of countries experiencing periods of pronounced inequality often show considerably less growth and more instability. On the other hand, it also finds that economies grow faster when income is more evenly distributed.
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In a study published in September, the International Monetary Fund (IMF) also concluded that: "The recent global economic crisis, with its roots in US financial markets, may have resulted, in part at least, from the increase in inequality" in the country.
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An Evolutionary View of Economics
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Cornell Univesity economist Robert Frank analyzes this development in his recently published book "The Darwin Economy." In it, he concludes that financial realities are best described not by Adam Smith's economic models but, rather, by Charles Darwin's thoughts on competition.

Frank writes that, with its often extreme deregulation, today's financial and economic system makes it impossible for individuals' self-serving behavior to ultimately contribute to the prosperity of society as a whole, as Smith had envisioned it. Instead, it leads to an economy in which only the fittest survive -- and the general public is left behind.
.The question is: How long can the US withstand this internal tension?
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Differences between rich and poor are tolerated as long as the rags-to-riches story of the dishwasher-turned-millionaire remains theoretically possible. But studies show that increasing inequality and political control concentrated in the hands of the wealthy elite have drastically reduced economic mobility and that the US has long since fallen far behind Europe on this issue.
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Indeed, only 4 percent of less-well-off Americans ever successfully make the leap into the upper-middle class.


"The major difference between this Gilded Age and the last one is the relative absence of protest," historian Gary Gerstle told the online magazine Salon in October. "In the first Gilded Age, the streets were flooded with protest movements."

Manhattan hasn't yet quite reached that point.
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Translated from the German by Ella Ornstein


October 30, 2011 4:00 pm

A three-pronged plan to revive Britain’s economy


The eurozone crisis has had a chilling effect on major economies around the world; and has added to the unprecedented pressures facing the global economy. But, in spite of the difficulties, I am confident that we can both resolve the crises at hand and come through them with an economy that is stronger and fundamentally fairer. My argument here at home and at the meeting of the Group of 20 leading economies in Cannes is that we can only do so if we show complete single-mindedness on three fronts: confronting our debts; strengthening the competitiveness of our economy; and unlocking global trade. Let me take each in turn.

First, confronting our debts. Those who still argue for an abandonment of our deficit reduction plan should reflect on the journey this country has taken. We went into the bust with the biggest structural deficit in the G7 and came out of it with a deficit forecast to be the biggest in the G20. It is thanks to the credible plan this government has set out that today we have market interest rates of just 2.5 per centhalf what they are in Spain or Italy. Earlier this month, the same credit rating agency that downgraded the US confirmed our triple A rating. This confidence has been hard-won; and it can be easily lost. As Standard & Poor’s made clear, the greatest threat to confidence would be if the coalition’s commitment to fiscal consolidation falters. Businesses, investors and families all over the country can rest assured that we will not falter. We will stay the course.

We need to see that same resolve in the eurozone. The deal forged in Brussels marked very good progress. But in the coming weeks, the vital details need to be agreed – on the reinforcement of the bail-out, the recapitalisation of European banks, and the resolution of Greek’s debt crisis. Forging a clear route forward is overwhelmingly in Britain’s national interest, which is why we will press for more progress at the G20 in Cannes.


Second, we are showing consistency of purpose on strengthening Britain’s competitiveness: raising the pension age; cutting corporation tax; reshaping the welfare system so that work pays; and in the chancellor’s autumn statement, he will set out more detail on our new programme for credit easing. In the run-up to that statement, our focus is on updating our infrastructure. This year the UK came 28th in international rankings. In terms of future productivity, this infrastructure deficit is as serious as our budget deficit. In terms of job creation today, getting construction projects off the ground is critical.

Too often projects get hobbled by planning restrictions, funding blockages or regulatory burdens. So this autumn the government is on an all-out mission to unblock the system and get projects under way. Today we give the green light to two power plants in the north of England – at Ferrybridge and Thorpe Marsh – which together will create more than 1,000 construction jobs. And we welcome another significant infrastructure project, with BT’s announcement that it will complete its roll-out of superfast broadband by the end of 2014meaning the recruitment of more than 500 engineers. Over this autumn you can expect to hear many more such announcements.

Finally, we are showing single-mindedness on unlocking global trade. At the G20 I’ll be making the argument that inward-looking, beggar-my-neighbour policies benefit no one. Allied to this is the argument on trade imbalances. Imbalances are growing again, and we know from recent experience how dangerous that can be. That’s why we have to push for a more balanced world economy, where countries like the UK do better at saving and investing and restoring their competitiveness, and trade surplus economies increase domestic consumption. This is a case for a stronger world economy for all – and we must not tire of making it.
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Above all, at home and abroad, we must counsel against the pessimism and fear that can become self-fulfilling prophecies in global markets. For Britain, there is much to be inspired by. Last year bilateral trade between the UK and India grew by 20 per cent. Our exports to China are up 40 per cent – and we recently signed £1.4bn of trade deals with them. Whatever the obstacles to growth today, we still boast some of the best universities in the world, the most favourable timezone in the world, and the world’s first language. I passionately believe that the global economy is presenting us with opportunities, not threats – and we must seize them.
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Take all this together and you have a coherent, long-term plan to lay solid foundations for a better future. Strong growth alone is not the goal. For too long the British economy has been characterised by unfairness and imbalance; short-term thinking and short-term gains.

Our ambition is to build a new and better economy – where opportunity, wealth and work are spread more widely; where those who work hard and play by the rules get a good deal. There will be no short-cuts to success. But this coalition has the determination to do the right thing for our country, so that we don’t just weather the international storm – but come out stronger on the other side.
.The writer is the UK prime minister
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Copyright The Financial Times Limited 2011

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October 29, 2011
 
Did You Hear the One About the Bankers?
 
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CITIGROUP is lucky that Muammar el-Qaddafi was killed when he was. The Libyan leader’s death diverted attention from a lethal article involving Citigroup that deserved more attention because it helps to explain why many average Americans have expressed support for the Occupy Wall Street movement.

The news was that Citigroup had to pay a $285 million fine to settle a case in which, with one hand, Citibank sold a package of toxic mortgage-backed securities to unsuspecting customers securities that it knew were likely to go bust — and, with the other hand, shorted the same securities — that is, bet millions of dollars that they would go bust.

It doesn’t get any more immoral than this. As the Securities and Exchange Commission civil complaint noted, in 2007, Citigroup exercisedsignificant influence” over choosing $500 million of the $1 billion worth of assets in the deal, and the global bank deliberately chose collateralized debt obligations, or C.D.O.’s, built from mortgage loans almost sure to fail. According to The Wall Street Journal, the S.E.C. complaint quoted one unnamed C.D.O. trader outside Citigroup as describing the portfolio as resembling something your dog leaves on your neighbor’s lawn. “The deal became largely worthless within months of its creation,” The Journal added. “As a result, about 15 hedge funds, investment managers and other firms that invested in the deal lost hundreds of millions of dollars, while Citigroup made $160 million in fees and trading profits.”
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Citigroup, which is under new and better management now, settled the case without admitting or denying any wrongdoing. James Stewart, a business columnist for The Times, noted that Citigroup’s flimflam made “Goldman Sachs mortgage traders look like Boy Scouts.

In settling its fraud charges for $550 million last year, Goldman was accused by the S.E.C. of being the middleman in a similar deal, allowing the hedge fund manager John Paulson to help choose the mortgages and then bet against them without disclosing this to the other parties. Citigroup dispensed with a Paulson figure altogether, grabbing those lucrative roles for itself.” (Last Thursday, the U.S. District Court judge overseeing the case demanded that the S.E.C. explain how such serious securities fraud could end with the defendant neither admitting nor denying wrongdoing.)
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This gets to the core of why all the anti-Wall Street groups around the globe are resonating. I was in Tahrir Square in Cairo for the fall of Hosni Mubarak, and one of the most striking things to me about that demonstration was how apolitical it was. When I talked to Egyptians, it was clear that what animated their protest, first and foremost, was not a quest for democracy — although that was surely a huge factor. It was a quest for “justice.” Many Egyptians were convinced that they lived in a deeply unjust society where the game had been rigged by the Mubarak family and its crony capitalists. Egypt shows what happens when a country adopts free-market capitalism without developing real rule of law and institutions.
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But, then, what happened to us? Our financial industry has grown so large and rich it has corrupted our real institutions through political donations. As Senator Richard Durbin, an Illinois Democrat, bluntly said in a 2009 radio interview, despite having caused this crisis, these same financial firms “are still the most powerful lobby on Capitol Hill. And they, frankly, own the place.”
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Our Congress today is a forum for legalized bribery. One consumer group using information from Opensecrets.org calculates that the financial services industry, including real estate, spent $2.3 billion on federal campaign contributions from 1990 to 2010, which was more than the health care, energy, defense, agriculture and transportation industries combined. Why are there 61 members on the House Committee on Financial Services? So many congressmen want to be in a position to sell votes to Wall Street.
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We can’t afford this any longer. We need to focus on four reforms that don’t require new bureaucracies to implement. 1) If a bank is too big to fail, it is too big and needs to be broken up. We can’t risk another trillion-dollar bailout. 2) If your bank’s deposits are federally insured by U.S. taxpayers, you can’t do any proprietary trading with those depositsperiod. 3) Derivatives have to be traded on transparent exchanges where we can see if another A.I.G. is building up enormous risk. 4) Finally, an idea from the blogosphere: U.S. congressmen should have to dress like Nascar drivers and wear the logos of all the banks, investment banks, insurance companies and real estate firms that they’re taking money from. The public needs to know.
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Capitalism and free markets are the best engines for generating growth and relieving povertyprovided they are balanced with meaningful transparency, regulation and oversight. We lost that balance in the last decade. If we don’t get it back — and there is now a tidal wave of money resisting that — we will have another crisis. And, if that happens, the cry for justice could turn ugly. Free advice to the financial services industry: Stick to being bulls. Stop being pigs.


The seven billionth baby: Malthus has not lost the argument yet

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Mark Malloch-Brown

Economics is competing with Thomas Malthus as the world’s seventh billion inhabitant is born. Global population has grown from 2.5bn to 7bn just in my lifetime, so there is plenty to alarm doomsayers. But this landmark arrives at a very different cultural moment to the six billionth baby, twelve years ago.

Some see beyond the extra hungry mouths to feed or scarce natural resources exhausted, and are excited by the prospect of new consumers that will power global demand and growth in the future.

They have a point. The last decade or so of dizzy economic growth, however precarious it currently looks, has lifted up large, heavily-populated countries such as China, India and Brazil. At the same time, the Malthusian expectation of the world running out of energy and food has also been pushed back. The development of shale gas deposits has started to turn assumptions about any early exhaustion of non-renewable energy resources on its head.

Over the last forty years we have seen a three and a half fold increase in food production. Food supply has largely kept up with population and famine. The bread riots in Tunisia and Egypt at the beginning of the Arab Spring, were more often a consequence of low incomes or rising prices, not global shortage. Indeed, in a savage challenge to conventional thinking, there are now more obese than hungry people in the world.

Population patterns stack up very differently in an increasingly urbanised world of cities with apartment buildings and tightly-packed homes. Although it brings social dislocation and often poverty, the great movement of surplus labour from an inefficient, over-crowded agricultural sector to metropolitan areas makes the former more efficient, and the latter an ever-growing market not just for farmers but for a range of goods and services as the new urbanites step onto the consumer escalator.

But population growth is slowing. It is now half the annual rate of what it was in the 1960s. Indeed many rich countries, notably in Europe, face imminent labour shortages unless they relax their immigration laws. It won’t be until 2050 that world population grows by the next 2bn. Almost none will be born in Europe.

This global demographic slowdown is down to parents responding to a fundamental shift in their economic lives where children are no longer a resource to help in the fields, but a cost. They are turning to family planning to limit the size of their families.
But this extra population is not going to bear as heavily on global climate change as many of us here already. Leaving aside the possible impact of green technologies, most of the newcomers will be born into countries that emit about a twentieth of the carbon of those in developed countries. They are not the problem.

Does that mean we should be entirely sanguine in greeting Monday’s birth of the world’s seventh billionth person? No. The fastest rates of population growth are in the poorest countries, notably Africa. Indeed, more than half of the growth between now and 2050 will be in that continent. While Africa may be able to absorb these extra numbers, many of its countries are caught in a trap of endemic economic and political weakness, environmental degradation and food insecurity without any of the incentives of modern employment to encourage the transition to smaller family size. So famine, as at present in Somalia, is going to remain with us.

While modern Malthusians may have been wrong for now about the energy situation, it is doubtful that similar happy surprises lie around the corner when it comes to water scarcity, or the slower gains in agricultural productivity as urban diets increase food demand at a much faster rate than population growth. We have a western development model, which has had the few, if not yet the many, living way beyond the world’s means. As fast-growing middle classes in countries such as China and India emulate western consumption patterns, the real stresses on our global systems will be exposed.

The world is an over-burdened place, but not because there is no room for our seventh billion neighbour. The problem is less about how many of us there are, and more about how we choose to live. Malthus might feel he has not lost the argument yet.

The writer is chairman for Europe, Middle East and Africa at FTI Consulting, and former UN deputy secretary-general.