The March of the Plutocrats

Worsening inequality in societies around the world has put the media spotlight on the wealthiest one per cent. But what if the current distribution of wealth is even more concentrated than the one per cent-99 per cent gap suggests? What would that reveal about the political and economic trends shaping the world today?

Meet the members of the plutocracy, the wealthiest members of the wealthiest one per cent. Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, by Canada’s own Chrystia Freeland, Managing Director and Editor of Consumer News at Thomson Reuters, offers a window into both the closed world of the .01 per cent and the ongoing transformation of the global economy.

Chrystia Freeland is this year’s recipient of the Lionel Gelber Prize for the world’s best non-fiction book in English on foreign affairs that seeks to deepen public debate on significant international issues. The Gelber Prize was founded in 1989 in the memory of Canadian diplomat Lionel Gelber (1907-1989) and is presented annually by The Lionel Gelber Foundation, in partnership with Foreign Policy magazine and the Munk School of Global Affairs.

Multiple periods in human history have been marked by extremely uneven distributions of wealth – is there something fundamentally different about the concentration of wealth in the hands of the plutocrats and the extent of the gap between the one per cent and 99 per cent?

Yes. The first big difference is the scope. Inequality today is truly global – everybody is being affected. The second is the degree. Inequality in the developed West as well as in developing countries has reached peaks as high or higher than the ones we saw during the Gilded Age. A third difference is that rising inequality has coincided with the creation of real mass democracy. If we look back, we haven’t had real mass democracy and concentrations of very great wealth until now.

Another difference is the precise ways that this inequality is being created. When I was writing Plutocrats, I spent a lot of time thinking about, and looking for, historical parallels to the current situation. History is the closest thing we human beings have to an experimental lab of how things work, and I had a lot of fun looking at big shifts from other time periods.

For a while, I got very interested in the invention of the stirrup – I thought that a big shift might have been when people started being able to ride horses. While I did discover a rich historical literature around the invention of the stirrup, I became truly convinced that the only relevant parallel to what we’re experiencing now is the Industrial Revolution. In the course of writing my book, I looked at the findings of historians who analyze history over long-term cycles of 2000 years or more. It’s fascinating stuff – up until the 1800s, nothing was really happening in terms of GDP growth, just very small increases or decreases of about 0.5%. Then, all of a sudden, you hit 1800 and the world fundamentally changes. And now, a 0.5 per cent fluctuation is something we might see in a single quarter.

Today, we’re going through another wave of profound economic change, comparable in scope and power to the industrial revolution. During the Industrial Revolution, great fortunes were created but there was also a real hollowing out of the middle class. A lot of the economic transformation was very positive, but there were also some wrenching political consequences, including soaring inequality.

We’re seeing something similar happening now, but with the profound differences I’ve already described. The fact that the Industrial Revolution has already happened also makes what’s happening now different, as we’re sitting on the shoulders of the advances of that period.

What insights did you gain into what’s happening today from the Industrial Revolution?

There’s no iron law of economics that says gains will automatically be shared equally, or even somewhat equally, or even shared at all. The societies that went through the Industrial Revolution had to find a way to cope with the uneven distribution of gains in productivity and wealth and return to equilibrium. And, eventually, they did. But it was a pretty wrenching process that involved two world wars, communist revolutions in Russia and China, the Great Depression, and the Long Depression in the late 19th century, which in many ways was worse than the Great Depression.

We need to fasten our seat belts for a similarly rough ride today, while remembering that western societies did succeed in transforming themselves. Western politics changed in order to harness the economic forces unleashed by the Industrial Revolution, which required the invention of the whole modern regulatory apparatus of the state, including welfare, as well as a lot of international institutions. We’re living through an economic transformation that is comparably significant and powerful, but we have only started to transform ourselves, both in terms of the technology revolution and our institutions of governance.

The level of post-industrial revolution inequality is creating huge challenges for the 99%. What do governments need to prioritize policy-wise in order to address the consequences of the gap? Innovation? Wealth distribution? More targeted help to disadvantaged groups?

You need all of those, but the innovation piece is really important. We need innovation both in terms of inventing new ways for government to work, and in creating more space for individual entrepreneurship. The lifetime job security of the post-WWII era is over. Everyone knows this, especially younger people, but we need our social institutions to adapt too, and start capitalizing on what is really a truly fertile time for invention.

The institutional innovation point is less of an imperative in Canada, but in the U.S., the reason health care reform is so essential is that without it, Americans are effectively serfs for their companies. Serfs couldn’t move without the permission of their owners; American workers are terrified to move jobs because they might lose their health care. Easing that fear will create valuable space for entrepreneurship.

I think the issue of wealth redistribution and the state’s power to tax is really important too. But before we get into that, I will say that it’s important to remember when talking about what government or business should or should not be doing that this isn’t a purely intellectual debate. It can be easy to imagine that this is solely a battle of ideas, but its not – it’s a battle of specific interest groups, money, and power.

Why should policymakers engaged in battles over how to respond to the gap between the 99 per cent and the 1 per cent care about the super-wealthy elites at the top of the 1 per cent?

Policymakers already care a lot about them. These are the people they call up to write cheques. They know their names and their phone numbers. The reason for my focus on the wealthiest individuals is purely driven by the data: the most extreme concentration of wealth is at the very, very top. The higher up you go, the greater the concentration. So, if any of us really want to understand what’s going on in the economy, we have to look at the people at the very top.

There’s been a collective aversion to doing just that, because the very rich don’t want us to focus on them, and paying attention to them makes everyone uncomfortable. One of the economists in my book talks about this tendency to look the other way, about how talking about poor people or the middle class is okay with everybody, but talking about the very rich gets you accused of class warfare. It’s one of the last taboos in the public discourse.

The treatment of the plutocrats reflects that: if we look at the tax rate for the 1 per cent, it’s actually pretty progressive, providing you’re looking at the 1% as a whole. But if you look at the very top, it’s astonishing how small the effective tax rate is for the plutocrats. We got a little glimpse of that with Mitt Romney’s tax returns and the 14 per cent rate. But that’s not unusual. The IRS in the U.S. has started releasing, without names, the tax data for the top 400 earners. Six of them paid no taxes. Six of the 400 richest people in America who have to file taxes paid zero.

To be in the 1 per cent is to be absolutely affluent, but if you’re in a category where you can hire a lobbyist to lobby personally for the kind of tax deductions you need, or a top lawyer to work full-time for you on figuring out where you should be routing your capital, you’re at the very, very top. There’s nothing illegal about doing those things, but our policymakers have to be more aware that this is happening. A little more attention is being paid to the broader consequences of how the plutocrats operate because of their increasing use of tax havens. This trend is forcing governments to recognize that one of the defining qualities of the state – the capacity to levy taxes – is eroding.

Do you see a difference in the tenor of the debates over income inequality in Canada versus the United States?

I see a huge difference. Writing this book had an interesting effect on me – it made me realize the extent to which my worldview is really rooted in a core set of ideas that I think you could define as Canadian. It’s easy to mock ‘peace, order, and good governance’ as a national ideology, but one of the things that we can see happening as a result of the emergence of the plutocracy is peace, order, and good government – especially the order and good government part – being undermined. Good government doesn’t come cheap. I think that in Canada, there is a stronger belief that you get what you pay for and if you want good government, you have to pay for it.

I also think that Canadians are much more comfortable with the idea that there is a collective interest that it is the job of the state to define and defend. The banking crisis was a real vindication of the Canadian approach. So I do think there are some real differences between the Canadian and American debates.

To what extent can and should Canada be carving out a different path from the United States through the upheaval of this period? Do we have the policy mechanisms in place now to balance engagement with globalization and staying true to our core values?

It’s a real challenge for the smaller countries to figure out a national strategy in a ‘winner-take-all’ economy. You need to stay plugged into the global economy so that you can win enough, while retaining the ability to step back and evaluate whether the ‘made in New York’ or ‘made in London’ ideas are the right ones for your economy.

Banking regulation is just such a great example. I was one of the people, of whom there were many, in the North American (including Canadian) intelligentsia who felt like Canada was being typically “Canadian” – it was playing the globalization game too safely to really take advantage of it. There was an article that Gord Nixon at the Royal Bank of Canada loved to refer to that said, “Why can’t RBC be more like RBS?” There was this period where it seemed like the Canadians were the boring ones, standing on the sidelines while others were seizing global markets. But in the end, it was right to go against the current. It’s really really hard to know when to do that, and sometimes, it’s impossible not to get swept up.

There’s that great saying by Warren Buffet about how there is class warfare, but it’s the rich class that’s making it, and they’re winning. Canada will have to figure out a strategy to win enough in a ‘winner-takes-all’ economy, where so far, it’s the Plutocrats – a transglobal, connected community of super-rich, super-powerful elites – who are winning.