An Open Message To The Top 0.1%
Opinions should be formed with more thought than choosing which hat to wear
I get to hear people in the top 0.1% of wealth (that’s one in a thousand) speak their minds about economic inequality.
They think there’s a war being waged against themselves. They hear the critical rhetoric about “millionaires and billionaires” and fear that words will become action, i.e., punitive taxes. Someone may have told them that the top marginal rate in the 1950s was 90% under Eisenhower, a Republican. 1
In reality, however, if there’s a war being waged between the rich and everyone else, the rich have routed the rest of the field.
Behold the numbers. 2
In 1989 the top 0.1% owned 8.5% of the country’s wealth; today, they own 13.6%
In 1989, you needed a minimum wealth of $8 million to be in the 0.1%; today you need a minimum of $46 million.
If the rich are doing so well, what’s the source of the cognitive dissonance? Numbers land cold on most hearts and minds, especially if the numbers contain truths that are in conflict with ingrained and comforting “received wisdom.”
I’m reminded of myself a decade ago when I’d nod along with complacent enthusiasm as I’d read the opinion pages of the Wall Street Journal. The WSJ was telling me my wealth was deserved, and that government in the wrong hands might take it away on behalf of the rabble who didn’t pay taxes.
In Anna Karenina, Tolstoy enters the mind of Stiva, a wealthy character reading the same morning paper that everyone else in his wealthy social set reads.
“[He] had not chosen his political opinions or his views; these political opinions and views had come to him of themselves, just as he had not chosen the shapes of his hat and coat, but simply took those that were being worn. And for him, living in a certain society…to have views was just as indispensable as to have a hat.”
When you recognize your former self in great literature, it can be humbling..
History moves in cycles. And as the economist Herb Stein said “If something can’t go on forever it will stop.”
That’s how I feel about wealth inequality. The current levels will revert. Whether they do so in gradual and orderly fashion or through a series of chaotic events that cause great damage is a question I’d like the ultra-wealthy to consider carefully.
I’m generalizing about the ultra-wealthy, but my comments are based on more than just my personal observations. For example, a Pew poll found that 83% of upper income Republicans don’t believe that where Americans start out in life is a significant cause of economic inequality. 3
I don’t think that those 83% are necessarily stupid or bad people. Many of the ultra-wealthy are incredibly generous with their philanthropy and as a group are not anymore kind or mean-spirited as any other socioeconomic group. 4
It’s relatively recent history, the years of Obama’s first term, that’s key to understanding how the views of most of the ultra-wealthy have become so calcified and classist.
Following are a few events of those years that stand out to me.
The prosecutorial dog that didn’t bark
After the 2008 Great Financial Crisis (GFC), not a single senior finance executive was prosecuted for financial fraud. This inaction sent a message to the wealthy that they were above the law. It also made it easy for the wealthy executives to self-justify their moral failings.
The clearest case of financial fraud from the 2008 crisis that I’ve come across is CEO Dick Fuld’s actions to hide the financial recklessness of Lehman Brothers until it went bankrupt. The details can be found in the multi-thousand page report commissioned by the bankruptcy court. 5
In 2007 and 2008, every time Lehman had to issue a financial report to the public, the company “painted” its balance sheet to make itself look far healthier than it was. Lehman did so by entering into esoteric, unreported, and massive transactions a few days before and after the balance sheet date. So if the reporting date was as of March 31st, the transactions might be entered into on March 28th and then reversed on April 3rd.
No one disputes that these transactions were shams without economic substance and should have been disclosed to regulators and investors.
Having read the relevant sections of the report, I don’t think it was possible that Fuld as Lehman’s CEO could have been unaware of the transactions unless he was willfully ignorant––“Don’t tell me, I don’t want to know”––which is not a valid legal defense.
The voluminous and painstaking report commissioned by the bankruptcy court concluded:
“There was sufficient evidence to support a colorable claim” (i.e., a clear indictment if not a clear conviction) that Fuld and others at Lehman committed fraud.
But no charges were brought against Fuld or any other Lehman executive. Fuld was fined but he didn’t have to pay a penny. Instead, his fine was paid by an insurance company that had issued a liability policy to Lehman. Fuld walked away a wealthy man from all his past CEO compensation, none of which he was asked to give back.
Why this prosecutorial failure occurred was the subject of a restrained but pointed essay written in 2014 for the New York Review of Books by Judge Jed Rakoff who was and continues to be a Senior Federal Judge in the Southern District of New York. 6
Rakoff’s conclusion is below:
“…you don’t go after the companies, at least not criminally, because they are too big to jail; and you don’t go after the individuals, because that would involve the kind of years-long investigations that you no longer have the experience or the resources to pursue.”
Instead, Rakoff wrote, it was easier to collect fines from the companies and prosecute insider trading cases that were relatively simple to prove.
I believe this failure to hold to account the wealthy executives responsible for the crisis carved a deep hole in the hearts of Americans who lost homes and jobs and suffered grievously because of the crisis.
It also deprived the ultra-wealthy of an opportunity for self-examination and contrition.
Steven Schwarzman’s very unfortunate analogy
Schwarzman is arguably the most successful and influential founder of any private equity firm (Blackstone) in modern financial history. In 2010, in a private setting among fellow plutocrats, Schwarzman commented on President Obama’s threat to do away with an arcane tax loophole called “carried interest.” The loophole is for the benefit of investment managers and converts what should logically be considered wages into capital gains, which are taxed at far lower rates. 7
Of the threatened closing of the carried interest loophole, Schwarzman said this:
“It’s a war. It’s like when Hitler invaded Poland in 1939.” 8
When his statement was leaked, he issued an apology for the language but not the sentiment.
It was a rare insight into how someone like Schwarzman, already on top and highly influential, sees the world when he thinks he can talk freely among like-minded people.
The 2012 Election: Romney’s “47%”
In May 2012, Mitt Romney held a private fundraising event in Miami for his presidential campaign. Romney was with his fellow ultra-wealthy Americans. No one else could have afforded the price of attending the event. Someone took a clandestine video of what Romney said.
The video is at the end of this post.
In the video, Romney claimed that the 47% of Americans who did not pay income tax would never vote for him and would always vote for Obama because they saw themselves as victims who expected the government to provide them healthcare, food, and housing. Romney was not going to worry about those people because he would never convince them to take personal responsibility for their own lives.
The video was released in September, timed for maximum damage. It devastated Romney’s campaign and devastated Romney too. He considered dropping out of the race.
My view is that Romney was feeding his donors what he thought they wanted to hear, not what he truly believed. Romney beat himself up later for his comments. He was remorseful beyond what it did to his election chances. 9
“47%” became part of the zeitgeist. Just the other day, I heard someone refer disparagingly to the “47%” as if the Romney comment had just been made. And this week I read a WSJ editorial arguing that people who don’t pay income tax don’t deserve an expanded child tax credit.
What is to be done?
The United States spends about 35% of its GDP on federal and local government. That compares to an average of about 50% in the other G7 countries (Canada, France, Germany, UK, Italy, and Japan) In those countries, and in the Scandinavian countries as well, the government generally tries to ensure that its people have their basic needs of healthcare, food, and housing met. 10
One spending statistic that’s particularly telling is that in America, government spends just 0.7% on supporting families compared to its peer countries who spend three or four times as much. 11
All the countries mentioned above have capitalist economies. But these countries have on average been far more effective at putting up guardrails to create a more fair and morally sound society. America has not.
The price of meeting people’s basic needs is a higher and more progressive tax code. It’s that simple in terms of the math but dreadfully difficult in terms of politics, in large measure because so much of politicians’ campaign money comes from the wealthy.
Yet, one out of a thousand people (the 0.1%) or one out of hundred (the 1%) or even one out of ten (the top 10%) will eventually have to yield to the majority.
The last president who appealed with great success to the nation’s conscience on this issue was LBJ who, among other things, created Medicare and Medicaid. Today, we can afford to do so much more because America is three times more prosperous in real terms per capita than when LBJ was in office.
Eventually, we’ll get another leader who will have similar views and similar support. And perhaps the charisma to win over most of the population. I believe it’s a question of when, not if. 12
The other big “gaffe” in the 2012 election campaign was Obama’s comment in an off the cuff campaign speech: “If you've got a business, you didn't build that.”
The response from the business community and from the newspapers I read and the pundits I listened to at the time was swift and vicious. So I too was outraged at Obama’s complete lack of understanding of how capitalism worked and the damage he might do in a second term.
It was only many years later that I took the time to read the relevant portions of Obama’s speech so I could place that allegedly “Marxist” sentence in its proper context.
“Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you've got a business, you didn't build that.” 13
I was chastened. I felt like Stiva, the Tolstoy character, having chosen my opinions with the same “open minded and rigorous analysis” I would use to choose which tie to wear. (Dark suit, white shirt, hard to go wrong.)
So I believe people can change their opinions. I have.
As well, we already have some influential wealthy people like Warren Buffet who has repeatedly called the current American tax system grossly unfair and in need of reform.
Reform or revolution. I know which one I prefer.
Question for the Comments: What would you say to the 0.1%
Many people confuse the top marginal tax rate with the effective tax rate. For example, under the Eisenhower tax code, if you earned the equivalent of about $1 mm today, you’d fall far short of the level of income where that 90% top rate kicked in. Your effective tax rate would be about 32.5%. Source; The Tax Foundation Historical Tax Codes.
Minimum wealth cutoff not adjusted for inflation.
Two different data sources, both from the Federal Reserve.
For the minimum wealth cutoff:
https://fred.stlouisfed.org/series/WFRBLTP1311
For wealth distribution:
Certainly it is good to be generous in giving money to not-for-profit organizations. But it is also true that philanthropy adds to the giver’s social capital, status, and self-esteem. As well, in terms of scope, philanthropy is small compared to what government is capable of doing.
REPORT OF ANTON R. VALUKAS, EXAMINER This report is an absolute marvel of forensic scholarship.
Jed S. Rakoff; The Financial Crisis: Why Have No High-Level Executives Been Indicted; New York Review of Books January 9th, 2014. Note: the article may only be available to NYRB subscribers.
In the course of my career, my partners and I benefitted from the carried interest loophole. But the partners I respected intellectually agreed that there was no logical basis for it. And that if it went away, it would not change our behavior one whit.
The New York Times: Schwarzman’s Unfortunate War Analogy; August 16, 2010
David Corn, the reporter who “obtained and posted” the video, writing in Mother Jones; How the 47 Percent Video Drove Mitt Romney to Depression and Nearly Out of the 2012 Race; October 23, 2023. In the article, David Corn references the 2023 book Romney: A Reckoning by McKay Coppins,
For the United States, the Federal Reserve;For other countries, The International Monetary Fund; World Economic Outlook database
FactCheck.org; July 2012; Below is the full paragraph of the speech. Although the two sentences were “inartfully phrased,” the context is clear.
“If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.”
I would remind them that business ownership and employing people is a form of undemocratic power, as is high-dollar philanthropy. I’d remind them that the problem with their wealth isn’t so much that they have more and nicer things than the rest of us but that they have louder voices, and the choices they make affect other people’s lives, dreams and even freedom. Like when they donate to a school district but premise it on the schools pivoting towards STEM, what does that do to the kid who wants to be an artist?
“It’s a war. It’s like when Hitler invaded Poland in 1939.” This is deranged.