Plutocrats of the People

Why are America’s superrich suddenly fretting about income inequality?

What’s hot for 2007 among the very rich? A $7.3 million diamond ring. Safari in Tanzania. Oh, and income inequality.

Sure, some leftish, Democratic-leaning billionaires like George Soros have been railing against income inequality for years. But increasingly, centrist and right-wing billionaires are starting to fret about income inequality and the fate of the middle class.

In December, Mortimer Zuckerman wrote a column in U.S. News & World Report, which he owns. “Our nation’s core bargain with the middle class is disintegrating,” lamented the 117th-richest man in America. “Most of our economic gains have gone to people at the very top of the income ladder. Median income for a household of people of working age, by contrast, has fallen five years in a row.” Channeling Barbara Ehrenreich, he noted that“Tens of millions of Americans live in fear that a major health problem can reduce them to bankruptcy.” Unbound, Zuckerman concluded with a plea for universal health insurance.

Wilbur Ross Jr., No. 322 on the Forbes 400, has echoed Zuckerman’s anger over the Dickensian struggles faced by middle-class Americans. “It’s an outrage that any American’s life expectancy should be shortened simply because the company they worked for went bankrupt and abrogated health-care coverage,” said the former chairman of the International Steel Group, who has minted money restructuring broken-down industrial companies.

Stephen Schwarzman, the co-founder of the Blackstone Group, is an unabashed economic royalist. He lives in a $30 million apartment once owned by John D. Rockefeller Jr., and he has been an active backer of the Bush-era Republican Party. (This November 2004 profile, by Landon Thomas Jr., in the New York Times is the definitive portrait.) He differs from Blackstone Group co-founder Pete Peterson, an abashed economic royalist who has been a fierce critic of recent economic policy. Yet in late December, speaking to the Financial Times, Schwarzman warned about the danger of rising income inequality. “The middle class in the US hasn’t done as well over the last 20 years as people at the high end, and I think part of the compact in America is everybody has got to do better,” said No. 73 on the Forbes 400list.

What gives? The very rich are just as trendy as you and I, and can be so when it comes to politics and policy. As they jet off to Davos, the world’s magnates will all be talking about how they’re managing to offset the emissions created by their G-IVs. Given the recent change of control in Congress, the popularity of measures like increasing the minimum wage, and efforts by California’s Republican governor to offer universal health care, these guys don’t need their own personal weathermen to know which way the wind blows.

But there’s more to it. Despite their vast fortunes, Ross and Schwarzman know whereof they speak when it comes to middle-class wage and benefit stagnation. When private equity firms restructure bankrupt firms and turn around struggling companies, they use the same playbook: Cut benefits and jobs, relocate factories to cheaper offshore locations, replace pensions with 401(k) plans, and increase co-payments for health care. Private equity firms and turnaround artists aren’t the cause of stagnant wages and disappearing benefits. But they are frequently the agents that implement the changes, and they have been among those that benefit most gaudily from the ongoing cram down.

It could also be that the sums raked in by high-end earners have become so mind-boggling that they are even rattling billionaires. Many of the laments surfaced in December—bonus season, when Goldman Sachs CEO Lloyd Blankfein’s $53.4 million bonus (as well as the firm’s $16.5 billion benefits and bonus pool) was the talk of the town. These guys know that for every publicly disclosed fortune minted last year, hundreds more were done so quietly. Perhaps the continued money shower makes them wonder how all those people who service the high earners—drivers and secretaries, personal trainers and physicians, architects and lawyers—can make it on the comparatively tiny salaries they receive.

These self-made billionaires know something about macroeconomics. And despite the laughable efforts of right-wing think tank denizens to sow doubt, there’s a pretty broad consensus that the usual mechanisms that produce gains for workers just haven’t kicked into gear in this cycle. Five years of growth and a tight labor market haven’t done much to increase wages or benefits—the proportion of workers receiving health insurance through work has actually declined through this expansion.

It’s possible that plutocrats are expressing solidarity with the struggling middle class as part of an effort to insulate themselves from confiscatory tax policies. But the prospect that income inequality will lead to higher taxes on the wealthy—before 2010, when the Bush tax cuts are supposed to expire—doesn’t keep plutocrats up at night. They can live with that.

No, the scenario they fear was the one laid out by Timothy Geithner, president of the Federal Reserve Bank of New York, in a speech last week to the Council on Foreign Relations. Borrowing several pages from Jacob Hacker’s The Great Risk Shift,Geithner cited problems such as a rise in long-term income inequality, greater income volatility, and anxiety over retirement savings and health-care costs. “The political challenges of sustaining support for global economic integration and fiscal sustainability will be more difficult in the United States because of what has happened to the distribution of income and economic insecurity.”

In other words, if middle-class Americans continue to struggle financially as the ultrawealthy grow ever wealthier, it will be increasingly difficult to maintain political support for the free flow of goods, services, and capital across borders. In addition to Lou Dobbs Democrats, we’ll have more Lou Dobbs Republicans. And when the United States places obstacles in the way of foreign investors and foreign goods, it’s likely to encourage reciprocal action abroad. For people who buy and sell companies, or who allocate capital to markets all around the world, that’s the real nightmare.