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Reuters Magazine: The one percent war

When Anders Aslund, a Swedish economist who has studied and advised most of the leaders in the former Soviet Union, visited Kiev in late 2004, at the height of the Orange Revolution, he returned to his office in Washington, D.C., with a surprising observation. Most reports depicted the Orange Revolutionaries, with their determined, subzero encampment of the capital city’s central square, either as western Ukrainians rebelling against the government’s pro-Russian stance, or as idealistic students who were unwilling to stomach political repression. Both characterizations were true, but Aslund saw a third dynamic at play. The Orange Revolution, he told me, was the rebellion of the millionaires against the billionaires. Ukraine’s crony capitalism worked extremely well for the small, well-connected group of oligarchs at the very top, but it was stifling the emerging business class. This ambitious haute bourgeoisie was finally fed up and it was fighting for more equitable rules of the game.

A member of Swiss special police forces stands on the roof of a hotel during strong snow fall in Davos, January 24, 2012. REUTERS/Christian Hartmann

A version of that battle of the millionaires versus the billionaires has been playing out around the world over the past twelve months. It was a decisive factor in the Tahrir Square uprising, whose most visible organizer was Wael Ghonim, a Google executive based in Dubai with an MBA degree; the protests also quickly won the support of the country’s well-heeled military elite. The same class struggle was on display in India, where veteran social activist Anna Hazare’s anti-corruption hunger strike was hailed as the political awakening of the prospering Indian urban middle class. And it could be seen last month in Moscow, where the unexpected revolt against Vladimir Putin’s “party of crooks and thieves” was catalyzed by a blogging lawyer and drew fur-clad professionals into the streets - it is being called the “Mink Revolution.” In the United States, Occupy Wall Street has drawn the political battle lines somewhat differently - between the 99 percent and the 1 percent. But when you drill down into the data, you can see another, even steeper division inside the 1 percent itself. The ultra-rich of the 0.1 percent have pulled far ahead of the merely rich who make up the other 0.9 percent at the tip of the income pyramid. The divide is cultural and it is economic - and if it becomes political it could transform the national debate.

The wider public discussion about income inequality hasn’t much touched on the divisions within the 1 percent. That is partly because it can be a little stomach-churning to consider the gradations of wealth at the very top at a time when unemployment is close to 9 percent and middle-class families are being hammered. Nor is this queasiness about studying what’s happening on Olympus confined to liberal do-gooders. Branko Milanovic, a World Bank economist who is one of the leading students of global income distribution, writes in his latest book, “The Haves and the Have-Nots,” that it is far easier to secure funding for research about poverty than about income inequality. The reason for that is “rather simple even if often wisely ignored,” Milanovic says. “Inequality studies are not particularly appreciated by the rich.” Indeed, Milanovic says he was “once told by the head of a prestigious think tank in Washington, D.C., that the institution’s board was very unlikely to fund any work that had income or wealth inequality in its title. Yes, they would finance anything to do with poverty alleviation, but inequality was an altogether different matter. Why? Because ‘my’ concern with the poverty of some people actually projects me in a very nice, warm glow: I am ready to use my money to help them... But inequality is different. Every mention of it raises in fact the issue of the appropriateness or legitimacy of my income.”

Within the 1 percent, awareness of the different tiers of wealth is as keen as an Indian matchmaker’s sensitivity to the finer divisions of caste. And thanks to the wiretapping authority of the Manhattan federal prosecutor, the hoi polloi were recently able to eavesdrop on one conversation within the 1 percent that revealed some of these internal distinctions. The dialogue was between Raj Rajaratnam, the hedge fund investor convicted of insider trading last summer, and Anil Kumar, who was at the time a partner at McKinsey, the management consultant. The two were discussing their mutual friend, Rajat Gupta, the former managing director of McKinsey. At the time of the conversation - August 2008 - Gupta was considering a move from the blue-chip board of Goldman Sachs to serve as an adviser to KKR, the legendary private equity group. “I think he wants to be in that circle,” Mr. Rajaratnam says to Mr. Kumar. “That’s a billionaire circle, right? Goldman is like the hundreds of millions circle, right?”

Holly Peterson, the daughter of private equity billionaire Pete Peterson - and herself a rather sly and eloquent chronicler of the 1 percent in her essays and fiction - tells a similar story of the tension at the very top. “I think people making five million dollars to 10 million dollars definitely don’t think they are making enough money,” she told me. “Wouldn’t it be nice to fly private? There are so many things you can aspire to, even making five million dollars a year. For the lower rung of this crowd, these people set up lives for themselves they can’t afford. They are broke and maxed out on their credit cards in December, just like middle-class couples living on one hundred thousand dollars. I don’t think the feel that rich. They are trying to play with the high-rollers, and there are things they can’t do, and they feel deprived, which is completely sick and absurd, but that’s the truth of the matter.”

Although the insecurities and petty jealousies of the rich are revealing, the best way to understand what’s happening at the top of the income distribution is simply to look at the numbers. Brian Bell and John van Reenan, two economists at the Centre for Economic Performance at the London School of Economics, have done a careful study of Britain’s super-rich. Peering inside the top 1 percent, they found a distribution almost as skewed as that within the economy as a whole - the top 2 percent of the 1 percent captured 11 percent of the wage share of this top slice overall in 1998 and 13 percent in 2008. Among financiers, who are disproportionately represented within the British and American 1 percent, the tilt towards the very top is even more pronounced.

Jeffrey Winters, an American political scientist, has devised another way to appreciate the difference between the merely rich and the super-rich. His “Material Power Index” (MPI) measures the income of the top 10 percent of Americans as a multiple of the average income of the bottom 90 percent. The index shows that, like a mountain whose slopes become steeper as you ascend to the peak, income polarization in America gets sharper the richer you are: the top 10 percent have a MPI of four (meaning their average income is four times that of the bottom 90 percent), the top 1 percent have an MPI of 15. But when you get to the top 0.1 percent, the MPI jumps to 124. That is the line, in Winters’ view, which separates the affluent from the plutocrats. “There were about 150,000 Americans whose average annual incomes were $4 million and above in 2007,” Winters writes of the 0.1 percent. “This is the threshold at which oligarchs dominate the landscape.”

Winters has more bad news for the merely rich. In a study of US tax policy over the past century he concludes that the ultra-wealthy have outfoxed their less-affluent neighbors in the top percentile. When a federal income tax was first levied in the United States in 1913 it was targeted solely above Winters’ oligarch threshold, at the 0.1 percent. Over the next hundred years that burden has shifted down the income ladder. Within the 1 percent, the richer you are, the lower your effective tax rate: in 2009, the top 1 percent paid more than 23 percent of their income in tax; the top 0.1 percent paid about 21 percent; and the top 400 taxpayers paid less than 17 percent.

The gap between the one percent and the 0.1 percent could have serious political consequences. Even in the United States, there are just 412 billionaires, and 134,888 taxpayers fall in the 0.1 percent. The 1 percent is bigger, containing 749,375 taxpayers. With an annual income of $486,395, the 1 percent is also not that far away from the 7.5 million taxpayers who occupy the wider 10 percent and earn an average $128,560. These people at the bottom of the top income distribution are financially essential to the country and politically vital to those at the very top. If the super-elite loses their loyalty, it could become very isolated indeed.

Historically in America the merely rich have strongly identified with the very rich. The strivers at the bottom of the one percent were just one big idea or one big job away from the summit. But there are a few indications that the sub-millionaires are beginning to suspect that the billionaires are getting an unfair deal. One sign is how “crony capitalism” has become the battle cry not only of Occupy Wall Street, but also of Tea Party darling Sarah Palin and conservative intellectual Paul Ryan. This emerging split between pro-business, pro-money Americans and the 0.1 percent is potentially much more important than the patchouli-scented, anti-establishment idealism of Occupy Wall Street. We always knew the left was suspicious of high finance. What is surprising is that Wall Street’s yeomen have become suspicious of their bosses.

Here’s how Joshua Brown, a self-described New York-based investment adviser to high-net-worth individuals, charitable foundations, and retirement plans responded to complaints by a number of Wall Street chiefs that they were being unjustly vilified. Brown’s tirade, which he posted on his blog, The Reformed Broker, quickly went viral: “Not only do we not ‘hate the rich’ as you and other em-bubbled plutocrats have postulated, in point of fact, we love them,” Brown wrote. “We love the success stories in our midst and it is a distinctly American trait to believe that we can all follow in the footsteps of the elite, even though so few of us ever actually do. So, no, we don’t hate the rich. What we hate are the predators. America hates unjustified privilege, it hates an unfair playing field and crony capitalism without the threat of bankruptcy, it hates privatized gains and socialized losses, it hates rule changes that benefit the few at the expense of the many and it hates people who have been bailed out and don’t display even the slightest bit of remorse or humbleness in the presence of so much suffering in the aftermath.”

In a populist age, the super-elite can survive if every millionaire is convinced he has a billionaire’s baton in his knapsack. If that conviction breaks down, the battle of the millionaires versus the billionaires could move west.