LONDON (Reuters Breakingviews) - Like its erotic namesake, wealth-porn can distract otherwise sensible people. It is all too easy to stare mindlessly at descriptions of billions and trillions of dollars and to relish tales of grand excesses of spending. What really matters about the rise of big fortunes, though, is not the thrill of luxury, but the effect of concentrated wealth on society.
Reports on global trends in the wealth of millionaires and billionaires are prime texts for some wealth-enthusiasts. This is a good season for them. The two largest Swiss banks have just published big studies, UBS on billionaires and Credit Suisse on millionaires.
The numbers are impressive. UBS calculates that the world’s 2,158 billionaires are worth $8.9 trillion. Credit Suisse has determined that total global wealth has increased from $117 trillion to $317 trillion since 2000, and that the richest 10 percent of the population has owned about 85 percent of that total since 2007. Such numbers are fuel for fantasies. Anyone selling to so-called ultra-high net worth individuals can imagine cashing in somehow, while defenders of economic justice can work themselves up into a frenzy of indignation.
All these wealth voyeurs should calm down, for two reasons. First, most of this money is pretty hypothetical. Credit Suisse describes rises in the prices of houses and financial assets as “real” gains, but that stretches the truth. Current prices can be realised by only a few people at a time. If there are too many sellers, all financial asset prices – and all rich people’s net worth – will fall.
Second, in developed countries, being rich brings only small material advantages over being solidly middle class. Mass production, welfare states and universal service requirements ensure that everyone uses the same roads, electricity, phones and so forth. All cars are obliged to obey the same speed limits. Healthcare is close to universal, with some exceptions in the United States. The top three-quarters of the population live in comfortable and reasonably spacious housing.
Of course, the mansions and penthouses of the rich are more luxurious than the standard-issue suburban townhouse. And private islands and beachfront estates are undoubtedly nicer than a two-star hotel in the tourist section of town. However, the practical comfort-gaps are pretty modest. Today’s middle class live very comfortably while the very rich live very, very comfortably.
The focus on these differences is best explained at an example of what pioneer psychoanalyst Sigmund Freud called the narcissism of small differences. People have to decide to get very excited about the objectively small incremental value of better ocean views, bigger diamonds or whatever other bauble indicates higher social status.
Great wealth certainly buys such status symbols. However, the social symbolism is only marginally economic. In countries where nearly everyone has lots of stuff, the levels of joy in having more and of discontent in having less depend largely on cultural values, not on the monetary values of the jewels and Lamborghinis.
Great fortunes can buy something important which is out of the reach of the typical member of the bourgeoisie. That is influence. Income from financial assets, legacies, an elite education and the ability to take jobs which pay little or nothing give the comfortably rich a vastly disproportionate authority in setting social priorities, guiding the consensus on moral questions and shaping the media. This society-shaping superpower creates a much wider divide between the uber-rich and the rest than any consumption gap.
The cultural influence of the rich is hard to separate from their political power. In democracies, they can often buy desired policies, by providing money, time and skills. In autocracies, the rich and the powerful are so closely entwined that they are almost indistinguishable.
These three advantages of great wealth – status, influence and power – may be judged obscene, but they have little to do with the numbers in the Swiss banks’ studies. The social authority of the rich is hardly increased by rising asset prices and hardly tarnished when markets fall.
Time has much more effect than market prices on the privileges of wealth. In particular, inheritance increases wealth-power. The children of the rich, raised to be at the top of the heap, can dedicate their ample time, well-honed skills and extensive connections to philanthropy or political campaigning. Their effortlessly acquired social status gives them extra clout.
It is not easy to keep democracy strong amidst high concentrations of wealth-power, especially when it is inherited. In many countries during the first half of the 20th century, the desire to reduce the sway of the affluent elite helped inspire progressive income and inheritance taxes – higher rates on higher incomes and larger fortunes.
In the last few decades, though, the political momentum has been towards lower tax rates, especially for the rich. Those who gain from the trend have used their influence and power to keep it going. This trend will tend to bring a further entrenchment of wealth-power and a smothering of non-elite voices.
Wealth-power is not the only challenge for democratic governments today, but it probably contributes to the alienation of many voters. Higher tax rates, especially on inheritances, would be a helpful move in a genuinely populist direction. Such a revolution looks unlikely. While waiting, there is one certainty. The current environment is good for wealth managers such as UBS and Credit Suisse, and for all other aficionados of affluence.
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