The New York Times
July 1, 2007
The Filthy Rich Are Different From You and Me
By ROGER COHEN
International Herald Tribune
With $1 billion in the bank, you have to try hard to avoid getting richer. Assuming a 10 percent rate of return, your arduous task is spending $100 million a year, or about $274,000 a day. Hermes ties will not get you there.
This may seem too marginal a problem to be of interest. Who has such money, after all? More and more people do. To make this year's list of the 25 highest paid hedge-fund managers, published by Alpha magazine, you had to make $240 million. At the top was James Simons of Renaissance Technologies with $1.7 billion.
Simons used to crack codes for the U.S. Defense Department before moving on. Good luck to him. It is clearly more lucrative to detect small pricing anomalies in the Polish zloty or penny stocks - piling into them with your clients' billions - than to ponder clandestine North Korean signals.
Hedge-fund managers use technology, and their brains, to arbitrage little inefficiencies. Who would have dreamed this ultimate refinement of making money out of money would make them masters of the universe?
I found myself musing on these conundrums here because London is no longer an expensive city. It is a phenomenally expensive city, one that has parted company with ordinary mortals who must now gaze at Mayfair-dwelling plutocrats rather as serfs once contemplated the Pharaohs.
It's not just the $120 taxi fare from Heathrow to central London (three times its New York equivalent), or the $100 entrees at mediocre restaurants, or the cozy (read small) $6-million homes. It's the uneasy feeling that something is going on here, some tectonic shift not altogether easy to grasp.
Austan Goolsbee, a University of Chicago economics professor, had the same sensation during a recent stay. As a member of the "upper income but not extremely wealthy" class, he is unused to wandering around Chicago and thinking: "Holy Cow - that is some upper crust with $8 million to spend on a house!"
London precipitated such thoughts daily. His disquiet is shared. The city has distilled globalization: The international elite is pricing British accountants, engineers and, yes, journalists out the multimillion-dollar housing market. More than half of homes over $6 million go to foreign residents with wealth matched only by their tax breaks.
As goes London, so, to some degree, go Moscow, Hong Kong, New York and Paris. Masters of the universe condemn mere professionals to being upper-losers. Income inequality grows. In the United States, the top 300,000 earners pocketed almost as much income as the bottom 150 million in 2005.
I asked Gary Becker, a Nobel Prize-winning economist, to explain what gives. Capital has gotten cheaper, he said, enabling those who use it to do so more lucratively. Capitalists' talents are now deployable on a global scale, increasing their value. Technology favors those with skills to exploit it, raising the premium for the super-educated but failing to spread education much wider.
"People accept that Bill Gates made a ton of money because he has a real product," Becker said. "When somebody makes it from a hedge fund, it's harder for people, including myself, to accept. But as an economist I have to say, O.K., these guys are managing a lot of capital, and if they get some of the value they create, that is what the market is telling us."
Where Becker balks, and I balk too, is at the fact that in the United States, fabulous wealth creation has been unmatched by improved education. Teaching that will get you recognized in a globalized world is denied minority kids in failing schools.
The proportion of American children not completing high school - around 25 percent - has scarcely changed in recent decades. Hedge-fundocrats and their private equity cousins should consider ways to pile money into ending this national failure.
Where I also balk is at tax treatment that allows many of the ultra-rich to pay 15 percent capital gains tax in the United States on much of their earnings, rather than the top income tax rate of 35 percent, and the global ultra-rich buying up London to sidestep many taxes, including stamp duty.
Tax authorities in the United States and Britain resemble dinosaurs pursuing space ships. They have lost touch with the super-rich, as has most of humanity.
Peter Mandelson, the EU Trade Commissioner, once gave Americans this clue to Britain's New Labour: "We are intensely relaxed about people getting filthy rich."
He did add, however, that the filthy rich should pay their taxes. That would be a start, some consolation for upper-losers, workers and the rest.