Feature

Moneybags

Today’s super-wealthy are as rich as Rockefeller,
but will they be as generous?

by
• 4,013 words

There are few things more boring than a class analysis, some say. Karl Marx’s “fetishism of the commodity” or Adam Smith’s “invisible hand” can kill a dinner party. But celebrity, especially celebrity attached to wealth – real, gigantic wealth – is another matter altogether. And so, while Conrad Black’s trial in Chicago concentrated on the arcane legalities of non-compete agreements and whether his Lordship pocketed tens of millions of dollars that didn’t belong to him, what sparked a real frisson about this case were the accounts of orgiastic spending Black and his vampish wife, Barb­ara Amiel, indulged in at the pinnacle of their power.

When is enough enough, people ask, mad, envious, curious. Three opulent mansions and a Park Avenue condo, a private jet and Rolls-Royce Silver Wraith, and Amiel’s “environmental chamber” – her dozen crocodile-skin Hermès Birkin handbags, the Renaud Pellegrino evening bags (whose handles are encased in jewels), the vast collection of Manolo Blahnik shoes – are part of the answer. But there were also the ludicrously expensive holidays in Bora-Bora, the parties, and, of course, the staff – the maids, chefs, chauffeurs, footmen, housemen, guards, and seventeen butlers, one of whom earned $130,000 annually, plus board. (Good help is hard to come by, apparently, and once found must be compensated accordingly.) “Nobody has seventeen butlers,” snorts Peter C. Newman, Black’s former confidant and biograph­er (and Amiel’s former boss), who covered the tycoon’s trial. “Nobody had seventeen butlers even during the Gilded Age.”

Newman’s quip provides an interesting historical comparison. As the Blacks’ pharaonic appetite for luxury illustrates, we are in the midst of a new Gilded Age, a period where “extravagance knows no bounds,” as Amiel herself put it. The world’s richest man, Bill Gates, is worth $56 billion (US) and lives in a 66,000-square-foot lakeside compound near Seattle, valued at approximately $100 million. Paul Allen, the co-founder of Microsoft, owns a 413-foot yacht complete with a cinema, recording studio, two helicopters, and a ten-person submarine. To call it a boat is absurd, says Shinan Govani, the National Post’s gossip columnist, who attended a party on Allen’s ship at the Cannes film festival. “It’s a country unto itself.”

In a manner that has become familiar, Ira Rennert became one of Amer­ica’s highest paid executives in the 1990s by accumulating nearly $500 million in dividends and management fees from his companies, mostly metals and steel plants (one of which, AM General, builds the gas-guzzling Hummer and Humvee). His duplex apartment on Park Avenue is replete with antiques and Impressionist paintings. He owns a palatial spread in Israel, a Gulfstream V jet, and, the pièce de résistance, a 100,000-square-foot oceanfront mansion in the Hamptons – a twenty-nine bedroom mini-Versailles on sixty-four acres with beach and garden pavilions, basketball, squash, and tennis courts, and a theatre.

Not to be outdone by US billionaires, Prince Alwaleed bin Talal Alsaud of Saudi Arabia, the world’s thirteenth richest man, owns a 317-room, 400,000-square-foot palace in Riyadh. Costing $130 million to build, it has eight elevators and more than 500 television sets, and the grounds, in this desert kingdom, feature a soccer field.

Canada has twenty-three billionaires, with David Thomson, controlling $22 billion (US), leading the pack. And many of our hyper-rich also enjoy their toys. David Ho, the Vancouver-based ceo of the now-defunct Harmony Airways, reportedly owns a golf course, a thirty-eight-foot Miami Vice-style cigarette racing boat, a custom-made Fer­rari Testarossa, and a 13,000-square-foot mansion. He also owns two homes in Hawaii, one of which is valued at over $20 million. Heather Reisman and Gerald Schwartz of Indigo and Onex fame, own homes in Nantucket and Palm Beach, a yacht and a plane, and live in a huge Toronto spread. They safari with Hollywood royalty like Michael Douglas and Catherine Zeta-Jones.

In 2003, according to Forbes magazine, there were 476 billionaires in the world. Today, there are 946, with an average net worth of $3.6 billion and a combined wealth of $3.5 trillion. (The current US budget is $2.7 trillion.) Five percent of Americans control just over half of the country’s wealth, and collectively the richest 300,000 Americans earn almost as much income as the bottom 150 million. A study co-authored by McMaster University economics professor Michael Veall and Emmanuel Saez at UC Berkeley revealed that in Canada, the wealth controlled by our most affluent class has risen dramatic­ally over the past thirty years. Today, the top 1 percent account for 13.5 percent of all income, as compared with 7.5 percent in the late 1970s; other studies show that wages for the working majority have either flattened out or declined for more than two decades.

While most Canadians consider themselves part of a broad middle class, that designation has shifted significantly. In the post-World War II era and through the 1970s, an ever-increasing number of Canadian families – supported largely by the salary of a single wage-earner – improved their standards of living and socked money away. Today, incomes are growing much more slowly if at all, and Canadians are borrowing more and more. As in the US, much of Canada’s “middle class” is actually two or three paycheques away from going broke, and many are wonder­ing what separates them from the privileged few.

In the 1970s, American ceos made roughly thirty times what average work­ers hauled in; today, they make 300 times the average wage. The chairman of Wal-Mart, America’s largest corpor­ation, earns $23 million (US) annually; the company’s non-supervisory staff take home $18,000 (US). Thirty years ago, Jack Armstrong of Imperial Oil was Canada’s highest-paid ceo. He made just over $500,000 ($1.5 million in today’s dollars). In 2005, the 100 highest-paid Canadian ceos took home an average annual salary of $9 million. Whereas executive pay was once almost entirely made up of salaries and bonuses, the use of stock options as inducements took hold when corporations started wooing a small class of superstar ceos. As a result, in both Canada and the US, executive compensation has gone through the roof. Between 1998 and 2000, Michael Eisner, then at the helm of Walt Disney, cashed in over $680 million (US) in stock options. Last March, the co-ceos of Canada’s Power Corp., André and Paul Desmarais Jr., earned a combined $35 million by exercising some of their stock options. Says David Green, a professor of economics at the University of British Columbia, “The right wing managed to win the argument that what is good for the rich is good for all of us.”

But is it? In North America, the wealth divide has become a canyon, and critics believe that the concentration of so much money pooled in the hands of a tiny elite is corrupting our institutions and dissipating economic vitality. Both national governments are becoming less relevant in the face of emergent plutocracies not necessarily loyal to local economies – perhaps one reason North America’s manufacturing base is in such sad shape. Nor does either national government seem interested in solving the myriad economic, health, environmental, educational, and social problems that cash-strapped local governments cannot address. Princeton economist and New York Times columnist Paul Krugman has argued that the growing gap between rich and poor in countries like Canada and the US has a haunting parallel with countries across Latin America, where for decades dramatic wealth inequality so fractured societies that revolution from below was a constant threat. It still is. “This, ultimately, is the most pressing issue we face as a society today,” Krugman wrote.

The original Gilded Age extended from the end of the US Civil War to the early years of the twentieth century, an era when industrialization took root and a small cabal took control of critical sectors of the economy. Given the failure of the political classes to prevent the war between the states and the bankrupt economy that followed, in some respects the emerging dominance of private capital was a necessary evil. While committed first and foremost to empire building, robber barons such as John D. Rockefeller, Andrew Carnegie, and J. P. Morgan also invested massively in infrastructure, helping to build the nation through roads and railroads, universities, libraries, hospitals, etc. Such men amassed vast fortunes, some of which they spent on elegant manors and castles staffed with armies of servants in New York City and Newport, Rhode Island. Canada’s own Gilded Age arrived later on, but its legacy can still be seen in Mont­real’s Golden Square Mile, a neighbourhood of giant and regal homes that hug Mount Royal.

Extraordinary wealth in the US led to political power and highly useful state benefits for the rich like protect­ive tariffs, free land for railways, and anti-strike measures. The codependent relationship that developed between the state and the super-wealthy is perhaps best exemplified by the Panic of 1893, when a deep depression led to a run on the gold supply. President Grover Cleveland asked financier J. P. Morgan to create a syndicate to supply the US Treasury with gold. Morgan did, and the national bank was rescued from insolvency. “That episode illustrated the bankers were more powerful than the government,” says Alan Lessoff, a professor of history at Illinois State University and an expert on the Gilded Age.

Special interests have always exercised undue influence on society, but after the shocks of two world wars and the Depression, most North Americans experienced an unparalleled rise in wages and living standards between the late 1940s and roughly 1980. By the mid-1970s, one-quarter of the US workforce and over one-third of Canadian workers were unionized, and working people were consistently winning significant wage concessions. Fordism – the notion that increasing wage rates for workers meant more consumers with more money to spend – prevailed in heavy industry. “It was an unpreced­ented period in the history of capitalism, where for a variety of reasons working people were able to advance their demands,” recalls Jim Stanford, an economist with the Can­adian Auto Workers union.

But not all was quiet in corporate America. In 1971, just prior to being appointed by Richard Nixon to the US Supreme Court, Lewis F. Powell Jr. – a prominent corporate lawyer who sat on the boards of more than fifteen cor­porations – wrote a memorandum claim­ing that “the American economic system is under broad attack” and that businesspeople must “confront this problem as a primary responsibility of corporate management.” Circulated to members of the US Chamber of Commerce, the memo claimed that big business had “shown little stomach for a hard-nosed contest with their critics” and that in terms of framing government policy, “the American business executive is truly the ‘forgotten man.’”

With the US mired in Vietnam and anti-war demonstrations becoming more vociferous, Powell Jr. attacked campus liberals, Ralph Na­der and his acolytes, and the press. While the stage was set for a firm business rebuttal, econom­ic preoccupations took a back seat to Watergate and the US’s failure in Vietnam. Dispiriting years followed but, by the late 1970s, with Jimmy Carter in the White House and corporate profits declining, some precipitously, the counter-revolution that Powell Jr. had attempted to spark gained renewed vigour.

Powell Jr.’s manifesto spelled out an array of tactics that big business could employ to challenge critics on campus, in the media and courts, and in the political arena. Most notable in this percolating ideological war was the formative role of conservative think tanks. The Heritage Foundation, funded initially by Joseph Coors, beat the drum for economic deregulation, a theme also central to the American Enterprise Institute, the Cato Institute, and the Hudson Institute, among others. Such groups began producing reports – customarily distilled into press releases and disseminated to major media outlets – as well as training young ideologues to staff key government and congressional posts. If the initial impetus was to promote Ronald Reagan’s “trickle down” economic theories, “expert analysts” from conservative think tanks were soon dominating the television talk show circuit, radio programs, and print journalism, and they were weighing in on practically every conceivable subject.

This business counterattack was highly organized, says Doug Henwood, publisher of the New York-based Left Business Observer, which covers Wall Street. “By the time Ronald Reagan and [Federal Reserve chairman] Paul Volcker were in power, they had an agenda. It was class warfare from above, and people at the bottom didn’t know what hit them.”

Canada came a little later to this game, but ultimately the Fraser and C. D. Howe institutes and the Canad­ian Council of Chief Executives came to play a similar role: all call for capital to be freed from constraints imposed by governments, all promote free trade, are generally critical of consumer protection laws and the welfare state, and make regular appearances in the media.

In the early 1980s, Volcker drove up interest rates in order to offset inflation, plunging the North American economy into its deepest recession since the Great Depression. By the time the Reagan administration broke the 1981 air traffic controllers’ strike by replacing unionized workers with scab labour, Fordism had effectively been defeated. Unions were on the defensive and corporations were extracting wage concessions.

With increased globalization and freer trade, North American workers were soon forced to compete for jobs with low-wage workers in the developing world. The era of the closed union shop was over, and organized labour wilted as a force for equalization in North American society. Today, the portion of the private sector workforce that is unionized is 7.4 percent in the US and 17 percent in Canada. Explains the caw’s Stanford, “Working people have lost power, not maintained their share of the pie, and seen a decline in their living standards.”

Exacerbating the wealth divide was the emergence of large institutional shareholders, including mutual and pension-plan funds, with get-rich-quick mindsets. This pressured corporations to increase profit margins regardless of the consequences. Across a number of industries, the security of workers and the middle class began to slip.

The reasons for the slippage are complex, but the result could be growing disorder. Social unrest tends to be rooted less in general poverty than in large and visible wealth disparities. When everyone is poor they are all in it together; when everyone is needy save for a privileged few are needy, the elites become a target. Enlightened self-interest should drive those at the top to distribute wealth evenly and to “lift all boats,” but ceo compensation today is not necessarily tied to shareholder gains or profit growth (and in many quarters shareholders are indeed feeling hosed down, to paraphrase Con­rad Black).

Between 1990 and 2001, as measured by Standard & Poor’s 500 index, share prices increased by an exceptional 300 percent, corporate profit growth was a solid 116 percent, and ceo pay skyrocketed by 535 percent. Suggesting that superb corporate stewardship is not always the principal reason for extraordinary pay packages, last year former Loblaw president John Lederer was paid $22 million as he was ushered out the door. This spring, the company announced its first annual loss in nineteen years.

And then there is the case of John Roth, former ceo of Nortel Networks. When Roth took over in 1997, Nortel was already a high-tech powerhouse. Roth then spent $32 billion on largely useless Internet start-ups that generated few sales. By the summer of 2000, with the Internet bubble about to burst, the company’s stock peaked at $124.50. Within weeks, Roth cashed in his stock options, and by year’s end he had pocketed $135 million.

While Roth and PR flaks continued to issue rosy projection statements, the company was in fact hemorrhaging money. In 2001, as the crisis mounted, Roth quit, retiring to his estate in Cal­edon, Ontario. Nortel spiralled into near-insolvency, its stock bottoming out at 67 cents per share. More than 60,000 of its 100,000 employees were given pink slips, and shareholders’ retirement portfolios were wiped out. “It seems inherently unfair when you see a guy like Roth living high off the hog and then the new version [of Nortel] trying to get it together and coughing up all of this money to settle lawsuits,” says Joel Rochon, a Toronto lawyer whose firm launched one of the class-action shareholder lawsuits against the company.

If Roth’s big mistake was hubris, elsewhere local investment seems to be drying up. By and large, the plutocrats of the initial Gilded Age invested in national projects. Business – in the US, steel or insurance; in Canada, timber or booze – came first, and because mon­opoly control was sought, it was often ruthless. But as Rockefeller, Carnegie, and others “developed a conscience” (or were pressured into doing so), spending spilled over into the arts, education, health care, etc. Many of today’s large corporations, however, are transnational (and highly diversified) and, as such, the necessity for home-country investment with the requisite socio-cultural infrastructure is less pronounced.

In 2006, non-financial Can­adian businesses accumulated about $40 billion in surplus cash. But these rec­ord profits aren’t being pumped back into the economy at a rate that will maintain prosperity. “In the sixties and seventies, [companies] would reinvest over 100 percent of cash flow,” says Stanford. “Now it is 70 to 80 percent and the rest they let pile up.” According to Stanford and others, North America’s business community is showing little interest in saving what’s left of the manu­facturing base. Investments offshore, where economies are developing at a faster rate and the regulatory regimes are more lax, are more attractive than at home. In February, auto-industry ana­lyst Ron Pinelli was quoted in the New York Times, saying: “If Chrysler disappeared, would anyone’s life change, except for the people that work for the company?”

In a globalized world, just as corpor­ations chase cheap labour offshore, local concerns must now fight for phil­anthropy dollars with more visible developing-world crises such as hiv/aids, basic immunization shots, and so forth. In an age of instant communication, Zambia can become more compelling than the South Bronx, Watts, or Jamestown.

The wealthy have always claimed that philanthropy is the great corrective, helping to balance out inequit­ies. “I don’t think you can find a better, more efficient way to get millions of dollars put back into society than to have the rich choose to do it,” says high-society chronicler Rosemary Sex­ton. Rockefeller and Carnegie gave away hundreds of millions (billions in today’s dollars) to build museums, libraries, universities, and hospitals, or to be disbursed by foundations. In 2004, the last year for which there are complete records in Canada, there were 2,400 active grant-making foundations that donated more than $1.2 billion and had over $14 billion in assets, combined. Both numbers are considerably higher today, and in recent years Canadian business leaders have given enormous sums to the arts, higher education, and health care. In the US, there are currently more than 70,000 foundations with roughly $550 billion in assets. US foun­da­tions donated over $40 billion in 2006. Most famously, Bill Gates and his wife Melinda, co-founders of the Bill and Melinda Gates Foundation, donated nearly $30 billion (US) to reduce the spread of disease, poverty, and premature death in the developing world, alongside anti-poverty initiatives in the US. Warren Buffett pledged $31 billion to the Gates Foundation as well.

Sounding a critical note in the New York Times Magazine, bioethics profes­sor Peter Singer, of the Center for Human Values at Princeton University, wrote: “When wealthy people give away money, we can always say that they are doing it to ease their consciences or generate favorable publi­city.” Some have speculated that Bill Gates, for one, is partly trying to upgrade his image after being pummelled in antitrust suits brought against Microsoft a few years ago. Others, like the Los Angeles Times, have pointed out that some of the Gates Foundation’s investments run counter to its stated mandate.

To be sure, foundations are tax havens that allow wealthy individuals to shelter money and, if so desired, create honourable family legacies. But gifts are gifts, and given the growing import­ance of the philanthropic sector, the more important questions are: What types of initiatives get support from foundations? And what happens to basic demo­cratic institutions when a select few exercise so much control? According to Toronto socialite and fundraiser Catherine Nugent, wealthy people “like to see bricks and mortar to put their names on, as opposed to research…research is like fixing pipes under the house, you can’t really see it.” Her point is borne out by the Million Dol­lar List, maintained by the Center on Philanthropy at Indiana University. On the allocation of foundation grants and gifts of more than $1 million in the fourth quarter of 2006, a scant 2 percent went specifically to human services.

While he is a staunch supporter of philanthropy, Singer expresses concern that “a few wealthy individuals” can effectively decide whether “billions go to research vaccines or viruses that kill millions in the developing world.” He argues that it would be “better that a democratic process determines where the funds go.” But that “democratic process” is called the tax regime, and one sure reason for foundations is the quid pro quo of control over where the money goes in exchange for providing the money in the first place.

It would be churlish to criticize major grants to the arts, for instance, which are increasingly reliant on private philanthropy. However, so are many other sectors of the economy – affordable housing projects, for instance, are generally not the kind of bricks-and-mortar projects that Nugent describes as appealing to the foundation sector. It might be fine for Ruth Lilly, heir to the Lilly pharmaceutical fortune, to give $200 million (US) to Poetry magazine, but the homeless in the Rust Belt might have liked to have seen that lucre come their way. Ultimately, there are genuine questions to be asked about whether society as a whole can afford to be subjected to the whims of a tiny elite; about whether foundation support for arts and culture, or for higher education, health care, or for myriad other critical areas, takes the state off the hook; and finally, about what happens to the losers in the granting sweepstakes. The record of the first Gilded Age was decidedly mixed. What of the second?

Krugman worries that the monumental upward shift of wealth is deny­ing too many North Americans the opportunities that they need, and that real cleavages are forming between the few haves and the legions of have-nots. “The statistical evidence shows, unequal societies tend to be corrupt societies,” he recently wrote. “When there are huge disparities in wealth, the rich have both the motive and the means to corrupt the system on their behalf.” Without significant changes, Krugman envisions history repeating itself, not necessarily with a new Gilded Age, but in the form of Latin American dictatorships of the rich.

But what if the increasingly rich donated significantly more than they currently do? What if philanthropy became a true third sector, as robust and varied as the private and public spheres? Again, the chief difficulties with vast wealth disparity occur when it becomes so visible that resentment is inevitable. But what if the new pluto­crats gave up their palaces and hoggish consumption and plowed their gains, whether legitimate or not, less into the playgrounds of the upwardly mobile (the opera houses, museums, and think tanks), and more into urban renewal, public education, and the like? If Bill Gates has thrown down the gauntlet and become more power­ful, more generous, and more influential than many nation-states, what if others followed in his large wake? Many can afford to make a significant dent to remedy the ravages of inequality, and if they did so, what could the left say then?

It would be wrong, at this point, to equate Bill Gates and Warren Buffett with Andrew Carnegie and John D. Rockefeller. Gates and Buffett have directed most of their philanthropy at the developing world; for Carnegie and Rockefeller, the developing world was at home. Today, the problems overseas are dire, of that there is no doubt, but much of North America is also hurting, and it is saying “charity begins at home.” How will our moneyed classes respond?