Fat Cats, Private Equity and the Morality of the Super Rich

Those who read my blog will know I have a special beef about the super-rich. This doesn’t make me unusual though it does lay me, and fellow objectors open to the (frequently leveled) charge of the ‘politics of envy’. Given human nature, some of this charge is justified but the purpose of this-I admit very personal- note is to show that, even allowing for such factors, the infamous quotation by Peter Mandelson in 1997 that ‘New Labour is intensely relaxed about people becoming filthy rich’ has unleashed a situation which has become harming to society- not just to the poor. I also discuss the views of a number of authors on the subject of modern materialism.

Are Critics Missing the Point?
This question was posed by one Peter Newhouse, a self styled ‘independent consultant on pay and management’ in The Guardian, 31st August, 2007. He is all in favour of publishing the extent of the fat cats’ fatness:

The disclosure of executive directors' pay is good for society. Rather than being a cause for hand-wringing and envy, the Guardian pay survey's revelations of what our best managers can earn from running the UK's biggest listed companies should encourage others to follow in their footsteps. The survey found that directors' pay at the 100 largest such firms has risen by 37%, with the average chief executive receiving £2.9m, including salary, benefits, bonuses and gains from share incentive schemes. These figures send an important message to able and aspirational young people.

Fair enough, you might think (and more from him later), but does this short paragraph tell us anything like the whole story? I think the existence of a new class of super-rich in the USA which has been exported to the UK, Europe and many other areas of the globalised world, represents a worrying problem, both morally, economically and politically.

The Extent of the problem

1. Share of world’s income: the richest 20% of the world earns 83% of its income. In descending order the other quintiles earn, 11.7%, 2.3%, 1.9% and a shaming 1.4%
2. Earnings of Top Directors: Simon Jenkins has written about this and those familiar with this classy columnist, will know he is no lefty bleeding heart, but he is astonished at the brass neck of company bosses:

The heads of Britain’s 100 biggest companies have had 37%, won 28% more last year, 16% the year before and 13% and 23% in the two preceding years, yielding an average pay of £2.8m a head or 20 times the rise in price inflation. Under Labour, these company directors have stretched their remuneration to almost 100 times average earnings, a gap unprecedented since the rise of modern taxation.'

3. Comparison with Average Workers’ Earnings: In the UK bosses earn on average 100 times the pay of the average worker in the companies they run. In the case of mining company Xstrata, the multiple is 544. In the USA there examples of the ratio being 1000:1.

4. Greeediness of Super-rich: some mega rich people can be amazingly generous but in the UK they donate only 1% of their incomes to charity; far less than in the USA. Lord Black and his wife Barbara Amiel, have been exposed as exploiters of their company where they fraudulently denied shareholders some £40m. Their purpose? To live a super extravagant lifestyle with private jets and birthday parties costing £100,000.


5. The Wealth Gap: Economic journalist Frank Rich, has written a book entitled ‘Richistan’ in which he argues that the super-rich have now reached a level whereby they virtually live in their own country, with low taxes, armies of servants, private planes and more money than they can possibly spend in a lifetime. Whilst median incomes have fallen in the USA for four years before 2005, the rich got richer by double digits. The richest 1% now own 33% of all the wealth and this is greater than that owned by the poorest 90%. The rich now sometimes pay a top specialist to give up normal practice and serve merely a group of mega rich families.

6. Millions of US Squillionaires: in 1995 there were 3.77m people classed a ‘millionaires’; in 1998 there were 5.43; and in 2004 9.05. The figures for those worth $5m were, respectively .55, .86 and 1.44; $10m- .23, .30, .53 and $25m- .05, .06 and .11. By 2004 the richest 1% of Americans were earning $1.3 trillion a year, greater than the total national incomes of France, Italy or Canada. In 1985 there were only 13 billionaires- by 2006 there were 400. The expansion in the States is being mirrored in Europe. The number of millionaires in the UK is expected to quadruple by 2020 from 376,000 to 1.7 million. London home prices frequently top £20m. :
‘British concierge services are thriving, as they arrange for rich clients to rent their own tropical islands, charter 250 foot yachts and host birthday parties in Cyprus.’(p.12)

7. Setting salaries: So how come they receive such amazing salaries?
After noting and dismissing various specious defences of such stupendous payments, Simon Jenkins quotes JK Galbraith who said such salaries:

'[were] nothing to do with the marketplace but were a heart-warming gift from executives and their friends to each other, a gift that had grown so large as to 'verge on larceny'.

8. High Gini Coefficents: this index charts the degree of inequality in society. Countries with high ratios tend to have low economic growth when they are poor overall and high social costs too. Ratios of about 25, typical of Western Europe are held to be about right for social harmony and reasonable growth but if as high as 40 as in China and the USA, severe problems of social cohesion and crime can result.

9. Private equity companies
These swashbuckling new players buy out public companies, which are subject to some common regulation and then use their new private status to inflict fairly blatant forms of exploitation. The device is to take the company into liquidation, maybe for only 24 hours, to shed liabilities; pensioners thus robbed become a call on tax funded government compensation schemes. On average 20% of jobs are cut after such a takeover; Toynbee observes:
Mega money is made by the dealmakers but it is a weakened company which limps back to the market.' and concludes
'Never mind the hard-won laws devoted to making public companies responsible: private equity is a return to primitive, unregulated capitalism'

But it is the tax breaks such companies exploit which cause the most anger:

Current tax breaks let private investors charge the interest from huge borrowings against profits. On capital gains they are not charged the usual 40% that applies to everyone else, but after owning the company for just two years their rate is cut to 10%. The two-year rule introduced in 2004, designed to help new ventures, puts ordinary public companies at a disadvantage , having to wait 10 years to pay so little.

It is this anomaly which led Nicholas Ferguson, chairman of SVG Capital private equity to remark recently that executives in his line of work 'pay less tax than a cleaning lady', a remark which won a headline for its author in The Financial Times. One has to applaud his honesty but when one of the robbers themselves complains his gang are receiving too much loot, there must be something seriously wrong.

10. Ghettos for Rich and Poor
Joseph Rowntree Foundation on Economic Segregation
records that the gap between richest and poorest is wider than at any time for 40 years and that: "Poor, rich and average households became less and less likely to live next door to one another between 1970 and 2000," It seems the greatest polarity is occurring in the South-east where the richest and poorest are increasingly living in separate parts of the capital with the former on the outskirts ; 'average' families on middle incomes are being priced out of the region by spiralling house prices and are either moving elsewhere or becoming poor


Professor Danny Dorling, from Sheffield University, leader of the study which analysed census data since the 1970s, commented that increased wealth had not really made the newly rich any happier:

"Rich people in London don't think that they are rich because they don't mix with poor people. That is one of the main differences with the 1970s. In the 1970s and the 1980s there were a few wealthy people almost everywhere. Now, apart from a small number in Cheshire and North Yorkshire, almost all the very rich are in the South East.

Sadly neither Blair nor Brown can claim the last decade, apart from the alleviating the incomes of the very poor has produced much progress towards equality. In February this year a Sunday Telegraph, poll revealed 73 per cent of voters thought City bonuses had become "excessive and something should be done about them"; meanwhile 69 per cent believed the gap between the highest earners and average earners is now excessive.

Analysing the Problem (or trying to)

Happiness and Money: Oliver James a journalist and psychologist has written Affluenza, a study of our relationship with money. He argues that:

‘People who favour certain key values- money, possessions, physical and social appearances, and fame- are at greater risk of emotional distress…. The reasons these values are so bad for our well-being were best summed up by an American psychologist writing in the 1950s and 60s. He presented a stark choice that the American variety of capitalism offered as ‘To Have or To Be’.

He feels that such obsessions amount to a condition which to which he ascribes a medical name: the virus of ‘Affluenza’:

‘In Having mode, people are as much in the grip of external forces as the hypnotized or the compulsively obsessed.’ Fromm saw them as people ‘dependent on success, sale-ability, the approval of others.’ James believes this condition is the result of decades of false needs inculcated by the economic system. As William Leith writes of the book in his review:

‘Affluenza, as defined by James, is clearly recognisable as our way of life. It spreads because it feeds on itself; when you try to make yourself feel better by buying a car, or bulking up in the gym, or spraying on a fake tan, or having a facelift, you actually make yourself feel worse, which makes you want to buy more things. As James points out, the virus has spread to television - "most programmes," he says, "are now barely concealed advertisements for classes of product" - and education. James sees modern education as "little better than a systematic method for spreading the virus"’.

Richard Layard’s Thesis on Happiness: Economist Layard, has written a book on happiness. This he describes as ‘new science’ with techniques now available to measure happiness quantitatively: the book contains a number of fascinating diagrams and graphs. In it he points out that huge improvements in material well being have not resulted in anything like commensurate improvements in happiness. We have become richer and richer yet also more and more unhappy.
Economies grow, GDP swells, but once above abject poverty, it makes no difference to citizens' well-being. What is all this extra money for if it is now proved beyond doubt not to deliver greater happiness, nationally or individually? Happiness has not risen in western nations in the last 50 years, despite massive increases in wealth.
Layard’s study concludes that, as long as one has the basic requirements of living- food, shelter and the like- the chances of a fortune making us any happier are by no means automatic. £25K a year is the basic requirement suggests Layard; after that, it’s up to you to achieve happiness. Layard points out that richer people get angry at their salaries mostly because they are less than others they know. Polly Toynbee, in The Guardian summarizes some key points thus:
In pursuit of money, working ever harder, we are, says Layard, on a "hedonic treadmill" - a phrase that resonates with most of us. Right across Europe people report more stress, harder work, greater fear of insecurity, chasing elusive gains. The seven key factors now scientifically established to affect happiness most are: mental health, satisfying and secure work, a secure and loving private life, a safe community, freedom and moral values.
Oliver James, in his book, cites a billionaire banker, Sam, with a private plane and houses all over the world but who is seriously neurotic with severe addictions, especially to youngish sexual partners. The taxi driving immigrant, Chet, James also cites has a fraction of this wealth yet works regularly and hard, is faithful to his wife and full of pleasure with the world. At least Bill Gates and Warren Buffet – the two richest men in the world- have solved the problem of what to do with their money by giving it away to charity. Few follow their example.
Will They all Move Overseas ?
Now to return to Mr Newhouse who warns us that these talented people earning obscene sums fail to continue to get them ‘they will leave listed UK plc bereft of talent’. I just wonder if that’s true. Not according to at least one economic expert cited by Larry Elliot in The Guardian:

Professor John Van Reenen, director of the Centre for Economic Performance, and the co-author of a recent study into management practices at 4,000 companies, was critical of UK management and questioned whether British executives could cut it overseas if they became disenchanted with pay levels in Britain.

"UK management is not in the premier league. Management aspires to pay as well as the US, but our study finds that average management quality in the US far outstrips that in the UK. Only one in every 50 American firms in our sample can be described as 'very badly managed', compared with roughly 1 in 12 in the UK.”
The suggestion of Simon Jenkins in his article quoted above is that we call the fat cats’ bluff. Dare them to move overseas and see how many takers there are: I suspect not many.

Morality and Mega-riches
This question has been left until the final paragraph, though it has run through my note from the beginning. In some ways it the most important theme of them all. When some people have piles of cash which could reach the moon or even Mars, can it be right that they exist alongside people who try to survive on 50pence or a dollar a day? Christian morality tells us this is a moral obscenity and virtually all other moralities urge fairness and something approaching social justice. The Hollywood film Wall St’s Gordon Gekko urged that ‘greed is good’, that it provides the motor which drives an economic system which delivers many more ‘goods’ than ‘bads’. Maybe this is true but one has to wish for the kind of thinking which led Gates-Buffet to realize their fortunes were worthless as guarantors of happiness and conclude that using their fortunes to help others ultimately, might be.

Government Action
Governments could do a number of things to attack the problem: raise taxes for the mega rich; end loop-holes which make London a virtual; tax haven; strengthen the rights of shareholders to question salaries of directors and chief executives. Evidence suggests indignation on this issue is cross party: Cameron has promised action on ‘non domiciled’ fat cats who avoid paying tax on their fortunes while they live in UK because technically they live overseas.

Reading
Several articles are quoted in this piece from The Guardian, The Observer and elsewhere. The n
books are:

Robert Frank, Richistan (2007): A Journey through the 21st century wealth boom and the lives of the new Rich. Plaktus
Oliver James(2006) Affluenza: How to be Successful and Stay Sane. Vermillion.
Richard Layard (2006) Happiness: Lessons from a new Science.
Bill Jones October 2007
http://skipper59.blogspot.com/