Saturday, November 18, 2006

A New Class War

The Haves against the Have Mores. Pity the poor doctors, lawyers and management consultants. Even the I-bankers, now that hedge fund management has become the ne plus ultra of capitalism. The only guys that the hedgies envy are the super-lucky entrepreneurs who can make their centi-million all in one pop!

As far as doctors and lawyers, I once asked a friend of mine in finance, who lives in a 3000+ sq ft apartment on the upper east side, who else lived in his building. After counting all the money guys, he let slip -- "Oh, I guess there are some doctors and lawyers as well. I don't know how they can afford it." You're so money, and you don't even know it! I like how Lemann hints at the social discomfort from occasional interactions between the rich and super-rich. Taking the whole family first class is justifiable, but a private jet is over the top ;-)

Note, I'd be a bit careful about the average numbers used below for top 1% and .1%. Averages are very misleading here and are dominated by the far tail. Numerically the bulk of each group are at the threshold rather than average value for each tranche, which is substantially lower. IIRC, the threshold income for top 1% is about $275k, much lower than the average of almost $1M for that group. What's a little innumeracy, this is America after all!

Note added: This topic is hitting the zeitgeist bigtime! The Times has a sequel to the first article, this time situated in Silicon Valley, here. See also this earlier article about all the "working class millionaires" in the valley.

NYTimes: ...Let’s define the terms first, or at least make some attempt to. The merely rich are those whose income puts them in the top 1 percent of the population. According to a recent study by the Center on Budget and Policy Priorities in Washington, the average real income for the top 1 percent of American taxpaying households was $940,000 in 2004 — a difficult group to feel pity for. But to stand for a moment on its shores (let’s pretend) and look toward the rapidly growing ranks of the superrich is to stare across a vast chasm indeed.

The superrich might be the top tenth of 1 percent (average real household income for 2004: $4.5 million) or the top hundredth (the $20-million-a-year households). Income inequality is growing fastest the higher we go up the chart. While the percentage change in average real household income between 1990 and 2004 was an increase of 2 percent for the bottom 90 percent of American households, it was 57 percent for the top 1 percent; and shot up to 85 percent for the top 0.1 percent; and up to 112 percent for the top .01 percent. That is, the richest are getting richer almost twice as fast as the rich.

Class warfare has been hypothesized by various publications, including the online magazine Slate, New York magazine and Matt Miller in Fortune last month. Mr. Miller calls the bigger and poorer group, which consists largely of professionals — doctors, lawyers, management consultants, the vast majority of Wall Street soldiers — the “lower-uppers.” The targets of their resentment, he says, are by and large hedge fund managers and certain astronomically paid C.E.O.’s.

“The problem is that there’s all this wealth at this new strata that feels unrelated to merit or achievement,” Mr. Miller says. “When a C.E.O. whose leadership has caused a company’s stock price to fall gets a $100 million golden parachute, or when a guy’s running so much money that his commission — even if his picks are only getting an 8 or 10 percent return on his client’s money — is $100 million, that’s crazy.” He says that such compensation “goes against the notion of a meritocracy.”

Or maybe not. “A meritocracy increases inequality — by its very nature, it has to,” says Nicholas Lemann, whose book “The Big Test” explored the history of the SAT and the American meritocracy. “The goal was equality of opportunity, not equality of result.”

Part of the problem may lie with the fact that the members of both classes went into their respective lines of work with the goal of making a lot of money, and one just happens to make several times more of it.

Take the lawyers. “Lawyers are an odd group,” says the novelist Louis Begley, whose day job for several decades has been practicing law with the white-shoe firm Debevoise & Plimpton. “Lawyers at the great law firms earn a lot of money. But for a good many of them, it’s impossible to do so without accepting anything but cases involving huge corporate deals that generate a great many hours they can charge for. But these deals are repetitive. And the lawyers in these transactions often play second fiddle to the bankers.”

The money paid to investment bankers, who were once the stronghold of the financial elite, typically pales next to hedge-fund money. “I recently hosted a panel with Carl Icahn at the Core Club where the whole point was that if you’re an investment banker nowadays, you’re kind of a schlepper,” says Michael Wolff, a Vanity Fair writer who has often written about the moneyed classes. “Investment banking is for the C+ students now. Where you want to be is not somebody who’s advising people with money — whose currency is intellectual capital — but somebody whose currency is money itself.”

This, too, may be what irks the professional classes. Managing a hedge fund is the purest abstraction of making money out of money — there is no other product to show for it.

The resentment may be intensified in New York, a city whose physical layout has always engendered a lot of class-mixing. The middle class might have been largely squeezed out of Manhattan over the past decade, but the merely rich and the superrich still live in the same neighborhoods (if not necessarily the same buildings), buy houses in the same Hamptons (just houses of very different scales), and send their children to the same schools.

Mr. Lemann said that the rich versus richer envy factor “assumes that the relatively poor group is bumping into the most upper income.”

He added, “You might only see it at, say, functions that parents go to at certain rarefied private schools — Fieldston, say, or Harvard-Westlake in Los Angeles.”

Even Mr. Begley, who has earned enough to raise a large family in a grand apartment on Park Avenue, said he was astonished by the sheer number of billionaires he has met in recent years.

“I must say, I’ve begun to feel in New York as if I were driving a Volkswagen on the highway when a Greyhound bus happens to go by,” he said. “At which point, I feel a whoosh of air blasting me off the road. These people belong to another species.”

Except, he said, that it’s “these young Wall Street types” buying up the apartments in his building. “There are maybe four or five of us who bought our apartments at some understandable price 30 years ago,” he said. “And then these new people — I must say, with the money seems to come a rather large physical size. Some of them are polite, but the men do fill the elevator cage. And the women always seem to have a bottle of water attached to their mouths.”

He added that he did not feel any need to engage in class warfare against his neighbors. “If I did, they might crush me against the elevator wall,” he said. “The only thing to do is get adopted by them.”


Anonymous said...

Hey I dowmloades spyberus and thought nothing of it-but yesterday I was infected with an Outerinfo toolbar/popups and your program dealt with it in 2 seconds.

Thanks alot!

Steve Hsu said...


But, I suppose it's too much to hope that creating technology that helps people might compete with running money in the scheme of things :-/

Anonymous said...

Nerdy point 1) I think of "centimillion" as $10,000, in keeping with the usual metric prefixes. I think you want "hectomillion" = $100M.

Nerdy point 2) I find the utility curve really is approximately logarithmic, so the "super-rich" at $20M/yr aren't really all that much better off than the "rich" at $1M/yr. About the same difference, in fact, as the $1M "rich" versus the $50k "junior physics researcher".

Steve Hsu said...


Thanks for reminding me about the logarithm. I feel much better now :-)

Anonymous said...

Reminds me of the old Krugman article on Slate: The CPI and the Rat Race.

It is all about the sigma(or tail)...

Imagine that a mad scientist went back to 1950 and offered to transport the median family to the wondrous world of the 1990s, and to place them at, say, the 25th percentile level. The 25th percentile of 1996 is a clear material improvement over the median of 1950. Would they accept his offer? Almost surely not--because in 1950 they were middle class, while in 1996 they would be poor, even if they lived better in material terms. People don't just care about their absolute material level--they care about their level compared with others'.
I know quite a few academics who have nice houses, two cars, and enviable working conditions, yet are disappointed and bitter men--because they have never received an offer from Harvard and will probably not get a Nobel Prize. They live very well in material terms, but they judge themselves relative to their reference group, and so they feel deprived. And on the other hand, it is an open secret that the chief payoff from being really rich is, as Tom Wolfe once put it, the pleasure of "seeing 'em jump." Privilege is not merely a means to other ends, it is an end in itself.


Steve Hsu said...

"I know quite a few academics who have nice houses, two cars, and enviable working conditions, yet are disappointed and bitter men--because they have never received an offer from Harvard and will probably not get a Nobel Prize. They live very well in material terms, but they judge themselves relative to their reference group, and so they feel deprived"

This is entirely too true! The selection bias for hypercompetitive strivers should probably be countered by required lessons in buddhist thought :-)

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