Citigroup: The rich will continue to get richer at the expense of everyone else

[Kuya]

Not news for some of you, but it's nice to see it being admitted by the horse in such a cynical matter. The report is from 2006, so take that in mind when you consider what 2008 did for the banks and what it did to everyone else.

Link

Quotes:

➤ The latest Survey of Consumer Finances, for 2004, has been released by the Federal Reserve. It shows the rich continue to account for a disproportionately large share of income and wealth in the US economy: the richest 10% of Americans account for 43% of income, and 57% of net worth. The net worth to income ratio for the richest 10% of Americans increased from 7.4x in 2001, to 8.4x in the 2004 survey. The rich are in great shape, financially.

➤ We think this income and wealth inequality (plutonomy) helps explain many of the conundrums that vex equity investors, such as why high oil prices haven't seriously dented growth, or why "global imbalances" are growing along with the equity bull market. Implication 1:Worry less about these conundrums.

➤ We think the rich are likely to get even wealthier in the coming years. Implication 2: we like companies that sell to or service the rich - luxury goods,
private banks etc. Favored names include LVMH and Richemont.

Back in October, we coined the term ‘Plutonomy’ (The Global Investigator, Plutonomy: Buying Luxury, Explaining Global Imbalances, October 14 2005). Our thesis is that the rich are the dominant drivers of demand in many economies around the world (the US, UK, Canada and Australia). These economies have seen the rich take an increasing share of income and wealth over the last 20 years, to the extent that the rich now dominate income, wealth and spending in these countries. Asset booms, a rising profit share and favorable treatment by market-friendly governments have allowed the rich to prosper and become a greater share of the economy in the plutonomy countries.

Indeed, David Gordon and Ian Dew-Becker of the NBER demonstrate that the top 10%, particularly the top 1% of the US – the plutonomists in our parlance – have benefited disproportionately from the recent productivity surge in the US.

Why as equity investors do we care about these issues? Despite being in great shape, we think that global capitalists are going to be getting an even greater share of the wealth pie over the next few years, as capitalists benefit disproportionately from globalization and the productivity boom, at the relative expense of labor. As we believe plutonomy explains away some of the conundrums we highlighted above, we are very relaxed about these issues.

Furthermore, the rising wealth gap between the rich and poor will probably at some point lead to a political backlash.Whilst the rich are getting a greater share of the wealth, and the poor a lesser share, political enfrachisement remains as was – one person, one vote (in the plutonomies). At some point it is likely that labor will fight back against the rising profit share of the rich and there will be a political backlash against the rising wealth of the rich. This could be felt through higher taxation (on the rich or indirectly though higher corporate taxes/regulation) or through trying to protect indigenous laborers, in a push-back on globalization – either anti-immigration, or protectionism.We don’t see this happening yet, though there are signs of rising political tensions. However we are keeping a close eye on developments.

Secondly, we believe that the rich are going to keep getting richer in coming years, as capitalists (the rich) get an even bigger share of GDP as a result, principally, of globalization. We expect the global pool of labor in developing economies to keep wage inflation in check, and profit margins rising – good for the wealth of capitalists, relatively bad for developed market unskilled/outsource-able labor. This bodes well for companies selling to or servicing the rich.We expect our Plutonomy basket of stocks – which has performed well relative to the S&P 500 index over the last 20 years – to continue performing well in future. From this basket, we would highlight in particular, at the moment, LVMH and Richemont.

Note that they aren't even saying it's a bad thing or a morally good thing, they're just saying that it's a sign that they need to cater to the rich more.

[Rhinox]

Think this email was in Michael Moores Documentary Capitalism: a love story.

but yeah pretty fucked up shit.

[Feedmenow]

I don't think it's necessarily good or bad that executives of extremely large corporations are getting huge wages. The main problem has more to do with the corporations themselves being extremely large.

[Kuya]

I don't think it's necessarily good or bad that executives of extremely large corporations are getting huge wages. The main problem has more to do with the corporations themselves being extremely large.

You don't understand. It's not that a few CEOs get really big bonuses. It's that there has been a trend where the top 1%, 10% have been getting huge increases in wealth, while the bottom 50% and even the bottom 75% have seen their income either slow down inmensely, or stagnate. The problem is inmense income inequality, where income goes rushing to the top and consequently, everyone else gets poorer. Big corporations is an issue, but that's not what this thread is about.

[Kuya]

Think this email was in Michael Moores Documentary Capitalism: a love story.

but yeah pretty fucked up shit.

It was also on Bill Moyers' last show on PBS.

[Feedmenow]

You don't understand. It's not that a few CEOs get really big bonuses. It's that there has been a trend where the top 1%, 10% have been getting huge increases in wealth, while the bottom 50% and even the bottom 75% have seen their income either slow down inmensely, or stagnate. The problem is inmense income inequality, where income goes rushing to the top and consequently, everyone else gets poorer. Big corporations is an issue, but that's not what this thread is about.

I'd assumed that said increase was directly because of said upper management, is it including the top professionals of other fields as well?

[Kuya]

No idea. CEOs are just more noticeable because they lack frugality.

edit: probably include any sector that has a lot of lobbying power

[Feedmenow]

No idea. CEOs are just more noticeable because they lack frugality.

edit: probably include any sector that has a lot of lobbying power

Well, they do tend to lack frugality, but the main problem relies in their success being less merit-based than top professionals in fields not related to management and/or business, despite being paid significantly more.

For instance, the best brain surgeon in the world is most likely in that upper 10% or maybe even the 1% and earns about every penny because he is the best in his field. On the other hand, a CEO hires lawyer and businesspeople to figure out how to exploit the everloving hell out of legal loopholes, with the money obtained hires lobbyists to convince government to make more laws with exploitable loopholes. I'm not sure that the brain surgeon's salary is increasing too much, but I'm far more certain that the lobbyists, businessmen, lawyers, and CEOs are the groups raking in ridiculous amounts of cash. You could argue that the lawyers and businessmen also deserve said pay because of their merit in their fields, but I'm much more skeptical of the lobbyists (if they make that much) and the CEOs.

Of course, the main reason I don't like big corporations is because as they get larger, government starts becoming much less of a means of restricting them as it starts becoming a resource for them to either bend to their benefit or to rescue them when they become "too big to fail".

[SwampdonkeyPLD]

Well we just saw what happens the gap gets smaller.

[Rhinox]

Please explain.

[SwampdonkeyPLD]

I didn't bookmark either article, but twice the gap b/w the rich and poor has gotten smaller. During the great depression and during the great recession. Maybe it's not so bitch worthy.

[Tulun]

You don't understand. It's not that a few CEOs get really big bonuses. It's that there has been a trend where the top 1%, 10% have been getting huge increases in wealth, while the bottom 50% and even the bottom 75% have seen their income either slow down inmensely, or stagnate. The problem is inmense income inequality, where income goes rushing to the top and consequently, everyone else gets poorer. Big corporations is an issue, but that's not what this thread is about.

But what is the fix? People do care about equity, but to what extent should we go to pursue equity?

I have taken an interest in economics but my knowledge is still rudimentary...

The wealthy making money isn't necessarily a bad thing; they are often wealthy for a reason (such as smart investments, hard work and so on).

As far as I understand it, from an economics stand point, the economic pie being unequal isn't necessarily a problem.

[Psion]

/facepalm


Correlation does NOT EQUAL causation. Repeat after me people.

Then again, this is SwampDonkeyPLD we're talking about.

Also, Kuya, I used to hate you, but you've been posting too many good points of view lately to make me hate you anymore. I hate you for that. ;.;

[SwampdonkeyPLD]

/facepalm

But clearly its a good thing when all the evidence points the other way?

And where in my post did I even make an argument dumbass.

[Feedmenow]

But what is the fix? People do care about equity, but to what extent should we go to pursue equity?

I have taken an interest in economics but my knowledge is still rudimentary...

The wealthy making money isn't necessarily a bad thing; they are often wealthy for a reason (such as smart investments, hard work and so on).

As far as I understand it, from an economics stand point, the economic pie being unequal isn't necessarily a problem.

I explained a bit of my response to this in my edited post earlier, but total economic equity is pretty much completely unattainable.

The wealthy ideally make money because they do make smart investments and hard work. I might have been a bit too rough on the CEO in the example of my edited post, but the large flaw in CEOs of big business is that they have control over such large amounts of money that it starts becoming extremely lucrative to find ways to hide assets from being taxable through either legitimate methods, "Cooking the books", or influencing government enough to give them a tax break directly or indirectly in some way. This essentially solidifies their position as top dog in industry, and can allow them in some cases to grow "too big to fail" and require government bailouts if they take exceptionally bad risks.

It's not necessarily to point out that CEOs, businessmen, lawyers, etc. are bad people, but the mixture of said people in big businesses that has vast amounts of money can be a dangerous combination.

[Not not Mattaru]

Incoming capital asymmetries leading to crises of legitimacy?

[Feedmenow]

Are you referring to Pierre Bourdieu and the three forms of capital with "capital asymmetry"? If so, then pretty much.

[Tulun]

It's not necessarily to point out that CEOs, businessmen, lawyers, etc. are bad people, but the mixture of said people in big businesses that has vast amounts of money can be a dangerous combination.

For sure; economic theory definitely goes hand in hand with proper oversight...

I could agree with the argument that large businesses are far more likely to avoid proper oversight due to the influence they can exert on the political system. This issue definitely needs to be addressed.

That is definitely more of a problem than the wealthy *having* money... there seems to be a tendency to think this on its own is bad.

[Not not Mattaru]

Are you referring to Pierre Bourdieu and the three forms of capital with "capital asymmetry"? If so, then pretty much.

More Habermas, only Bourdieu stuff I am familiar with is language/linguistics.

[Cadsuane]

/facepalm

But clearly its a good thing when all the evidence points the other way?

And where in my post did I even make an argument dumbass.

Swamp's (apparent) argument: The gap between the rich and poor narrows during a recession. Therefore, because recessions are bad, income inequality is preferable.

There are lots of countries with less income inequality than the United states. A bunch of them have higher rated standards of living, GDP per capita, and life expectancy too. Just something to think about.