Redshirting Kindergarteners

THIS WEEK

Donald Trump Jr., the eldest son of America’s most self-aggrandizing billionaire, created a bit of a stir last week. A leaked photo showed Trump junior on safari in Zimbabwe, standing over a dead elephant, ammo belt around his waist, knife in one hand and the elephant’s severed tail in the other. In Africa as elsewhere, you pay, you play. Have $250,000 to spare? You can legally shoot an endangered black rhino. But this pay-and-play phenomenon, political philosopher Michael Sandel pointed out last week, reaches into aspects of contemporary life far more mundane. Price tags are turning up everywhere. Pay $8 in San Diego and you can drive solo in a carpool lane. Pay $1,500 and you can get the cell number of a “concierge” doctor who’ll give you a same-day appointment. Foreigners can now pay Uncle Sam $500,000 and get a green card. In one California city, while-collar crooks can purchase a prison cell upgrade. The more that money can buy, philosopher Sandel explains in a superb new analysis, the more the maldistribution of income and wealth matters. In this week’s Too Much, we dig into that maldistribution — and some antidotes for it.

GREED AT A GLANCE

Wall Street’s Goldman Sachs swung into heavy-duty damage control mode last week after Greg Smith, an exec at the firm, publicly resigned — in a New York Times op-ed that related how Goldman power suits routinely strategize “about ripping their clients off.” But the real story here goes well beyond Goldman Sachs, notes Time magazine health analyst Maia Szalavitz. A “growing body of research,” she points out, “suggests that Wall Street offers a perfect storm of an environment” that serves “to attract psychopaths and to promote them to the top.” Those who exhibit psychopathic behaviors, Szalavitz stresses, don’t typically become serial killers. They merely manipulate without remorse, show little concern for consequences, and threaten and lie to get what they want . . . Daniel D’Aniello, William Conway Jr., and David Rubenstein, the billionaire co-founders of the private equity Carlyle Group, don’t likely consider themselves psychopaths. But they can manipulate with the best of them. In 2010, news reports last week revealed, Carlyle borrowed $500 million from the Abu Dhabi government, then shelled out $400 million of that as dividends to Carlyle’s top brass. Dividends currently face only a 15 percent federal tax rate, less than half the 35 percent top rate on ordinary income. Also getting into the dividend act: America’s big bailed-out banks. Wells Fargo has just more than doubled its dividend payout from 10 to 22 cents a share. Says CEO John Stumpf: “We are extremely pleased to reward our shareholders.” Stumpf’s $17.9 million in 2011 compensation included $12 million in Wells Fargo shares . . . The world’s uber rich now have one less problem. They finally have a luxury SUV to call their own. Bentley Motors has unveiled plans for a new soccer mom-friendly sport utility vehicle that figures to retail somewhere “north of $180,000.” Bentley CEO Wolfgang Dürheimer expects to sell 3,500 of the new SUVs annually. Bentley’s clients, he notes, typically own eight cars each. The problem the new Bentley will solve? Explains Dürheimer: “Right now, none of these customers has the chance to buy a really top-of-the line SUV. It just doesn't exist.” Bentley’s SUV will feature “diamond-quilted leather seats,” built-in iPads, and a rear deck that can turn into “an instant upscale tailgate party.”

PETULANT PLUTOCRAT OF THE WEEK

Kenneth Griffin, the Chicago hedge fund billionaire, is quietly seething no more. He’s now seething in public. Griffin a week ago gave a “rare interview” to complain about a White House that “has embraced class warfare” and placed every bank in America “under the thumb of the government.” Griffin has personally funneled over $1 million into super PACs backing Mitt Romney and “economic freedom.” But he told his Chicago Tribune interviewer that the ultra wealthy “have an insufficient influence” on politics today. One former investment banker now working to raise taxes on America’s rich, Eric Schoenberg, quickly called Griffin’s claim simply “bizarre,” what with the GOP, he noted, “in the process of nominating for President a multi-millionaire who has received the bulk of his support from other multi-millionaires.”

inequality by the numbers

IN FOCUS

Should the Billionaire Club Start Paying Dues? Austerity is spreading everywhere, but wealth, new data show, has become even more concentrated at the global economic summit. From Cairo to Palo Alto, even some conservatives are now talking wealth tax. Forbes magazine started tracking America’s 400 richest on an annual basis back in 1982. Five years later Forbes started annually counting billionaires — on a global basis. Earlier this month, this global list celebrated its 25th anniversary. In one sense, not much has changed over those 25 years. On the first Forbes global billionaire list in 1987, the United States led the ultra-rich pack. That still remains the basic story. In fact, Americans now make up an even greater share of the world’s billionaire population than they did a quarter-century ago. In 1987, 41 of the 140 billionaires that Forbes spotted — 29 percent of the deepest-pocket total — hailed from the United States. Americans now account for 35 percent of the global total. They make up 425 of the world’s richest 1,226. These richest of the rich, the Forbes data also show, have never been richer. They now hold $4.6 trillion in combined net worth. The combined net worth of the global super rich in the original Forbes billionaires list: only $295 billion. Forbes had 50 staffers working on this year’s billionaire tally. Those researchers totaled up individual super-rich holdings in publicly traded and privately held businesses, financial investments, real estate, yachts, art, and just plain cash. But one wealth management company founded by former Forbes researchers, the Singapore-based Wealth-X, is charging that the new Forbes numbers actually understate the wealth of the world’s wealthiest. Wealth-X research puts the global billionaire total at nearly 2,500, twice the Forbes count. Researchers at Bloomberg Businessweek also believe that Forbes is missing a significant chunk of super-rich wealth. A limited investigation by the magazine has found eight billionaires who don't appear on the new Forbes list. Why such uncertainty over the wealth of the super wealthy? At the root of the counting confusion: Governments, by and large, don’t keep track of how much wealth individual wealthy people hold. They don’t keep official track of the wealth of the wealthy for one simple reason: They don’t tax it. Governments, by contrast, do tax the wealth of the middle class. Most middle class wealth comes from home ownership. Homes face property taxes. The super rich certainly do pay property taxes as well. But homes make up just a minor share of their net worth. The vast bulk of the assets the really rich hold — their investments, jewels, yachts — go tax-free. And these assets are going tax-free at the same time that governments worldwide are adopting austerity budgets that are destroying jobs and futures for families of modest means. Hundreds of billions in untaxed wealth. Hundreds of billions in budget cuts. Perceptive people worldwide are beginning to notice. And they're beginning, in one nation after another, to start pushing the notion of taxing wealth. All wealth. Last week, for instance, former U.S. secretary of labor Robert Reich noted that America’s 400 richest “have more wealth than the bottom 150 million Americans put together” and called for a new tax levy on grand fortune. “Let Santorum and Romney duke it out for who will cut taxes on the wealthy the most and shred the public services everyone else depends on,” Reich urged. “The rest of us ought to be having a serious discussion about a wealth tax.” Wealth taxes do already exist on an isolated basis. Several European countries have had wealth taxes on the books for years. Norway levies a 1.1 percent tax on assessed assets over a basic threshold, and about 17 percent of Norway’s adult population currently has some wealth tax liability. Most other existing wealth taxes run under 1 percent. The new push for wealth taxes now emerging is calling for higher rates. In the United States, Yale law profs Bruce Ackerman and Anne Alstott have proposed an annual 2 percent tax on the nation’s richest 0.5 percent, households worth over $7.2 million. “Rather than draconian cuts to Medicaid or Medicare,” Ackerman and Alstott ask, “why not a wealth tax?” From Stanford University, the conservative economist Ronald McKinnon is making a similar push. In a Wall Street Journal op-ed this past January, McKinnon called for an annual 3 percent tax on wealth over $3 million, a level that would touch less than 5 percent of the nation’s population.   Elsewhere in the world, wealth tax advocates are pointing to the global economic emergency all around us and demanding even more substantial action — in the form of a one-time, high-rate tax on assets.    Inequality, notes British income analyst Stewart Lansley, is choking off economic recovery. Average consumers in the United States, he notes, would have nearly $800 billion more in their pockets today if they were still earning the same share of the nation’s income they earned in the late 1970s. “With the national cake so unevenly divided,” Lansley notes, “consumers have been denied the means to help revive the economy.” A wealth tax, analysts like Lansley believe, would raise the revenue necessary to give stagnant economies the stimulus that consumers cannot. Just how high should a one-time, economic emergency tax on the assets of the wealthy go? The CEO at EFG Hermes, the Middle East’s most important investment bank, last fall urged a one-time “global wealth tax” of 10 to 20 percent on individuals with net worth over $10 million. Receipts from this new levy, EFG Hermes exec Hassan Heikal proposes, would go to each wealth tax payer’s country of citizenship. Such a levy, says EFG Hermes CEO Heikal, would touch less than 0.01 of the world’s population and raise — at a 10 percent rate level — about $5 trillion. Europe, Heikal notes, would pocket from this wealth tax “more than enough to deal with the European public debt crisis.” Developing nations would be able to reduce their public debt and “reinvest in infrastructure, research, and other means of energizing labor markets.” And the United States, he points out, would have budget “room to breathe” — and be better able to help fuel global economic recovery. “If we are really serious about getting out of the current crisis,” concludes CEO Heikal, “the rich should pay their dues.” This dues paying, adds Hofstra University legal scholar Leon Friedman, may have to continue for the next five to ten years, “until our financial health improves.” Friedman supports a simple 1 percent tax on America’s top 1 percent. “In the face of the nation's stark financial problems, our richest Americans can afford this modest diminution of their wealth,” he observes. “And they certainly would have no right to complain, since it was previous government actions that enabled them to accumulate it.”

In Review

On the 'Redshirting' of Kindergarteners Robert Frank, The Darwin Economy: Liberty, Competition, and the Common Good. Princeton University Press, 240 pp. Most Americans don’t like what they see when they survey the contemporary American political scene. Neither does Robert Frank, the Cornell University economist who may be America’s most consistently insightful — and provocative — inequality analyst. In his new book, The Darwin Economy, Frank sees political paralysis everywhere. On climate change. On education. On our decaying infrastructure. All these problems are going unattended, writes Frank, in no small part because we face “antigovernment activists who insist that the state has no legitimate right to limit individual freedom in any way." This zealous libertarianism has infused our national political discourse with a series of simplistic anti-tax slogans. It’s your money, we’re told, and government bureaucrats can’t spend it better than you can. Taxing the rich kills the goose that lays the golden egg. Taxation, down deep, equals theft. The zealots behind these slogans like to claim the 18th century's Adam Smith as their patron saint, and they’ve turned Smith, a rather complex character, into an apologist for greed and grasping. All society always benefits, they insist, when all of us meet in the marketplace to pursue own own naked self-interest. But we really ought to be looking elsewhere, Robert Frank suggests, for our economic inspiration. His surprising choice for that inspiration wellspring: the thought of Charles Darwin, the great 19th century naturalist.   Darwin can help us understand, explains Frank, that competition molds behavior “in ways that benefit the individual.” And that behavior only sometimes benefits society as a whole. The natural world sends us this lesson over and over. Bull elks, for instance, have evolved fantastically large sets of antlers. Large antlers make sense for individuals. They help bulls defeat male rivals in mating battles. But large antlers limit elk mobility in the forest and leave elks vulnerable to wolves. “A bull with smaller antlers would be better able to escape predators,” notes Frank, “but because he'd be handicapped in his battles with other bulls, he'd be unlikely to pass those smaller antlers into the next generation.” Competition has not showered benefits on elk populations. Competition has led to a wasteful and socially counterproductive arms race in antlers. Competition can bring similarly “wasteful arms races” in human society, as Frank vividly illustrates on a wide variety of fronts. Including kindergarten. Most all local jurisdictions in the United States, Frank reminds us, require kids to start kindergarten in the year they turn five. The alternative? If parents had the “freedom” to start their children in kindergarten whenever they wanted, some would no doubt hold their kids back a year. This delay, Frank notes, would have these kids starting school “older, smarter, bigger, stronger, and more emotionally mature” than their classmates. They’d become more likely to do well in school, more likely down the road “to win admission to a selective university.” But other parents, Frank notes, would soon feel pressure to start “redshirting” their young children. In the end, most children would end up starting school later, “but no more of them than before would win admission to selective universities.” In this context, government regs that require all kids to start school at the same age prevent the waste of prime years for learning. Critiques of waste pop up, of course, all the time in today's American politics. Politicos endlessly pledge themselves to rooting out “wasteful government spending,” and the most virulently right wing among them urge us to “starve the beast” — government — to end this waste once and for all. But the real waste, Cornell’s Frank argues, comes from our growing economic inequality. This inequality sets off “positional” arms races in our everyday lives, what Frank calls “expenditure cascades.” How do these cascades flow? One example: An ever-richer super rich build ever-bigger mansions. These larger mansions, in turn, “shift the frame of reference that defines acceptable housing for the near-rich.” The near-rich go bigger, too, and that overbuilding continues step by step down the income ladder. The wasteful result? In 2007, the typical new U.S. single-family home averaged 50 percent more square feet than the typical new home of 1970 — despite the shrinking size of the typical American family. “The shifting standards that define what people feel they must spend to achieve their goals constitute a very different sort of beast,” writes Frank, “I'll call it the positional consumption beast. It's a dramatically more voracious beast than government ever was.” But we can tame this beast — if we place a heavier tax burden on our society’s highest incomes. Frank himself advocates a “progressive consumption tax,” a levy on the gap between what a family spends and saves, and asks us to consider a family making $10 million a year. If the United States had a top progressive consumption tax rate set at 100 percent, the cost to that family of adding a $2 million addition to its mansion would be $4 million. And “if people at the top were to save more and spend less on mansions,” Frank adds, “that would shift the frame of reference that influences the housing expenditures of those just below them.” In other words, less waste.