American Plutonomy Report Eleven Years Later…



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Eleven years ago today Citigroup released an internal memo that observed what is described as a “plutonomy”.  This is defined as an economy powered by the wealthy. It got leaked, and I first got wind of it when I saw the film “Capitalism: A Love Story”. I am not the biggest Michael Moore fan, but I was intrigued about the memo itself. Today I’m going to write my analysis of what is discussed in that memo. If you want to view it yourself, you can find it here.

So, what does this report say?

Pluto’s Bark and Pluto’s Bite

The memo lists three authors: Ajay Kapur, Niall Macleod, and Narendra Singh. The summary of the memo is probably what will capture your attention. Three bullet points are mentioned that summarize the findings:

The World is dividing into two blocs – the Plutonomy and the rest. The U.S., UK, and Canada are the key Plutonomies – economies powered by the wealthy. Continental Europe (ex-Italy) and Japan are in the egalitarian bloc.

Here is the initial definition of a plutonomy. The best possible interpretation of this is that the economy is very “top heavy”. Since the wealth is concentrated so much at the top (as it will later quantify), the wealthy have control over the economy. But, as the report later details, this wasn’t always the case and has come as a result of a confluence of several factors.

The second bullet point:

Equity risk premium embedded in “global imbalances” are unwarranted. In plutonomies the rich absorb a disproportionate chunk of the economy and have a massive impact on reported aggregate numbers like savings rates, current account deficits, consumption levels, etc. This imbalance in inequality expresses itself in the standard scary “ global imbalances”. We worry less.

This finding is dense with jargon that it’s almost completely inaccessible to a lay audience, which was likely because it wasn’t intended for a lay audience in the first place. From what I can gather is that “equity risk premium” means the extra financial return that you get from investing in a stock that goes beyond a risk-free method. The comparison I got was investing in a stock with an 11% return as compared to a long-term government bond that has a 3% return. So, you have an 8% equity risk premium, you get 8% more from that risk on the stock market.

But, what this is saying is that apparently doesn’t matter because in a plutonomy the rich are the prime movers of the economy. Given that this is expressed as “we worry less”, this is apparently something that Citigroup’s clients were worried about.

There is no “average consumer” in a Plutonomy. Consensus analyses focusing on the “average” consumer are flawed from the start. The Plutonomy Stock Basket outperformed MSCI AC World by 6.8% per year since 1985. Does even better if equities beat housing. Select names: Julius Baer, Bulgari, Richemont, Kuoni, and Toll Brothers.

The final bullet point does away with the average consumer model, since it’s an obsolete concept in a plutonomy.

It’s clear that the authors of this memo are not concerned with the issue. They couch it in language including the titles”Riding the Gravy Train”.

Another snippet that reveals the magnitude of the issue as well as the attitude the authors present:

As Figure 1 shows the top 1% of households in the U.S., (about 1 million households) accounted for about 20% of overall U.S. income in 2000, slightly smaller than the share of income of the bottom 60% of households put together. That’s about 1 million households compared with 60 million households, both with similar slices of the income pie! Clearly, the analysis of the top 1% of U.S. households is paramount. The usual analysis of the “average” U.S. consumer is flawed from the start. To continue with the U.S., the top 1% of households also account for 33% of net worth, greater than the bottom 90% of households put together. It gets better (or worse, depending on your political stripe) – the top 1% of households account for 40% of financial net worth, more than the bottom 95% of households put together.

Keep in mind, this was written in 2005. Income inequality has become something of a hot button topic as of late and likely the statistics have intensified. But the picture painted by Citigroup’s memo is bleak nonetheless, at least for that bottom 95%.

What might surprise the reader is that the memo acknowledges that the economy has not always been powered by the wealthy.

Was the U.S. always a plutonomy – powered by the wealthy, who aggrandized larger chunks of the economy to themselves? Not really. For those interested in the details, we recommend “Wealth and Democracy: A Political History of the American Rich” by Kevin Phillips, Broadway Books, 2002.

I’ll put that on the list after I get the backlog done. But what causes this?

 The six drivers of the current plutonomy: 1) an ongoing technology/biotechnology revolution, 2) capitalist-friendly governments and tax regimes, 3) globalization that re-arranges global supply chains with mobile well-capitalized elites and immigrants, 4) greater financial complexity and innovation, 5) the rule of law, and 6) patent protection are all well ensconced in the U.S., the UK, and Canada. They are also gaining strength in the emerging world.

The first factor is something of an inevitability, as they say, technology marches on. The second factor is a government that is friendly with corporate power, which is a fairly uncontroversial observation in today’s political context. Globalization itself plays a role in creating a plutonomy, as it stands. The rise of finance as an economic force also plays a role in this stratification. The rule of law is not specifically referring to the concept of rule of law intrinsically. It appears to suggest that when the law is shaped by corporate interest, this proves greatly beneficial. Patent protection is self-explanatory.

There’s additional speculation on the role that dopamine plays in the formation of plutonomies.

The thesis: Dopamine, a pleasure-inducing brain chemical, is linked with curiosity, adventure, entrepreneurship, and helps drive results in uncertain environments. Populations generally have about 2% of their members with high enough dopamine levels with the curiosity to emigrate. Ergo, immigrant nations like the U.S. and Canada, and increasingly the UK, have high dopamine-intensity populations. If encouraged to keep the rewards of their high dopamine-induced risk-seeking entrepreneurialism, these countries will be more prone to wealth waves, unequally distributed. Presto, a plutonomy driven by dopamine!

Building Shinra

It would not be a controversial statement to claim that corporations are the most powerful institutions of the modern world. What began as small associations designated for short-term projects such as building a bridge or a railroad have by now become organizations of tremendous wealth and political power.

In previous estimates, corporations had enormous economies. The highest estimates claimed that 53 of the top 100 economies were corporations. That estimate has changed to only 13 in World Bank’s  top 100 economies of 2016.

The rise in corporate power is perhaps best understood through a film called “The Corporation”, which deserves a review of its own. Much of the 21st century will be spent trying to reign in corporate power, a process that will not be quick or without resistance. After all, who would want to return to an era before the Super PAC? Which corporation would want to overturn Citizens United V. FEC, with perhaps the exception of Ben and Jerry’s?

In science fiction, the consequences of corporate power running amok are explored in full. Robocop, Idiocracy, and even video games like Final Fantasy VII’s Shinra Corporation explore the ominous implications that a massive corporation could pose to the world.

This was stalled, however, and the public’s faith in corporations has been shaken since the memo’s initial publishing. Possible outcomes that could bring down plutonomy were indeed predicted:

Plutonomy, we suspect is elastic. Concentration of wealth and spending in the hands of a few, probably has its limits. What might cause the elastic to snap back? We can see a number of potential challenges to plutonomy.

A third threat comes from the potential social backlash. To use Rawls-ian analysis, the invisible hand stops working. Perhaps one reason that societies allow plutonomy, is because enough of the electorate believe they have a chance of becoming a Plutoparticipant. Why kill it off, if you can join it? In a sense this is the embodiment of the 24 “American dream”. But if voters feel they cannot participate, they are more likely to divide up the wealth pie, rather than aspire to being truly rich. Could the plutonomies die because the dream is dead, because enough of society does not believe they can participate? The answer is of course yes. But we suspect this is a threat more clearly felt during recessions, and periods of falling wealth, than when average citizens feel that they are better off. There are signs around the world that society is unhappy with plutonomy – judging by how tight electoral races are. But as yet, there seems little political fight being born out on this battleground.

There is a disclaimer included:

We should at this point make clear that we have no view on whether plutonomies are good or bad, our analysis here is based on the facts, not what we want society to look like.

Yet, for the average John Q. Public reading this, this will appear to spell out a very bleak scenario. Unless sensible policies are put into place, the door to Shinra’s dystopian city of Midgar would be left open. Perhaps not in a flashy, entertainment-friendly way that the game presents, but its spirit could very well remain. Can humanity survive in a world built for corporations?

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