Jan 27, 2011

Rich and Poor in the World

Selections below from an interesting report from the good journalist Chrystia Freeland in Reutersonline Jan 26th that speaks of the ever increasing space between the very rich and the vcry poor in the world.
This is of course driven by what we are told is capitalism but we find in a very uncapitalistic manner those that can play the government to their liking are rewarded more than those that can or do not.

Of course many of the smartest people we know are not necessarily the wealthiest. Gaining great wealth takes craft but not always great intelligence although Bill Gates and Mark Zuckerberg were both admitted to Harvard

We still feel society and even tax policy should reward those that teach or heal more than those that study balance sheets all day long with the only goal of gaining a larger bank account.

Or maybe those that completely transfer the current method of delivering energy to one that is ubiquitous and offers little pollution

And intentionally or not, Davos(the World Economic Forum) will focus attention on one of the most striking consequences of the most recent technological revolution and the spread of globalization that has transformed the world economy in the past 30 years or so: the emergence of an international economic elite whose globe-trotting members have largely pulled away from their compatriots.

The trend is particularly stark in the United States, where from 1980 to 2005 more than 80 percent of the total increase in income went to the top 1 percent of the population.

The gap there between the superrich and everybody else is now greater than at any time since before the Depression of the 1930s.

Income inequality has surged in much of the rest of the world, too: in Britain and Canada, to be sure, but in the  more egalitarian countries of Scandinavia and Germany as well.

While poor but resource-rich countries like Brazil, Mexico and South Africa have long been known for stark disparities in wealth and income, the divide is widening further in emerging markets, too, including India and China, which now has a bigger gap between the top and bottom than the United States.

To be sure, the world’s most sophisticated companies, like G.E., Google and Goldman Sachs, are finding plenty of ways to profit from the great economic shift under way. But the greatest riches go not to institutions but to individuals smart enough and lucky enough to make it on their own. Just a few years out of college, for example, Facebook’s founder, Mark Zuckerberg, is already challenging Google, prompting the recent management shakeout there.

Robert Reich, a professor at Berkeley who is a former U.S. labor secretary, illustrates the disparity with a vivid statistic: In 2005, Bill Gates was worth $46 billion and Warren Buffet was worth $44 billion. That year,  the combined wealth of the 120 million Americans at the bottom of the pyramid, 40 percent of the population, was about $95 billion — barely more than the sum of the fortunes of those two men.

Mr. Gates and Mr. Buffett are extreme examples, of course, but they embody a broader trend. The richest one-hundredth of 1 percent of American families — about 15,000 — accounted for less than 1 percent of national income in 1974. By 2007, the figure was 6 percent, according to Tyler Cowen, an economist at George Mason University outside Washington. That difference translates into hundreds of billions of dollars.

None of this is a secret, but it does not get as much attention as many critics think it deserves. One reason for that may be that the plutocrats do not like talking about it very much.

In a history of global income inequality published last month, Branko Milanovic, a World Bank economist, wrote that ‘‘studies of interpersonal inequality are not too popular.’’ That is because, he believes, ‘‘inequality studies are not particularly appreciated by the rich.’’

Mr. Milanovic recounted a discussion with the head of a prestigious Washington research institute, who told him that ‘‘the think tank’s board was very unlikely to fund any work that had ‘income or wealth inequality’ in its title.’’

‘‘Yes, they would finance anything to do with poverty alleviation,’’ he recalled, ‘‘but inequality was an altogether different matter.’’

One concern some economists express about the emergence of a global plutocracy is that it may be driven, not only by seemingly benign forces like the technology revolution and global trade, but also by malign ones, particularly the elite’s ability to shape government and other public policy activities in its own self-interest.

That is a point made by Ragharam Rajan, a professor at the Booth School of Business at the University of Chicago, the intellectual home of free market economics in the United States.
In 2008, Mr.  Rajan, who will be a panelist at Davos this year, delivered a stinging keynote address at the Bombay Chamber of Commerce. India, he said, risked becoming ‘‘an unequal oligarchy, or worse — perhaps far sooner than we think.’’

One piece of evidence Mr. Rajan cited was a spreadsheet compiled by Jayant Sinha, a classmate of his from the India Institute of Technology, the alma mater of many  Indian software entrepreneurs. Mr. Sinha had calculated the number of billionaires per trillion dollars of gross domestic product in a number of countries around the world. Russia, with 87 billionaires and a national G.D.P. of $1.3 trillion, had the highest ratio. India, Rajan said, was No.2, with 55 billionaires and a $1.1 trillion G.D.P.

Mr. Rajan assured his audience that he had nothing against billionaires per se. ‘‘We should certainly welcome it if businessmen make money legitimately,’’ he said. But he argued that India’s high ratio was alarming because ‘‘too many people have gotten too rich, based on their proximity to the government.’’ Instead of reflecting new software inventions or a thriving manufacturing operation, ‘‘land, natural resources and government contracts or licenses are the predominant sources of the wealth of our billionaires, and all of these factors come from the government,’’ he said.
‘‘If Russia is an oligarchy,’’ Mr. Rajan warned the assembled magnates, ‘‘how long can we resist calling India one?’’

The rise of government-connected plutocrats is not just a phenomenon in places like Russia, India and China. The generous government bailouts of U.S. financial institutions prompted Simon Johnson, a professor of economics at the Massachusetts Institute of Technology, to compare U.S. bankers with emerging-market oligarchs. In an article in The Atlantic magazine, which he later expanded into a book, Mr.  Johnson wrote that American financiers had pulled off a ‘‘quiet coup.’’
Mr. Johnson, like Mr. Rajan, is a former chief economist at the International Monetary Fund. He, too, will be on a panel at Davos this year.

Mr. Johnson is on the center-left. But his view is shared in part by Mr.  Cowen, a libertarian. Mr. Cowen argues that concerns about income inequality are overstated by some critics: Quality of life is rising, and the wealth of the elite, he argues, largely represents returns for hard work and talent. ‘‘If we are looking for objectionable problems in the top 1 percent of income earners,’’ he wrote in the current issue of The American Interest, ‘‘much of it boils down to finance and activities related to financial markets. And to be sure, the high incomes in finance should give us all pause.’’

A further, more subtle critique of the globocrats (a term popularized by The Economist magazine) has been articulated by another economist who will speak  at Davos this year. Dan Ariely, a professor of behavioral economics at Duke University in North Carolina, worries that too many public intellectuals and policy makers have an unconscious but powerful tendency to view the sorts of big social and political questions debated at Davos through the prism of the self-interest of the elite.
‘‘We are deeply social animals,’’ Mr.  Ariely said. ‘‘We see things from the perspective of our friends, not of strangers.’’

‘‘One of the things that inequality does,’’ he went on,  ‘‘is it creates not a single society, but it creates multiple societies. It might be that inequality is creating another layer of separation between the in group and the out group.’’

One of the functions of the annual Davos gathering is to define an in group. Indeed, ‘‘Davos man’’ has become a shorthand for membership in the global elite.

For the World Economic Forum, that has turned out to be a highly effective business model. But Mr. Schwab, also contends that the gap between Davos man (and woman) and the rest of us is one of the biggest challenges facing the world today.

‘‘Economic disparity and global governance failures both influence the evolution of many other global risks and inhibit our capacity to respond effectively to them,’’ the forum’s Global Risks report for this year’s conference notes. ‘‘In this way, the global risk context in 2011 is defined by a 21st-century paradox: as the world grows together, it is also growing apart.’’

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