Mind the Gap

Mind the Gap

    Much has been made of the widening gap between rich and poor, in many cases, focusing on the top one tenth of the one percent...the rest, despite their billions, are basically wannabes, likely unable to ever attain the riches this upper, upper crust control.  But dropping back down to earth, we minions are also feeling a bit below the graph, what with U.S. presidential candidate, Hillary Clinton, describing the "middle class" as those making less that $250,000 per year.  For me, that is quite a wealthy middle class...and if you're one of the many struggling to live on $50,000 per year, or maybe substantially less, where does that put you?  Is there a light at the end of the tunnel, especially when you watch cartload after cartload of items sail past you at Costco and wonder, how are those people doing it?  Said author Simon Reid-Henry in his new book, How to Spread the World's Wealth Beyond Corporate Elites, "average wealth in the United States is now 19% more than even its pre-2008 peak, and in 2010, no less than 93% of post–financial crisis recovery in gross domestic product in the United States went to the top 1% of income earners."  Welcome to "the gap."

    The criticism about the gap mainly comes from paying --or not paying-- one's fair share.  Often, the use of lawyers and accountants to "hide" money offshore or find loopholes to avoid paying taxes is what seems to be behind most of the uproar.  And several books have come out trying to emphasize that, pointing out that an estimated $7.6 trillion are in tax havens, with Switzerland alone holding over a third of that money.  In a review in the New York Review of Books, two such books are considered, and one by Gabriel Zucman, The Hidden Wealth of Nations, had this to say about one proposal: Zucman much prefers the Foreign Account Tax Compliance Act (FATCA), which was signed into law by President Obama in 2010.  Under FATCA, all foreign banks are required to identify any American citizens among their clients and to disclose to the Internal Revenue Service the amount of their holdings and any dividends and interest paid on them.  What Zucman emphasizes, and especially admires, is the automatic nature of the act’s requirements.  The IRS need not name names or show grounds for suspicion.  Every year, foreign banks are required to comply.  If they fail to do so, they face a severe sanction, in the form of a 30 percent withholding tax on gross income (including dividends and interest) from US sources.  In Zucman’s account, the sanction appears to be working; foreign banks are meeting their obligations, and some initially skeptical nations (including China) are even praising the new law...With respect to the approach taken in FATCA, some nations are already considering emulating the United States, and importantly, Luxembourg, Singapore, and Switzerland have said that they would agree to automatic sharing of bank information. 

    In a review of Simon Reid-Henry's book, Kristi Mcguire wrote what now seems a common note: We have reached a crossroads in our history.  For all the achievements and riches of our time, the world has never been so unequal or more unjust.  A century ago, at the time of the First World War, the richest 20% of the world’s population earned eleven times more than the poorest 20%.  By the end of the twentieth century they earned seventy-four times as much...When it comes to wealth, rather than income, the picture is more extreme.  Globally, the richest 1% now own nearly half of all the world’s wealth.  The poorest 50% of the world, by contrast—fully 3 billion people—own less than 1% of its wealth.  Anyone with assets of more than $10,000 a year is an exception to the global norm and is better off than 70% of everyone else alive.  But here is where she changes the picture slightly: How often are we told that, if only we could see what life is like in a cramped slum in Dhaka or on some scrabble of land in rural Chad, we would be moved to help? But the problem is not one of our empathy...It is not one of distance, either...There is a politics to this, but it is all too often ignored in a debate which to date has preferred to focus on the economics of who has what...Few of the world’s richest people intentionally exploit the world’s poor, it is obvious to note, and none of us is personally responsible for the plight of distant strangers.  But some of us have not earned the base privilege we enjoy in this life: it is ours by fortune of inheritance and geographical luck, for the most part, and it comes at the cost of others.


    Michael Massing finished his two-piece article on the one percent, which appeared in the recent issue of the New York Review of Books: Over the last fifteen years, the number of foundations with a billion dollars or more in assets has doubled, to more than eighty.  A significant portion of that money goes to such traditional causes as universities, museums, hospitals, and local charities. Needless to say, such munificence does much good.  The philanthropic sector in the United States is far more dynamic than it is in, say, Europe, due in part to the tax deductions allowed under US law for charitable giving.  Unlike in Europe, where cultural institutions depend largely on state support, here they rely mainly on private donors...The tax write-offs for such contributions, however, mean that this giving is subsidized by US taxpayers.  Every year, an estimated $40 billion is diverted from the public treasury through charitable donations.  That makes accountability for them all the more pressing.  So does the fact that many of today’s philanthropists are more activist than those in the past.  A number are current or former hedge fund managers, private equity executives, and tech entrepreneurs who, having made their fortunes on Wall Street or in Silicon Valley, are now seeking to apply their know-how to social problems.  Rather than simply write checks for existing institutions, these “philanthrocapitalists,” as they are often called, aggressively seek to shape their operations.  When donors approach a nonprofit, “they’re more likely to say not ‘How can I help you?’ but ‘Here’s my agenda,’” Nicholas Lemann, the former dean of the Columbia School of Journalism, told me.  Mainstream news organizations haven’t caught on to this new activism, he said, adding that most of them are into covering “the ‘giving pledge,’” by which the rich commit to giving away at least half their wealth in their lifetime.  Massing proposes more transparency, letting the public know exactly who is giving away their money and how much and to what organizations, citing the existing website Inside Philanthropy created by David Callahan. 

    The site follows major contributors, not only individuals but foundations and endowments as well, what their links are to other interests and organizations and what their planned influence might be.  But all of this made me think, the gap aside, would any of us want such transparency?  Even our $10 or $50 given to a charity...would we want that broadcast across the world?  Perhaps our neighbors would resent us giving a check to a hunting group since their check goes to an animal rescue mission.  But such giving would be our choice...and if we suddenly moved up in the world and could now give $1 million to a charity, whatever its cause, should that be a concern (and we're primarily talking individuals here, vs. governments and world powers).  And if that gift were $10 million or $50 million, does the equation change? 

    So it was surprising to read The Investment Secrets of Al Gore, a piece in The Atlantic Monthly written by James Fallows.  One of Al Gore's accomplishments since leaving the political scene has been in co-creating the Generation Investment Management fund (you need at least $3 million to even enter the nearly closed fund, and much more than that in other assets).  But the view of the fund departs radically from the short term view of most of Wall Street. Says Fallows: The most sweeping way to describe this undertaking is as a demonstration of a new version of capitalism, one that will shift the incentives of financial and business operations to reduce the environmental, social, political, and long-term economic damage being caused by unsustainable commercial excesses.  What this means in practical terms is that Gore and his Generation colleagues have done the theoretically impossible: Over the past decade, they have made more money, in the Darwinian competition of international finance, by applying an environmentally conscious model of “sustainable” investing than have most fund managers who were guided by a straight-ahead pursuit of profit at any environmental or social price...Of the more than 200 global-equity managers in the survey, Generation’s 10-year average ranked as No. 2.  In addition to being nearly the highest-returning fund, Generation’s global-equity fund was among the least volatile... “It turns out that in capitalism, the people with the real influence are the ones with capital!,” Gore told me during one of our talks this year.  The message he hopes Generation’s record will call attention to is one the world’s investors can’t ignore: They can make more money if they change their practices in a way that will, at the same time, also reduce the environmental and social damage modern capitalism can do.

    One big difference in Generation's approach is to use the gap, that ever increasing wealth that sits waiting to make even more money, and use it to do just that...but also to help the earth and its peoples as well.  Sound impossible?  Large fund managers are listening, for Generation's approach is not just the usual social investing, but rather a long-term sustainable earth approach (coal and Coke and oil are basically unsustainable in Generation's view and not worth investing in).  Laurence Fink, of BlackRock (with 400 times more assets than Generation), said that he wrote his open letter to CEOs because “I truly believe we need to have inclusive capitalism, progressive capitalism”—a system that can be “stronger, more resilient, more equitable, and better able to deliver the sustainable growth the world needs.”  Fink said that countless pressures, from hyper-fast automated trading to the frenzied tone of cable-news coverage, were steering managers toward destructively shortsighted behavior.  “We decided that we needed to be a countervailing voice, to say that as your largest shareholder, we’re going to raise expectations about how you behave.”  Dominic Barton, of McKinsey, has written extensively about the leverage that investors and boards can have in deterring short-term, unsustainable corporate behavior.  With Fink and other asset managers from Europe, North America, Asia, and elsewhere, Barton has been organizing an effort to convert major investors to a longer-term outlook.  “We have something like $10 trillion in investable assets lined up here,” he told me.  “This is not a small-potatoes amount, and it can send a very powerful signal.” 

    So back to the gap.  We minions clamor for Powerball or magazine sweepstakes, realizing that we'll probably have to be content with the infinity pool at the hotel we splurged on and not the infinity pool that sits unused in one of our vacation homes.  Bodyguards and gates will keep us away from those that are likely unaware that a gap even exists; but in some ways, it's a privacy we would also demand if we moved up several notches.  The new floor in our hallway would now show those muddy footprints and we might be a bit more upset when that crystal figurine gets knocked off the shelf, even if accidentally.  It happens, and the irritations would likely grow as the income levels grew, even as we would try to "keep up with the Jones," albeit on a higher scale.  But it's heartening to know that even at those levels, there are those working to help the planet (another U.S. coal company just declared bankruptcy today).  Perhaps Al Gore (even though he won the popular vote) lost the election for the presidency for a reason...perhaps he's doing more good now, minding the gap.