In the popular imagination, "the 1%" consists of equal parts inherited wealth and financiers' ill-gotten gains. But the global super-elite has other components too, thanks in part to a rising-tide effect first noticed by economist Alfred Marshall more than a century ago. As the world economy grows, and as the super-elite, in particular, get richer, professionals who work for the super-rich can charge super-fees. And they too are soon absorbed into the plutocracy.
Consider the 2009 legal showdown between Hank Greenberg and AIG, the insurance giant he had built. It was a high-stakes battle, as AIG accused Greenberg, through a privately held company, Starr International, of misappropriating $4.3-billion worth of assets (all currency in U.S. dollars). For his defence, Greenberg hired the much sought-after New York lawyer David Boies. With his trademark slightly ratty Lands' End suits (ordered a dozen at a time by his office online), his midwestern background, his proud affection for Middle American pastimes like craps, and his severe dyslexia (he didn't learn how to read until he was in the third grade), Boies comes across as neither a superstar nor a member of the super-elite. But he is both.
Boies and his eponymous firm earned a reputed $100 million for the nine-month job of defending Greenberg. That was one of the richest fees earned in a single litigation. Yet, for Greenberg, it was a terrific deal. When you have $4.3 billion at risk, $100 million—only 2.3% of the total—just isn't that much money. (Further sweetening the transaction was the judge's eventual ruling that AIG, then nearly 80% owned by the U.S. government, was liable for up to $150 million of Greenberg's legal fees.)
It is this logic of big numbers that is driving up the fees of Boies and a cadre of elite lawyers. The willingness of richer clients, with more at stake, to pay higher fees is why even those superstars who aren't directly affected by the new engines of wealth generation—globalization and the technology revolution—can nevertheless benefit from them. Boies has never lived outside the United States, speaks only English, travels overseas only for an annual biking holiday in southern Europe, and has never appeared in a non-American court. He is something of a Luddite, as well—he sends fewer than a dozen e-mails a week and was only recently persuaded by his wife to get an iPad, which he mostly uses to check stock prices. But because globalization and technology have made his clients rich, they have made Boies a superstar, too.
It is not just the stellar providers of business services, like lawyers, who profit from the rise of the super-elite. Purveyors of luxury, like interior designers, are becoming superstars, too. Michael Smith redecorated the Oval Office and the East Wing of the White House in 2009, but his most famous commission is his $1.2-million facelift of the Manhattan office of John Thain, the last CEO of Merrill Lynch. The job made headlines in 2009, when Bank of America, which had rescued a struggling Merrill, got a $45-billion bailout from the U.S. government. Suddenly, Smith's $800,000 fee, and some of his big-ticket purchases, including an $87,000 area rug and a $35,000 antique commode—both paid for by the company—became symbols of plutocratic excess.
Another pair of winners is Candy & Candy, the London-based brothers whose interior design business expanded into property development. Property is the ultimate local good, but it has also allowed Candy & Candy to surf the waves of the twin gilded ages—the rise of the plutocrats not just in the West but also in the emerging markets. Candy & Candy's star 2011 venture turned out to be a play on the rise of the global super-elite. The list of buyers at One Hyde Park, an apartment building next to the Mandarin Oriental and overlooking London's Hyde Park, is a better directory to the international plutocracy than the bricklike facebooks distributed each year at the World Economic Forum. The biggest unit, occupying some 25,000 square feet, was sold for $223 million to Rinat Akhmetov, a coal and metallurgy oligarch from Ukraine. Other buyers include Vladimir Kim, who made his money in Kazakh copper; Sheik Hamad bin Jassim bin Jabr al-Thani, the prime minister of Qatar; Irish property developer Ray Grehan; and Russian real estate magnates Kirill Pisarev and Yuri Zhukov.
Candy & Candy is an example of how the twin gilded ages have driven up the prices those at the very top of their professions can command. You can also see the power of globalization in the divergent careers of two North American architects born just 20 years apart. Gordon Bunshaft was born in 1909 in Buffalo. Frank Gehry was born in 1929, not far away in Toronto. Both had Eastern European roots—Bunshaft's parents were Russian Jews; Gehry's people were Polish Jews. Both went on to win the Pritzker Prize, architecture's highest honour. But you have almost certainly heard of Gehry, and you probably haven't heard of Bunshaft.
Bunshaft's signature construction is Lever House, a clean-lined modernist rectangle that presides over Park Avenue just across the street from the Four Seasons restaurant, the lunchtime canteen of Manhattan's princes of finance. The architect designed just a few buildings outside North America, and one of those, the National Commercial Bank in Jeddah, was built at the very end of his career, in 1983, when he was 74. Globalization had arrived, but too late to make much of a difference to Gordon Bunshaft. But for Gehry, who began his work just 20 years later, globalization was the making of his career. His first foreign commission, the Vitra Design Museum in Germany, came in 1989, six years after Bunshaft's big international gig. But what was a nightcap for Bunshaft was the main course for Gehry. Since 1989, half of his work has been outside the United States, including landmark buildings like the Guggenheim Museum in Bilbao.
Gehry is more than an architect—he is a "starchitect," a neologism coined to describe the small band of elite international architects whose personal brands transcend their buildings. He has appeared in Apple's iconic black-and-white "Think Different" ad campaign, parodied himself on The Simpsons, and helped Arthur and his friends build a tree house on his eponymous cartoon. He has even designed a hat for Lady Gaga. The difference between Bunshaft, an award-winning North American architect, and Gehry, a multimillionaire global starchitect, is the difference between living in the postwar era of the Great Compression, as economists describe the decade after the Second World War, when the gap between the 1% and everyone else shrank, and living during the twin gilded ages, when globalization and the technology revolution are creating an international plutocracy and therefore a fantastically wealthy global clientele for superstars like Gehry.
Here's how Eric Schmidt, the former CEO of Google, explained the impact of the global plutocracy on the prices of luxury goods, and on the fortunes of those who produce and sell them. "I'm a pilot, so I understand airplane economics very well. For a while, high-end private air jets went up 50% to 80% higher than they should be by any modelling, because the Russians all entered the market," he recalled. "In these wealth markets, the numbers are small enough that you can watch the real economics. You know, there's three bidders for one property kind of thing.… In California 10 years ago, during the bubble, there was a specific street in Atherton where all the prices doubled because of a set of offers that a number of executives who no longer live in the Bay Area made. They had so much discretionary income at the time, and they needed a house, so boom, right?"
If you understand the economic cycles of the plutocrats, Schmidt explained, you can become pretty rich yourself: "There's another IPO cycle going to happen off companies like Facebook. And those companies are predominantly headquartered in a number of cities. Those cities will have scarcity of some things those people, newly arrived, need. The first thing you need is a house, okay? So, if you want to make some short-term money, buy the assets that will be bid up by the people when they get their money six months after the IPO.
"There's obviously negative consequences from all of this. I'm not endorsing it. I'm just trying to describe it."
Already in the 19th century, Alfred Marshall noticed that the rising tide of prosperity wasn't lifting the boats of all artists and professionals—"moderately good oil paintings" had never been as cheap, while the "first-rate" ones had never "sold so dearly." More than a century later, that winner-take-all effect has become even more pronounced in the professions whose superstars are prospering from the rise of the global super-elite.
A good example is the law. In 1950, the median salary for American lawyers working in private practice was $50,000 in today's dollars. Lawyers working at firms with nine or more partners enjoyed a median income of around $200,000 in today's dollars. In 2011, The Wall Street Journal found that the highest-paid partners at America's top firms earned more than $10 million a year; the average salary of a partner in a law firm was $640,000. A similar chasm is opening between partners within firms. In the 1950s, the highest-paid partner at a Wall Street law firm earned double, or maybe triple, what his lowest-paid partner earned. In 2011, America's most aggressively expanding law firms paid their stars 10 times what the average partner earned.
That is just the gap between partners within elite firms. The difference between star partners at such firms and those lower down in the legal profession has become a chasm. In 2011, a year when top partner paydays exceeded $10 million and more than 100 U.S. lawyers were on the record as charging more than $1,000 an hour (David Boies's hourly rate is reportedly more than $1,220), the average starting salary for a law school graduate was $84,111 and the average lawyer earned $130,490. This trend is intensifying. More and more law firms are adopting a "permanent associate" or domestic outsourcing model, in which they employ experienced lawyers at associate pay rates in non-partner-track jobs.
Part of what is going on is the economics of the plutonomy. As the elite pulls ahead of everyone else, the market for luxury services is growing more quickly than the demand for low-rent ones. This was the investing thesis that a team of strategists at Citigroup devised for their clients. They dubbed it "plutonomics"—the theory that the economy inhabited by the rich will prosper, while the space inhabited by the rest of us will stagnate. Gucci is doing better than Walmart; outstanding oil paintings are appreciating in value more quickly than moderately good ones; the willingness to pay a premium for David Boies is increasing, while the work of associates is being commoditized.
And even as the growing demand for high-end services is putting a premium on legal stars, some of the other forces at work in the 21st-century economy are pushing down the incomes of those in the middle.
Technology helps David Boies—mostly by making his clients richer. But it is driving down the incomes of more junior lawyers and creating less of a demand for their services as law firms discover ways to computerize work that was once done by well-paid lawyers. The most advanced example of this trend is e-discovery. As The New York Times reported, in 2010, DLA Piper faced a court-imposed deadline of searching through 570,000 documents in one week. The firm, which has expanded from its Baltimore base to become the biggest law firm in the world, hired Clearwell, a Silicon Valley e-discovery company. Clearwell's software did the job in two days. DLA Piper lawyers spent one day going through the results. After three days of work, the firm responded to the judge's order with 3,070 documents. A decade ago, that job would have eaten up hundreds of billable hours and taken weeks, if not months.
Globalization is having a similar, two-speed impact. For those at the top, it is one of the forces creating richer clients, bigger cases and fatter fees. But at the bottom, emerging-market lawyers are undercutting the salaries of Western lawyers, just as outsourcing has brought down costs—and wages—in manufacturing and services like call centre work. One example is Pangea3, an Indian legal process outsourcing firm, which recently opened offices in the United States. (Full disclosure—Pangea3 is now owned by my employer, Thomson Reuters.)
Employing hundreds of lawyers who work in shifts around the clock, Pangea3 does basic, repetitive legal work such as drafting contracts and reviewing documents. Its clients have included blue-chip companies like American Express, GE, Sony, Yahoo and Netflix. This amounts to "Manhattan work at Mumbai prices," as the American Bar Association's ABA Journal put it in a recent headline.
In the age of the super-elite, even dentists can be superstars. That's the only way to describe Bernard Touati, the Moroccan-born French dentist who has parlayed fixing the teeth of the plutocrats, starting with the Russian oligarchs, into a superstar career of his own. Roman Abramovich, the Siberian oil oligarch, paid Touati to fly regularly to Moscow to fix his teeth—and installed a dentist's chair in his office specially for the job. Touati treated Mikhail Khodorkovsky, Russia's richest man (before Putin sent him to Siberia), and he brightens the smiles of the wives of oligarchs like oil and banking baron Mikhail Fridman. Touati himself has become such a celebrity that, as a New York Times style magazine profile reported, his clients in the West include Madonna and designer Diane von Furstenberg.
Touati's patient list is an example of how, thanks to the Marshall effect, the plutonomy is a self-sustaining global economy, largely insulated from the rest of us. Russian oligarchs create a superstar French dentist; Wall Street bankers and Arab sheiks, superstar interior designers. Whether your skill is with tooth enamel or fabric swatches, in this league you can benefit from the concentration of wealth in the hands of a few. And whether you got your start in western Siberia or the American Midwest, once you join the super-elite, you patronize the same dentist, interior designer, art curator. That's how, from the inside, the plutonomy becomes a cozy global village.
Providing services to the plutocrats is one way to join them. But an even more powerful driver of 21st-century superstar economics is the way that globalization and technology have allowed some top-tier types to achieve global scale and earn the commensurate global fortunes. This is the effect that Sherwin Rosen, who invented the theory of the economics of superstars back in 1981, was most interested in, and it is both the most visible and the easiest to understand. These superstars are the direct beneficiaries of the twin gilded ages.
In the first gilded age, Marshall found that soprano Elizabeth Billington illustrated how growing prosperity meant richer paydays for the most skilled practitioners of every trade and profession, even as the Industrial Revolution drove down the incomes of ordinary artisans. Thanks to the Internet, Lady Gaga reaches hundreds of millions more listeners than Billington did. In 2011, when Lady Gaga topped the Forbes Celebrity 100 list, Forbes estimated her 2010 earnings at $90 million—over 1,800 times the typical U.S. family income. Billington's £10,000 income in 1801—a fee so extravagant that Alfred Marshall used it as shorthand for superstar remuneration nearly a century later—was roughly 200 times the average British farm labourer's income at the time.
There isn't much mystery to why Lady Gaga is worth multiple Elizabeth Billingtons. Each one was the leading diva of her time, and each one had an international reputation. But the only way to listen to Billington was in person; Lady Gaga can be heard and seen by anyone with an Internet connection.
What is particularly striking about these Rosen superstars is that they have become richer even as the Internet has weakened the businesses they're in. Singers like Lady Gaga have never done better, yet the music business has been eviscerated by the Internet. Movie studios have also been weakened even as their stars do better than ever. Athletes can earn millions while their teams go broke.
Those on top have stayed on top partly by cashing in on their technology-driven celebrity with lucrative in-person performances. Lady Gaga earns much of her income from her concerts. The same is true of the other best-paid pop performers of 2011—U2, Bon Jovi, Elton John and Paul McCartney. All of them earned more than $65 million, and all of them depended heavily on the revenues from live shows.
In a study of concert ticket prices, economist Alan Krueger found that in the two decades between 1982 and 2003, a time when first music videos and then digital sharing technology extended the reach of top performers, the share of concert revenue taken by the top 5% of entertainers increased by more than 20%, from 62% to 84%. The top 1% did even better: Their share more than doubled, from 26% in 1981 to 56% in 2003. (By contrast, the top 1% in the United States overall earned 14.6% of the income in 1998.)
More intimate deals with the billionaire class are a smaller, but significant, source of income for superstar performers. A Russian businessman in his 30s known only as Arkady reportedly paid Lady Gaga $1 million to allow him to appear in her Alejandro music video. And even stars a little past their prime can earn fat fees for personal appearances for the plutocrats. This seems to have become the standard for the big birthdays of private equity chiefs, their equivalent of baking themselves a homemade birthday cake. In 2011, Leon Black, the founder of private equity group Apollo, celebrated his 60th with a birthday bash that included a million-dollar performance by Elton John.
The people a previous generation might have called public intellectuals also make much of their living by leveraging the Rosen and Marshall effects. Malcolm Gladwell, the world's most influential business writer, is paid millions to write books. But he makes almost as much—and with less effort—by giving $100,000 speeches. Groups he has addressed include a gathering of investors in private equity giant Blackstone and the Pebble Beach legal conference, the Davos of the world's top lawyers.
Sometimes, you can have it both ways. Unlike singing or speechmaking, modern fashion design was invented as a very expensive service for the elite of the original gilded age. In the 1960s, Yves Saint Laurent understood that his move into ready-to-wear was a break with that paradigm, and he sought to make his populism a virtue.
Many contemporary designers were critical of Saint Laurent's move. Before long, however, it became clear that by producing both an haute couture line and a prêt-à-porter line—offering very costly personal service to the super-rich, while also using technology to scale their reach —the fashion designers at the very height of their profession could benefit from both Marshall and Rosen effects. Even in 1975, Yves Saint Laurent earned $25 million, vastly more than Charles Worth, the creator of haute couture, earned at the peak of his career (when taking inflation into account). Worth was richer than his French seamstresses; YSL, however, is a veritable plutocrat compared with the foreign garment workers who sewed his prêt-à-porter line. As in the law and the performing arts, in fashion the chasm between the superstars and everyone else is only getting bigger.
Excerpted from Plutocrats: The Rise of the New Global Super Rich and the Fall of Everyone Else. Copyright © 2012 Chrystia Freeland. Published by Doubleday Canada, an imprint of the Doubleday Canada Publishing Group, which is a division of Random House of Canada Limited. Reproduced by arrangement with the Publisher. All rights reserved.
Plutocrats goes on sale Oct. 16.