Welcome to the Global Plutonomy
In 2005 Citigroup published a controversial equity research piece that described what they termed the Plutonomy. The authors, Ajay Kapur, Niall Macleod, and Narendra Singh, presented a very detailed description of what a Plutonomy is, how it came to be, how sustainable it might be, and perhaps more to the point - how to take advantage of it.
[Here is a link to the report.]
In this article I revisit the Citigroup report, 14 years on, and check on the progress of the trends the authors envisioned. One thing is certain - the gap between the wealthy and the non-wealthy has grown since 2005. Is that a bad thing? I guess it depends on your political philosophy. For some thoughts on that, read on.
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Back in 2005 the authors argued that the world was divided into two economic camps - the Plutonomy and the rest. This has turned out to be prescient. Today there is no longer a middle class to speak of. You're either well-off or struggling to make ends meet.
In plutonomies the wealthy represent a disproportionate share of the economy and have an out sized impact on numbers like household net worth, average investment account size, current account deficits, consumption levels, etc. This imbalance in wealth and influence is euphemistically called "global imbalances" by economists.
THE NEW MANAGERIAL ARISTOCRACY
The authors identified a "New Managerial Aristocracy." That sounded a little hyperbolic at the time, but 14 years on it doesn't seem so far-fetched.
The top 1% of households in the U.S. accounted for about 30% of overall U.S. income in 2017, slightly smaller than the share of income of the bottom 70% of households put together. The top 1% of households also account for 37% of net worth, greater than the bottom 90% of households put together.
It gets better (or worse, depending on your political leanings) - the top 1% of households account for 44% of financial net worth, more than the bottom 95% of households put together. This is data for 2017, from the Survey of Consumer Finances.
The top 1% of households own significantly more stocks as a percentage of their net worth than the rest of the population who tend to have more real estate. Was the U.S. always a plutonomy - dominated by the wealthy, who captured larger chunks of the economy for themselves? Read on to find some answers.
WHY THE PLUTONOMY WILL CONTINUE TO GET STRONGER
The authors identified six drivers of the plutonomy:
1) an ongoing technology/biotechnology revolution,
2) capitalist-friendly governments and tax regimes,
3) globalization that thrives under well-capitalized elites and an endless supply of immigrant labor,
4) greater financial complexity and innovation,
5) the rule of law, and
6) patent laws that keeps competition suppressed and allows for monopolies to emerge.
They pointed out that Eastern Europe was embracing many of these drivers of plutonomy, as were China, India, and Russia.
Deja Vu
The authors go on to say that we've been here before. Just as we saw in the Gilded Age, the Roaring Twenties, and the Booming Nineties, the managerial aristocracy siphons off an ever-expanding share of that ever-expanding profit pie, either through investment gains, or simply by paying itself well.
After the global financial crisis in 2008 there was a backlash against celebrity CEOs. The new trend of cost-cutting, balance sheet-improving CEOs didn't last long. It is now starting to shift once again to risk-seeking CEOs, re-leveraging, going for growth and expecting disproportionate compensation for it.
Private Equity and Leveraged Buyout funds are once again filling the risk-seeking and re-leveraging vacuum, expecting and getting disproportionate remuneration for their skills.
Feeling wealthier, many in the upper echelons of wealth are spending a larger part of their capital gains right away. In other words, they save less of their income, the well known wealth effect. The key point though is that this new lower savings rate is applied to a massively larger pool of savings.
THE DEATH OF PLUTONOMY
As the authors noted, at the heart of a plutonomy is income inequality. Societies that are willing to tolerate or endorse income inequality are willing to tolerate and endorse plutonomy. That's how politicians remain in power year after year.
Organized societies have two ways of expropriating wealth - through the revocation of property rights or through the tax system. Capital markets generally strive for certainty and stability. The pricing of assets is more transparent, projections more accurate, and so on. For this reason, in developed capital markets, governments have recognized the importance of having level playing fields, regulatory certainty, and the sanctity of property rights.
WHERE DO WE STAND TODAY?
In a plutonomy, there seems little threat of blatant expropriation of property by governments. There are few examples of governments changing the rules in the plutonomies and engaging in widespread nationalization, or asset re-distribution.
Likewise, if anything, the trends of taxation are positive for corporations. This is good for the profit share, of which the wealthy class, through their holdings of equity, benefit disproportionately.
As the authors correctly pointed out, in general, globalization is making it easier for companies to either outsource manufacturing (source from cheap emerging markets like China and India) or “offshore” manufacturing (move production to lower cost countries).
The final option for countries willing to consider it, is to in-source labor. This keeps the price of labor contained. Plutonomy countries all have - generally - a welcoming attitude to skilled immigration.
So, property rights look as if they are being protected, tax policies helpful, and the profit share should continue to rise, through globalization and the productivity/technology wave.
The three levers governments and societies could pull on to end plutonomy are there, but who will have the political courage to use them? Property rights are generally still intact, taxation policies neutral to favorable, and globalization is keeping the supply of labor in surplus, acting as a brake on wage inflation.
The Backlash
Concentration of wealth and spending in the hands of a few, undoubtedly has natural limits. What might cause a major backlash? Back in 2005 the authors saw a number of potential challenges to plutonomy. The first, and probably most potent, was through a labor backlash. Outsourcing, offshoring or insourcing of cheap labor is done to undercut current labor costs.
There are plenty of examples of the outsourcing or offshoring of labor being attacked as “unpatriotic” or plain unfair. This tends to lead to calls for protectionism to save the low-skilled domestic jobs being lost. This is a cause championed, generally, by left-wing politicians.
At the other extreme, insourcing, or allowing mass immigration, which might price domestic workers out of jobs, leads to calls for anti-immigration policies, at worst championed by those on the far right.
The authors posited that a second related threat might come from productive labor no longer maintaining its productive edge.
Kevin Phillips’s arguments in his book, Wealth and Democracy, fascinated the authors. Phillips highlights the problems in the late 1700s Netherlands, where an increasing obsession with financial speculation by the wealthy elites caused nonfinancial skilled labor that had built that country’s wealth, to seek their success in other countries.
A third threat comes from the potential social backlash. This is what keeps the wealthy class up at night - the fever dreams of pitchforks and torches, or as the title of this article describes it, Barbarians At The Gate.
Why struggling consumers do not rise up en masse
Perhaps one reason that societies allow plutonomy is because enough of the electorate believe they have a chance of becoming a member of the wealthy elite class. Why kill it off, if you can join it?
In a sense this is the embodiment of the “American dream”. But if voters feel they cannot participate, they are more likely to vote for dividing up the wealth pie, rather than aspiring to become part of the wealthy class.
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 the concept of plutonomy. But as yet, there seems little political fight being born out on this battleground. A related threat comes from the backlash to “Robber-barron” economies. The population at large might still endorse the concept of plutonomy but feel they have lost out to unfair rules.
This “backlash” seems to be something that comes with bull markets and their subsequent collapse. To this end, the cleaning up of business practice, by high profile champions of fair play, might actually prolong plutonomy. Our overall conclusion is that a backlash against plutonomy is probable at some point. However, that point is not now.
So long as economies continue to grow, and enough of the electorates feel that they are benefiting and getting rich in absolute terms, even if they are less well off in relative terms, there is little threat to Plutonomies in the developed world.
But the balance of power between right (generally pro-plutonomy) and left (generally pro-equality) is fluid in many countries. Just look at how close the U.S. election was in 2016, or how close the results of the German election were.
A crash in the stock market, or a deep and prolonged recession could easily raise the prospects of anti-plutonomy policy.
Plutonomy stocks
As promised, below is a short list of companies who cater specifically to the wealthy class of consumers. This list is quite different than the one the authors presented in 2005, but that should not be a surprise. Companies get taken over, or merge with larger rivals. But their brands remain intact, and the wealthy consumers remain loyal to them.
Browse through this list and think about whether the plutonomy will continue long enough to reward you for climbing on board the gravy train.
