The rich

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The rich

For too long we have said that poor people are the problem. Now it’s time to say that rich people are the problem, writes Vanessa Baird.

This is strange. The world economy has many problems. Most people are getting poorer. Household income is more than five per cent less than last year. That’s the global average; in some countries it’s much worse. We need 80 million new jobs to get back to the employment levels before the crash. And progress on reducing world hunger has stopped. One in seven people do not have enough to eat.

But for one group of people life is getting better, no matter where they live. These people are called HNWIs – High Net Worth Individuals (people who have a lot of money individually). These people are the elite of the world, and their money keeps increasing.

The richest man in the world - telecoms businessman Carlos Slim - after giving a lecture at the UN in Geneva. Valentin Flauraud / Reuters

In the past year, the money of the 400 richest Americans has grown by $200 billion. This is enough to give every student in the country free education. But of course the money isn’t spent on education.

Also in the past year, the money of the 1,000 richest Britons has grown to $667 billion – more than ever before. This is a nearly five-per-cent more than the year before.

The number of super rich people in India increased by 30 per cent in 2012. Sri Ram Khanna of the Delhi School of Economics said: ‘The rich people continue to get richer when the economy slows down and it has little effect on them. … If your income is lower, you are more at risk. This is true all over the world.’

How did this happen? How did these super rich people separate themselves from the rest of humanity, to get even richer in the crisis?

But first: let’s look at who these people are.

Rich? Me?

Carlos Slim Helú is the richest man in the world. This Mexican telecoms businessman, a large 72-year-old, has $69 billion. When Carlos was 12, he bought his first shares in a bank. He invested a lot of money during Mexico’s 1982 financial crisis, buying a wide variety of shares, including tobacco. But he made most of his money in the privatization of the state telephone company. People say (but he says it is not true) that he had complete control because of his close friends in the Institutional Revolutionary Party (PRI) government. Since then, he has always had a close relationship with the government, no matter which party is in power. Today, Slim has so many business interests that people say you cannot spend a day in Mexico without making him richer.

Gina Rinehart, 58, is an Australian mining heiress. She is the world’s richest woman (with $28 billion), and she says that poor people should ‘spend less time in the pub’ and that the minimum wage should be reduced. She gives money to people who insist the climate is not changing, and she is now trying to fight against carbon cuts by using the Australian media (which she is buying more of all the time). Rinehart became owner of Hancock Prospecting when her father died and she is now fighting for the family fortune with three of her children.

Slim and Rinehart are billionaires together with about 1,200 other people. There are also around 29 million millionaires. Their money comes from various places. About a third of the super-rich inherited the money from their parents. Two-thirds of them made the money themselves. Many of them studied maths at university and do IT and software development. Not many of them used to be poor; most of them have always had some money and university educations. A large number of the richest people work in finance.

Many of the super-rich have had very important friends. The powerful rich people from the former Soviet states, for example, were very close friends with the people who had political power at the time of transition. They bought the public companies and state-owned businesses; the many super-rich in China are mostly the children of Communist Party officials.

Many of the rich have been increasing their wealth with the help of hedge fund operators and clever finance advisors. The Upper East Side in New York City now has a lot of people, many aged under 40, who make $20 or $30 million a year from hedge funds, says business journalist Chrystia Freeland in her amazing book Plutocrats: the rise of the new global super rich.

But if you want to have a super-rich lifestyle, you need a lot of money. Egyptian telecom billionaire Naguib Sawaris said to Freeland. ‘To have enough money for a good life, the plane, the boat, you need a billion.’

There is a lot of demand for luxury goods and services. A London domestic service agency, Bespoke Bureau, found jobs for 430 British-trained butlers last year, mainly in Russia, China and the Middle East.

But many rich people do not actually feel rich. This is not a surprise.

Economist Angus Deaton has shown that when you get richer, you want more and more money. Millionaires control 40 per cent of the world’s money. But Fidelity, a consultancy firm that often does surveys on millionaires, has found that even with super-rich people, all rich people usually say they need twice as much money as they have. A recent survey of 1,000 millionaires, with on average $3 million, found that a quarter felt they needed an extra $5 million to feel rich.

How did this happen?

We have to go back to the 1980s to find out more about how this happened.

In the 1980s, conservative governments in both the US and the UK supported free markets. This meant there was less regulation, public services were privatized and there were many new business opportunities.

Most wages grew slowly, but the pay of top executives started to increase quickly.

New laws cut the power of trade unions. Globalization meant that many large businesses were able to get cheap labour from poor countries with no unions.

Businesses made more profit. This was great for shareholders and business owners. And there were big cuts in tax paid by both businesses and people who had big salaries.

Most important was the decision to remove regulations from the financial markets. This was done first in New York and London. Pay in finance jobs increased an amazing amount, finance workers began to get huge bonuses, people thought greed was good. We now know that this was the cause of the crisis.

To solve the 2008 financial crisis, the governments first gave billions of dollars to the banks, then they cut public spending. This has produced a terrible irony: the people who caused the problems have not suffered at all; the rest of us are being punished.

Governments have tried to encourage growth, but this has also made rich people richer by increasing share prices and the value of property. In Britain, each rich family had $561,000 more money after the Bank of England’s “quantitative easing” (increasing the supply of money); each poor family had, on average $1,900 more.

How do they spend the money?

A few goods and services for the super rich:

o A phone (customized 18-carat solid gold mobile phone from Aesir Copenhagen, designed by Yves Beher) – $60,000 o A night in a hotel (Royal Penthouse of the Hotel President Wilson, Geneva) – $85,000 o Meal for two (New York's Masa restaurant) – $1,500 o Umbrella (crocodile-skin) – $55,000 o Private plane (small)– $9,000 per hour o Holiday (Royal Villa, Grand Resort, Lagonisi, Greece) – $48,000 a night o Toilet paper (green, orange, and black Renova) – $20 o Apartment (penthouse on New York’s Upper East Side) –$60 million + o Hunting (in Namibia) – $16,000 (one giraffe: mounting and shipping extra) o Vacuum cleaner (Crystal ErgoRapido with 3,730 Swarovski crystals) – $18,993 o Skateboard (Louis Vuitton) – $8,250 o Vibrator (Little Gold 24-carat gold, silent and waterproof) – $325 o Bluetooth headset (diamond encrusted)– $50,000 o Noodles (tub of Harrods Posh Instant noodles) – $43 o Frisbee (luxury) – $305 o Space trip (Virgin Galactic - per person) – $283,000

Rich people have enough money to take risks with investments. If they make very risky investments, they can get much more back. “Vulture funds” (vultures are large, black birds that eat dead animals), for example, buy up debts very cheaply from companies that are about to collapse. Dart Management, registered in the Cayman Islands, made a lot of money from Greek debt. They bought the debt for 35 per cent of the price but the Greek people had to pay back the debt at a much higher price.

Everyone knows that the financial sector needs change. But the changes to make it safer keep being stopped. There are many reasons why – most reasons are criminal. The British financial services industry used $150 million to lobby (change the minds of) politicians and regulators when lots of people wanted stricter rules after the Barclays Libor rate-fixing scandal. The US finance industry spent $355 million on political lobbying in Washington in 2012, nearly as much money as the health industry spent on lobbying.

Politicians and regulators still say we need light self-regulation. They don’t want the rich people working in finance to leave the country, because they will lose tax. The same argument supports low taxes on businesses and high earners. The corporate rich, especially those in finance, have control the governments. To make the problem worse, many people in government are millionaires too, and they have close links to the finance industry.

There are many victims in this crisis – democracy is one of them. British writer George Monbiot says we now have ‘totalitarian capitalism’.

‘Rich people are successful and that’s good for society’

This opinion is based on beliefs about how people get their money.

For some people, especially people who remember the Cold War, getting a lot of money means political freedom. Other people simply believe that ‘rich people deserve their wealth’. 60 per cent of Australians said in a survey that they agree with this statement; 58 per cent of North Americans agree. 45 per cent of British people agree – but only 16 per cent of Russians and 9 per cent of Greeks.

People say that ‘rich people create jobs’. Nick Hanauer thinks this is ridiculous. He is a wealthy businessman who founded the online advertising company aQuantive. He then sold it to Microsoft for $6 billion. He says it’s like saying ‘squirrels create evolution’. Even if businessmen build companies that eventually employ thousands of people, it is the customers and a healthy economic system surrounding the firm that create the jobs, not the owners.

People are beginning to question the idea that rich people create money and benefit society. In India, for example, many of the country’s new millionaires are not software developers or manufacturing innovators, but ‘rent-seekers’. They get most money from land, natural resources and government contracts. They don’t create new things; they use contacts and important friends to get more and more money.

The rich are actually doing more bad than good. London is getting so expensive that local people cannot live there. Homeless people live in boxes in the doorways of houses in Mayfair. There is a housing crisis because of recession – a million builders are jobless. But there’s another reason. Rich international investors are buying almost 60 per cent of expensive properties ($3.2 million or more). These buildings are often empty for many months and squatting (living in empty buildings) is now illegal. Local councils making the poorer people move to other cities, maybe hundreds of miles of away, where rent is cheaper.

This is all happening in London because of no controls on wealth and property.

Thousands of miles away, Peru is also suffering from wild capitalism. Gold has a very high value in times of trouble – and mining is bringing a lot money to businesses and investors. Poor people have been shot in protests against gold mining projects. The mining is poisoning their water and polluting their land.

French writer Hervé Kempf says that the rich are destroying the earth. With their investments in oil and mining, the new powerful rich are making it impossible to live on the planet. And, like Gina Rinehart, they are using their power to stop the changes we desperately need to fight against climate change.

What next?

The people who destroyed and stole from shops in the riots in the UK in August 2011 were punished; many were sent to prison for years. People described them as ‘feral’ (wild) and ‘underclass’ in news reports.

Advice to rich people: 'Look at your Rolex, the hour of revolution is coming.' Masante Patrice / ABACA / PA Images

But one journalist, Peter Oborne (usually conservative) of the Daily Telegraph, wrote about another group of people that had ‘forgotten that they have responsibilities as well as rights… the feral rich of Chelsea and Kensington’. They had ‘an almost universal culture of selfishness and greed’.

Not all rich people, of course, greedy and selfish. Some use their money to try to do good in the world. Even Bill Gates, the Microsoft boss seems really concerned to improve public health in Africa. Currency speculator George Soros openly criticizes the system that has made him so rich; he encourages democracy with his Open Society Foundations. But these individual actions won’t change the situation. The rich still give a smaller share of their income to charity than people who earn average incomes; they give much less than people who earn least.

But here are signs that some friends of the rich – and some rich people themselves – are feeling bad about this situation. They say the unfairness is bad for capitalism. Marx predicted this: he said that capitalism has inside it the seeds of its own destruction.

Problems are beginning between the millionaires and the billionaires – the billionaires have become so much richer, so much faster and the millionaires are struggling to be as rich as them. Equality is a popular word in all areas now – including meetings of business and world leaders at the World Economic Forum and in The Economist. People see increasing inequality as a danger, which brings social unrest to harm capitalism.

This is the big hope: power from below. The inequality we have now is the result of years of destroying the power of unions, making wages lower and creating a high level of powerful people. It is not enough to talk about more equality. We need to take money from the rich and give it more equally to the rest. We need to break down the institutions and practices that make privilege and inequality stay with us. What the young British rioters of 2011 were doing was redistribution, but with no discipline or political system. When protesters from Uncut occupy Starbucks coffee shops and turn them into crêches – because when Starbucks doesn’t pay tax, the government cuts things like crèches – people support them. When 800 council workers in Caerphilly, Wales, go on strike to protest against a 30-per-cent pay rise for their bosses, this shows that change is happening.

We are finding out that many big companies around the world have not paid tax – Apple, General Electric, Vodafone, Starbucks, Google, Amazon, PepsiCo, Goldman Sachs, Facebook – and many people are angry. The mood has changed. In Greece, a country where it used to be normal to try not to pay tax, the new hero is the journalist who was accused of making public the names of 2,000 people who didn’t pay tax.

In 2013, we will have more cuts. Governments are trying to tell the people that it is their fault that the country has no money, and they must pay for it with their jobs, public services, pensions and savings. Maybe people will fight against this. The political class, like the rich, are in the minority. The rich and powerful need the help of the 99 per cent, even if they think and behave as if they don’t. It is dangerous for them to cut themselves off from the rest of humanity. And it is dangerous for us to ignore them or to accept their terrible power.