Chrystia Freeland - Plutocrats

This double-barreled economic shift has coincided with an equally consequential social and political one. MIT researchers Frank Levy and Peter Temin describe the transformation as a move from “The Treaty of Detroit” to the “Washington Consensus.” The Treaty of Detroit was the five-year contract agreed to in 1950 by the United Auto Workers and the big three manufacturers. That deal protected the carmakers from annual strikes; in exchange, it gave the workers generous health care coverage and pensions. Levy and Temin use “The Treaty of Detroit” as a shorthand to describe the broader set of political, social, and economic institutions that were established in the United States during the postwar era: strong unions, high taxes, and a high minimum wage. The Treaty of Detroit era was a golden age for the middle class, and a time when the gap between the 1 percent and everyone else shrank.

But in the late 1970s and early 1980s, the Treaty of Detroit began to break down. This was the decade of Ronald Reagan and Margaret Thatcher. They both sharply cut taxes at the top—Reagan slashed the highest marginal tax rate from 70 percent to 28 percent and reduced the maximum capital gains tax to 20 percent—reined in trade unions, cut social welfare spending, and deregulated the economy.

This Washington Consensus was exported abroad, too. Its greatest impact, and its greatest validation, was in communist regimes. The collapse of communism in the Soviet bloc and the adoption of market economics in communist China ended that ideology’s seventy-year-long intellectual and political challenge to capitalism, leaving the market economy as the only system anyone has come up with that works. That red threat was one reason the plutocrats accepted the Treaty of Detroit, and its even more generous European equivalents. The red surrender emboldened the advocates of the Washington Consensus and helped them to create the international institutions needed to underpin a globalized economy.

These three transformations—the technology revolution, globalization, and the rise of the Washington Consensus—have coincided with an age of strong global economic growth, and also with the reemergence of the plutocrats, this time on a global scale. Among students of income inequality, there is a fierce debate about which of the three is the most important driver of the rise of the 1 percent. Ideology helps to shape the argument. If you are a true-faith believer in the Washington Consensus, you tend to believe rising income inequality is the product of impersonal—and largely benign—economic forces, like the technology revolution and globalization. If you are a liberal and regret the passing of the Treaty of Detroit, you tend to attribute the changed income distribution chiefly to politics—a process Jacob Hacker and Paul Pierson have powerfully described in Winner-Take-All Politics .

This is an important argument, with real political implications. But, viewed from the summit of the plutocracy, both sides are right. Globalization and the technology revolution have allowed the 1 percent to prosper; but as the plutocrats have been getting richer and more powerful, the collapse of the Treaty of Detroit has meant we have taxed and regulated them less. It is a return to the first gilded age not only because we are living through an economic revolution, but also because the rules of the game again favor those who are winning it.

“The bottom line: we may not be able to reverse the trend, but don’t make it worse,” Peter Orszag, President Barack Obama’s former budget chief, told me. “Most of this is coming from globalization and technological change, not from government policy. But instead of leaning against the wind, we have been putting a little more wind in the sails of rising inequality.”

On a bitter evening in mid-January 2012, a group of bankers and book publishers gathered on the forty-second floor of Goldman Sachs’s global headquarters at the southern tip of Manhattan. The setting could not have been more American—the most eye-catching view was of the skyscrapers of midtown twinkling to the north, and a jazz ensemble played softly in one corner.

But the appetizers were an international mishmash—thumb-sized potato pancakes with sour cream and caviar, steaming Chinese dumplings, Indian samosas, Turkish kebabs. That’s because the party was in honor of the Goldman thinker who served notice to the Western investment community a decade ago that the Internet revolution wasn’t the only economic game in town. The world was also being dramatically transformed by the rise of the emerging markets, in particular the four behemoths that Jim O’Neill, then chief economist at Goldman Sachs, dubbed the BRICs: Brazil, Russia, India, China.

In the book Mr. O’Neill launched at his January party, The Growth Map: Economic Opportunity in the BRICs and Beyond , he argues that the BRIC concept “has become the dominant story of our generation” and introduces readers to “the next eleven” emerging markets, which are joining the BRICs in transforming the world.

The group of Goldman executives who toasted Mr. O’Neill in New York are in the vanguard of one of the consequences of the powerful economic forces he describes—the rise, in the developed Western economies, of the 1 percent and the creation of what many are now calling a new gilded age. In the nineteenth century, the industrial revolution and the opening of the American frontier created the Gilded Age and the robber barons who ruled it; today, as the world economy is being reshaped by the technology revolution and globalization, the resulting economic transformation is creating a new gilded age and a new plutocracy.

But this time around, it really is different: we aren’t just living through a replay of the Gilded Age—we are living through two, slightly different gilded ages that are unfolding simultaneously. The industrialized West is experiencing a second gilded age; as Mr. O’Neill has documented, the emerging markets are experiencing their first gilded age.

The resulting economic transformation is even more dramatic than the first gilded age in the West—this time billions of people are taking part, not just the inhabitants of western Europe and North America. Together, these twin gilded ages are transforming the world economy at a speed and a scale we have never experienced before.

“It is structurally much more extreme now in multiple dimensions,” said Michael Spence, a Nobel Prize–winning economist, adviser to the Chinese government’s twelfth five-year plan, and author of The Next Convergence: The Future of Economic Growth in a Multispeed World , a book exploring the interaction of these twin gilded ages. “Now that the emerging economies are pretty big, this is just a harder problem. It is so different from previous economic change that I think these are issues that we have never wrestled with before.

“In the two hundred years from the British industrial revolution to World War Two there were asymmetries in the world economy, but the entire world wasn’t industrializing and it wasn’t interacting in the same way,” Professor Spence told me. “These are complex phenomena and we should approach them with humility.”

The gilded age of the emerging markets is the easiest to understand. Many countries in Asia, Latin America, and Africa are industrializing and urbanizing, just as the West did in the nineteenth century, and with the added oomph of the technology revolution and a globalized economy. The countries of the former Soviet Union aren’t industrializing—Stalin accomplished that—but they have been replacing the failed central planning regime that coordinated their creaky industrial economy with a market system, and many are enjoying a surge in their standard of living as a result. The people at the very top of all of the emerging economies are benefiting most, but the transition is also pulling tens of millions of people into the middle class and lifting hundreds of millions out of absolute poverty.