As, perhaps, a note to future generations, The Great Gatsby ends with the narrator looking across the bay towards the green light of the eponymous character’s erstwhile love and source of eventual downfall. Besides Dickensian comments on class, lies the beguiling simple note that periods of great exuberance often end with sombre silence.
Some of that exuberance was understandable: the world had just passed through a global pandemic and the Second Industrial Revolution was in full swing. Women’s right and African culture became popular, and, as the great industrialists of the Coolidge Era headed for their eternal rest, margin trading became so commonplace as to give rise to the term shareholder capitalism.
Yet, however much one may project the most heartfelt hopes upon a venture, physics remains unchangeable: expansion fades into dissolution, action meets reaction. In other words, parties end – and when they do bills still have to be paid, and tables cleaned. Those at the top, moreover, follow the same rules.
Back in our 20s, we see that today’s wealthy are quite a different lot, better known for healthy diets and astonishing intelligence rather than cigars and what one would call nouveau riche bravado, Rich Kids of Instagram aside. But the same dynamics apply – and there is every indication that today’s wealthy clans need at least a tactical adjustment.
So far, the previous 50 years have been close to a golden age for the world’s wealthy families. So much momentum was built in their continued rise that even a global pandemic could barely put a dent in their trajectory. As Credit Suisse estimates, the global numbers of millionaires shrank in 2020 by 56,000 – less than 1% of the 5,700,000 millionaires added in 2019. Those at the very top did even better: today we can count over 175,690 people with assets over USD 50 million. 55,820 of those have assets over 100 million and, on the top of the 1%, stand 4,410 individuals with assets over 500 million.
Partially, that momentum was built by 3 underlying trends that no individual family could hope for, much less control.
Following the 1970s’ stagflation in the West, income taxes, as well as capital taxes, were cut to historically low levels. We mostly remember how ‘greed was good’, presumably at least, but all of this was part of a wider trend that started much earlier, and structurally so. It was the Kennedy administration in the United States, faced with the end of the post-war boom, which was the first to significantly reduce the top income tax. This was soon followed all across the Western world as governments tried to spur innovation, enterprise, and economic dynamism. That not only allowed for equity holders to enjoy better returns but also for others to rise. That in turn allowed the current phenomena of many newly minted millionaires being workers whose wealth is derived from income, rather than the reverse. Quite simply, it would have been difficult to imagine people like Stephen Schwarzman of the Blackstone Group to acquire such wealth without being born into most of it.
The development of East Asia and, later, the end of the Cold War unleashed what the World Trade Organization refers to as the Third Wave of Globalization. This provided extraordinary opportunities to translate domestic fortunes into globe spanning enterprises while optimising global value chains to maximise profits. Not only were markets of millions turned into markets of billions for many major firms in Europe, America and parts of East Asia, but financial capital enjoyed returns to mirror just that.
In 1964, President Johnson empanelled a “blue ribbon” National Commission on Technology, Automation, and Economic Progress, whose charge was ‘“’to identify and assess the past effects and the current and prospective role and pace of technological change’. Most of the starkest predictions didn’t come to pass, but the wave of technological innovation Klaus Schwab of the World Economic Forum categorises as the Third Industrial Revolution did nevertheless generally move economic dynamics towards polarization around the few, rather than the many. That trends have accelerated in the past decades rather than decelerate. First, the move towards digital automation meant fewer workers are needed, perhaps reflected in the ratio between worker productivity and compensation as well as a decline in labour’s share of GDP from 76% to 66% from 1980s onwards. Secondly, while in the past ‘asset-light, idea intensive’ companies accounted for just 13% of corporate returns in the United States according to McKinsey estimates, today they account for more than 31%.
Each of these factors is facing a reverse in the new 20s. Partially, this is just mean reversion – the part where the bills have to be paid and tables cleaned – and thus a debt from one generation to another.
First, taxes may rise. This is because of two factors: the changing social contract and the accumulation of debt.
The social contract may snap back to requiring high levels of protection and social security. Over the past 50 years, taxes could be kept low partially because the social contract has shifted considerably. While McKinsey’s report The Social Contract in the 21ts Century is a useful run through things, for our purposes it suffices to say that as responsibilities declined, so did benefits. That has greatly benefitted certain groups, who can take advantage of the increase in liberties while being less exposed to the costs. In other words, all across what is usually referred to as the developed world the past 50 years were a great time to be smart, young, relatively wealthy, able bodied and well educated. However, as the Office of the Director of National Intelligence observes, the demands most publics now make of their respective governments are at odds with those governments’ ability to provide. This in turn fuelled what Yascha Mounk called ‘pitchfork politics’. The expansion of government during the SARS-CoV-2 pandemic may thus prove an inflexion point rather than a temporary change. Using estimates from McKinsey, increases range from 38% in Canada to less than 9% in Norway, the percentages reflecting pre-existing levels of state intervention. The worry for most is that many publics may very well like work guarantees, increased spending on healthcare and rent controls. All of that would require taxes to rise considerably.
Secondly, public government debt is getting out of hand. Well before the United States’ USD 2.2 trillion CARES Act and the European Union’ 1.35 programme, debt was worrisome. The pre-existing pile of debt is financed only due to historically low interest rates. Quite simply, it turns out that there is such a thing as free money and it’s currently financing most of the Western world. However, the dynamics this has allowed to build also mean an extreme sensitivity to any rise in interest rates: it would only take a minor rise for significant portions of debt to face rollover risk. This situation does not yet account for the social security crisis facing both sides of the Atlantic as well as most of East Asia, nor does it account for the ageing infrastructure or pension savings deficits running into billions on both Sides of the Atlantic. In America, for example, about 90% of state pension funds are underfunded.
Composing this is the fact that globalization itself is changing. Some, like the Economist, have dubbed this ‘slowbalisation’, reflecting the fact that no significant shifts have occurred. But the rate of growth in volumes has decreased. As the World Trade Organization notes in its most recent World Trade Report, this is partially due to the proportional decline of manufacturing in global trade flows towards services which are more difficult to measure and face informal barriers to trade, such as language or cultural differences. Moreover, some of this is great news as it reflects that many countries have developed their own industries to supersede imports and grown their own commercial dynasties: fewer billionaires but more millionaires if you will. However, it may also be duly said that the Third Wave of Globalization is over and the next generation for many of the world’s wealthiest families will not be able to enjoy the vast, growing, open markets their parents came of age looking over.
Lastly, the Fourth Industrial Revolution may not follow the course of the Third or Second, using Klaus Schawb’s terminology again. Quite simply it may not trigger the vast increases in overall prosperity seen after the 1920s wave of industrial standardization, nor the vast accumulation in wealth seen with the wave of digitalization. While AI is likely to have similar effects as digitalization on the balance between labour and capital initially, it needs to be kept in mind that the rapid wave of digitalization which has otherwise reshaped our world has otherwise kept average wages almost stagnant for over 50 years in places such as the United States. So, publics across already developed countries may not acquiescence another 40 years of meagre growth without redistribution.
The way that is usually avoided is by increasing the overall pie, as with the Second Industrial Revolution. But Artificial Intelligence, while having every indication of starting to deliver ‘real world’ benefits from research on protein folding to rapid rises in productivity for cognitive tasks, may simply prove labour displacing rather than trigger any shifts in overall output – this being the thesis of Robert Gordon, in the Rise and Fall of American Growth, recently commented on in Businessweek, as to whether the new 20s will give course to boom or bust. Overall, that’s great for owners of capital, but not for already pressed workers. The results of this are that a backlash is simmering and has every indication that it may boil over. This in turn fuels the previous two issues, with the added threat of heavy-handed regulation making a comeback. Indeed, the SARS-CoV-2 may reflect a similar inflection point as that of the 2008 credit crisis. While global household wealth grew at an estimated 10.3% between 2000 and 2007, this dropped to 7.3% in 2008 and then retrenched permanently lower at 5.7% since.
Wealthy families looking ahead over the new decade may conclude the next generation may face a different environment. While most fortunes were built in the previous 70 years in what could easily be labelled the best of times for just that, the inheritors of those fortunes have a very different set of challenges ahead of them, where careful planning and caution may trump risk taking. Indeed, the SARS-CoV-2 may prove to be just the omen to look for.
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