From his perch at The Wall Street Journal, Robert Frank has become one of the nation’s leading chroniclers of the 1%. He has been the newspaper’s wealth reporter for eight years, writing about the lives, culture, economy, spending and investing of the wealthy....
Frank: To a degree, there has always been churn in the world of wealth. Austrian economist Joseph Schumpeter called it “creative destruction,” where one sector of the economy replaces another because of business and product cycles. But the cycles of wealth are now far more rapid, extreme and frequent. The old saying used to be “shirtsleeves to shirtsleeves” in three generations. Now it can happen in three years.
Before the 1980s, the top 1% used to be the flat line on the income charts—rising and falling less than the rest of America during economic cycles. Suddenly, in the early 1980s—1982 to be exact—the 1% started jumping off the charts, soaring far higher than the rest of the country during good times and crashing harder during recessions. They became like the binge drinkers of the economy....
First, more fortunes are tied to the stock market. The Dow Jones rose from under 1,000 in 1981 to 11,000 and change today. That fueled the creation of the largest number of new millionaires and billionaires ever in America, with the rise of stock-based pay—and entrepreneurs who started and sold companies, either through IPOs or mergers. Those fortunes, however, are far less stable, since the stock market is up to 20 times more volatile than overall economic growth.
The second reason is debt. The debt levels of the top 1% increased more than threefold since the 1980s, and many of the rich loaded that debt pile onto speculative bubbles or paper wealth. Leverage can be deadly, no matter how much you think is “manageable.”
The third reason is spending. Some of the wealthy went overboard with homes, cars, yachts, planes, vacations, handbags, shoes and other luxury goods because they thought they could afford it. As it turned out, many looked rich but were actually living one crisis away from financial collapse. Some of the wealth of the past decade was a mirage.
The wealthy are a more diverse group than ever, and on the subject of taxes, they’re as divided as the rest of the country. By sticking to this rich-get-richer narrative, the country may be missing the real danger, which is that we’re more dependent than ever before on a group that is highly unstable.
Prince: So what’s the solution?
Frank: That was the hardest question to answer in the book. To solve the problem of high-beta wealth you have to roll back all the forces that have created inequality. You’d have to roll back all the recent advances in technology, you’d have to roll back globalization and you’d have to somehow wipe out most of the financial markets around the world. Not going to happen. So the practical solution is to better prepare for these wealth and income shocks. Governments need to create bigger, more robust rainy day funds that they can fill during good times and drain down during crises. As consumers and workers, we need to save more, spend less and borrow less to survive these cycles. And for those who aspire to be wealthly, they need to take money off the table as they’re on the way up and use debt sparingly. You can’t get around risk if you want to get rich today. But you can manage those risks and price it more intelligently....
And in a high-beta world, wealth no longer ensures stability and security in your life. What really matters in this world is doing something you love, having strong connections to family and friends, and making a contribution to your community or the world at large.
