Thursday, November 17, 2011

The High-Beta Rich: A review

I don't normally make book reviews here in the blog, but I recently read Robert Frank's The High-Beta Rich. Now this is not the same Robert Frank who wrote an economics textbook with Ben Bernanke. He's WSJ's wealth reporter who also wrote Richistan: A Journey through the American Wealth Boom. In High-Beta Rich, Frank revisits the lives of some of the people he profiled in Richistan, and follows up on what has happened to them in the years since he wrote the first book in 2006. By 2011, some of these rich people have since gone from riches to rags, or merely to less affluence. He also follows up on some people whose jobs it was to serve the needs of the rich, and profiles how many of them are now finding it hard to secure stable jobs from the rich since the 2008 economic crisis.

The book's central theme is how the rich's fortunes now depend largely on rising asset values, and how asset price movements correspondingly affect their over-all wealth, and so affect their consumption of services, and hence, employment of a lot of people. The book tells stories of formerly rich people, how they came into big wealth during the two decades of continuous rise in debt and asset values, and the rise in conspicuous consumption that came with it. It relates anecdotes of people who bought rich man's toys such as Maseratis, yachts, private jets, and hired private armies of household help, from personal chefs, personal masseuses to household managers a.k.a. butlers. It tells of their experiences finding themselves suddenly back in the world of the non-rich, losing mansions, and then letting go of their butlers .

The book tells of how the rich and their money took over previously more egalitarian towns, such as Aspen, and the rising cost of living that drove away the locals and the economy that thrived on serving those locals, and how in its place arose an economy that simply caters to the whims and demands of the very rich. In one of the chapters, this statement sticks out:

When the waves of high-beta wealth come crashing down, they can affect an entire town like Aspen as well as a much larger canvas like the American consumer economy. In a plutonomy, we're all occasional butlers now, relying in the increasingly erratic jobs and spending of the wealthy.

Frank then elevates the discussion to the state government level and profiles California, which as he shows, has over the years grown more dependent on tax revenues from a few large income tax payers who are largely high-beta rich from Silicon Valley. This sentence stands out:

The masses at the bottom require increased funding for entitlements and social programs. But those at the top, who are increasingly paying for those programs, will exert an outsize influence on politicians through their money and will lobby for lower tax rates. The result is that governments will have more booms and busts and permanent deficits.

I have a problem with one of the author's proposed solutions to the problem of over-dependence on the high-beta rich - that governments, companies, and individuals need to save more during booms so they ride out the busts. This coordinated desire by all sectors of the economy to suddenly save simultaneously is precisely what turns the booms into sudden busts. While the author is referring to local governments, which could literally run out of money, it would have been better if he had made a distinction between a local government, which is merely a currency user, and a sovereign currency-issuing federal government. That sovereign assumes the counter-party role of doing the dissaving whenever the other sectors, the companies and individuals, suddenly stop spending, so as to ensure that the whole economy doesn't suddenly grind to a complete halt.

I would also have appreciated a furthering of this idea:

In the age of high-beta wealth, most of the spending and taxpaying in America will be directed by the stock market. As Greenspan noted, stocks are no longer just measurements of growth and decline, but the main drivers of both. In an economy dominated by the rich, S&P is the new GDP.
While I agree with this statement, I would take it further and say that therein lies the main problem: that S&P is the new GDP, and that people have moved away from the idea of acquiring and maintaing wealth via continuous investment in actual companies, and into getting rich by buying and cashing out at the right time. Nobody plays for the long haul anymore, including those who originally got rich the classic way. Many eventually sell out and use the sudden liquidity speculating in short term investments instead, which while in aggregate results in the self-perpetuating effect of increasing the prices of those very same investments, does not really result in creating new productive endeavours, which is a prerequisite for growing GDP, which is then a prerequisite for the continuous rise in S&P. Without real investments and real growth in the real economy, S&P growth coming from just more money chasing the same investments is not sustainable, and the money being taken out of the real economy will eventually make itself evident with the S&P boom and bust. (Author does profile one guy near the end who gets it).

Nonetheless, if you want a change from reading long serious economic tomes of how and why the economy now experiences more frequent booms and busts, and want to lose yourself in amusing stories of the 'high-beta rich', then this book is worth a read. I found it so when reading my review book.


PaulJ said...

In my view, both saving and profit-taking, thought by most to be virtuous aspirations, are in the overall sense un-sustainable.

Any behavior that removes spending from the overall economy (wealth accumulation) is doomed to failure unless some external entity replaces the "lost" financial assets.

Most people I talk to reject the idea that saving is ultimately a destructive force, especially in a steady-state economy.

Rogue Economist said...

Paul, I mostly agree, though in my version, it's the TOO MUCH saving and profit-taking that becomes a vice. A bit of saving is good if it's to prepare for a rainy day. That's where currency-issuing governments can be helpful, as they can take up the slack in private spending, as they have in japan.

As for profit-taking, it's also necessary if you look at it as the wage of the capitalist. For as long as it's not eating away at the wages of the workers, it is necessary, so everyone gets rewarded for their contribution, and everyone has something to consume with.