Inequality Play Is Over, Says Analyst Who Coined ‘Plutonomy’
(Bloomberg Businessweek) -- A few years before the financial crisis, Ajay Kapur started advising investors to bet on the rich. He now says it may be time to unwind that trade.
In the mid-2000s, Kapur and his then-colleagues at Citigroup Inc. used the term “plutonomy” to describe economies where income and wealth are increasingly concentrated at the top. The U.S. was Exhibit A. The investment thesis, which they fleshed out in a series of reports, boiled down to this: Buy the stuff rich people like.
The Citi stockpickers were latching onto a trend that was already decades old. And it’s persisted ever since, through the worst financial crash in generations and now the longest expansion on record—making America the most unequal country in the developed world.
There are signs that a political backlash is building. Democratic contenders for the 2020 presidential election support measures, from public health care to new taxes on income and wealth or securities trades, that aim to narrow the gap. Even in President Donald Trump’s Republican Party, which passed a tax bill widely reckoned to favor the wealthy, there’s been support for curbs on share buybacks and the power of superstar tech firms.
That’s the shape of things to come, according to Kapur, who’s now head of Asian and emerging-market equity strategy at Bank of America Merrill Lynch in Hong Kong. He ticks off features of the U.S. economy that have been around so long that investors take them for granted: “oligopoly power, lower taxes, capitalist-friendly legislation.”
“All of these are subject to change,” he says. “No one is ready for this new world.”
There are lots of ways to measure inequality, and most of them show it’s getting worse. The problem isn’t confined to America. France has seen months of protests by the yellow-vest movement, triggered by a fuel tax perceived to be unfair to the poor. Left-behind regions of the U.K. helped swing the vote for Brexit.
In the U.S., the Census Bureau’s gauge of income disparity is the highest since record-keeping began in the 1960s. The Federal Reserve says the share of the nation’s total wealth has declined over the past decade for every group except the richest 10%.
“We’re supposedly a more egalitarian country, where if you work hard and play by the rules and have access to capital, you can make it,” says Heather Boushey, president of the Washington Center for Equitable Growth, a nonprofit research group in D.C. “That has been changing over the past half-century, and closing off opportunity.”
While the U.S. economy, measured by gross domestic product, bounced back faster from the 2008 crisis than Europe and Japan, Boushey points out that GDP is an aggregate measure, and says nothing about “the very different experience across income groups.”
Many economists say that inequality is one reason the recovery has been lackluster by America’s own past standards. Rich people spend a smaller proportion of their income on goods and services than average folks. They’re more likely to invest their money or sock it into savings, which is one reason stock prices are so high and interest rates so low.
“You have to ask: ‘Why has the expansion been so weak and so slow?’ And maybe the answer is inequality,” says Torsten Slok, chief economist at Deutsche Bank AG in New York. “The wealth effect that was supposed to generate a stronger expansion, well, if it’s held by just one side of Manhattan, then it’s not a surprise if you have slower consumption and growth.”
To arrest the financial meltdown that began in 2008 and get economies growing again, the Fed lowered interest rates drastically and bought trillions of dollars in securities. That pumped up asset prices—and it’s the wealthy who have benefited most. The richest 1% of Americans own about half of the stock market.
Meanwhile, wages haven’t risen much even as unemployment has plunged to record lows. That’s a conundrum that has perplexed economists and policymakers, including those at the Federal Reserve. Only late in the decadelong rebound has pay started to pick up, as Fed Chairman Jerome Powell—who’s leaning toward a rate cut to keep the expansion going—pointed out in Congress this month. “The benefits of a strong job market have been more widely shared in recent years,” he said. “Indeed, wage gains have been greater for lower-skilled workers.”
That’s why there’s a growing consensus that governments will have to kick-start economies with budget spending, as monetary policy reaches the end of the road. Kapur agrees. Compared with cheap money, he says, fiscal stimulus is generally “more friendly to the average person than the plutonomist.”
The resulting rise in government spending and debt will likely hurt bonds and “rate-sensitive equities” like utilities, Kapur and two Merrill colleagues wrote in April. Their report examined “peak plutonomy” and other global megatrends, including rising nationalism and fading belief in economic orthodoxy. (Defense and entertainment stocks were tipped to be among the winners, in case you’re wondering.)
History shows that inequality is driven by powerful forces that are hard to reverse, and often leads to disruption and violence, Kapur says. But he sees signs that the U.S. is moving toward addressing the problem through elections and legislation—like it did in the 1930s. “Out there in the political realm, the 1%, the 10%—it’s part of the conversation,” he said. “The antagonism toward plutonomy has spread.”
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