Home Is Where the Empty Investment Property Is
The unrelenting disgrace of America’s economic inequality has continued to reach new heights of executive pay and new depths of depravity. The numbers are stark. In September, Emmanuel Saez of UC-Berkeley reported that the “Top 1 percent incomes grew by 31.4 percent while bottom 99 percent grew only by 0.4 percent from 2009 to 2012. Hence, the top 1 percent captured 95 percent of the income gains in the first 3 years of the recovery…. Top 1 percent incomes are close to full recovery while the bottom 99 percent have hardly started to recover” (“Striking It Richer: The Evolution of Top Incomes in the United States,” 9/3/13). A similar story comes from Forbes, which in its annual Forbes 400 list of the richest Americans, summarizes the picture like this: “Five years after the financial crisis sent fortunes spiraling, the wealthiest Americans have gained back all they lost and then some. The Forbes 400 are worth a record $2.02 trillion, double the sum of a decade ago—and the equivalent of the economic output of Russia. This year a billion-dollar fortune wasn’t enough to make the cut. Some 61 billionaires didn’t qualify. The minimum? A personal fortune of $1.3 billion.”
The other end of the spectrum can be studied in detail with the current edition of “The State of Working America,” prepared by Economic Policy Institute economists. The compilation reports that in 2010 the richest 1 percent of households owned 35.4 percent of U.S. net worth and the next 9 percent owned another 41.3 percent, leaving the bottom 90 percent with less than a quarter of American wealth. It also confirms the concentrated ownership of the productive economy—the top 1 percent of households hold 35 percent of directly-held stock, more than the 32.9 percent held by the bottom 95 percent combined. Its analysis also finds that the average household in the middle-fifth of the country, by wealth, lost 45 percent of this wealth in the Great Recession and has essentially flatlined since (Cornell University Press, 2012).
Telling figures, but of course day-to-day life is a story of lived experiences, not just aggregate numbers. So it’s sometimes useful to put the crucial data aside for a moment and consider the wild divergence in the kinds of lives lived by the different classes created by our lopsided distribution of wealth. These differences are assuming such proportions that it’s quite fair to say they are one of the principle impressions future generations will have of our social system and they are visible in all facets of American life—at home, at work, and at play.
The Housing Market
The housing market is a central element of any economy and none more so than in the U.S., where the value of a family’s home is typically the largest component of household wealth by far. This means that housing wealth is extremely important for the American majority, not just for its inherent utility as a comfortable shelter, but also as the principal investment of the middle class. During the housing bubble from 1997 to 2006, housing prices skyrocketed, but home equity (home value minus outstanding mortgages or home equity loans) did not—meaning that workers were compensating for falling or stagnating wages by borrowing against rising home prices. Income stagnation aside, this still wasn’t easily accomplished—it took literally billions in financial services marketing to goad Americans into borrowing aggressively against their home (Z, “Pennies For Your Thoughts,” 10/12). The SWA documents U.S. homeowner equity dropping sharply as housing markets crashed from their 2006 peak, from a ratio of equity to total home value of 59.6 percent down to 38.2 percent at the end of 2011—meaning that “creditors, including banks, own far more of the nation’s housing stock than people do.” This, of course, also meant that homeowners could no longer refinance their home equity loans, resulting in a tripling of the foreclosure rate, reaching over one million foreclosures in the second quarter of 2009 alone. This is a catastrophe for middle-class wealth, representing not just a loss of a home for millions of families, but also accounting for a great part of the lost 45 percent of middle-quintile household wealth in the crash.
But for the owning class, the recent experience of housing is dramatically different, as housing makes up a far smaller proportion of their net worth, though it can still include numerous separate properties. Consider the most expensive, exclusive parts of New York and London. There, the more expensive neighborhoods have a high concentration of second or third apartments for globally affluent families or individuals, meaning they often go empty. The New York Times describes an afluent street where “very few people come and go because most of the apartment owners live someplace else…the higher the price, the higher the concentration is likely to be of owners who spend only a few months, a few weeks, or even just a few days each year in their apartments. This very costly form of desolation means that some of the city’s most expensive residential buildings stand mostly dark, lonesome, and empty on the inside.” Like some of their owners.
The odd full-time resident reports seeing other owners “maybe once a year,” and indeed “global economic jitters have drawn more and more astonishingly wealthy people into the market…. They come from all over, whether Monaco, Moscow, or Texas, looking for a safe place to put their money, as well as a trophy, and perhaps a second—or third or fourth or fifth—home while they’re at it.” As for the working majority, the investment in a home can be an important part of household wealth. The difference is in gradually paying off a mortgage on a single home where a family lives and uses the value of the house, and puts the balance of their wealth into it, versus racking up a roster of hip apartments and country estates as part of your fortune’s investment strategy, with most of the places empty while the local poor street people get hypothermia. While in New York City, a couple hundred homeless people die on its streets every winter, a condo tower in the Time Warner complex is “generally about 60 percent occupied, while those in the north tower are only about 30 percent occupied.”
London’s real estate landscape has a parallel desertion, where “practically the only people who can afford to live there don’t actually want to. Last year, the real estate firm Savills found that at least 37 percent of people buying property in the most expensive neighborhoods of central London did not intend them to be primary residences.” Prices are described as “nuts” and “bonkers,” and indeed are the province of the global 1 percent: “the world’s richest people leave their expensive properties vacant while they stay in their expensive properties someplace else.” And the tax angle is also favorable, since in a particularly elite Knightsbridge apartment building “only 17 of 76 apartments…are registered as primary residences, which means the owners pay negligible second home taxes of a few thousand dollars a year” (NYT, “A Slice of London So Exclusive Even the Owners Are Visitors,” 4/1/13).
Even as their properties sit in empty silence, the 1 percent indulge in hotel stays with bills to startle the most jaded observers. The trend is reviewed in a Wall Street Journal article titled “Suites Get Even Sweeter,” which reads like a celebration of waste and bad taste. Elite suites around the world include features like “bathrooms clad in honey-colored onyx and Skyros marble, with shelves lined in leather…a walk-in cellar and a spa suite…21,000-square-foot suite has its own hair salon and movie theater…a two-story round library complete with a secret passageway.” The Ritz-Carlton Abu Dhabi’s Royal Suite has a neighboring room for bodyguards. The New York Palace has its own massive space “which a Saudi prince spent $12 million refurbishing for a six-month stay some years back,” coming in at about $2 million per month.
When not enjoying Zen meditation with the bodyguards next door, some areas do retain enduring interest from the rich. Chief among these is the Hamptons in New York’s Long Island, the summer home tradition for the Wall Street core of America’s wealthiest families. The press reports that the Great Recession left a mark on the elite retreat, though, with foreclosures “relatively few in the supermansion neighborhoods.” Still, some affluent families “were wary of flagrant spending, out of either anxiety or decorum. So Porsche and yacht sales slowed. High-rolling holders of black American Express cards toss them around less frequently….” But now the recovery of the rich is in full swing, as “Porsche ads clog the local radio here…boisterous parties that draw an endless stream of black SUV’s” and elite bars have restarted “offering Methuselah (six-liter) bottles of Dom Perignon for $30,000.” Hedge fund head Steven Cohen bought a new Hamptons oceanfront mansion “down the road from the one he already owns,” and a local developer suggests that to Wall Street corporate officers and traders, “These trophy properties are a personal statement for them…. They want every bedroom to have an en-suite bath.” Another credits the recovery in real estate fortunes to “the Federal Reserve for the economic stimulus, which he said has helped the wealthy most of all. ‘The stock market’s flying through the roof and who’s that helping—the middle class? No, I mean that’s the reality,’ he said. ‘Out here, life goes on’” (NYT, “Hamptons McMansions Herald a Return of Excess” 8/26/13; “Hedge Fund Titan Buys Hamptons Property for $60 Million,” 3/27/13; “Well Before Summer, Hamptons Luxury Real Estate Is Scorching,” 3/2/13).
However nothing compares to Ellison’s new place out west, where he recently bought an Hawaiian island. As the Wall Street Journal recounts, while it doesn’t quite “feel real” to him, the Oracle founder and billionaire “Now…owns nearly everything on the island, including many of the candy-colored plantation-style homes and apartments, one of the two grocery stores, the Four Seasons hotel and golf courses, the community center and pool, water company, movie theater, half the roads and some 88,000 acres of land. (2 percent of the island is owned by the government or by longtime Lanai families).”
Plans include “building an ultraluxury hotel on the pristine, white-sand beach…and returning commercial agriculture to the clear-cut acres.” It is acknowledged that the “local population” is “one whose economic future is heavily dependent on his decisions,” but the billionaire’s plans to expand it make it okay, as Ellison has also purchased an airline to ferry wealthy tourists out from Honolulu. Worth about $40 billion, Ellison bought the island from the Dole family, who played a key role in the overthrow of Hawaii’s indigenous monarchy in favor of rich landowners, setting the stage for its U.S. annexation. “By buying up properties across the island and consolidating his holdings, Mr. Dole also ushered in a tradition of single ownership of the island.” One era’s banana plantation is another’s ruling-class playground.
Literal Helicopter Parents
Of course, it’s in recreation that conspicuous consumption takes its most striking and cruelly wasteful proportions. As America’s major cities close public schools for middle-class kids by the dozen, the elite spend nearly $40K a year to send their kids to prep school. This is eclipsed though by a high-end home tennis court at $55,000, the $330,000 yearling race horse, and the $11 million personal Sikorsky helicopter, for flying into Manhattan to shop without sitting in traffic on Route 27.
The art trade, long a realm of conspicuous consumption by the privileged, has its ironic moments. Art-sale reports routinely indicate that among the masterpieces lately bought and sold for millions among rich collectors are canvasses by Pablo Picasso, the great pacifist and socialist. As his work mutely changes hands and hangs on the walls of hedge-fund managers, an art dealer is quoted saying, “Trophy-hunting season has started… brand names, that’s what collectors want” (NYT, “Cezanne and Modigliani Push Sotheby’s Art Sale to $230 Million,” 5/7/13).
Meanwhile, traditional elite pastimes have changed with the times. Yachting, the emblem of class privilege, has been transformed through the rise of the multi-billionaires, themselves the heart of the 1 percent. In the showpiece America’s Cup race, Ellison’s Oracle team snatched a win in San Francisco Bay, on “extremely expensive, sophisticated and fast 72-foot catamarans that…fly above the water in high winds.” Most teams ducked out due to the expense, leaving only Oracle and the New Zealand team, which was left “scrambling to raise hundreds of thousands of dollars to meet the new safety changes.” The team’s director remarked “We can’t just snap our fingers and make one phone call to the boss” (NYT, “When Billionaire Sets Rules, It’s an Exclusive Race,” 6/3/13).
Meanwhile, the average American’s recreation, like taking in the game on TV, has remained an ad-traffic plaything of the great U.S. corporate cartels, themselves mainly the property of the richest households. The Wall Street Journal reports that ticket prices in the lower bowl will increase by over 50 percent from last year to $1,500, partly due to this year’s New York City game. The lowest-priced tickets remain around $500, but the proportion of seats available at that price has dropped while those set at elite prices (or given away to executives of corporate sponsors) has jumped: “If money is no object, you’re in luck: indoor suites, which come with 30 tickets each, are already selling for $500,000 and up depending on the location” (WSJ, “NFL to Charge New York Prices,” 9/17/13).
On the “Job”
The dramatic differences of work experience are maybe the most striking of all. The business section breathlessly describes the new heights in U.S. executive pay packages, some now in excess of $10 million a year, far above the 1 percent threshold of $380,000 in annual household income. The press accurately observes that, “Of course, most of us can’t begin to wrap out heads around pay figures like these. An American with a bachelor’s degree, after all, typically makes $2.3 million, not in a year, but in a lifetime.” However, even drawing attention to the subject is now an issue, as the Dodd-Frank finance “reform” bill now requires public-traded firms to disclose a ratio of top compensation packages to the median pay of the company workforce. The SEC is developing the rules for this requirement, which is being fiercely resisted by many firms, since, as the Times notes, it’s “the kind of statistic that could grab headlines in this era of the 1 percent.” The main corporate argument against the rule is that it is “too complex, time consuming, and costly.” A hard pill to swallow, considering these firms have no trouble throwing educated workers at creating complicated commodity derivatives and different tranches of rated consumer debt, but now can’t manage some simple division (NYT, “In Executive Pay, a Rich Game of Thrones,” 4/7/12; Dealbook, “S.E.C. Proposes New Rule on Pay Disclosure,” 9/18/13).
The ratio in question is universally expected to be huge, especially considering the opposite end of the work experience. One reason for flagging majority incomes is the near-total annihilation of economic security for the lower-paid, often part-time, workforce. The business press summarizes the situation: “The vast majority of large American retailers [prefers that] most employees work part-time, with its stores changing many of their workers’ schedules week to week… Workers’ schedules have become far less predictable and stable,” with shifts as short as two hours, and contingency on the rise. “Some employers even ask workers to come in at the last minute, and the workers risk losing their jobs or being assigned fewer hours in the future if they are unavailable…pushing many into poverty and forcing some onto food stamps and Medicaid. And with work schedules that change week to week, workers can find it hard to arrange child care, attend college or hold a second job.” A manager relates that “part-timers would sometimes come into his office on the brink of tears” (NYT, “A Part-Time Life, as Hours Shrink and Shift,” 10/27/12).
“When in early middle life some people discover that certain limits have been placed on their capacity to ascend socially by such apparent irrelevancies as heredity, early environment, and the social class of their immediate forbears, they go into something like despair, which, if generally secret, is no less destructive.” As the Tea Party mobilizes this disappointment and despair to target the most vulnerable groups in society, the opportunity for organizing against the ruling elite is the left’s great asset—an asset, against the trend, that is equally distributed.
Rob Larson teaches economics at Tacoma Community College in Washington State. His first book, Bleakonomics, was published by Pluto Press.