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Musings Report 2023-28 7-8-23 All Their Friends Are Wealthy
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All Their Friends Are Wealthy
I want to stipulate that I am not mocking or slamming the class of people I'm describing here. Rather, I am observing them as an anthropologist or sociologist observes tribes, classes and cultures.
I recently met up with some old friends from our heady activist days in the early to mid-1970s. At the time, they were grad students living in a cookie-cutter high-rise apartment with the usual hand-me-down furniture and concrete-block / pine boards book-shelving.
Now they live in a multi-million dollar house in an exclusive neighborhood, surrounded by $5 million McMansions recently built on small lots after the original modest homes were demolished. They too demolished the house he inherited from his parents, but kept the hardwood floor and foundation so their new house is only somewhat larger than the original home built in the 1940s.
What struck me as a journalist / observer was how wealthy there are, and how all their friends are wealthy. They don't interact with the bottom 95% of "normal" people except as their housecleaning maids, repair or delivery person, etc., as interchangeable, commoditized laborers who are effectively peasants / peons in our highly stratified neofeudal economy. They don't actually know any "normal" people as friends or even colleagues; their friends are all wealthy people like themselves.
We might say this impermeable class divide is natural, but this overlooks two factors.
One is that the barrier between the wealthy and the not-wealthy was once more permeable, a point Christopher Lasch made in his 1996 book The Revolt of the Elites and the Betrayal of Democracy in which Lasch argues that America's elites have separated themselves from the rest of society in exclusive enclaves and in a mobile lifestyle detached from place.
Other commentators have written about the same sociological trend of elites living in bubbles populated by other elites: in elite universities, in exclusive social groups, in exclusive neighborhoods no normal household can possibly afford, etc.
Lasch's point was this economic / lifestyle stratification is toxic to democracy.
The other factor is all the wealthy people I know became wealthy as a direct result of financial help from their parents and the speculative bubble that has inflated housing and stocks. Every wealthy person I know--and by that I mean people who live in homes worth $750,000 or more in value and who own other substantial financial assets that generate capital gains and income--attended university funded by their parents, and whose first home purchase was enabled by help from their parents.
They also inherited substantial wealth when their parents passed away, or from trusts established by the parents to transfer their wealth prior to their death.
Lastly, all the wealthy people I know bought or acquired assets long ago at prices that were affordable at that time to the top 40% or 50% of the populace, i.e. "normal" households with normal middle-class incomes. At today's valuations, the homes and assets they bought decades ago are no longer affordable to any household below the top 5%.
Another shared characteristic of the wealthy who inherited their wealth and benefited tremendously from the past 30 years of asset inflation is that they uniformly attribute their wealth to their hard work. Yes, they worked hard, but so did most of the bottom 95% who aren't wealthy. The deciding factor wasn't the wealth they created as entrepreneurs; it was the assets they were able to buy long ago as the direct result of financial help from their parents--or put another way, the wealth generated by the monumental inflation of assets their parents bought decades ago.
Scrape away the 1) parents-paid university, 2) the parental help in buying their first property, 3) their ability to save money in IRAs and 401Ks as a result of having low-cost mortgages (or no mortgage at all) and invest these savings in other assets at low prices, and 4) the rampant asset inflation of the past 30 years, and how much wealth would they own that was solely the result of their earnings / frugality?
Yes, there are wealthy entrepreneurs who earned their wealth by creating value in an enterprise, but once again, scrape away the enterprises that are bubble-dependent real estate and stock-market based ventures, and how many entrepreneurs actually created wealth via creating value? Take away the 30 years of asset inflation and the answer is very few.
Much of what the wealthy claim as brilliance is nothing more than the good fortune of living in a multi-decade era of ever-rising asset valuations.
Some friends inherited portfolios of dividend-paying stocks that had been on auto-reinvestment of dividends for 50 or 60 years. Small stakes invested back then are now worth $1 million or more. Others inherited 100 ounces of gold purchased at low prices decades ago. These are just two examples of many transfers of wealth that rarely get mentioned.
As a general rule, the wealthy don't reveal all the help they received, or attribute their wealth to asset inflation. They tout their long service in academia or Corporate America, their wise investing, their hard work, etc.
I know all this because I've benefited from the same asset inflation, though I didn't benefit from any inheritance or help from my parents. But even the accomplishments I can claim sole credit for--working my way through university by working 24-32 hours a week, fully self-supported, and building my own house at the age of 27--are out of reach of "normal people" now.
University tuition and fees have skyrocketed, and so have rents. It's almost impossible for a young person to make enough income from 24-30 hours of work per week to pay all the university costs, the rent for a tiny studio ($135 per month in 1975) and maintain an old car, plus groceries, beer, etc.
The house I built that sold in 1993 for $135,000 would be worth $287,000 today if the value had tracked inflation. Instead, it's more than double the inflation-tracking value. Where just about any working couple could have bought it in 1993, now only those with substantial incomes (top 10%) and parental help could afford to buy it.
I can say I worked hard these past 30 years, but how much of my wealth is the result of asset inflation rather than value creation? Just like everyone else who bought assets 30 years ago, most of the "value" is from asset inflation.
There is one other factor that must be described in this stratification of wealth: the role of frugality. My wife and I lived in the cheapest, crummiest studio in the city for years, worked Saturdays on construction side-jobs, did our own auto maintenance, etc. to save up the money to buy a lot and building materials to build our own house. I know many other people, mostly immigrants but some native-born Americans, who followed the same route of extremely disciplined frugality to save up the down payment needed to buy a house.
But even the path of frugality is steeper now. The rent for even the crummiest studio is sky-high, used cars cost a small fortune and wages have stagnated for 45 years, a fact I've often noted in my blog posts. Even wages in construction have stagnated.
Adjusted for inflation / purchasing power, I made more money as a 23-year old carpenter/trades worker in 1976 than I've ever made since. In other words, it took fewer hours of work in 1976 to pay for basic shelter, food, utilities and transport than it does now.
When the economic stratification was less pronounced and less entrenched, you might have had a spectrum of neighbors. Now the wealthy only know other wealthy people, because no one who isn't wealthy can possibly buy a home in their exclusive enclaves or enter their social circles of people wealthy enough to donate to the arts or politics.
In the bubble of the wealthy, one hears about the travails of finding people to fix pool pumps, wealthy acquaintances who scored a beachfront rental for only $6,000 a month, other acquaintances who are paying for flying lessons for their 15-year son, and endless stories of jetting around. One also hears strained efforts to show how frugal they are, as if scoring discounted airline flights is the sort of frugality that will eventually build up a down payment for an insanely over-valued house.
You might be wondering, how about your neighbors, Mr. Smith? My neighbors are 1) retired prison guard; 2) retired newspaper printing plant employee, 3) school teacher. Another neighbor is a veteran of the storied US Army unit, the 442nd. He is 100 years old and I don't see him outside very often. I don't know what jobs he held after his military service. Nearby neighbors include a police officer and an employee of a care home.
This reflects the flat socio-economic nature of this area. The vast majority of households have similar incomes and wealth. There are near-zero luxury vehicles around town, and few McMansions. Yes, those who bought long ago have benefited enormously. Houses are far less affordable to young households than they were 30 years ago. The stratification generated by credit-asset bubbles exists here, too, because it exists virtually everywhere.
Extreme stratification is now the norm in places like NYC and the San Francisco Bay Area. The barrier between those who inherited wealth or who had enough help to buy assets decades ago and those without parental wealth to help them now is impermeable. Even as younger generations lobby for more housing to be built, it's still unaffordable unless it's heavily subsidized.
Here are a few links to stories of this impermeable stratification:
New Grads Chasing 'TikTok Lifestyles' Struggle In NYC As Rents Surge.
A Tale of Paradise, Parking Lots and My Mother’s Berkeley Backyard (NYT.com) NIMBYs and YIMBYs
Majority of flights taken by a small percentage of flyers.
The Saving Glut of the Rich.
A new survey has found that there are 13.61 million households that have a net worth of $1 million or more, not including the value of their primary residence. About 8,046,080 US households have a net worth of $2 million or more, covering about 6.25% of American households.
A bit of realism and humility are in order. Yes, we worked hard, but we're not wealthy because we're so brilliant or even because we're so frugal. We're wealthy because the global economy is structured to inflate asset bubbles. Those who bought or were given assets decades ago have benefited, those entering university and the workforce now cannot afford the same things we bought with average incomes without inheriting wealth from their families.
This is not limited to the US. It's a condition of the global economy.
Those inside the bubble of wealth who only associate with other wealthy people don't seem to notice the social / financial stratification or its profoundly negative consequences. Perhaps they think this is how everyone lives, fretting about finding laborers and cheap flights, or they discount their own wealth as merely "comfortable." They have lost touch with those who didn't get to buy assets on the cheap, who didn't get their university education paid for by their family, who don't have an inheritance or a down payment provided by the Bank of Mom and Dad.
History suggests such an impermeably stratified society cannot endure.
Highlights of the Blog
All Dreams End: The Collapse of Keynesian Economics 7/7/23
Who Wins and Who Loses in a Deep Global Recession? 7/3/23
Best Thing That Happened To Me This Week
I launched a Substack newsletter a month ago to add another distribution channel for my posts and Musings. My audience is tiny compared to those with tens of thousands of subscribers, but it's good to plant a seed and see it sprout.
From Left Field
NOTE TO NEW READERS: This list is not comprised of articles I agree with or that I judge to be correct or of the highest quality. It is representative of the content I find interesting as reflections of the current zeitgeist. The list is intended to be perused with an open, critical, occasionally amused mind.
Many links are behind paywalls. Most paywalled sites allow a few free articles per month if you register. It's the New Normal.
The rise of woodland off-gridders: ‘It makes more sense than a nine-to-five’
In Search of a New Political Economy.
Why Societies Can't Avoid Collapse: A homogenous world is a weak world.
A Civilisation Of Self-Harm
Let’s be clear about what Geoffrey Hinton is saying about deep learning.
Visualizing The American Workforce As 100 People.
E.O. Wilson Saw the World in a Wholly New Way.
MILES DAVIS - Time After Time (9:47 min)
"It's not the note you play that's the wrong note – it's the note you play afterwards that makes it right or wrong." Miles Davis
Thanks for reading--
charles |
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