Market Instability and the Plight of the Rich
by David Atkins ("thereisnospoon")
In case you missed it, there was another "pity the poor rich" article this weeknd in the Wall Street Journal. The main upshot was that the incomes of the wealthy have grown increasingly unstable over the past 20 years--and apparently, that we should feel sorry for them or something, even as the upper 1% and especially the top 1/10th of 1% continue to far outpace the rest of us. Case in point was the family of epic douchebags known as the Siegels:
Jacqueline Siegel paces the floor of her unfinished 7,200-square-foot ballroom. The former beauty queen, with platinum-blond hair, blue eye shadow and a white minidress, clacks along the plywood construction boards in her high heels trailed by a small entourage of helpers and staff.
"This is the grand hall," she says, opening her arms to a space the size of a concert hall and surrounded by balconies. "It will fit 500 people comfortably, probably more. The problem with our place now is that when we have parties with, like, 400 people, it gets too crowded."
The Siegels' dream home, called "Versailles," after its French inspiration, is still a work in progress. Its steel-and-wood frame rises from the tropical suburbs of Orlando, Fla., like a skeleton from the Jurassic age of real estate. Ms. Siegel shows off the future bowling alley, indoor relaxing pools, five kitchens, 23 bathrooms, 13 bedrooms, two elevators, two movie theaters (one for kids and one for adults, each modeled after a French opera theater), 20-car garage and wine cellar built for 20,000 bottles.
At 90,000 square feet, the Siegels' Versailles is believed to be the largest private home in America. (The Vanderbilt family's Biltmore house in North Carolina is bigger at 135,000 square feet, but it's now a hotel and tourist attraction). The Siegels' home is so big that they bought 10 Segways to get around—one for each of their eight children.
After touring the house, Ms. Siegel walks out to the deck, with its Olympic-size pool, future rock grotto, three hot tubs and 80-foot waterfall overlooking Lake Butler. Her eyes well up with tears.
Versailles was supposed to be done by now. The Siegels were supposed to be living their dream life—throwing charity balls and getting spa treatments downstairs after a long flight on their Gulfstream. The home was the culmination of David Siegel's Horatio Alger story, from TV repairman to chief executive and owner of America's largest time-share company, Westgate Resorts, with more than $1 billion in annual revenue and $200 million in profits.
Sadly, due to the crash in the real estate market that hurt the timeshare industry, the Siegels are having to put their poor "Versailles" up for sale for a mere $75-$100 million, let the bank repossess their private Gulfstream, and stay in their 26,000 square foot mansion instead. The loss of the plane will really hurt the kids' self-esteem though:
Ms. Siegel has started a nonprofit called ThriftMart, a mega thrift-store that sells donated clothes—many from her own closet—and other items for $1.
She does miss one luxury—the Gulfstream. After they defaulted on the $8 million jet loan, the banks seized the plane. The Siegels can use it only occasionally, with the banks' permission.
Recently, the family boarded a commercial flight for a vacation, making for some confusion. One of the kids looked around the crowded cabin and asked, "Mom, what are all these strangers doing on our plane?"
There are so many different angles to take on this story that it's hard to know where to begin. One could rant against the repulsive notion that we should feel the least bit sorry for people who still have far more money than they could remotely actually need in a lifetime taking a bath because they tried to build an American Versailles. Or one could point out that Westgate Resorts is one of the more odious timeshare companies out there, and that the Siegels' business largely consists of suckering and bilking people out of their money for a product they won't actually use. There is a lifetime's worth of fire-breathing progressive sermons just in the Siegels' story alone.
But I'll be kind and take the article on its merits for the main point it was trying to make, summed up here:
Their story might seem like the exception among the rich, who, we're told, just keep getting richer. Yet episodes like the Fall of the House of Siegel are becoming increasingly common as the wealthy undergo a sweeping and little-noticed revolution. The American rich, who used to be the most stable slice of the personal economy, are now the most volatile, with escalating booms and busts.
During the past three recessions, the top 1% of earners (those making $380,000 or more in 2008) experienced the largest income shocks in percentage terms of any income group in the U.S., according to research from economists Jonathan A. Parker and Annette Vissing-Jorgensen at Northwestern University. When the economy grows, their incomes grow up to three times faster than the rest of the country's. When the economy falls, their incomes fall two or three times as much.
The super-high earners have the biggest crashes. The number of Americans making $1 million or more fell 40% between 2007 and 2009, to 236,883, while their combined incomes fell by nearly 50%—far greater than the less than 2% drop in total incomes of those making $50,000 or less, according to Internal Revenue Service figures.
Of course, the trauma of giving up a Gulfstream or a yacht can't compare with the millions of Americans who have lost their only job or home. The Siegels will make do in their current 26,000-square-foot mansion.
The incomes of the wealthy can also be "managed" through selling stock, exercising options and shifting around business losses. Yet their income volatility is roughly the same when options are excluded, and their accumulated wealth is also highly unstable.
During the 1990 and 2001 recessions, the richest 5% of Americans (measured by net worth) experienced the largest decline in their wealth, according to research from the Federal Reserve. As of 2009, the richest 20% of Americans showed the largest decline in mean wealth of any other group.
Yet the rise of the manic millionaire marks something new in the U.S. economy and will increasingly be felt by the rest of the country. With the wealthy now at the center of the political debate, from the Occupy Wall Street protesters in New York to the tax battles in Washington, portrayals of millionaires and billionaires are being shaped more by partisan ideologies than economic realities. The story of more volatile wealth may not fit neatly with either party's agenda, but it offers a clearer view of the rich—who they are, how they got there, and how they will drive our own economic futures.
Though often described as a permanent plutocracy, this elite actually moves through a revolving door of riches, with some of today's nouveau riche becoming tomorrow's fallen kings. Only 27% of America's 400 top earners have made the list more than one year since 1994, one study shows.
There are two major sleights of hand in this argument: the first is the false suggestion that the wealthy are experiencing the same sorts of losses in this economy that the rest of us are. This is simply not true: the wealthy continue as a class to remain wealthy, and in fact they are growing richer and richer compared to the rest of us. The second sleight of hand is the idea that the wealthy are somehow falling into poverty or even into the middle class. This is also not true. It's true that sometimes the very rich become the mega-rich (say, one of the top 400 people who have more wealth than the entire bottom half of Americans), and then slide back down the scale to simply being very rich. Maybe they have to get rid of their private jets. But they don't stop being rich.
Still, giving the author of the article an extreme benefit of the doubt, this is what happens when a nation relies on financialized assets for its economy. It gets massive volatility--which is precisely what major industrialized economies should be trying to avoid.
Interviews with more than 100 people with net worths (or former net worths) of $10 million or more, and a wave of new studies on the rich, suggest a different cause: the "financialization" of wealth. Simply put, more wealth today is tied to the stock market than to broader economic growth. A larger share of today's rich make their fortunes from stock-based pay, shares in publicly traded companies, selling a business or working in finance.
Because the stock market is up to 20 times more volatile than overall economic growth, the market-based fortunes of the wealthy are now more unsteady. Fast-moving global capital is also creating more asset bubbles, which have become their own self-destructing wealth machines.
This all falls under the rubric of what Americans are so upset with Wall Street about, and why the Occupy protests have gained such traction. It's not just the poor and the middle class who experience volatility as a result of over-financialization. The rich experience negative repercussions as well.
There is a battle afoot between the people who want to see economic stability and sustainability even at the expense of short-term growth, and the people who want the entire world careening with nausea on an asset-based rollercoaster in pursuit of next quarter's frothy profits. The funny thing is that the latter crowd call themselves "conservatives." Strange moniker, that.
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