Tag Archives: wealth

Economics

Beware. Economic Growth May Kill You

There is a long-held belief that economic growth and prosperity makes for a happier, healthier populace. Most economists and social scientists, and indeed lay-people, have subscribed to this idea for many decades.

But, this may be completely wrong.

A handful of contrarian economists began noticing a strange paradox in their research studies from 2000. Evidence suggests that rising incomes and personal well-being are linked in the opposite way. It seems that when the US economy is improving, people suffer more medical problems and die faster.

How could this be? Well, put simply, there are three main factors: increased pollution from increased industrial activity; greater occupational hazards from increased work; and, higher exposure to risky behaviors from greater income.

From the Washington Post:

Yet in recent years, accumulating evidence suggests that rising incomes and personal well-being are linked in the opposite way. It seems that economic growth actually kills people.

Christopher Ruhm, an economics professor at the University of Virginia, was one of the first to notice this paradox. In a 2000 paper, he showed that when the American economy is on an upswing, people suffer more medical problems and die faster; when the economy falters, people tend to live longer.

“It’s very puzzling,” says Adriana Lleras-Muney, an economics professor at the University of California, Los Angeles. “We know that people in rich countries live longer than people in poor countries. There’s a strong relationship between GDP and life expectancy, suggesting that more money is better. And yet, when the economy is doing well, when it’s growing faster than average, we find that more people are dying.”

In other words, there are great benefits to being wealthy. But the process of becoming wealthy — well, that seems to be dangerous.

Lleras-Muney and her colleagues, David Cutler of Harvard and Wei Huang of the National Bureau of Economic Research, believe they can explain why. They have conducted one of the most comprehensive investigations yet of this phenomenon, analyzing over 200 years of data from 32 countries. In a draft of their research, released last week, they lay out something of a grand unified theory of life, death and economic growth.

To start, the economists confirm that when a country’s economic output — its GDP — is higher than expected, mortality rates are also higher than expected.

…

The data show that when economies are growing particularly fast, emissions and pollution are also on the rise. After controlling for changes in air quality, the economists find that economic growth doesn’t seem to impact death rates as much. “As much as two-thirds of the adverse effect of booms may be the result of increased pollution,” they write.

…

A booming economy spurs death in other ways too. People start to spend more time at their jobs, exposing them to occupational hazards, as well as the stress of overwork. People drive more, leading to an increase in traffic-related fatalities. People also drink more, causing health problems and accidents. In particular, the economists’ data suggest that alcohol-related mortality is the second-most important explanation, after pollution, for the connection between economic growth and death rates.

This is consistent with other studies finding that people are more likely to die right after they receive their tax rebates. More income makes it easier for people to pay for health care and other basic necessities, but it also makes it easier for people to engage in risky activities and hurt themselves.

Read the entire story here.

Economics, Idea Soup

Education, Income Inequality and the Great Divide

There’s a commonly held belief that having a greater level of education ensures a higher level of lifetime income. While this is generally true the picture is rather more complex. It’s painfully clear that income inequality is more acute now than it has ever been and the gap between white and black wage earners in the United States is wider than ever. But, perhaps surprisingly, the overall income gap is increasing between well-educated whites and blacks. Why is this the case? A detailed study by the Economic Policy Institute (EPI) reminds us that:

Income growth in recent decades has been limited, more or less, to the highest echelon of earners, a group that is overwhelmingly white. Out of every 1,000 households in the top 1 percent, only two are black, while about 910 are white. And so, as economic forces lifted the incomes of the 1 percent, the blacks on lower rungs of the economic ladder have been largely left behind.

So while black Americans with high school diplomas and college degrees may historically be doing better, the predominantly white top 1 percent continues to pull away.

From Washington Post:

We’ve known for a while that black Americans aren’t making economic progress. A recent report from the Economic Policy Institute, a left-leaning think tank, shows that the black-white wage gap is now the widest it has been since 1979. What’s more interesting, though, is how inequality has been increasing, and for whom.

It used to be that low-skilled black workers suffered the greatest disadvantage relative to their white counterparts. But there has been a strange reversal in the past 40 years. EPI finds that the black-white wage gap has become wider — and is widening faster — among those with more education.

This chart illustrates the history of the wage gap among men with less than 10 years of job experience. The early years are the most crucial in a person’s career, and also the most sensitive to fluctuations in the job market.

Read the entire article here.

Economics, Idea Soup

Scary Chart. Scary Times

Chart-percent-able-to-pay-emergency-expense

A recent report by the US Federal Reserve examines the relative financial health of US households. It makes for very sober reading, highlighting the economic pain suffered by a large swathe of the population.

The report centers around one simple question put to households:

Can you come up with $400 in an emergency (say an unexpected medical bill) and pay for it either in cash or with a credit card whose bill you could pay off within a month?

The answer was jaw-dropping:

For people earning between $40,000 and $100,000 (i.e. not the very poorest), 44 percent said they could not come up with $400 in an emergency.

Even more astonishing, 27 percent of those making more than $100,000 also could not.

The report suggests that this is not poverty. So what on earth is going on?

One thing is clear, and it’s a disturbing message that we keep seeing in many of our neighborhoods and echoed in the media — the great middle-class is declining and income inequality continues to broaden. At the low-end of the economic spectrum, the number of households in or close to poverty is expanding — this, in the richest country in the history of the world. At the high-end, the 1 percent, and especially the richest 0.1 percent, hold an ever greater share of the income and wealth.

Image: Percent of respondents who would completely pay an emergency expense that costs $400 using cash or a credit card
that they pay off at the end of the month (by race/ethnicity and household income). Courtesy: Report on the Economic Well-Being
of U.S. Households in 2014, May 2015. Board of Governors of the Federal Reserve System.

Economics, Idea Soup, Political Discourse

Divergence

chart-income-and-wealth-inequality

Columnist Thomas B. Edsall over at the NYT offers an incisive article on the diverging fortunes and misfortunes of Americans in the top and bottom fifths of the population as measured by income. We’ve all become accustomed to hearing about the concentration of wealth and power by the 0.1 percent and even the 1 percent. But the separation between the top 10-20 percent and bottom 10-20 percent is no less stark. This separation in income and wealth is now increasingly fracturing the United States along various fault lines: geography, educational attainment, health care access, race and class.

From NYT:

For years now, people have been talking about the insulated world of the top 1 percent of Americans, but the top 20 percent of the income distribution is also steadily separating itself — by geography and by education as well as by income.

This self-segregation of a privileged fifth of the population is changing the American social order and the American political system, creating a self-perpetuating class at the top, which is ever more difficult to break into.

The accompanying chart, taken from “The Continuing Increase in Income Segregation,” a March 2016 paper by Sean F. Reardon, a professor of education at Stanford, and Kendra Bischoff, a professor of sociology at Cornell, demonstrates the accelerating geographic isolation of the well-to-do — the upper middle and upper classes (a pattern of isolation that also applies to the poor, with devastating effect).

In hard numbers, the percentage of families with children living in very affluent neighborhoods more than doubled between 1970 and 2012, from 6.6 percent to 15.7 percent.

At the same time, the percentage of families with children living in traditional middle class neighborhoods with median incomes between 80 and 125 percent of the surrounding metropolitan area fell from 64.7 percent in 1970 to 40.5 percent.

Read the entire article here.

Image: Chart showing income and wealth inequality, 1913?2014, from “The Continuing Increase in Income Segregation”, March 2016. Courtesy: Sean F. Reardon and Kendra Bischoff.

 

Business

Sharing the Wealth: Chobani-Style

Chobani-black-cherry-yogurtOK, so I am thoroughly addicted to yogurt (or yoghurt, for my non-US readers). My favorite is the greek yogurt Fage, followed by an Aussie concoction called Noosa. Chobani doesn’t even make my top 5.

However, Chobani did something today, April 26, 2016, that made me want to cheer. The company founder, and majority stockholder, gave 10 percent of the business to his 2,000 employees. On average, each will get around $150,000; some, based on length of employment, will gain millions.

Hamdi Ulukaya, a Turkish immigrant, founded Chobani in 2005. The company is privately held, but is estimated to be now valued at $3-5 billion. Chobani’s employees will reap their rewards when the company goes public in an IPO. In Hamdi Ulukaya’s words:

I’ve built something I never thought would be such a success, but I cannot think of Chobani being built without all these people.

Mr. Ulukaya is a role model for other business leaders, who would do well to follow his great example. Chobani offers us a vision that shows employer and employee working to win together.

I may have to revisit Chobani and my yogurt preferences!

From the NYT:

The 2,000 full-time employees of Chobani were handed quite the surprise on Tuesday: an ownership stake in the yogurt company that could make some of them millionaires.

Hamdi Ulukaya, the Turkish immigrant who founded Chobani in 2005, told workers at the company’s plant here in upstate New York that he would be giving them shares worth up to 10 percent of the company when it goes public or is sold. The goal, he said, is to pass along the wealth they have helped build in the decade since the company started. Chobani is now widely considered to be worth several billion dollars.

“I’ve built something I never thought would be such a success, but I cannot think of Chobani being built without all these people,” Mr. Ulukaya said in an interview in his Manhattan office that was granted on the condition that no details of the program would be disclosed before the announcement. “Now they’ll be working to build the company even more and building their future at the same time.”

Employees got the news on Tuesday morning. Each worker received a white packet; inside was information about how many “Chobani Shares” they were given. The number of shares given to each person is based on tenure, so the longer an employee has been at the company, the bigger the stake.

Read the entire story here.

Image: Chobani yogurt. Courtesy of Chobani.

Idea Soup, Political Discourse

One Dollar, One Vote

Top-20-political-donors

Money continues to swirl and flow in US politics. During a presidential election season the dollar figure is now in the billions. The number is unfathomable and despicable. And, yet according to the US Supreme Court money is free speech so it’s perfectly legal — although morally abhorrent (to many).

Thus, by corollary, many people feel (and know) that the system is twisted, rigged, and corrupt. Money sways lawmakers. Money helps write laws; it overturns others. Money elects. Money smears. Money impeaches. Money filters news; it distorts fact. Money buys influence, it buys access.

Of course, in a democracy, this would seem to be a travesty — many millions of ordinary citizens without thousands or millions of dollars are left without a voice. Because the voice of the many is completely usurped by the voice of the few, replete with their expensive megaphones and smartphones with speed-dial connections to their political puppets. But, don’t forget, we — the ordinary citizens of the US — don’t live in a democracy; we live in a plutocracy. The wealthy few, rule for and by themselves.

A small example, collectively, the top 20 political donors have so far, this election season alone, donated a staggering $171.5 million to their favorite political action committees (PAC). This doesn’t even include money that’s funneled directly to the candidates themselves.

It’s obscene and corrupt.

But, hey, it’s free speech, so we’re told.

From Washington Post:

Since 2015, super PACs have raised $607.7 million and have spent $452 million. The top 50 donors together have supplied $248.2 million—41 percent of the money raised to date.

The largest share of the money has come from donors who have given between $1 million and $5 million. Five contributors giving more than $10 million each contributed 14 percent of the total raised.

…

Many of the biggest super PAC donors have spread around their money, financing multiple super PACs that back presidential hopefuls and congressional candidates. They hail from various sectors, with many drawing on fortunes made in the energy industry, on Wall Street and in health care.

The Washington Post is also tracking donations made through “ghost corporations” whose backers cannot be identified. Clicking on “ghost corporations” below brings up a list the corporate contributors to super PACs who have not yet been publicly linked to individual donors.

Read the whole story here.

Image: Snapshot of top donors compiled by Washington Post.

Social Sciences

World Happiness Ranking

national-happiness-2015

Yet again, nations covering the northern latitudes outrank all others on this year’s global happiness scale. Not surprisingly, Denmark topped the happiness list in 2015, having secured the top spot since 2012, except for 2014 when it was pipped by Switzerland. The top 5 for 2015 are: Denmark, Iceland, Norway, Finland, and Canada.

The report finds that the happiest nations tend to be those with lower income disparity and strong national health and social safety programs. Ironically, richer nations, including the United States, tend to rank lower due to rising inequalities in income, wealth and health.

That said, the United States moved to No. 13, up two places from No. 15 the previous year. This is rather perplexing considering all the anger that we’re hearing about during the relentless 2016 presidential election campaign.

At the bottom of the list of 157 nations is Burundi, recently torn by a violent political upheaval. The bottom five nations for 2015 are: Benin, Afghanistan, Togo, Syria and Burundi; all have recently suffered from war or disease or both.

The happiness score for each nation is based on multiple national surveys covering a number of criteria, which are aggregated into six key measures: GDP per capita, social support; healthy life expectancy; freedom to make life choices; generosity; and perceptions of corruption.

The World Happiness Report was prepared by the Sustainable Development Solutions Network, an international group of social scientists and public health experts under the auspices of the United Nations.

Read more on the report here.

Image: Top 30 nations ranked for happiness, screenshot. Courtesy: World Happiness Report, The Distribution of World Happiness, by John F. Helliwell, Canadian Institute for Advanced Research and Vancouver School of Economics, University of British Columbia; Haifang Huang, Department of Economics, University of Alberta; Shun Wang, KDI School of Public Policy and Management, South Korea.

Idea Soup

Hyperlinks of Hypocrisy: Money, Power and Corruption

[tube]F6XnH_OnpO0[/tube]

The extraordinary and very welcome leak of over 11 million files — collectively known as the Panama Papers — from one of the world’s largest offshore law firms, Mossack Fonseca, shows three very simple things. First, power corrupts. Second, the super-rich will continue to get richer. Third, the very rich live by different rules to the rest of the global population.

None of the preceding is, of course, of any surprise.

What fascinates me is to see this common thread of brash hypocrisy and self-aggrandizement links politicians of all stripes in democracies, with business leaders in totalitarian states, with so-called “communist” dictators, and holier-than-thou celebrities.

This tangled web of tax-avoiders and wealth-obfuscators links oligarchs with royals; it links Christians and Muslims; it links atheists with the pious; it links military dictators with socialists; it links criminals and bankers (too many, one and the same) and drug lords; it links sanctions-busters with sanctions-enforcers; it links the Saudis with the Iranians; it links footballers with cello players.

Avarice and greed knows no boundaries and transcends all political systems.

This, of course, shouldn’t come as any surprise either.

From the International Consortium of Investigative Journalists:

A massive leak of documents exposes the offshore holdings of 12 current and former world leaders and reveals how associates of Russian President Vladimir Putin secretly shuffled as much as $2 billion through banks and shadow companies.

The leak also provides details of the hidden financial dealings of 128 more politicians and public officials around the world.

The cache of 11.5 million records shows how a global industry of law firms and big banks sells financial secrecy to politicians, fraudsters and drug traffickers as well as billionaires, celebrities and sports stars.

These are among the findings of a yearlong investigation by the International Consortium of Investigative Journalists, German newspaper Süddeutsche Zeitung and more than 100 other news organizations.

The files expose offshore companies controlled by the prime ministers of Iceland and Pakistan, the king of Saudi Arabia and the children of the president of Azerbaijan.

They also include at least 33 people and companies blacklisted by the U.S. government because of evidence that they’d been involved in wrongdoing, such as doing business with Mexican drug lords, terrorist organizations like Hezbollah or rogue nations like North Korea and Iran.

One of those companies supplied fuel for the aircraft that the Syrian government used to bomb and kill thousands of its own citizens, U.S. authorities have charged.

“These findings show how deeply ingrained harmful practices and criminality are in the offshore world,” said Gabriel Zucman, an economist at the University of California, Berkeley and author of “The Hidden Wealth of Nations: The Scourge of Tax Havens.” Zucman, who was briefed on the media partners’ investigation, said the release of the leaked documents should prompt governments to seek “concrete sanctions” against jurisdictions and institutions that peddle offshore secrecy.

World leaders who have embraced anti-corruption platforms feature in the leaked documents. The files reveal offshore companies linked to the family of China’s top leader, Xi Jinping, who has vowed to fight “armies of corruption,” as well as Ukrainian President Petro Poroshenko, who has positioned himself as a reformer in a country shaken by corruption scandals. The files also contain new details of offshore dealings by the late father of British Prime Minister David Cameron, a leader in the push for tax-haven reform.

The leaked data covers nearly 40 years, from 1977 through the end of 2015. It allows a never-before-seen view inside the offshore world — providing a day-to-day, decade-by-decade look at how dark money flows through the global financial system, breeding crime and stripping national treasuries of tax revenues.

Read the entire story here.

Video: The Panama Papers: Victims of Offshore. Courtesy: International Consortium of Investigative Journalists (ICIJ).

Idea Soup

The Greatest Fear

We are often told and then reminded that the rich are not that different from the poor. Though, the storytellers weaving these narratives are usually organs of the rich, of course.

While I’m lucky to have had the education and initiative to rise above the poverty that my parents endured — I would categorize myself as “in between” — I have to gulp incredulously at the utter insensitivity of some who seem to have it all, and yet want more.

One very rich gentleman reminds us that (some) rich people are indeed very different from the poor. Let’s look at Johann Rupert’s (owner of Cartier and other luxury brands) biggest fear, which would seem to be rather different from the more pressing fears of the poor, and for that matter, the remaining 99 percent (think: food, health care, shelter, transportation etc etc).

From the Independent:

The multi-billionaire owner of luxury jewellery company Cartier has revealed his greatest fear – robots replacing workers and the poor rising up to bring down the rich.

Speaking at the Financial Times Business of Luxury Summit in Monaco (obviously), the fashion tycoon told his fellow elite that he can’t sleep at the thought of the social upheaval he thinks is imminent.

According to Bloomberg, Johann Rupert told the conference to bear in mind that when the poor rise up, the middle classes won’t want to buy luxury goods for fear of exposing their wealth.

He said he had been reading about changes in labour technology, as well as recent Oxfam figures suggesting the top 1 per cent of the global population now owns more wealth than the other 99 per cent.

“How is society going to cope with structural unemployment and the envy, hatred and the social warfare?” he said. “We are destroying the middle classes at this stage and it will affect us. It’s unfair. So that’s what keeps me awake at night.”

Read the entire story here.

Book Reviews, Technica

Creative Destruction

Internet_map

Author Andrew Keen ponders the true value of the internet in his new book The Internet is Not the Answer. Quite rightfully he asserts that many billions of consumers have benefited from the improved convenience and usually lower prices of every product imaginable delivered through a couple of clicks online. But there is a higher price to pay — one that touches on the values we want for our society and the deeper costs to our culture.

From the Guardian:

During every minute of every day of 2014, according to Andrew Keen’s new book, the world’s internet users – all three billion of them – sent 204m emails, uploaded 72 hours of YouTube video, undertook 4m Google searches, shared 2.46m pieces of Facebook content, published 277,000 tweets, posted 216,000 new photos on Instagram and spent $83,000 on Amazon.

By any measure, for a network that has existed recognisably for barely 20 years (the first graphical web browser, Mosaic, was released in 1993), those are astonishing numbers: the internet, plainly, has transformed all our lives, making so much of what we do every day – communicating, shopping, finding, watching, booking – unimaginably easier than it was. A Pew survey in the United States found last year that 90% of Americans believed the internet had been good for them.

So it takes a brave man to argue that there is another side to the internet; that stratospheric numbers and undreamed-of personal convenience are not the whole story. Keen (who was once so sure the internet was the answer that he sank all he had into a startup) is now a thoughtful and erudite contrarian who believes the internet is actually doing untold damage. The net, he argues, was meant to be “power to the people, a platform for equality”: an open, decentralised, democratising technology that liberates as it empowers as it informs.

Instead, it has handed extraordinary power and wealth to a tiny handful of people, while simultaneously, for the rest of us, compounding and often aggravating existing inequalities – cultural, social and economic – whenever and wherever it has found them. Individually, it may work wonders for us. Collectively, it’s doing us no good at all. “It was supposed to be win-win,” Keen declares. “The network’s users were supposed to be its beneficiaries. But in a lot of ways, we are its victims.”

This is not, Keen acknowledges, a very popular view, especially in Silicon Valley, where he has spent the best part of the past 30-odd years after an uneventful north London childhood (the family was in the rag trade). But The Internet is Not the Answer – Keen’s third book (the first questioned the value of user-generated content, the second the point of social media; you get where he’s coming from) – has been “remarkably well received”, he says. “I’m not alone in making these points. Moderate opinion is starting to see that this is a problem.”

What seems most unarguable is that, whatever else it has done, the internet – after its early years as a network for academics and researchers from which vulgar commercial activity was, in effect, outlawed – has been largely about the money. The US government’s decision, in 1991, to throw the nascent network open to private enterprise amounted, as one leading (and now eye-wateringly wealthy) Californian venture capitalist has put it, to “the largest creation of legal wealth in the history of the planet”.

The numbers Keen reels off are eye-popping: Google, which now handles 3.5bn searches daily and controls more than 90% of the market in some countries, including Britain, was valued at $400bn last year – more than seven times General Motors, which employs nearly four times more people. Its two founders, Larry Page and Sergey Brin, are worth $30bn apiece. Facebook’s Mark Zuckerberg, head of the world’s second biggest internet site – used by 19% of people in the world, half of whom access it six days a week or more – is sitting on a similar personal pile, while at $190bn in July last year, his company was worth more than Coca-Cola, Disney and AT&T.

Jeff Bezos of Amazon also has $30bn in his bank account. And even more recent online ventures look to be headed the same way: Uber, a five-year-old startup employing about 1,000 people and once succinctly described as “software that eats taxis”, was valued last year at more than $18bn – roughly the same as Hertz and Avis combined. The 700-staff lodging rental site Airbnb was valued at $10bn in February last year, not far off half as much as the Hilton group, which owns nearly 4,000 hotels and employs 150,000 people. The messaging app WhatsApp, bought by Facebook for $19bn, employs just 55, while the payroll of Snapchat – which turned down an offer of $3bn – numbers barely 20.

Part of the problem here, argues Keen, is that the digital economy is, by its nature, winner-takes-all. “There’s no inevitable or conspiratorial logic here; no one really knew it would happen,” he says. “There are just certain structural qualities that mean the internet lends itself to monopolies. The internet is a perfect global platform for free-market capitalism – a pure, frictionless, borderless economy … It’s a libertarian’s wet dream. Digital Milton Friedman.”Nor are those monopolies confined to just one business. Keen cites San Francisco-based writer Rebecca Solnit’s incisive take on Google: imagine it is 100 years ago, and the post office, the phone company, the public libraries, the printing houses, Ordnance Survey maps and the cinemas were all controlled by the same secretive and unaccountable organisation. Plus, he adds, almost as an afterthought: “Google doesn’t just own the post office – it has the right to open everyone’s letters.”

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This, Keen argues, is the net economy’s natural tendency: “Google is the search and information monopoly and the largest advertising company in history. It is incredibly strong, joining up the dots across more and more industries. Uber’s about being the transport monopoly; Airbnb the hospitality monopoly; TaskRabbit the labour monopoly. These are all, ultimately, monopoly plays – that’s the logic. And that should worry people.”

It is already having consequences, Keen says, in the real world. Take – surely the most glaring example – Amazon. Keen’s book cites a 2013 survey by the US Institute for Local Self-Reliance, which found that while it takes, on average, a regular bricks-and-mortar store 47 employees to generate $10m in turnover, Bezos’s many-tentacled, all-consuming and completely ruthless “Everything Store” achieves the same with 14. Amazon, that report concluded, probably destroyed 27,000 US jobs in 2012.

“And we love it,” Keen says. “We all use Amazon. We strike this Faustian deal. It’s ultra-convenient, fantastic service, great interface, absurdly cheap prices. But what’s the cost? Truly appalling working conditions; we know this. Deep hostility to unions. A massive impact on independent retail; in books, savage bullying of publishers. This is back to the early years of the 19th century. But we’re seduced into thinking it’s good; Amazon has told us what we want to hear. Bezos says, ‘This is about you, the consumer.’ The problem is, we’re not just consumers. We’re citizens, too.”

Read the entire article here.

Image: Visualization of routing paths through a portion of the Internet. Courtesy of the Opte Project.

Idea Soup

Are Most CEOs Talented or Lucky?

According to Harold G. Hamm, founder and CEO of Continental Resources, most CEOs are lucky not talented. You see, Hamm’s net worth has reached around $18 billion and in recent divorce filings he claims to only have been responsible for generating around 10 percent of this wealth since founding his company in 1988. Interestingly, even though he made most of the key company appointments and oversaw all the key business decisions, he seems to be rather reticent in claiming much of the company’s success as his own. Strange then that his company  would compensate him to the tune of around $43 million during 2006-2013 for essentially being a lucky slacker!

This, of course, enables him to minimize the amount owed to his ex-wife. Thus, one has to surmise from these shenanigans that some CEOs are not only merely lucky, they’re also stupid.

On a broader note this does raise the question of why many CEOs are rewarded such extraordinary sums when it’s mostly luck guiding their company’s progress!

From NYT:

The divorce of the oil billionaire Harold G. Hamm from Sue Ann Arnall has gained attention largely for its outsize dollar amounts. Mr. Hamm, the chief executive and founder of Continental Resources, who was worth more than $18 billion at one point, wrote his ex-wife a check last month for $974,790,317.77 to settle their split. She’s appealing to get more; he’s appealing to pay less.

Yet beyond the staggering sums, the Hamm divorce raises a fundamental question about the wealth of executives and entrepreneurs: How much do they owe their fortunes to skill and hard work, and how much comes from happenstance and luck?

Mr. Hamm, seeking to exploit a wrinkle in divorce law, made the unusual argument that his wealth came largely from forces outside his control, like global oil prices, the expertise of his deputies and other people’s technology. During the nine-week divorce trial, his lawyers claimed that although Mr. Hamm had founded Continental Resources and led the company to become a multibillion-dollar energy giant, he was responsible for less than 10 percent of his personal and corporate success.

Some in the courtroom started calling it the “Jed Clampett defense,” after the lead character in “The Beverly Hillbillies” TV series who got rich after tapping a gusher in his swampland.

In a filing last month supporting his appeal, Mr. Hamm cites the recent drop in oil prices and subsequent 50 percent drop in Continental’s share price and his fortune as further proof that forces outside his control direct his company’s fortunes.

Lawyers for Ms. Arnall argue that Mr. Hamm is responsible for more than 90 percent of his fortune.

While rooted in a messy divorce, the dispute frames a philosophical and ethical debate over inequality and the obligations of the wealthy. If wealth comes mainly from luck or circumstance, many say the wealthy owe a greater debt to society in the form of taxes or charity. If wealth comes from skill and hard work, perhaps higher taxes would discourage that effort.

Sorting out what value is created by luck or skill is a tricky proposition in itself. The limited amount of academic research on the topic, which mainly looks at how executives can influence a company’s value, has often found that broader market forces often have a bigger impact on a company’s success than an executive’s actions.

“As we know from the research, the performance of a large firm is due primarily to things outside the control of the top executive,” said J. Scott Armstrong, a professor at the Wharton School at the University of Pennsylvania. “We call that luck. Executives freely admit this — when they encounter bad luck.”

A study conducted from 1992 to 2011 of how C.E.O. compensation changed in response to luck or events beyond the executives’ control showed that their pay was 25 percent higher when luck favored the C.E.O.

Some management experts say the role of luck is nearly impossible to measure because it depends on the particular industry. Oil, for instance, is especially sensitive to outside forces.

“Within any industry, a more talented management team is going to tend to do better,” said Steven Neil Kaplan of the University of Chicago Booth School of Business. “That is why investors and boards of directors look for the best talent to run their companies. That is why company stock prices often move a lot, in both directions, when a C.E.O. dies or a new C.E.O. is hired.”

The Hamm case hinged on a quirk in divorce law known as “active versus passive appreciation.” In Oklahoma, and many other states, if a spouse owns an asset before the marriage, the increase in the value of an asset during marriage is not subject to division if the increase was because of “passive” appreciation. Passive appreciation is when an asset grows on its own because of factors outside either spouse’s control, like land that appreciates without any improvements or passively held stocks. Any value that’s not deemed as “passive” is considered “active” — meaning it increased because of the efforts, skills or funding of a spouse and can therefore be subject to division in a divorce.

The issue has been at the center of some other big divorces. In the 2002 divorce of the Chicago taxi magnate David Markin and Susan Markin, filed in Palm Beach, Fla., Mr. Markin claimed he was “merely a passenger on this corporate ship traveling through the ocean,” according to the judge. But he ruled that Mr. Markin was more like “the captain of the ship. Certainly he benefited by sailing through some good weather. However, he picked the course and he picked the crew. In short, he was directly responsible for everything that happened.” Ms. Markin was awarded more than $30 million, along with other assets.

Mr. Hamm, now 69, also had favorable conditions after founding Continental Resources well before his marriage in 1988 to Sue Ann, then a lawyer at the company. By this fall, when the trial ended, Continental had a market capitalization of over $30 billion; Mr. Hamm’s stake of 68 percent and other wealth exceeded $18 billion.

Their divorce trial was closed to the public, and all but a few of the documents are under seal. Neither Mr. Hamm nor his lawyers or representatives would comment. Ms. Arnall and her spokesman also declined to comment.

According to people with knowledge of the case, however, Mr. Hamm’s chief strategy was to claim most of his wealth as passive appreciation, and therefore not subject to division. During his testimony, the typically commanding Mr. Hamm, who had been the face of the company for decades, said he couldn’t recall certain decisions, didn’t know much about the engineering aspects of oil drilling and didn’t attend critical meetings.

Mr. Hamm’s lawyers calculated that only 5 to 10 percent of his wealth came from his own effort, skill, management or investment. It’s unclear how they squared this argument with his compensation, which totaled $42.7 million from 2006 to 2013, according to Equilar, an executive compensation data company.

Ms. Arnall called more than 80 witnesses — from Continental executives to leading economists like Glenn Hubbard and Kenneth Button — to show how much better Continental had done than its peers and that Mr. Hamm made most or all of the key decisions about the company’s strategy, finances and operations. They estimated that Mr. Hamm was responsible for $14 billion to $17 billion of his $18 billion fortune.

Read the entire article here.

 

Idea Soup

The Haves versus the Have-Mores

los-angeles-billionaires

Poverty and wealth are relative terms here in the United States. Certainly those who have amassed millions will seem “poor” to the established and nouveaux-riche billionaires. Yet these is something rather surreal in the spectacle of watching Los Angeles’ lesser-millionaires fight the mega-rich for their excess. As Peter Haldeman says in the following article of Michael Ovitz, founder of Creative Arts Agency, mere millionaire and landlord of a 28,000 square foot mega mansion, “Mr. Ovitz calling out a neighbor for overbuilding is a little like Lady Gaga accusing someone of overdressing. Welcome to the giga-mansion — Roman emperor Caligula, would feel much at home in this Californian circus of excess.

From NYT:

At the end of a narrow, twisting side street not far from the Hotel Bel-Air rises a knoll that until recently was largely covered with scrub brush and Algerian ivy. Now the hilltop is sheared and graded, girded by caissons sprouting exposed rebar. “They took 50- or 60,000 cubic yards of dirt out of the place,” said Fred Rosen, a neighbor, glowering at the site from behind the wheel of his Cadillac Escalade on a sunny October afternoon.

Mr. Rosen, who used to run Ticketmaster, has lately devoted himself to the homeowners alliance he helped form shortly after this construction project was approved. When it is finished, a modern compound of glass and steel will rise two stories, encompass several structures and span — wait for it — some 90,000 square feet.

In an article titled “Here Comes L.A.’s Biggest Residence,” The Los Angeles Business Journal announced in June that the house, conceived by Nile Niami, a film producer turned developer, with an estimated sale price “in the $150 million range,” will feature a cantilevered tennis court and five swimming pools. “We’re talking 200 construction trucks a day,” fumed Mr. Rosen. “Then multiply that by all the other giant projects. More than a million cubic yards of this hillside have been taken out. What happens when the next earthquake comes? How nuts is all this?”

By “all this,” he means not just the house with five swimming pools but the ever-expanding number of houses the size of Hyatt resorts rising in the most expensive precincts of Los Angeles. Built for the most part on spec, bestowed with names as assuming as their dimensions, these behemoths are transforming once leafy and placid neighborhoods into dusty enclaves carved by retaining walls and overrun by dirt haulers and cement mixers. “Twenty-thousand-square-foot homes have become teardowns for people who want to build 70-, 80-, and 90,000-square-foot homes,” Los Angeles City Councilman Paul Koretz said. So long, megamansion. Say hello to the gigamansion.

In Mr. Rosen’s neighborhood, ground was recently broken on a 70,000- to 80,000-square-foot Mediterranean manse for a citizen of Qatar, while Chateau des Fleurs, a 60,000-square-foot pile with a 40-car underground garage, is nearing completion. Not long ago, Anthony Pritzker, an heir to the Hyatt hotel fortune, built a boxy contemporary residence for himself in Beverly Hills that covers just shy of 50,000 square feet. And Mohamed Hadid, a prolific and high-profile developer (he has appeared on “The Shahs of Sunset” and “The Real Housewives of Beverly Hills”), is known for two palaces that measure 48,000 square feet each: Le Palais in Beverly Hills, which has a swan pond and a Jacuzzi that seats 20 people, and Le Belvédère in Bel Air, which features a Turkish hammam and a ballroom for 250.

Why are people building houses the size of shopping malls? Because they can. “Why do you see a yacht 500 feet long when you could easily have the same fun in one half the size?” asked Jeffrey Hyland, a partner in the Beverly Hills real estate firm Hilton & Hyland, who is developing five 50,000-square-foot properties on the site of the old Merv Griffin estate in Beverly Hills.

Le Belvédère was reportedly purchased by an Indonesian buyer, and Le Palais sold to a daughter of President Islam Karimov of Uzbekistan. According to Mr. Hyland, the market for these Versailles knockoffs is “flight capital.” “It’s oligarchs, oilgarchs, people from Asia, people who came up with the next app for the iPhone,” he said. While global wealth is pouring into other American cities as well, Los Angeles is still a relative bargain, Mr. Hyland said, adding: “Here you can buy the best house for $3,000 a square foot. In Manhattan, you’re looking at $11,000 a square foot and you get a skybox.”

Speculators are tapping the demand, snapping up the best lots, bulldozing whatever is on them and building not only domiciles but also West Coast “lifestyles.” The particulars can seem a little puzzling to the uninitiated. The very busy Mr. Niami (he also built the Winklevoss twins’ perch above the Sunset Strip) constructed a 30,000-square-foot Mediterranean-style house in Holmby Hills that locals have called the Fendi Casa because it was filled with furniture and accessories from the Italian fashion house.

The residence also offered indoor and outdoor pools, commissioned artwork by the graffiti artist Retna, and an operating room in the basement. “It’s not like it’s set up to take out your gallbladder,” said Mark David, a real estate columnist for Variety, who has toured the house. “It’s for cosmetic procedures — fillers, dermabrasion, that kind of thing.” The house sold, with all its furnishings, to an unidentified Saudi buyer for $44 million.

Read the entire article here.

Image: Satellite view of the 70,000 square foot giga-mansion development in Bel Air. Los Angeles. Courtesy of Google Maps.

Idea Soup

Money Can Buy You… (Some) Happiness

Google-search-moneyNew results are in, and yes, money can buy you happiness. But the picture from some extensive new research shows that your happiness is much more dependent on how you spend it, than how much your earn. Generally, you are more likely to be happier if you give money away rather than fritter it on yourself. Also, you are more likely to be happier if you spend it on an experience rather than things.

From the WSJ:

It’s an age-old question: Can money buy happiness?

Over the past few years, new research has given us a much deeper understanding of the relationship between what we earn and how we feel. Economists have been scrutinizing the links between income and happiness across nations, and psychologists have probed individuals to find out what really makes us tick when it comes to cash.

The results, at first glance, may seem a bit obvious: Yes, people with higher incomes are, broadly speaking, happier than those who struggle to get by.

But dig a little deeper into the findings, and they get a lot more surprising—and a lot more useful.

In short, this latest research suggests, wealth alone doesn’t provide any guarantee of a good life. What matters a lot more than a big income is howpeople spend it. For instance, giving money away makes people a lot happier than lavishing it on themselves. And when they do spend money on themselves, people are a lot happier when they use it for experiences like travel than for material goods.

With that in mind, here’s what the latest research says about how people can make smarter use of their dollars and maximize their happiness.

Experiences Are Worth More Than You Think

Ryan Howell was bothered by a conundrum. Numerous studies conducted over the past 10 years have shown that life experiences give us more lasting pleasure than material things, and yet people still often deny themselves experiences and prioritize buying material goods.

So, Prof. Howell, associate professor of psychology at San Francisco State University, decided to look at what’s going on. In a study published earlier this year, he found that people think material purchases offer better value for the money because experiences are fleeting, and material goods last longer. So, although they’ll occasionally splurge on a big vacation or concert tickets, when they’re in more money-conscious mode, they stick to material goods.

But in fact, Prof. Howell found that when people looked back at their purchases, they realized that experiences actually provided better value.

“What we find is that there’s this huge misforecast,” he says. “People think that experiences are only going to provide temporary happiness, but they actually provide both more happiness and more lasting value.” And yet we still keep on buying material things, he says, because they’re tangible and we think we can keep on using them.

Cornell University psychology professor Thomas Gilovich has reached similar conclusions. “People often make a rational calculation: I have a limited amount of money, and I can either go there, or I can have this,” he says. “If I go there, it’ll be great, but it’ll be done in no time. If I buy this thing, at least I’ll always have it. That is factually true, but not psychologically true. We adapt to our material goods.”

It’s this process of “hedonic adaptation” that makes it so hard to buy happiness through material purchases. The new dress or the fancy car provides a brief thrill, but we soon come to take it for granted.

Experiences, on the other hand, tend to meet more of our underlying psychological needs, says Prof. Gilovich. They’re often shared with other people, giving us a greater sense of connection, and they form a bigger part of our sense of identity. If you’ve climbed in the Himalayas, that’s something you’ll always remember and talk about, long after all your favorite gadgets have gone to the landfill.

Read the entire article here.

Image courtesy of Google Search.

Idea Soup

$28,000 Per Night

The New York Palace - Jewel Suite

A seven-night stay at an ultra-luxurious hotel suite for the super-rich will set you back a staggering $200,000. To put it into perspective, this is just slightly over $196,500 — the median U.S house price at the end of 2013. The Jewel Suite by Martin Katz at the New York Palace hotel commands a princely sum of $28,000 per night.

From the NYT:

In most hotels, luxury is measured by the thread count of the linens (minimum 400, please) or the brand of the bathroom toiletries. But for those at the highest end of the market, where the only restraint on consumption is how conspicuous they want to be, a race to the top has broken out, with hotels outdoing one another to serve this tiny, if highly visible, niche.

Take the Jewel Suite by Martin Katz at the New York Palace, one of two recently opened specialty suites. The three-story, 5,000-square-foot space — a sort of penthouse Versailles — itself resembles a jewel box, albeit one with its own private elevator and views of the Empire State and Chrysler Buildings.

It’s hard to imagine Louis XIV being left wanting. The floor in the entryway is glittering black marble arranged in a sunburst pattern, while a 20-foot crystal chandelier hangs from the ceiling. The living room sofa is a brilliant sapphire blue and a tufted ivory chaise has a pearlescent sheen. Two floors up, in a second living room next to a vast private terrace, the wet bar (one of two in the suite) and half-bath are swathed in a sparkling wall covering, and an angular lavender sofa calls to mind an amethyst crystal. Iridescent tiles lining the private rooftop hot tub give the impression of sinking into a giant opal.

And then there are the jewels themselves: More than a million dollars of the jewelry designer’s work is displayed in five museum-like cases in the entryway, and a boudoir area in the master suite has lighting and floor-to-ceiling mirrors designed specifically for jewelry showings.

Such grandeur — or excess, depending on your point of view — is all there for the taking, starting at $25,000 a night.

“There is a very narrow market who want nothing less,” said Scott Berman, the United States hospitality and leisure practice leader at PricewaterhouseCoopers. “Price is not an issue. We’re talking about the jet set of the jet sets — high-net-worth individuals, generally foreign travelers in the U.S. who are accustomed to opulence.”

“It’s bragging rights,” said Pam Danziger, president of the luxury marketing firm Unity Marketing and author of “Putting the Luxe Back in Luxury,” published in 2011.

“I think this is just a matter of other brands trying to play catch-up to that. They don’t want to be the only hotel on the block that doesn’t have this super, super high-end offering.”

In New York, the race to capture the highest end of the market continues. In November, the Mandarin Oriental, New York, opened a 3,300-square-foot suite that includes floor-to-ceiling windows and a dining room that seats 10; its rate is $28,000 a night. The Loews Regency Hotel in New York reopened last week after a yearlong, $100 million renovation, and six one-of-a-kind suites will open in April. (Rates haven’t been set yet.)

“We want to present an image that’s commensurate with the new product,” said Jonathan Tisch, chairman of Loews Hotels. “By doing six different designs, we can create a sense of luxury in six different ways.”

“We’ve seen more and more boutique hotels and the bigger-name hotels making suites that are one-off,” said Kris Fuchs, principal at Suite New York, a furniture showroom involved in the Regency’s suite renovation. “I think it makes it extra special that you’re in a room no one else in the hotel has.”

This trend of super-suites had overseas antecedents, with demand driven by a growing cadre of the ultra-rich from around the world.

“Some of the major European capitals have had this going on in the past few years,” said David Loeb, a senior hotel analyst at Robert W. Baird & Company.

Ms. Danziger said the trend started in places like Singapore, London and major Middle Eastern cities. “You find that the new money types are the kinds given to this excessive display, valuing the display of this excessive, over-the-top consumption,” she said. “Subtlety is not appreciated.”

In the United States, this luxury race took longer to get going, in part because of the recession and a resistance to overt displays of wealth. But now, any such concerns have given way. It is perhaps most noticeable in New York City’s thriving hotel market, although spaces with similar square footage and amenities (if slightly less stratospheric rates) are surfacing in cities including Las Vegas, Miami and Dallas.

“Development is strong again,” said David Chase, general manager of the New York Palace. After struggling through the aftermath of the recession, luxury hotels are recovering and investing in capital improvements.

This week, the Ritz-Carlton in Dallas will open a 5,135-square-foot suite wing, including three adjoining suites and two rooms, for travelers who bring an entourage. “We found this need for this private area,” its general manager, Roberto van Geenen, said. Multiple interconnected spaces make it more convenient to house the phalanx of nannies, assistants, bodyguards, personal chefs and other attendants that the super-wealthy bring with them on trips.

“There are more and more hotels in that market, in Miami in particular, that are competing for very high-end leisure travelers,” Mr. Loeb said. “The growth of international travel is affecting many of the major markets in the U.S.”

“Without question this will increase the prestige of the hotel,” said John Laclé, general manager of the Hilton Bentley Miami/South Beach in Miami Beach, which opened a 3,000-square-foot penthouse in December.

Hotel industry professionals say these over-the-top suites serve a dual purpose. “A large part of what we do is creating an image,” Mr. Tisch said. Super-suites cater to the needs of billionaire travelers as well as the imaginations of middle-class tourists.

“This hotel already had a fantastic flow of high-net-worth people using our suites,” Mr. Chase said, listing Saudi diplomats and royalty, as well as Hollywood and sports stars, as regular guests.

Read the entire story here.

Image: The New York Palace – Dining room, Jewel Suite by Martin Katz. Courtesy of Martin Katz / The New York Palace.

Art

A Home for Art or A Home for Artists

Most art is made in a location that is very different and often far removed from the location in which it is displayed and/or purchased. In this time, it is highly unlikely that any new or emerging professional artist will make and sell art in the same place. This is particularly evident in a place like New York city where starving artists and wealthy patrons co-exist side by side.

From the New York Times:

Last week The Guardian published an essay by the singer-songwriter David Byrne, which received a fair amount of attention online, arriving under the headline “If the 1% Stifles New York’s Creative Talent, I’m Out of Here.”

What followed was considerably more nuanced than the kind of diatribe, now familiar, often delivered by artists and others who came of age in the city during the 1970s and yearn for the seductions of a vanished danger. In this view, the start of the last quarter of the 20th century left New York populated entirely by addicts and hustlers, painters and drug pushers, and the city was a better, more enlivening place for the anxieties it bred.

“I don’t romanticize the bad old days,” Mr. Byrne said in his piece. “I have no illusions that there was a connection between that city on its knees and a flourishing of creativity.” What he laments instead is that our cultural capital now languishes completely in the hands of a brash upper class.

On one level it seems difficult to argue with him. Current market realities make it inconceivable that anyone could arrive today in New York at 23 with a knapsack and a handful of Luna bars and become David Byrne.

We also famously live in an era of diminishing support for the arts. According to a report released last month, government arts financing reached a record low in 2011 at the same time the proportion of American households giving money to the arts dwindled to 8.6 percent. But perhaps the problem is one of paradox, not exclusion, which is to say that while New York has become an increasingly inhospitable place to incubate a career as an artist, it has become an ever easier place to experience and consume the arts. The evolution of Downtown Brooklyn’s cultural district is emblematic of this new democracy. Last week saw the official opening of BRIC House, a 66,000-square-foot building with a gallery space and another space for film screenings, readings, lectures and so on, all with no admission charges.

BRIC House, which is under the direction of Leslie Greisbach Schultz and occupies an old vaudeville theater into which the city has poured $41 million, also contains a flexible performance space where it will be possible to see dance and music from emerging and established artists largely for under $20. The ticket price of plays, offered as works in progress, is $10.

The upper floors are host to something called Urban Glass, a monument to the art of glass blowing. “There are people in this city who get as excited about glass blowing as I get about Junior’s,” the Brooklyn borough president, Marty Markowitz, marveled to me.

Both BRIC, which offers classes in digital photography and video production for nothing or next to nothing, and the nearby Mark Morris Dance Center involve residents of Brooklyn public housing in free dance instruction. At Mark Morris it costs less to enroll a 3-year-old in a dance class with a teacher who is studying for a doctorate in philosophy than it does to enroll a child in Super Soccer Stars.

Further challenging claims about the end of culture in the city is that the number of public art exhibits grew under Mayor Michael R. Bloomberg’s tenure. Additionally, through his private philanthropic efforts, Mr. Bloomberg has donated more than $230 million since 2002 to arts and social service organizations across the city. Over the summer, his foundation announced an additional contribution of $15 million to a handful of cultural institutions to help them enhance visitors’ experiences through mobile technology.

At BRIC — “the epicenter of the center of the artistic universe,” Mr. Markowitz calls it — as with other Brooklyn cultural institutions, a good deal of the progress has come about with the help of a quiet philanthropic community that exists far from the world of hedge-fund vanity. A handful of wealthy residents support the borough’s institutions, their names not the kind to appear in Women’s Wear Daily.

Read the entire article here.

Idea Soup

Charting the Rise (and Fall) of Humanity

Rob Wile over at Business Insider has posted a selection of graphs that in his words “will restore your faith in humanity”. This should put many cynics on the defensive — after all, his charts clearly show that conflict is on the decline, and democracy is on the rise. But, look more closely and you’ll see that slavery is still with us, poverty and social injustice abounds, the wealthy are wealthier, conspicuous consumption is rising.

From Business Insider:

Lately, it feels like the news has been dominated by tragedies: natural disasters, evil people, and sometimes just carelessness.

But it would be a mistake to become cynical.

We’ve put together 31 charts that we think will help restore your faith in humanity.

2) Democracy’s in. Autocracy’s out.

3) Slavery is disappearing.

Read the entire article here.

Environs

Your Weekly Groceries

Photographer Peter Menzel traveled to over 20 countries to compile his culinary atlas Hungry Planet. But this is no ordinary cookbook or trove of local delicacies. The book is a visual catalog of a family’s average weekly grocery shopping.

It is both enlightening and sobering to see the nutritional inventory of a Western family juxtaposed with that of a sub-Saharan African family. It puts into perspective the internal debate within the United States of the 1 percent versus the 99 percent. Those of us lucky enough to have been born in one of the world’s richer nations, even though we may be part of the 99 percent are still truly in the group of haves, rather than the have-nots.

For more on Menzel’s book jump over to Amazon.

The Melander family from Bargteheide, Germany, who spend around £320 [$480] on a week’s worth of food.

 

The Aboubakar family from Darfur, Sudan, in the Breidjing refugee camp in Chad. Their weekly food, which feeds six people, costs 79p [$1.19].

 

The Revis family from Raleigh in North Carolina. Their weekly shopping costs £219 [$328.50].

 

The Namgay family from Shingkhey, Bhutan, with a week’s worth of food that costs them around £3.20 [$4.80].

Images courtesy of Peter Menzel /Barcroft Media.

Idea Soup

The Myth of Social Mobility

There is a commonly held myth in the United States that anyone can make it; that is, even if you’re at the bottom of the income distribution curve you have the opportunity to climb up to a wealthier future. Independent research over the last couple of decades debunks this myth and paints a rather different and more disturbing reality. For instance, it shows how Americans are now less socially mobile — in the upward sense — than citizens of Canada and most countries in Europe.

[div class=attrib]From the Economist:[end-div]

THE HAMPTONS, A string of small towns on the south shore of Long Island, have long been a playground for America’s affluent. Nowadays the merely rich are being crimped by the ultra-wealthy. In August it can cost $400,000 to rent a fancy house there. The din of helicopters and private jets is omnipresent. The “Quiet Skies Coalition”, formed by a group of angry residents, protests against the noise, particularly of one billionaire’s military-size Chinook. “You can’t even play tennis,” moans an old-timer who stays near the East Hampton airport. “It’s like the third world war with GIV and GV jets.”

Thirty years ago, Loudoun County, just outside Washington, DC, in Northern Virginia, was a rural backwater with a rich history. During the war of 1812 federal documents were kept safe there from the English. Today it is the wealthiest county in America. Rolling pastures have given way to technology firms, swathes of companies that thrive on government contracts and pristine neighbourhoods with large houses. The average household income, at over $130,000, is twice the national level. The county also marks the western tip of the biggest cluster of affluence in the country. Between Loudoun County and north-west Washington, DC, there are over 800,000 people in exclusive postcodes that are home to the best-educated and wealthiest 5% of the population, dubbed “superzips” by Charles Murray, a libertarian social scientist.

THE HAMPTONS, A string of small towns on the south shore of Long Island, have long been a playground for America’s affluent. Nowadays the merely rich are being crimped by the ultra-wealthy. In August it can cost $400,000 to rent a fancy house there. The din of helicopters and private jets is omnipresent. The “Quiet Skies Coalition”, formed by a group of angry residents, protests against the noise, particularly of one billionaire’s military-size Chinook. “You can’t even play tennis,” moans an old-timer who stays near the East Hampton airport. “It’s like the third world war with GIV and GV jets.”

Thirty years ago, Loudoun County, just outside Washington, DC, in Northern Virginia, was a rural backwater with a rich history. During the war of 1812 federal documents were kept safe there from the English. Today it is the wealthiest county in America. Rolling pastures have given way to technology firms, swathes of companies that thrive on government contracts and pristine neighbourhoods with large houses. The average household income, at over $130,000, is twice the national level. The county also marks the western tip of the biggest cluster of affluence in the country. Between Loudoun County and north-west Washington, DC, there are over 800,000 people in exclusive postcodes that are home to the best-educated and wealthiest 5% of the population, dubbed “superzips” by Charles Murray, a libertarian social scientist.

[div clas=attrib]Read the entire article following the jump.[end-div]

Idea Soup

It’s About Equality, Stupid

[div class=attrib]From Project Syndicate:[end-div]

The king of Bhutan wants to make us all happier. Governments, he says, should aim to maximize their people’s Gross National Happiness rather than their Gross National Product. Does this new emphasis on happiness represent a shift or just a passing fad?

It is easy to see why governments should de-emphasize economic growth when it is proving so elusive. The eurozone is not expected to grow at all this year. The British economy is contracting. Greece’s economy has been shrinking for years. Even China is expected to slow down. Why not give up growth and enjoy what we have?

No doubt this mood will pass when growth revives, as it is bound to. Nevertheless, a deeper shift in attitude toward growth has occurred, which is likely to make it a less important lodestar in the future – especially in rich countries.

The first factor to undermine the pursuit of growth was concern about its sustainability. Can we continue growing at the old rate without endangering our future?

When people started talking about the “natural” limits to growth in the 1970’s, they meant the impending exhaustion of food and non-renewable natural resources. Recently the debate has shifted to carbon emissions. As the Stern Review of 2006 emphasized, we must sacrifice some growth today to ensure that we do not all fry tomorrow.

Curiously, the one taboo area in this discussion is population. The fewer people there are, the less risk we face of heating up the planet. But, instead of accepting the natural decline in their populations, rich-country governments absorb more and more people to hold down wages and thereby grow faster.

A more recent concern focuses on the disappointing results of growth. It is increasingly understood that growth does not necessarily increase our sense of well-being. So why continue to grow?

The groundwork for this question was laid some time ago. In 1974, the economist Richard Easterlin published a famous paper, “Does Economic Growth Improve the Human Lot? Some Empirical Evidence.” After correlating per capita income and self-reported happiness levels across a number of countries, he reached a startling conclusion: probably not.

Above a rather low level of income (enough to satisfy basic needs), Easterlin found no correlation between happiness and GNP per head. In other words, GNP is a poor measure of life satisfaction.

That finding reinforced efforts to devise alternative indexes. In 1972, two economists, William Nordhaus and James Tobin, introduced a measure that they called “Net Economic Welfare,” obtained by deducting from GNP “bad” outputs, like pollution, and adding non-market activities, like leisure. They showed that a society with more leisure and less work could have as much welfare as one with more work – and therefore more GNP – and less leisure.

More recent metrics have tried to incorporate a wider range of “quality of life” indicators. The trouble is that you can measure quantity of stuff, but not quality of life. How one combines quantity and quality in some index of “life satisfaction” is a matter of morals rather than economics, so it is not surprising that most economists stick to their quantitative measures of “welfare.”

But another finding has also started to influence the current debate on growth: poor people within a country are less happy than rich people. In other words, above a low level of sufficiency, peoples’ happiness levels are determined much less by their absolute income than by their income relative to some reference group. We constantly compare our lot with that of others, feeling either superior or inferior, whatever our income level; well-being depends more on how the fruits of growth are distributed than on their absolute amount.

Put another way, what matters for life satisfaction is the growth not of mean income but of median income – the income of the typical person. Consider a population of ten people (say, a factory) in which the managing director earns $150,000 a year and the other nine, all workers, earn $10,000 each. The mean average of their incomes is $25,000, but 90% earn $10,000. With this kind of income distribution, it would be surprising if growth increased the typical person’s sense of well-being.

[div class=attrib]Read the entire article after the jump.[end-div]

Idea Soup

Let the Wealthy Fund Innovation?

Nathan Myhrvold, former CTO of Microsoft, suggests that the wealthy should “think big” by funding large-scale and long-term innovation. Arguably, this would be a much preferred alternative to the wealthy using their millions to gain (more) political influence in much of the West, especially the United States. Myhrvold is now a backer of TerraPower, a nuclear energy startup.

[div class=attrib]From Technology Review:[end-div]

For some technologists, it’s enough to build something that makes them financially successful. They retire happily. Others stay with the company they founded for years and years, enthralled with the platform it gives them. Think how different the work Steve Jobs did at Apple in 2010 was from the innovative ride he took in the 1970s.

A different kind of challenge is to start something new. Once you’ve made it, a new venture carries some disadvantages. It will be smaller than your last company, and more frustrating. Startups require a level of commitment not everyone is ready for after tasting success. On the other hand, there’s no better time than that to be an entrepreneur. You’re not gambling your family’s entire future on what happens next. That is why many accomplished technologists are out in the trenches, leading and funding startups in unprecedented areas.

Jeff Bezos has Blue Origin, a company that builds spaceships. Elon Musk has Tesla, an electric-car company, and SpaceX, another rocket-ship company. Bill Gates took on big challenges in the developing world—combating malaria, HIV, and poverty. He is also funding inventive new companies at the cutting edge of technology. I’m involved in some of them, including TerraPower, which we formed to commercialize a promising new kind of nuclear reactor.

There are few technologies more daunting to inventors (and investors) than nuclear power. On top of the logistics, science, and engineering, you have to deal with the regulations and politics. In the 1970s, much of the world became afraid of nuclear energy, and last year’s events in Fukushima haven’t exactly assuaged those fears.

So why would any rational group of people create a nuclear power company? Part of the reason is that Bill and I have been primed to think long-term. We have the experience and resources to look for game-changing ideas—and the confidence to act when we think we’ve found one. Other technologists who fund ambitious projects have similar motivations. Elon Musk and Jeff Bezos are literally reaching for the stars because they believe NASA and its traditional suppliers can’t innovate at the same rate they can.

In the next few decades, we need more technology leaders to reach for some very big advances. If 20 of us were to try to solve energy problems—with carbon capture and storage, or perhaps some other crazy idea—maybe one or two of us would actually succeed. If nobody tries, we’ll all certainly fail.

I believe the world will need to rely on nuclear energy. A looming energy crisis will force us to rework the underpinnings of our energy economy. That happened last in the 19th century, when we moved at unprecedented scale toward gas and oil. The 20th century didn’t require a big switcheroo, but looking into the 21st century, it’s clear that we have a much bigger challenge.

[div class=attrib]Read the entire article following the jump.[end-div]

[div class=attrib]Image: Nathan Myhrvold. Courtesy of AllThingsD.[end-div]

Environs

Your Life Expectancy Mapped

Your life expectancy mapped, that is, if you live in London, U.K. So, take the iconic London tube (subway) map, then overlay it with figures for average life expectancy. Voila, you get to see how your neighbors on the Piccadilly Line fair in their longevity compared with say, you, who happen to live near a Central Line station. It turns out that in some cases adjacent areas — as depicted by nearby but different subway stations — show an astounding gap of more than 20 years in projected life span.

So, what is at work? And, more importantly, should you move to Bond Street where the average life expectancy is 96 years, versus only 79 in Kennington, South London?

[div class=attrib]From the Atlantic:[end-div]

Last year’s dystopian action flick In Time has Justin Timberlake playing a street rat who suddenly comes into a great deal of money — only the currency isn’t cash, it’s time. Hours and minutes of Timberlake’s life that can be traded just like dollars and cents in our world. Moving from poor districts to rich ones, and vice versa, requires Timberlake to pay a toll, each time shaving off a portion of his life savings.

Literally paying with your life just to get around town seems like — you guessed it — pure science fiction. It’s absolute baloney to think that driving or taking a crosstown bus could result in a shorter life (unless you count this). But a project by University College London researchers called Lives on the Line echoes something similar with a map that plots local differences in life expectancy based on the nearest Tube stop.

The trends are largely unsurprising, and correlate mostly with wealth. Britons living in the ritzier West London tend to have longer expected lifespans compared to those who live in the east or the south. Those residing near the Oxford Circus Tube stop have it the easiest, with an average life expectancy of 96 years. Going into less wealthy neighborhoods in south and east London, life expectancy begins to drop — though it still hovers in the respectable range of 78-79.

Meanwhile, differences in life expectancy between even adjacent stations can be stark. Britons living near Pimlico are predicted to live six years longer than those just across the Thames near Vauxhall. There’s about a two-decade difference between those living in central London compared to those near some stations on the Docklands Light Railway, according to the BBC. Similarly, moving from Tottenham Court Road to Holborn will also shave six years off the Londoner’s average life expectancy.

Michael Marmot, a UCL professor who wasn’t involved in the project, put the numbers in international perspective.

“The difference between Hackney and the West End,” Marmot told the BBC, “is the same as the difference between England and Guatemala in terms of life expectancy.”

[div class=atrib]Read the entire article after the jump.[end-div]

[div class=attrib]Image courtesy of Atlantic / MappingLondon.co.uk.[end-div]

Idea Soup

Irrational Exuberance and Holiday Shopping

‘Tis the season to buy, give, receive and “re-gift” mostly useless and unwanted “stuff”. That’s how many economists would characterize these days of retail madness. Matthew Yglesias over a Slate ponders a more efficient way to re-distribute wealth.

[div class=attrib]From Slate:[end-div]

Christmas is not the most wonderful time of the year for economists. The holiday spirit is puzzlingly difficult to model: It plays havoc with the notion of rational utility-maximization. There’s so much waste! Price-insensitive travelers pack airports beyond capacity on Dec. 24 only to leave planes empty on Christmas Day. Even worse are the gifts, which represent an abandonment of our efficient system of monetary exchange in favor of a semi-barbaric form of bartering.

Still, even the most rational and Scroogey of economists must concede that gift-giving is clearly here to stay. What’s needed is a bit of advice: What can economics tell us about efficient gifting so that your loved ones get the most bang for your buck?

We need to start with the basic problem of gift-giving and barter in general: preference heterogeneity. Different people, in other words, want different stuff and they value it differently.

In a system of monetary exchange, everything has more or less one price. In that sense, we can say that a Lexus or a pile of coconuts is “worth” a certain amount: its market price. But I, personally, would have little use for a Lexus. I live in an apartment building near a Metro station and above a supermarket; I walk to work; and driving up to New York to visit my family is much less practical than taking a bus or a train. So while of course I won’t complain if you buy me a Lexus, its value to me will be low relative to its market price. Similarly, I don’t like coconuts and I’m not on the verge of starvation. If you dump a pile of coconuts in my living room, all you’re doing is creating a hassle for me. The market price of coconuts is low, but the utility I would derive from a gift of coconuts is actually negative.

In the case of the Lexus, the sensible thing for me to do would be to sell the car. But this would be a bit of a hassle and would doubtless leave me with less money in my pocket than you spent.

This gap between what something is worth to me and what it actually costs is “deadweight loss.” The deadweight loss can be thought of in monetary terms, or you might think of it as the hassle involved in returning something for store credit. It’s the gap in usefulness between a $20 gift certificate to the Olive Garden and a $20 bill that could, among other things, be used to buy $20 worth of food at Olive Garden. Research suggests that there’s quite a lot of deadweight loss during the holiday season. Joel Waldfogel’s classic paper (later expanded into a short book) suggests that gift exchange carries with it an average deadweight loss of 10 percent to a third of the value of the gifts. The National Retail Federation is projecting total holiday spending of more than $460 billion, implying $46-$152 billion worth of holiday wastage, potentially equivalent to an entire year’s worth of output from Iowa.

Partially rescuing Christmas is the reality that a lot of gift-giving isn’t exchange at all. Rather, it’s a kind of Robin Hood transfer in which we take resources from (relatively) rich parents and grandparents and give them to kids with little or no income. This is welfare enhancing for the same reason that redistributive taxation is welfare enhancing: People with less money need the stuff more.

[div class=attrib]Read the entire article here.[end-div]

Environs

The Corporate One Percent of the One Percent

With the Occupy Wall Street movement and related protests continuing to gather steam much recent media and public attention has focused on 1 percent versus the remaining 99 percent of the population. By most accepted estimates, 1 percent of households control around 40 percent of the global wealth, and there is a vast discrepancy between the top and bottom of the economic spectrum. While these statistics are telling, a related analysis of corporate wealth, highlighted in the New Scientist, shows a much tighter concentration among a very select group of transnational corporations (TNC).

[div class=attrib]New Scientist:[end-div]

An analysis of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.

The study’s assumptions have attracted some criticism, but complex systems analysts contacted by New Scientist say it is a unique effort to untangle control in the global economy. Pushing the analysis further, they say, could help to identify ways of making global capitalism more stable.

The idea that a few bankers control a large chunk of the global economy might not seem like news to New York’s Occupy Wall Street movement and protesters elsewhere (see photo). But the study, by a trio of complex systems theorists at the Swiss Federal Institute of Technology in Zurich, is the first to go beyond ideology to empirically identify such a network of power. It combines the mathematics long used to model natural systems with comprehensive corporate data to map ownership among the world’s transnational corporations (TNCs).

“Reality is so complex, we must move away from dogma, whether it’s conspiracy theories or free-market,” says James Glattfelder. “Our analysis is reality-based.”

Previous studies have found that a few TNCs own large chunks of the world’s economy, but they included only a limited number of companies and omitted indirect ownerships, so could not say how this affected the global economy – whether it made it more or less stable, for instance.

The Zurich team can. From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 TNCs and the share ownerships linking them. Then they constructed a model of which companies controlled others through shareholding networks, coupled with each company’s operating revenues, to map the structure of economic power.

The work, to be published in PLoS One, revealed a core of 1318 companies with interlocking ownerships (see image). Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What’s more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world’s large blue chip and manufacturing firms – the “real” economy – representing a further 60 per cent of global revenues.

When the team further untangled the web of ownership, it found much of it tracked back to a “super-entity” of 147 even more tightly knit companies – all of their ownership was held by other members of the super-entity – that controlled 40 per cent of the total wealth in the network. “In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network,” says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

[div class=attrib]Read the entire article here.[end-div]

[div class=attrib]Image courtesy of New Scientist / PLoS One. The 1318 transnational corporations that form the core of the economy. Superconnected companies are red, very connected companies are yellow. The size of the dot represents revenue.[end-div]