Excerpted from: Citigroup Equity Strategy re Plutonomy Part 1 Oct 16, 2005 BY Ajay Kapur, CFA, CITIGROUP
[plutonomy - n. An economy that is driven by or that disproportionately benefits wealthy people, or one where the creation of wealth is the principal goal. [Blend of pluto- (wealth) and economy.]
- The World is dividing into two blocs - the Plutonomy and the rest. - The U.S., UK, and Canada are the key Plutonomies - economies powered by the wealthy. Continental Europe (ex-Italy) and Japan are in the egalitarian bloc.
- Equity risk premium embedded in "global imbalances" are unwarranted. In plutonomies the rich absorb a disproportionate chunk of the economy and have a massive impact on reported aggregate numbers like savings rates, current account deficits, consumption levels, etc.
This imbalance in inequality expresses itself in the standard scary "global imbalances". We worry less.
What are the common drivers of Plutonomy?
- Disruptive technology-driven productivity gains, - creative financial innovation, - capitalist-friendly cooperative governments, - an international dimension of immigrants and - overseas conquests invigorating wealth creation, - the rule of law, and - patenting inventions.
Plutonomies have occurred before in sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the U.S.
Often these wealth waves involve great complexity, exploited best by the rich and educated of the time. 2) We project that the plutonomies (the U.S., UK, and Canada) will likely see even more income inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization.
4) In a plutonomy there is no such animal as "the U.S. consumer" or "the UK consumer", or indeed the "Russian consumer".
There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the "non-rich", the multitudinous many, but only accounting for surprisingly small bites of the national pie. [...] i.e., focus on the "average" consumer are flawed from the start.
At the heart of plutonomy, is income inequality. Societies that are willing to tolerate/endorse income inequality, are willing to tolerate/endorse plutonomy. We make the assumption that the technology revolution, and financial innovation, are likely to continue. So an examination of what might disrupt Plutonomy - or worse, reverse it - falls to societal analysis: will electorates continue to endorse it, or will they end it [as they did with the New Deal], and why.
Organized societies have two ways of expropriating wealth - through the revocation of property rights or through the tax system. The more likely means of expropriation is through the tax system. Corporate tax rates could rise, choking off returns to the private sector, and personal taxation rates could rise - dividend, capital-gains, and inheritance tax rises would hurt the plutonomy.
Capital markets, like human beings, generally strive for certainty and stability. The pricing of assets is easier, projections more comfortable, etc. For this reason, in developed capital markets, governments have learnt the lessons of level playing fields, regulatory certainty, and the sanctity of property rights.
WHERE DO WE STAND TODAY?
In the plutonomies, there seems little threat from the first of these challenges: blatant expropriation of property by governments. There are few examples of governments changing the rules in the plutonomies and engaging in widespread nationalization, or asset re-distribution.
Likewise, if anything, the trends of taxation are positive for corporates, with fiscal competition in Europe forcing rates lower, year by year. Ironically, this is happening most in non-plutonomy countries, like Germany. This is good for the profit share, of which the mega-rich, through their holdings of equity, are “longâ€.
However, even if the profit share is rising, the fruits of those profits could be taxed before ending up in the pockets of the rich. In other words, dividend, capital gains and estate taxes could all rise. However, we struggle to find examples of this happening.
Indeed, in the U.S., the current (Bush) administration’s attempts to change the estate tax code and make permanent dividend tax cuts, plays directly into the hands of the plutonomy.
While such Pluto-friendly policies are not widely being copied around the world, we have not found examples of the opposite occurring elsewhere.
Protectionism or regulation. Here, we believe lies a cornerstone of the current wave of plutonomy, and with it, the potential for capitalists around the world to profit. The wave of globalization that the world is currently surfing, is clearly to the benefit of global capitalists, as we have highlighted. But it is also to the disadvantage of developed market labor, especially at the lower end of the food-chain.
There are periodic attempts by countries to redress this balance - Jospin’s introduction of the 35 hour working week in France to the anticipated benefit of labor being one example. But in general, on-going globalization is making it easier for companies to either outsource manufacturing (source from cheap emerging markets like China and India) or “offshore†manufacturing (move production to lower cost countries).
Brunswick, the recreational services company, is typical of the “globalized†world we now live in. We were intrigued to see in the company’s September 27 presentation, that in 2000, the company had 17 manufacturing/procurement centers globally, 14 of them in North America, high cost European countries or Japan. Today, five years later, they have 40 manufacturing/sourcing /engineering centers. Of these half are in low-cost countries. Such examples abound in today’s globalized world.
The final option for countries willing to consider it, is to in-source labor. For example, in the UK, between May 2004 accession of the 10 new countries into the EU, and March 2005, 176,000 workers have moved from the accession countries to the UK and joined the workforce. Leaving aside any demand benefits they might bring, this does, in theory keep the price of labor contained. It interests us that the Plutonomy countries (U.S.A, UK, Australia, and Canada) all have - generally - a welcoming attitude to skilled immigration. Of the pre-accession EU 15 countries, only a handful, the UK and Ireland included allow full and free labor movement from the new EU 10 countries into their labor markets. The vast majority, Germany, Austria, Italy etc., are refusing to allow accession countries full freedom of movement until 2009-11.
So, property rights look as if they are being protected, tax policies helpful, and the profit share should continue to rise, through globalization and the productivity/technology wave.
Our conclusion? The three levers governments and societies could pull on to end plutonomy are benign. Property rights are generally still intact, taxation policies neutral to favorable, and globalization is keeping the supply of labor in surplus, acting as a brake on wage inflation.
There are rich consumers, and there are the rest. The rich are getting richer, we have contended, and they dominate consumption.
|