- The Washington Times - Monday, July 7, 2008

NEW YORK — Nearly three decades of an economy less fettered by taxes, regulation and national borders has produced a crop of more than 1,000 billionaires, whose wealth and influence rival that of the robber barons a century ago.

Microsoft tycoon Bill Gates and investment superstar Warren Buffett head the list of luminaries in the new gilded age and, like the Carnegies, Fords and Rockefellers before them, are using their riches to usher in a new age of philanthropy with unprecedented gifts to favored causes that do everything from developing vaccines to eradicating diseases and lifting educational standards.

Fashion designer Ralph Lauren, blockbuster film producer George Lucas, and celebrities such as Oprah Winfrey - who is as adored in Africa as she is in the United States - also have amassed fortunes through their appeal to billions of fans worldwide.

But many of today’s billionaires are far from household names and how they made their money and spend it is even less understood. Entrepreneurs who invented products with universal appeal and investors who plugged into major global trends dominate the list.

The largest concentration of wealth resides on Wall Street, where the sheer volume of trillions of dollars of global trading and capital flows each day has produced untold riches for money managers at top investments banks, hedge funds, venture capital and private equity firms.

Although the expanding global economy has created an increasing number of billionaires from Moscow to Sao Paolo, Brazil, the United States - which has led the way in cutting taxes and opening and deregulating markets - still racked up the most last year - 472 out of 1,125.

“There is a widespread perception - not inaccurate - that globalization has largely benefited the wealthy,” said Jeffry Frieden, a Harvard University professor and author of “Global Capitalism: Its Fall and Rise in the 20th Century.” The book documents how the concentration of wealth in the last era of globalization helped to plant the seeds of its destruction with the rise of communism after World War I.

Going global

Then as now, the rich got richer, but everyone else seemed to benefit as well from the global economy. Consumers and investors had access to products and assets from the whole world as trade and capital flows flourished. Immigration mushroomed as people in countries with few jobs or opportunities crossed into wealthier countries, where they could make a future for themselves.

The earlier episode of globalization was brought to an abrupt end by two world wars and the rise of closed communist systems that engulfed half the globe until the Berlin Wall fell in 1989. Since then, a new system of global trading of unprecedented size has emerged, with 6 billion potential consumers and workers that capitalists with the right ideas and wares have moved to exploit.

“Today capitalism is at least as global as it was in the decades before 1914, which raises the specter of a return to the failures that ended that earlier episode,” especially the increasing concentration of wealth and growth of income inequality, Mr. Frieden said.

The opening of the economy has benefited billionaires, but it also has dampened the wages of workers in industries that make internationally traded goods by bringing them into competition with 2 billion unskilled workers, who previously toiled in countries largely closed to the rest of the world.

The result has been slower income growth for about 90 percent of the population, even as the vastly increased size of consumer and labor markets worldwide greatly increased the earning power of the relatively few people with the skills and money to exploit the possibilities.

Meanwhile, the gigantic flows of money across borders - aided by extensive deregulation of the financial markets and tax cuts starting in the 1980s with the arrival of Ronald Reagan in the U.S. and Margaret Thatcher in Britain - kicked off a competition for capital worldwide, which led to a round of competitive tax cuts among developed countries.

“It drove down taxation of capital, and that disproportionately helped the wealthy,” Mr. Frieden said at a New York seminar of the Century Foundation.

On the Street

The biggest beneficiaries of global markets, lower taxes and decreased regulation are on Wall Street, where the number of billionaires has proliferated. New York has routinely had the greatest concentration of billionaires worldwide, with a total of 71, but it got edged out for the first time this year by Moscow, with 74 billionaires, spawned by Russia’s oil and commodity boom.

Some well-known names perennially lead the list of Wall Street winners, including hedge-fund mogul and political activist George Soros, hostile takeover maven Carl Icahn, big-time investor Kirk Kerkorian and New York City Mayor Michael R. Bloomberg, who made his $11.5 billion fortune with his Wall Street information service.

But many previously unknown billionaires also have emerged as they profited from a burgeoning number of exotic financial instruments, ranging from credit derivatives to “dark pools” of commodity funds made possible by the extensive deregulation of markets in the 1990s.

Hedge fund manager John Paulson vaulted to billionaire status last year by short-selling the complicated subprime mortgage securities that imploded during the credit crisis - making money as many hedge funds do as the market went down.

A frenzy of leveraged buyouts last year made billionaires out of David Bonderman and James Coulter of the Texas Pacific private equity group, as well as William Conway, Daniel D’Aniello and David Rubenstein of the Carlyle private equity group and Blackstone equity fund managers Peter Peterson and Hamilton “Tony” James.

Oil and commodities were a major source of wealth last year and are likely to be even more so this year. The youngest member of the Forbes 400 list of billionaires last year was John Arnold, a 33-year-old former Enron trader who now runs hedge fund Centaurus Energy and has amassed a $1.5 billion fortune.

The cutoff point to make the Forbes 400 list last year was the highest ever - $1.3 billion in net worth, up from $800 million in 2002.

Myth of CEOs

The fact that billionaire investors and Wall Street managers are the largest category of “super rich” is not well understood by Americans or the media, which tends to focus on rich corporate chieftains and assign them blame for amassing fortunes at the expense of lower-paid workers.

The median pay of chief executives is 150 times the median household pay in the U.S., but they account for only about 6 percent of the top echelon, which is populated more by hedge fund managers and oil and technology tycoons, said Matthew Miller, a senior editor who compiles the Forbes 400 list for the magazine.

“If you’re a CEO, I don’t think the outlook’s as bright as it was in the past,” when company boards showered stock options on CEOs to provide incentives to improve earnings, he said. Accounting rule changes enacted in the wake of the Enron scandal now require companies to charge stock-option compensation against earnings, and that has caused a big reduction in the amount of stock options companies offer to their executives.

“The potential for making enormous realized pay is less now” that companies are replacing stock options with less-lucrative stock grants, Mr. Miller said. “You couldn’t have had an [Oracle CEO Lawrence] Ellison or [Disney CEO Michael] Eisner” under today’s regime, he said.

Wall Street players - including investment bankers at top firms such as Goldman Sachs and JP Morgan as well as hedge-fund managers, venture capitalists and private-equity investors - together earned more than twice as much as all American CEOs last year, or more than $80 billion versus $33 billion for CEOs, said Steven Kaplan, professor at the University of Chicago business school.

“Billionaires and the very top are dominated by investors and entrepreneurs,” he said. Also, unlike CEOs, the managers of hedge funds, private equity and venture capital firms are not required to disclose their pay in filings before the Securities and Exchange Commission (SEC), he noted.

Hedge funds and private equity funds, in fact, are not regulated at all by the SEC, and they are taxed at capital gains rates that are half the level of income-tax rates paid by other billionaires - both key to the success and enormous wealth they’ve amassed, the analysts said.

Technology stars

Technology is another area that has benefited from minimal regulation and taxes in the past two decades. Congress moved quickly to exempt Internet transactions from federal taxes when the new communications medium emerged in the 1990s, and it until recently encouraged the issuance of stock options by technology firms through lenient tax and regulatory policies.

The result was a crop of technology entrepreneurs that continues to dominate the list of the top 20 American billionaires, including Microsoft’s Mr. Gates, co-founder Paul Allen and CEO Steven Ballmer; Oracle’s Mr. Ellison; and Google’s Larry Page and Sergey Brin.

Mr. Gates, whose Microsoft stock has given him a net worth of $59 billion, was peppered by critics for not giving much to charity when he emerged as the richest man in the world in the 1990s. It prompted a stunning gesture that started a trend among billionaires: The software tycoon established the Gates Foundation and donated more than half his wealth to it, which last month also became his full-time occupation.

The move was reminiscent of the major philanthropic trend started by Andrew Carnegie and John D. Rockefeller a century earlier.

The unprecedented resources of Mr. Gates’ largest-ever private charity were greatly augmented last year when Mr. Buffett, the world’s second-richest man, decided to contribute a sizable share of his $53 billion fortune to Mr. Gates’ foundation.

The foundation has ambitious goals to, among other things, eradicate AIDS and malaria - the leading cause of death among Third World children - through the creation of vaccines. In the United States, the foundation has contributed billions of dollars to improving education for poor children to bolster their chances of success.

“There’s been an explosion of philanthropy,” said Peter Frumkin, a University of Texas professor who noted that private giving now outpacing federal government discretionary spending on social welfare.

“We have a very supportive tax environment for philanthropy,” which allows billionaires not only to keep a large share of their wealth through low income taxes and capital-gains taxes, but adds an incentive to give it away before they die to avoid estate taxes on their heirs.

“The estate tax moves money aggressively into philanthropy,” he said.

“Clearly, there is more money in philanthropy today, and there will be even more tomorrow” as more billionaires join the trend, said Michael Edwards, a Ford Foundation director and former World Bank official.

“The new philanthropists have larger and louder ambitions” than their 20th-century counterparts and want to get short-term results, he said. But so far they’ve not achieved much of the quick success they sought - perhaps because they are tackling intransigent problems and typically avoid getting involved in the political fray that could be unavoidable if they want to advance their causes, he said.

Judith Samuelson, executive director at the Aspen Institute, said foundations created by wealthy philanthropists can promote much good in the world, but they rarely have as great an impact on society and the economy as the business ventures that made them rich in the first place.

“Henry Ford was a great philanthropist, but his real legacy is the automobile,” she said. “We need to focus on how people go about creating their wealth” and not just how they spend money, sometimes trying to rectify the problems their business empires created, she said.

Public relations

Today’s billionaires strive to contribute to social causes from “green” technologies to feeding the poor, in part to connect with the public and prevent a possible backlash against the growing income inequality that their success symbolizes, said author and commentator David Callahan.

“The rich care what people think,” he said. “The successful rule of the elite rests to some degree on public legitimacy. Their power rests on popular support of the free-market system,” low taxes and open trade, and that’s why they’re following the example of early 20th-century robber barons who embraced social reforms, he said.

So far, despite the growing wealth at the top, Americans by and large still support an open economy, the analysts said, but discontent is growing.

Harvard’s Mr. Frieden said public reaction against the polarization of incomes might have been blunted by a consumer buying binge since 2000, which was largely financed by debt, enabling people to live for a while like they were affluent even though their incomes were barely growing. But with today’s subprime mess and credit crunch, that debt-financed spending spree appears to be over, he said.

“Inequality is inherent - even essential - in a market economy,” he said, but growing public unhappiness with diminished incomes and purchasing power could undermine support for free markets.

Evidence of “increasing disenchantment with global economic integration” could be seen in the presidential primary battles over trade in key states such as Ohio and Pennsylvania, which may have been a harbinger, he said. “That is likely to be the issue of the next decade.”

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