Berkeley Talks transcript: How the super-rich really live
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June 17, 2022
Listen to Berkeley Talks episode #144: How the super-rich really live.
[Music: “Silver Lanyard” by Blue Dot Sessions]
Intro: This is Berkeley Talks, a Berkeley News podcast from the Office of Communications and Public Affairs that features lectures and conversations at UC Berkeley. You can subscribe on Spotify, Apple Podcasts or wherever you listen. New episodes come out every other Friday.
[Music fades]
David Barstow: I’m David Barstow and I am blessed to hold the Reva and David Logan Distinguished Chair in Investigative Journalism, which is a very fancy way of saying I also get to run the investigative reporting program here. And we’re here tonight to talk about Jackpot, a book that explores one of the great issues of our time, income inequality.
And we are so lucky to be joined in person here tonight by the book’s author, Michael Mechanic. Michael is a longtime senior editor, yes, please applaud, is a longtime senior editor at Mother Jones, where he writes and edits everything from blog posts to award-winning essays and feature stories. Born and raised in Madison, Wisconsin. Let’s hear it for the Badgers. He earned an undergraduate degree in biochemistry from UC Berkeley and a master’s in cellular and developmental biology from Harvard, otherwise known as the Berkeley of the Northeast, before returning to Berkeley Journalism for a master’s in journalism.
Michael has run his own record label. He has served as the managing editor for the East Bay Express and a senior writer for The Industry Standard. He’s been honored for, among other things, a Mother Jones story about a reality TV show whose contestants were subjected to solitary confinement and other torments for the chance to win $50,000. That’s a story I’d like to read. Michael lives with his family in Oakland and Jackpot is his first book. Welcome back to Berkeley, Michael, and welcome also to our audience and we also have a big online audience.
Can I ask everyone, please, please, please, to silence your cell phones because we are streaming. My plan tonight is to have a conversation with Michael for about 40 minutes to leave plenty of time for some questions at the end. And then I think for those of us on YouTube, there’s going to be a method for you to submit your questions via the comments and we’ll get to as many as we possibly can, and then afterwards, I believe Michael will be happy to sign some books and maybe sell a few too. I hope you’ve brought a secret stash with you. So with that, let’s dive in.
Michael Mechanic: Sounds good.
David Barstow: Oh my gosh. I love this subject. So most of us, I think probably all of us, understand that income inequality is getting worse, but one of the revelations in your book is that our intuitive sense of the problem is way out of kilter with the actual scale of the problem, and I wondered whether that’s where we would start and I hoped I might lure you into giving our audience a bit of a quiz to test their knowledge of how bad the problem of income inequality is.
Michael Mechanic: Sure. I will preface that with telling you about an experiment that was done in 2011 by two psychologists, one Harvard guy, one guy at Duke, Dan Ariely and Michael Norton. And they wanted to find out what Americans felt about the distribution of wealth in their country and what they felt would be fair, and so the first thing they did is showed them pie charts of different wealth distributions.
One was the U.S. wealth distribution. One was Sweden’s, which was more progressive and one was perfect in equality, so every 20% of the population got 20% of the wealth and they didn’t tell them Sweden or U.S. They just showed them the pie charts and said, “Which of these two countries, if you were randomly placed in them, which one would you want to live in?” And interestingly, people weren’t interested in perfect equality.
You work hard. You’re smart. You put in the hours. You deserve to get paid more. But how much more? So when they showed people the U.S. distribution versus Sweden’s distribution, and this is 5,000 Americans they’re talking about, 90% of them chose Sweden. 90%, Democrat and Republican. And so the second phase of the experiment, they asked them, “For every wealth category, every 20% of the population, how much of the national wealth should they own in an ideal world, in a fair world, and how much do you think they really own?” And people were way off. Crazy way off. Instead of telling you what the results were, why don’t I just ask… Raise your hand if you have not read the book. How about you?
David Barstow: What an honest room.
Michael Mechanic: How about you? I looked up the real time inequality numbers on Gabriel Zucman’s site and so this is 2022 numbers. What percentage of the national wealth is owned by the top 10%, the wealthiest 10% of Americans? What percentage of the national wealth?
Audience member 1: 50.
Michael Mechanic: 74. What percent is owned by the top 1%?
Audience member 1: 40.
Michael Mechanic: Close. 37. And what about the top one tenth of the top 1%?
Audience member 1: 30.
Michael Mechanic: 19. See, now you’re guessing high. Let’s look at the other end. The least wealthy 40% of the population… There’s 165 million people or thereabouts. How much of the national wealth does the least wealthy 40% of the population own?
David Barstow: The bottom 40%?
Michael Mechanic: Yeah. Let’s ask someone else. How about you?
Audience member 2: 20%.
Michael Mechanic: Zero. No assets whatsoever. And that’s only possible because the bottom 20% owns less than nothing. They’re in debt. I put this in the book, but if you’re in the 24th wealth percentile in America, you have $199 to your name. Enough to buy a Home Depot grill, if you’re lucky.
David Barstow: Holy cow.
Michael Mechanic: Yeah.
David Barstow: Okay. All right. So the cover of your book is right up there on screen. Here it is right here. It’s a gorgeous looking book and the subtitle is, “How the super rich really live and how their wealth harms us all.” But wait a minute. I feel like I can hear Elon Musk and Jeff Bezos and Mark Zuckerberg and Bill Gates all shrieking somewhere in the distance about how they’re using their wealth to save the world and how they’re better at allocating money than any government bureaucrat. So why are they wrong?
Michael Mechanic: Well, they’re not better at allocating money. They’re better at running a business. The government is not running a business.
David Barstow: But they’re saving the world.
Michael Mechanic: Oh sure. But the government is neither running business nor running a charity. I’ve talked to a lot of wealthy people who said, “The government makes a terrible charity,” and I say, “Well, the government’s not a charity. It’s not its purpose.”
David Barstow: But Bill Gates is running around solving big, giant healthcare problems and…
Michael Mechanic: There’s been some recent research on philanthropy, which is a whole can of worms we could get into.
David Barstow: You can hear this is the pushback.
Michael Mechanic: Of course, you’re going to get the pushback but you look at the actual numbers of the so-called big bets in the society. These are the big philanthropic gestures where people are giving 10 million and up and there was a big study of this recently of what happened where these big bets went. And if you look at the public statements of the philanthropists, they were very aspirational. “We want social justice and economic justice and feed the world,” and things like this. But turns out most of these big bets were going to another building at Harvard or give to the medical center that’s a very wealthy medical center, as opposed to one that’s serving underserved communities. So there’s a real disconnect between what people say publicly and what they’re actually doing. And also they’re giving…
David Barstow: But Elon Musk taking…
Michael Mechanic: … 1% of their wealth.
David Barstow: … all of his money right now and he’s going to fix Twitter-
Michael Mechanic: Oh, well.
David Barstow: … for us.
Michael Mechanic: That’d be great. He’s going to let Donny back on there.
David Barstow: But that’s the argument. What exactly…
Michael Mechanic: He’s helping the journalism world.
David Barstow: I think I can also hear the ghostly distant shrieks of Milton Friedman and Ayn Rand and the entire Wall Street Journal editorial board about how the rewards of great wealth in the… That they’re essential to innovation and risk taking. Any healthy system of capitalism, so what would you want them to take from this book?
Michael Mechanic: You hear that argument when people are saying why capital gains taxes should be lower than wage taxes. We pay what? The maximum is 37% on earnings from your job and it’s 20% on earnings profits from the big pile of money that you have invested in the stock market. Is that fair or reasonable? Well, people say, “Well, it provides incentive for people to build companies and to invest and so forth,” and I say, “What are you going to do with your money? If we made capital gains taxes as high as wage taxes, are you going to put your money under your mattress?” You’re still going to invest. You’re still going to start to… that’s what these people do. That’s what drives them. You’re not going to just go, “Oh, I’m just going to sit by the pool now.”
David Barstow: One of the ideas that you surface in this book is that huge wealth is often harmful to those who hit the jackpot, so to speak.
Michael Mechanic: Mm-hmm.
David Barstow: So, for example, one of your characters is James Everingham, who’s a middle class coder who became this instant millionaire and along with all of his colleagues at Netscape when the company went public. And they called themselves mozillionaires.
Michael Mechanic: Yeah, the mozillionaires.
David Barstow: The mozillionaires.
Michael Mechanic: Because it was the Mozilla project that led to the first Netscape navigator browser.
David Barstow: I wonder if you wouldn’t mind actually just reading a passage describing what the experience was like for them.
Michael Mechanic: Sure. So, James Everingham, he came from rural Pennsylvania. He flunked out high school, flunked out of college, but he was a teen hacker. He was kind of like Matthew Broderick in WarGames. He was making software. He was obsessed with it and he was doing it an extracurricular way. He managed to build this library, got the attention of some companies, got hired, moved up a little bit and eventually he got recruited to work at Netscape three months before the IPO in 1995 and the Netscape IPO was the first dot-com boom we saw. It was the first company that was listed and took off and the entire tech world just go, “Whoa. Check it out.” So that’s the context for this. So, overnight, his small amount of stock options from when he came in is worth 8.5 million today’s dollars. And he’s 29 and at the stocks peak, it would be worth $20 million.
Michael Mechanic: His stock options vested over four years, so the money didn’t come all at once. Morgan Stanley, the IPO manager, called him one day, “Hey, your cliff is up. What do you want us to do?” Everingham told the banker to go ahead and sell the first chunk of stock and then promptly forgot all about the conversation.
A week later, he went to the ATM to get some money out. His balance in today’s dollars was more than $2 million. “The highest balance I’d ever seen in there was probably $4,000 and this incredible stress hit me,” he recalls. “I almost passed out. I don’t know what to do with that. People at work started going a little nuts. One colleague ordered enough silly putty to fill his bathtub, literally, because he could,” Everingham says.
He still rented a garage in Palo Alto. This is the only thing that he had bought. He was worth probably $30 million right out of college. Colleague, Lou Montulli, whose office aquarium featured one of the web’s first live cams, bought a massive new 350 gallon tank for the office and went snorkeling in it. Some mozillionaires bought decked out campers and began to live in the parking lot. Nobody knew what to do with their windfalls and the company wasn’t helping, so they turned to one another.
“How are you managing it? How are you dealing with people?” Because the people thing, well, the whole tech world was watching Netscape’s stock price and some of Everingham’s old buddies felt put out. “A couple of my closest friends completely stopped talking to me,” he says. New acquaintances came around and pretty women. They’d never noticed him before that. It was just like in the old blues songs. Suddenly everybody was his friend, which was kind of fun, but also super disconcerting. Even things that seemed simple turned out not to be. For instance, Everingham got excited after the IPO so he went out and bought a Nissan Maxima for his mother who had never owned a new car.
He later learned that his brother had gotten depressed about this and had gone to their mom and apologized because he hadn’t ever been able to do something so nice for her. “I’m like, ‘Oh, shit. I didn’t think about how that’s going to make him feel,'” Everingham says. The NASDAQ roller coaster made matters worse. The stock would shoot up suddenly. You’re doing the math and you’re like, “That can’t be. That’s millions of dollars.” He would get a number in his head, the number at which he would no longer need to work and then it goes right below that. “Damn, I have to work,” and then it shoots back up and I’m like, “Oh, now I don’t have to work.” Then a week later, “Damn.”
But not needing to work begets a sort of existential crisis. The mozillionaires, some of whom never would’ve been friends had they not bonded over their shared trauma, talked about this a lot. One mozillionaire decided he would go become a photographer. “He came to me after three or four years of being lost,” Everingham says, “and he’s like, ‘I figured out what I want to be when I grow up,’ and I’m like, ‘What?’ He goes, ‘That I don’t have to figure out what I want to be when I grow up.'”
David Barstow: Some nice writing there. Congratulations. You come to a different version of this same idea when you write about Martha who hit the jackpot in a completely different way through this massive inheritance. So it’s a different angle and it wasn’t easy for her either. So read a little bit of that, because I think this sets up a bit of conversation I wanted to explore with you.
Michael Mechanic: Yeah. I would say it was less easy for her because it tends to be less easy for people who inherit. One other source I talked to said, “There’s sort of a vagueness about their lives, knowing that you’re going to come into a lot of money.” Now, Martha knew she had a rich grandfather. She was third generation, but her family was not ostentatious. They were pretty low key. I’d say that she was raised upper middle class and it was also family culture not to ask or talk about their grandfather’s company or the money. It just wasn’t something they talked about. So she was totally unprepared for this. So I’ll read a little bit about telling how she felt.
Michael Mechanic: Toward the end of high school, Martha was set up with an account to cover her college expenses. Her mother said she would be getting some small cap shares. Martha didn’t know what that meant, but she came to understand that the money that appeared in her account as if by magic was something called dividends from funds administered by her grandfather’s financial company. She attended an elite East Coast college, paying her way from the account. After graduating, she worked in publishing and then briefly as a teacher before earning a master’s degree in creative writing. So she’s an author now. The money kept flowing all the while. It accumulated in her account throughout her twenties, as she honed her writerly skills, and into her thirties. By that time, the balance was substantial, though not insane. Definitely less than a million dollars. “It was enough to buy a very nice house one day,” Martha figured.
She and her brother sometimes compared notes and scratched their heads about all this money they were getting. The quarterly statements would arrive in the mail and Martha would glance at them and shove them in a drawer. “The number would seem unrelated to me,” she recalls, “but the number kept getting bigger.”
By the late ’90s, it was growing by perhaps $200,000 a year and then quite abruptly, something changed with the distribution of dividends. In 2001 or 2002, without warning or explanation, the figures exploded. Martha’s annual income was no longer a couple of hundred grand. It was millions. I’m skipping ahead. Martha was woefully unprepared when, in her late 30s, she learned the whole truth. About a month before we met, at a meeting with her mother’s estate lawyer, she was handed a document that made her relive the moment of revelation.
The document included all the details about the trusts her mother had set up for Martha and her brother. It also showed the value of another trust they stood to inherit, in addition to the tens of millions of dollars they’d already received. The number was shockingly large. Martha is reluctant to reveal it and when she does, she declares that it is never to leave this room. She seems upset. I ask her what it’s like to say the number out loud. “Shameful. It’s shameful,” she says, her blue eyes welling with tears, “and it makes me want to cry because this is the fantasy. I’ve got the fantasy in my fucking drawer.” “You’re going to be showered with gold. How can that be anything but the best news?” Her fortune hangs over her like a cartoon anvil, “It’s practically a daily battle to put it down so I can actually write my books,” she says, “I feel like I have a train coming at me. That’s how I feel about it.”
David Barstow: Wow. That’s amazing. I have to ask you. I really wondered how on earth did you… How hard was it to get people to talk about extreme wealth?
Michael Mechanic: Hard.
David Barstow: How hard was it to find them and then to convince them to really open up about this?
Michael Mechanic: It’s taboo in our society to talk openly about your finances and I think as you go up the income scale and the wealth scale, it becomes even more and more so. Children of wealthy families are just told, “You never talk about it with anybody outside of your family.”
David Barstow: Right.
Michael Mechanic: Now, she didn’t have anyone in her family to talk about it with, except for her husband who ended up being… Well, there was her fiancé when she learned all this and it created a lot of tensions in her marriage and they ended up getting divorced, and part of the problem was he got obsessed with finding out more and more and more about the mystery of her wealth than she did. And so he would pressure her and so forth. You run into a lot of problems in relationships when one person has way more money than the other.
David Barstow: Did it surprise you, the degree to which people were ending up miserable?
Michael Mechanic: Yeah. They’re not…
David Barstow: We hear about the lottery winner who ends up broke and I think probably all of us have heard those stories of lottery winners who somehow don’t end up happy happily ever after.
Michael Mechanic: Right. That’s the conventional wisdom and I can’t really say that it’s true for all lottery winners, by any means. I would say there’s a subset of them that it completely destroys their lives, but those are the ones we hear about. We don’t hear about the person who is living within their means and has a nice boring life and a nice house. Sorry. I lost my train of thought.
David Barstow: No, I just wondered, as you…
Michael Mechanic: Oh, yeah.
David Barstow: … succeeded in getting people to start actually talking about the taboo of extreme wealth, I have this sense that you were yourself a little bit taken aback at the unexpected ways… This is our dream, right?
Michael Mechanic: Yeah. It’s the dream and the dream is really qualified because money, when you have a lot of it, it becomes a big responsibility and it raises a lot of authority questions of things like inheritance. “Do you give it to your kids. How much do you give? Are your kids are going to resent you for not giving them a big chunk of change?” You worry about how you’re going to be perceived and you are perceived differently. One question I ask most wealthy people, I say, “Do you think money changes people?” and the stock answer was, “Well, it amplifies your personality. If you’re a terrible person, it makes you awful. And if you’re a great person, it gives you the means to do great good in the world.”
But personally, wealth can be really isolating because people with a lot of money don’t want to hang around with people with no money, except for maybe very old friends and even then it can be awkward. But you don’t want to live in the same community, your middle class community, when all of a sudden you have $50 million because how are you going to enjoy your wealth without looking like a jerk? You can’t put a Bentley in your driveway.
David Barstow: Well, speaking of Bentleys, all right… You’re such a good writer that you really did make me start to feel some empathy for your characters here and yet, then you have this maddening habit of taking us on these tours of conspicuous consumption and suddenly, my empathy starts to melt away and I wondered if you wouldn’t mind giving the audience just a taste of some of those passages.
Michael Mechanic: Yeah. There is a chapter called “Retail Therapy,” which I sort of take people on a tour of some of the ridiculous things you can buy with this kind of wealth. This is a real short bit. I hung out with a brand manager at Walnut Creek Luxury Cars. He doesn’t call himself a salesman. In fact, he says, “I hate car sales people.” He’s really a salesperson, but there’s no customers coming in because they’ll bring the cars to the St. Francis Yacht Club or to XOJet’s gala or whatever.
So, put the fancy car in front of the who don’t know they want it yet. That’s their strategy. They take the cars to the rich people. So, people customized these cars to the T. He was telling me how at the Rolls Royce factory in London, they have on display a lipstick. That’s because this guy wanted a Rolls Royce that matched his wife’s favorite lipstick color, so he sent in the lipstick and they matched the color of the lipstick and so the lipstick is there on display.
This guy’s saying, “If you got a Hermes bag, you could send a sample of the leather and they’ll paint the car that color for you.” this is right after I had been sitting inside a $520,000 Lamborghini. It was very hard to get into and there’s a driving mode called EGO. We enter another showroom to visit the Bentleys. They drip wealth, elegant, imposing. In the center of the room is a Mulsanne, base priced at $360,000, but this customized Mulliner edition is $404,000. It’s 6.25-liter twin turbo engine bears a plaque, “Hand built in Crewe, England,” with the engine number and the name of the person, Steve Brown, who oversaw the fabrication. The supple dashboard leather is sourced from cows raised in barbwire free environments to avoid scratches.
The floor mats are made from lamb’s wool. “The ultimate luxury,” Christensen says, noting the polished wooden console’s hand-stitched seats and door panels fitted with heavy chrome ashtrays for cigars or whatever. The car has massaging front and rear seats. Another backseat option is, “An illuminated handcrafted wooden cocktail cabinet complete with a pair of hand-blown crystal decanters designed for Mulliner by the exquisite glassmaker, David Redman of London,” Bentley’s website notes.
Rolls Royce’s equivalent, the Phantom, starts at $450,000. Another $12,000 gets you the Starlight Headliner, thousands of tiny LEDs embedded in the ceiling leather to approximate the night sky. The option is customizable. Rolls will configure the stars as they appeared on the day you were born. Christensen, the sales guy, considers it a gimmick, “But I will tell you, it’s really tough to sell a Rolls Royce now without the Starlight Headliner.”
David Barstow: There was a moment that started to give me a little bit of hope in this book…
Michael Mechanic: Which one?
David Barstow: … and it’s when you started to write about the, this is a phrase I just love and won’t get out of my head, the satiation point, the point of diminishing returns, and you explained that researchers find that people’s self reported happiness peaks when they’re making between $65- and $95,000 a year, and that the life satisfaction scores top off at around $105,000. And then they begin to decline with higher earnings, and I thought that was quite interesting and I didn’t actually expect that it would be actually that low.
Michael Mechanic: Right.
David Barstow: I thought somehow you’d have to get up in a few million before you’d hit that satiation point. I wonder if you maybe just read a little bit about what might account for the decline in happiness once you get past that certain point.
Michael Mechanic: Yeah. You’re right. It is low. It seems very low.
David Barstow: It feels low.
Michael Mechanic: Right.
David Barstow: I know a lot of people…
Michael Mechanic: Those people haven’t hit old age yet and had big medical bills, but I guess the idea is that you’re not freaking out about your bills. You’re paying your debts. You can kind of get along. Now, these people don’t live in the Bay Area, apparently. It’s a million and a half for a two bedroom house.
David Barstow: Right.
Michael Mechanic: But I’ll tell you what the researchers wrote about the decline, and I just actually saw an article today in the Washington Post saying that life satisfaction scores are partially dependent on how unequal the society is and the more wealth inequality, the lower people’s generally life satisfaction scores. This is how you perceive how you’re doing in life, as opposed to happiness and positive or negative emotions. While their data on very high earners was too limited to provide a complete picture, the researchers hypothesized that the decline may be related to heavier workloads, greater responsibilities and time demands that limit higher earners’ opportunities for enjoyment. Other factors they wrote may include increased materialistic values and social comparisons and unfulfilled material strivings.
Wealth-related social comparisons are particularly toxic as they bring about feelings of inadequacy. “Most of the search for wealth is not about how good the stuff is. It’s about what the stuff says about how valuable of a person you are,” says 41-year old Sam Polk, whose memoir, For the Love of Money, recalls his days as a hedge fund trader on Wall Street. His moment of revelation, which prompted him to change careers, came when the fund he worked for offered him a $3.6 million year-end bonus and he got angry. He felt he deserved $6- to 8 million. Polk was just seven years out of college. “The guy who was giving me that bonus was literally taking home $400 million that year,” he told me over appetizers at a Newport Beach restaurant. “You live in this total myopic cocoon of other people that have this kind of money.”
A psychologist, Bob Kenny, a founding partner of North Bridge Advisory Group in the Boston area, spends his days helping super-rich clients and their children grapple with their wealth anxieties. “If anything,” he says, “affluent folks are at a small disadvantage when it comes to finding happiness, because Americans tend to think that more money would solve their problems. Wouldn’t it make things better if I had that house on the ocean, that mansion on the hill, if I just had something? Deep down, we believe that,” Kenny says, but his clients don’t have this fallacy to cling to.
“I say to people all the time, ‘Look, retail therapy works, but so does cocaine,'” he says. “The problem is it wears off. When you go out and buy something and it’s new and it’s pretty, the latest iPhone or the Tesla, God, this is great. It just isn’t sustainable. It’s not that you don’t have enough money, but that it’ll lose its kick. So you buy another one. I know a guy who bought three.” “iPhones?” I asked. “Teslas,” Kenny replies. “His fourth car was a BMW convertible or something and you wouldn’t meet him and think, ‘God, that is one happy guy.'”
David Barstow: That seems to sort of explain why so often you hear about people who have made a huge amount of money who seem obsessed with one thing, which is making…
Michael Mechanic: More money.
David Barstow: … an even huger amount of money.
Michael Mechanic: That’s another question that comes up. The, “How much is enough?” question.
David Barstow: How much is enough?
Michael Mechanic: And people, especially people who have money, are always thinking about this. Investors say, “At what point will I feel financially secure and I can just stop?” But you hit that number and, “How much is enough?” just goes up 10%. It’s a strange psychological thing. We always feel like we need a little bit more and we’ll be good. And that happens with billionaires.
David Barstow: Yeah.
Michael Mechanic: I’ve always asked myself, what is the guy… Jeff Bezos or Elon Musk or any of these guys, they have so much money that they couldn’t possibly spend it in 10 lifetimes. And yet, they’re still trying to make more money. And why?
David Barstow: Why?
Michael Mechanic: Why? And I think it’s just a scorecard at that point. It’s just, “I want to be the guy with the biggest yacht.”
David Barstow: It’s Donald Trump calling up Forbes magazine and arguing to be higher up on the list, right?
Michael Mechanic: That’s right. Wilbur Ross, his commerce secretary, also did that.
David Barstow: Yeah. Did the same thing, right?
Michael Mechanic: Yeah.
David Barstow: I want to shift gears for a moment and play a commercial that I suspect many of you probably have encountered a bunch of times, especially if you watch CNBC. I’m wondering if we can tee that commercial up, and then I think that will lead us to an interesting conversation.
Dad (in commercial): You can’t just inherit 4,000 acres.
Amanda (in commercial): Dad. I’m not saying…
Dad: The taxes. Amanda, you’d get killed on the taxes.
Amanda: I was going to say there’s a way I can buy the business. We set up a trust and that’s how we transfer the stock.
Dad: But the estate taxes.
Amanda: There are no estate taxes.
Dad: Let’s run this by BDO.
Amanda: It was their idea.
Voiceover in commercial: People who know, know BDO.
David Barstow: Okay. First of all, quick show of hands. How many of you have a grantor-retained annuity trust? Because that’s what that is an ad for, in fact, and GRATs, that’s how they’re affectionately known, is exactly what’s being pitched in that advertisement. And I wondered, Michael, if you would just talk a bit about the booming business of wealth management and how that fits into the overall picture of growing income inequality.
Michael Mechanic: You know what’s funny? I showed that to an estate lawyer today who was somebody I know who was actually in the book and I said, “What do you make of this? Is there a type of trust that would do this?” And she said, “I don’t know that just a trust could do it. They’re fudging things a little bit, but there’s something called an intentionally delayed grantor trust and if you combine it with a self canceling something note, then you could probably suss something out,” right?
David Barstow: That’s right.
Michael Mechanic: There’s just this alphabet soup of weird trust vehicles that expensive lawyers have figured out how to hide money and shipped it around in ways that are usually legal. What happens is these wealth lawyers, they may not be super rich themselves, although many of them get super rich through charging clients a lot of money, but they get off on finding all the little nuances in the law and “Oh, how can we tweak this,” and testing all these new legal theories.
The IRS is out-manned and out-gunned by these smart lawyers and so they’re throwing spaghetti and see what sticks. Eventually, the IRS catches on. They take you to tax court. If the tax court rules against you, they can appeal it and these strategies will save very, very wealthy people millions of dollars, billions in some cases. And so, it behooves them to just keep pushing it in these courts, because they’ll spend a bunch of money on legal fees, but if it pays off, it pays off big and often it does. Now what you’re talking about, the grantor trusts, those were created by accident in 1990. There was another kind of trust called a granter-retained income trust, a GRIT.
David Barstow: GRIT.
Michael Mechanic: A GRIT.
David Barstow: It was GRITs and GRATs.
Michael Mechanic: GRITs and GRATs.
David Barstow: And GRUTs, too.
Michael Mechanic: And GRUTs. GRUTs, there’s GRUTs.
David Barstow: GRUTs.
Michael Mechanic: Yeah. And so, smart estate lawyers figured out, “Oh, hey. If the interest rates are right, we can use this GRIT to shave a bunch of points off the estate tax,” and the IRS caught onto it and was griping about it and the tax people in Congress said, “Oh, we got to do something about this,” so they tried to fix it and they screwed up. They opened up the avenue to a new kind of trust, the GRAT, which is just… It’s a no risk situation. You basically put low value assets in it and it has a lifetime and during that lifetime, it pays those assets back to you, but if the assets grow in value, the excess goes to your heirs tax free. So, it’s out of your estate. It’s not included in the estate tax.
You can set up whole series of these. Sheldon Adelson did it with volatile stocks and he avoided something like $3 billion in estate taxes and he used it to pass about $8 billion to his heirs tax-free. Pre-IPO shares is one thing that people put in this all the time. When Facebook, in 2008, when it was just established, before it went public, Mark Zuckerberg, Dustin Moskovitz, Sheryl Sandberg, it said in the SEC filings that they had each put millions of shares into these annuity trusts and some of these shares were six cents a piece. These were very, very early pre-IPO shares of Facebook.
And now, of course, they’re worth a bloody fortune. So those guys were able to pass millions, hundreds of millions, billions possibly. I don’t know all the details of that, and ProPublica did some stuff on this recently. They got some leaks and they found that half of the wealthiest families in America are using these. So it’s a big… But let me ask you this. How many of you know… Let’s just pick somebody. How about you, sir? As of today, how much money could you and a spouse give to your heirs without paying any taxes?
Audience member 3: With this GRAT thing?
Michael Mechanic: No, no. Just straight up. How much money could you give as a gift to your children without…
Audience member 3: A million dollars.
Michael Mechanic: Really? Anyone else?
Audience member 4: $15,000.
Michael Mechanic: How much?
Audience member 4: $15,000 to anybody, unlimited.
Michael Mechanic: Okay. So, you can give $15,000 a year to any person.
Audience member 4: Right.
Michael Mechanic: I could give you $15,000, you $15,000, you $15,000 and it wouldn’t be taxable as a gift. Anyone else? A couple can give $24 million as of 2022. $24 million. That’s the estate gift tax exemption. So, that’s a lifetime gift. You can give that much without paying a dime.
David Barstow: Michael, at one point in the book, you write that we should have 105 Black billionaires in this country, but instead we have seven, if you just went based on the portion of the population. And meanwhile, when we look at the global population of people worth at least $30 million, men outnumber women by nine to one. And one thing I’d love for you to talk about is really just the demographics of the super wealthy and even more importantly, the structural forces that help account for those demographics.
Michael Mechanic: Well, clearly they’re mostly white guys, especially in this country. We have something like 750 billionaires. I don’t know what the latest numbers are, but people say, “Look, there’s a lot of poor white people in America,” and my answer to that is, “Of course there are, but it wasn’t being white that makes them poor, whereas if you’re Black in America, intergenerational wealth and opportunity’s been suppressed for you for so long, you’re much less likely to have a family cushion of wealth to push you forward.” In the most recent survey of consumer finances that the Fed does, white people were three times more likely to have any kind of inheritance than Black families were and those inheritances are also bigger.
I have a chapter on race and I have a chapter on gender and what comes up in the chapter on race called “Thriving While Black” is something called the Black tax and the Black tax just refers to all the systemic things from the homestead acts through red lining through the Jim Crow laws, the Black Codes, all these things that in effect suppressed the opportunity for Black people to accumulate wealth and pass it on to the next generation.
And you see the same thing when you look at women. Women were, of course, not allowed to work in many professions for a long time. You had to stay at home. Apart from being a teacher or a nurse, and that was only for single women, you couldn’t go and earn money. You certainly couldn’t work in a bank or on Wall Street or anything like that. And even today, women have much greater challenge in getting money to start a business and borrowing money and getting money from a venture capital firm because it’s a bunch of white guys sitting around a conference table and the bar is higher.
Female tech CEOs were telling me this, “You just have to prove yourself a lot more because even though the guys might be nice guys, there’s this innate feeling like, ‘Well, I know what an entrepreneur rock star looks like and it’s not you,’ and so you really have to prove to them that you’re special in order to get the same kind of funding.” If you look at hedge funds, alternative investments, cryptocurrency, all these emerging fields where people are making fortunes and even the partnership level, equity partners in law firms, it’s still 10% women. And so, one thing that blew me away is that up until 1974, a woman could not get a bank loan without her husband to co-sign it. So if you were a widow, if you were single, forget it. You can’t start a business.
David Barstow: Before we open it up for some questions here, I just wondered if you could tell us a little bit about Tracy Gary. Who is she and more importantly, what did you learn from her?
Michael Mechanic: Tracy Gary lives in Tiburon, which is a very fancy place, but she lives in a little condo that’s mortgaged to the max. She comes from a very wealthy telecom family from the Midwest and her parents were jet setters. They didn’t work. They were socialites and jet setters. Her mom, she told me, spent $300,000 a year on dresses. She liked to be in Women’s Wear Daily. The father taught tennis to local kids at whichever of their estates they happened to be living at. There were seven or so. These estates were fully staffed. She had a chauffeur taking her to her private school. Her parents were gone half the year. They traveled all the time. They kind of left her alone. The family never, ever ate together. She said five times during her childhood, did the family sit down and have dinner together.
She was basically raised by nannies and caregivers and all women of color, not very well-educated. When she was young, she said she didn’t actually talk for a long time because no one was talking to her. There were no kids in her world and one of the places, they had an estate was on Fisher Island in Florida, which has 42 super-wealthy families living there. You can’t even go there unless you’re friends with one of those families. But it was all big hoity-toity people. There were no children there and then she would be chauffeured an hour and a half to her private school. At 14, she’s sent off the boarding school and her parents sat her down and said, “We’re giving you and your brother each a million dollars.” This is 1965. That amount of money, if you put in the S&P, it’d be worth $150 million today.
And of course, she didn’t know… That was back when a millionaire was Thurston Howell III. Giving a 14-year-old a million bucks and they said, “Well, we want you to do something. This money will accumulate ’till you’re 21 and then we want you to go and do something good with it for the community. That could be starting a business, starting a nonprofit and giving your money away to good causes, whatever,” and so that fueled her to go and become a person who started creating women’s foundations and doing all these things and eventually gave all her money away and she still gives all her money away. She acts as an adviser to wealthy families. She says she now makes about $140,000 a year, gives away 40,000 of it.
When her mom died, she got a $40,000 a year allowance from her mom’s estate. She gives that away, too, because the way she grew up, she was miserable, awful, miserable, miserable. She was just depressed and isolated and lonely and she hated her life, the way she was brought up. Her parents also polished off two bottles of scotch a day, so that didn’t help. But she said, “Giving away my money and finding happiness in the bonds of community and connection to people, that made me blissfully happy and the money made me miserable. And so, that’s how she’s lived her life. She’s very inspirational. She prompts families to give away more and keep less. Does her best, but it’s pretty hard.
David Barstow: I don’t want to end on too hopeful a note. I don’t believe in that. But speaking of giving away a lot of money, there was one fact that, really, I don’t think I’m going to be able to forget, which was the idea of the giving pledge, and that Mark Zuckerberg and Priscilla Chan have pledged to give away 99% of their Facebook fortune. That sounds like a lot. What would that leave them with?
Michael Mechanic: Millions. Billions, actually.
David Barstow: A billion.
Michael Mechanic: Yeah.
David Barstow: According to you, at least, in your book, it would leave them with $900 million bucks.
Michael Mechanic: Yeah. Facebook isn’t their only asset.
David Barstow: Right.
Michael Mechanic: They own a lot of property, including hundreds of acres in Kauai, Hawaii.
David Barstow: Right.
Michael Mechanic: They bought tremendously expensive real estate in the Bay Area. 1% of the Facebook fortune is a vast amount and that’s going to sit in trust and so forth and just keep growing and growing and growing and they’re pretty young. By the time they’re old, they’re going to be back in the billions. And remember, that 99% is being given out over a long period and I don’t know how they’re figuring. Is it the 99%? So that stock is going to be making money for them in the meantime.
David Barstow: Well, the first billion is always the toughest to make.
Michael Mechanic: Yeah, it’s true. My first billion certainly was.
David Barstow: Let’s take some questions here and folks who are watching online, please chime in with comments. But does anyone have any questions for Michael? Ah.
Audience member 5: Thanks. This is great. This is a very specific question, but it has come up, I feel, in conversations throughout my life and no one seems to know the answer.
Michael Mechanic: How much money do I have?
Audience member 5: But among the very wealthy, what is their relationship with the petty bureaucracies we all have to deal with? So getting your driver’s license renewed at the DMV or these things. How does that work?
Michael Mechanic: Yeah, I remember looking that up once. “Do billionaires have to go to the DMV to get their license?” I’ve got to think they have a little private session somewhere. You can actually go to AAA and it’s a lot nicer. That’s a little hint, but I’m sure they find the AAA office with one person and go in there with their bodyguards. Bureaucracy… Very wealthy families have what’s called a family office and I posted on Facebook at one point, “Don’t peek. How many of you ever heard of a family office?” and the only people who said, “Yes” were lawyers. Family office is an LLC, a private company, that very wealthy families set up just to manage all their affairs and mostly to manage their investments, but also to make sure that kids are educated and go to the right schools and hire people and fire people and deal with aircraft and boats and all the bureaucracy that wealth creates actually.
Because, in a way, at a lower level of super-wealth, your life becomes incredibly more complicated. At a higher level, you hire people to do it all for you and they might be stealing from you. That’s what you got to worry about. But the nickel and diming doesn’t happen. The things we all deal with, the little fees and things. You’re in a realm where you don’t have to deal with that and also, if you want to borrow money, people throw money at you. I had a very wealthy real estate investor say to me, “It’s easier for me to borrow $150 million than it is for you to borrow $150,000.”
David Barstow: Ah, we have a question here.
Audience member 6: Thank you. Thanks very much for a fascinating presentation. I wanted to ask, presumably, if people want to live in Sweden, but the United States actually getting further and further away from it, at what point does this start to have wider political consequences, do you think?
Michael Mechanic: That is hard to say. When we have a French revolution here? I don’t know. Last I checked, we’re not supposed to be an aristocracy or we’re not supposed to have one, but we have one and there’s a lot of dynastic families now in this country and they put a lot of money into politics and into influencing politics to the degree we’ve seen this moment of potential great change be squashed by Joe Manchin not going along because he’s subservient to very wealthy interests and others, Sinema. I feel like more and more, the political system is getting locked in and it’s getting harder and harder to change things to level the playing field.
It’s going to take a real uprising. It’s going to take people saying, “Look…” Well, A, it’s going to take wealthy people gaining some kind of conscience and saying, “This isn’t right,” and actually stepping up and taking part in the revolution, so to speak. And it’s also going to take a real up swelling of people who say, “We’re not going to support anymore the politicians who keep these things in play,” but the trouble is, as we’ve seen, politicians are really good at dividing people and all the anger about wealth inequality, it’s right wing, left wing, it’s everywhere. But the anger is pointed in different directions, isn’t it? So I don’t know.
David Barstow: We have a question over there.
Audience member 7: So, I was thinking of how their wealth harms us all. Are you speaking particularly to the political thing that you were just talking about or is there some other kind of harm from just that accumulation of wealth?
Michael Mechanic: That’s one aspect of it. I have a book specifically about politics and political attitudes and researchers have found that the political attitudes of the people that have access to power and access to Congress and regulators and so forth, they have different kinds of priorities for society than the general public does. And for one, they tend to be socially liberal, but they are very much economically conservative when it comes to redistributing wealth in any way and they’re also down on public education, which is a real problem because education is really one of the few paths to mobility in this country.
One of the reasons we put up with this stuff so much in America is because there’s what do we call mobility optimism. There’s these myths around, “You work hard. You dedicate yourself and you’re going to succeed.” The rags to riches stories are actually quite rare, but we fetishize them and we believe them so strongly that we don’t rebel against the system as it is.
David Barstow: Michael, we’ve been seeing for the last couple of months photographs of just enormous yachts owned by Russian oligarchs, just 200, 300 feet, multiple helicopter pads. Just incredible. We have a question from our online audience asking, “What about all the ill-gotten wealth, like, what we know has been seized from the Russians over the Ukraine invasion? How much wealth is dirty?” is the simple question.
Michael Mechanic: That’s a good question for Gabriel Zucman, who studies wealth havens, among other things. I don’t have any numbers off the top of my head. I guess one surprising thing is there’s many ways to get wealth in ways that are ill-gotten, but you don’t really have to because the laws are so permissive in this country. You can accumulate massive wealth and protect it using these kinds of strategies, these legal strategies. You don’t have to break the law, but actually interestingly, there’s a lot of very high income people who don’t file taxes. They just don’t pay their taxes and the IRS has been so gutted that half of these cases just fall off. They pass the statute of limitations.
David Barstow: Yeah. One of the lessons of the recent ProPublica reporting is how many of the wealthiest Americans pay absolutely zero in federal income taxes. This is something I happen to know a lot about because I wrote an awful lot about Donald Trump not paying taxes and one of the lessons that… And Trump, by the way, had GRATs and GRITs and GRUTs out the wazoo, but one of the things that makes it so difficult for the IRS is this fundamental mismatch between the resources of the IRS and just the maddening complexity of these different tax shelters that only a tiny fraction of people in the world can actually understand.
Michael Mechanic: Right. I like to…
David Barstow: The joke in New York City is all the best lawyers in New York City are tax and estate lawyers.
Michael Mechanic: Yeah.
David Barstow: They make absolutely the most money of any of the lawyers in New York City.
Michael Mechanic: I like to say that the boredom is the point.
David Barstow: The boredom.
Michael Mechanic: These rules are so arcane and so eye-glazing that a the well-educated journalist has trouble understanding them, right?
David Barstow: Yeah.
Michael Mechanic: I’ll give you an example. There was recently a bill passed called the SECURE 2.0 Act, which expands government subsidies for retirement savings and it was passed overwhelmingly. It was 400 something to four, easily passed through Congress and most of the provisions in this bill, although they sound nice and middle classy, are actually helping the rich. The United States spends about $380 billion a year subsidizing retirement savings, and the overwhelming majority of those subsidies go to the top 10% and of course, exponentially, as you get to the top. And so you’ve got guys with hundreds of millions and billions of dollars sitting in a Roth IRA, and they’re still being subsidized by the public.
David Barstow: By the public.
Michael Mechanic: It’s just real misallocation of resources.
David Barstow: I think we might have time for one more question. I have two questions. Well, let’s not leave anyone hanging. Let’s go for…
Audience member 8: Hi, Michael. Very interesting. I want to revisit what you talked about, the law of diminishing returns as far as wealth goes and that number you came up with was between what and what was that?
Michael Mechanic: Well, there’s different measures. One is for positive emotions. One’s for negative emotions, sort of the inverse satiation point. So, the positive emotions peak at $65,000. Negative ones bottom out at $95,000 and then life satisfaction peaks at $105,000.
Audience member 8: Perfect for the journalism school. That being said, is there a similar study or have you found something in your work that might… You talked about the poor little rich children that had so much wealth that they were miserable about it. Is there a number where you want to leave something for your kids? It will make that will make them happy, but not too much to make them miserable.
Michael Mechanic: There’s a guy in my book called Richard Watts who’s a consigliere for some of the wealthiest families in America. His average client is between a hundred million and billion dollars. “After that,” he says, “have your own family office. You don’t need me.” And he’s also written a couple of books, one called Entitlemania. He says, “I try to convince my clients, ‘Why not just give them $5 million each and call it good?'” and he says, “People are so reluctant to do that. They say, ‘How can we just be rid of all this money?'” and he says, “Well, you’re going to be rid of it in three generations anyway, and you’re going to destroy some of them in the process.”
Audience member 8: $5 million, that’s okay?
Michael Mechanic: Well, you got five mill? Five million in this day… It’s specific to one’s circumstances, but 5 million bucks, a divorce will take half of that. Some bad medical procedure will take a chunk of that. A house in the Bay Area will take a couple million of that.
David Barstow: So, we have one last question, I think.
Audience member 9: Hi, in my regrettably extensive time on Gen Z Twitter, there seems to be two sides of a coin. One being this gross fetishization of Bezos and Musk and Zuckerberg, but also this increasingly progressive vision of wealth redistribution. So where do you see the conversation going and potentially politically as well with what we’re discussing and going forward?
Michael Mechanic: Well, things are pretty up in the air right now with the Roe leak and the midterms, which are looking bad for Democrats, but who knows whether the Roe thing is going to change that? As long as the Republicans are in power, you’re not going to get much in the way of wealth distribution, period. In fact, it may go more the other way. The Biden administration, to its credit, has been trying. They tried to kill GRATs. They tried to change the step up rule, which basically says that when your parent dies and gives you stock, the stock resets its value to today’s market price, meaning all the stock that they kept their whole lives, they don’t pay any capital gains taxes on it.
David Barstow: But that went absolutely nowhere.
Michael Mechanic: Yeah, these things got stripped out.
David Barstow: That went absolutely nowhere.
Michael Mechanic: They were put in some early language and they got stripped right out.
David Barstow: Yeah, they lasted about five seconds.
Michael Mechanic: Right. Part of the problem is there’s a lot of wealthy Democrats who want to keep these things in place too. We’re partially governed by our ideology. We’re partially governed by our self-interest and to the extent that there’s a lot of very wealthy people, just… In fact, if you look at the top donors of the political parties, they’re mostly all billionaires. They’re pretty evenly split between Democrat and Republican, and unlike they used to give to both parties, now they give only to one.
So, we got our billionaires and they got their billionaires. No, I’m not too optimistic about the wealth… There’s been the several billionaire tax proposals come up. Elizabeth Warren’s, the one that, who was it? Was it …? No. Sheldon Whitehouse? One of these guys put it forth recently. It’s been killed twice already.
David Barstow: They put it forward. I’m just saying that they go absolutely nowhere.
Michael Mechanic: Yeah. Because Manchin says, “I don’t want to have anything to do with it,” you know?
David Barstow: Yeah. Well on that really cheerful note, thank you all so much for being here. Thank you, Michael Mechanic, for coming and talking about this fabulous book that you’ve written on a really important topic.
[Music: “Silver Lanyard” by Blue Dot Sessions]
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