Davos Man, page 16
Once Black people secured equal rights on public transportation, white taxpayers starved the system of finance. Rosa Parks had gained the right to sit wherever she liked on the bus. Except now there was no bus.
Sweden was supposed to be more compassionate. But Sweden was one of the most homogeneous societies on earth. As native-born Swedes confronted the fact that their taxes were financing the settlement of people who looked different and prayed to different gods, some refused to go along.
The framing of the argument over immigration and the impact on public resources spared one central actor of scrutiny: the billionaires whose success in shedding their tax burden had forced decades of budget cuts.
Sweden was indeed struggling to maintain its traditionally generous public services. But this was not because newcomers had arrived, constructing cacophonous houses of prayer and monopolizing dental care.
It was because Davos Man had added Sweden to the confines of his refuge.
When he died in January 2018 at the age of ninety-one, Ingvar Kamprad, the founder of IKEA, was celebrated as a national icon. Along with the inevitable jokes about whether his coffin had required assembly from a flat pack, his passing afforded an opportunity to recount Sweden’s version of the Horatio Alger story.
Kamprad had launched his first business as a five-year-old on his family farm, buying matches in bulk and selling them retail to his neighbors. Soon, he was hawking Christmas decorations, ballpoint pens, and watches. By the time he was seventeen, he had his own mail order catalogue, using a milk van to deliver his wares to the local train station. Then, he moved into furniture. People liked the sleek, angular look of what he was selling, and they especially liked the prices. That formula would turn IKEA into the largest retailer of furniture on earth.
Kamprad famously disdained the typical trappings of a tycoon, flying economy class5. He drove an old Volvo—a requisite detail in every profile (though he also drove a Porsche). He wore secondhand clothes6 that he purchased at flea markets, and he made a point of getting haircuts when he was in low-wage countries like Vietnam. He had a habit of showing up unannounced7 at IKEA stores around the world and pretending to be a customer to test out the experience. In his bearing and demeanor, he looked like just another guy snagging a cheap bookcase before grabbing a plate of meatballs.
Not all of the details of his biography were endearing. Kamprad had been forced to acknowledge his participation in a fascist group8 that had been sympathetic to the Nazis. He had a legendary temper that he would train on unfortunate subordinates. But mostly he displayed a composite of traits that Swedes were inclined to see in themselves—hardworking, resourceful, innovative, and willing to travel great distances in advance of a good idea.
Yet if Kamprad was Sweden’s most celebrated entrepreneur, he was also a symbol of a more dubious achievement—the triumph of Sweden’s wealthiest people in lowering their tax bills.
In 1973, he abandoned Sweden to get out from under its hefty taxes, which then reached as high as 90 percent, moving to Denmark, and then to Switzerland. In 1982, he transferred control of IKEA to a foundation registered in the Netherlands, a legal ruse that allowed the company to pay minimal taxes.
“His philosophy throughout the years9 has been that IKEA should at all costs avoid paying taxes,” Kamprad’s longtime assistant wrote in a memoir. “Ingvar does not for reasons unknown to anybody but himself, want to see taxes go to the general well-being of people. Health service, schools and social care are, so to speak, not part of the Kamprad vocabulary.”
He made contributions to charities, “but only symbolic sums,”10 his assistant wrote, accusing IKEA’s founder of bearing “an avarice so limitless that it is difficult to understand for any ordinary taxpayer.”
In 2013, following the death of his wife, Kamprad returned home11 to Sweden. Over the four decades of his absence, the country had made itself more hospitable to people of spectacular means, in part to dissuade future Kamprads from leaving.
It had dropped its top income tax rate to 57 percent while eliminating many levies on property, wealth, and inheritance. It had cut corporate taxes. The net effect was a reduction in government revenue12 equivalent to 7 percent of national economic output (though some 40 percent was recovered by closing loopholes and broadening other taxes).
Sweden paid for this reduction by slashing public spending13 from about 65 percent of its overall economy to just above 50 percent. It privatized government services, including care for elderly people.
Much of the refashioning reflected how Swedish policymakers were, like their counterparts almost everywhere, embracing the thinking of economists like Milton Friedman. On university campuses, in think tanks, and in policy journals, some economists began to portray the state as less the solution to social problems than an obstacle to national dynamism.
“It’s like fashion,” said Torbjörn Dalin, chief economist at Kommunal, a Swedish trade union. “You don’t think that you’re following fashion. You’re not interested in that. But when you look back at the picture, you can see that, ‘Okay, I am following it, even if I don’t understand it.’ Of course you’re following it. It’s like a mindset that is coming from everywhere.”
True to form, economists warned that Sweden’s generosity toward workers was unsustainable. Economic growth fueled by government spending had rendered joblessness largely unknown for the Swedish populace, with the average rate of unemployment14 just above 2 percent between 1960 and 1994. But business leaders complained that the government was subsidizing industries that were not internationally competitive. As wages rose, inflation spread15 through the Swedish economy.
By the fall of 1992, Sweden’s central bank lifted interest rates16 as high as 75 percent to choke off inflation, while preventing a plunge in the value of the currency, the krona. The economy contracted violently. By the following year, the unemployment rate was above 8 percent17.
As Sweden pursued the goal of joining the European Union, gaining admission in 1995, the government slashed public sector jobs18 to comply with the bloc’s limits on debt. Sweden reduced job training19 and unemployment benefits. It curtailed spending on childcare, added fees to the national health care system, and diminished care for the elderly.
Sweden’s largest companies used global expansions to push wages lower, employing a threat recognizable to their unions in the United States: work more for lower pay or watch production get moved overseas.
And as Sweden’s government gratified wealthy people with tax cuts, its ministers parroted the Cosmic Lie that they would pay for themselves20 by prompting investment.
Some of the funds Sweden spent on world-class social programs were given to people like Stefan Persson, scion of the founder of H&M.
In the years following Sweden’s elimination of the wealth tax, he did indeed increase investment—in the English countryside. He purchased an 8,700-acre country estate21, an entire English village22 complete with medieval chapel and a cricket pitch, plus another 8,500-acre manor23 where he meandered the grounds shooting partridge and pheasants like a lord.
Incomes in Sweden were widening24 faster than any wealthy economy on earth. Those ensnared in poverty doubled25 to 14 percent of the population between 1995 and 2013.
Meanwhile, those at the top were raking it in—especially as the value of real estate soared.
Throughout the country, one in four young adults26 was living at home with their parents, in large part because the cost of housing was beyond them. People were waiting fourteen years for apartments at rents regulated by the state.
The situation was especially dire in Stockholm, where the vacancy rate was about 1 percent, as compared to 3.8 percent in that bastion of affordable housing, New York City.
Among those responsible for driving housing prices higher was Steve Schwarzman.
Like every Davos Man, Schwarzman wielded his origin story as protection against those inclined to scrutinize the injustice of one man ending up with so much.
“I grew up in the middle-class suburbs27 of Philadelphia, absorbing the values of 1950s America: integrity, straightforwardness, and hard work,” he wrote in his memoir.
As a teenager, he chafed at having to spend his weekends working in his father’s store, Schwarzman’s Curtains and Linens. Instead of attending high school dances, he was stuck measuring drapes.
The United States was in the midst of the post–World War II construction boom. Millions of soldiers freshly returned home were raising families, driving explosive demand for new housing. Schwarzman implored his father to turn the store into a national chain.
“We could be like Sears,” he told him.
But his father was guilty of an emotion Schwarzman would never grasp—contentment.
“Steve,” he told his son, “I’m a very happy man28. We have a nice house. We have two cars. I have enough money to send you and your brothers to college. What more do I need?”
Schwarzman needed more.
Near the end of his senior year at Yale, he exploited his inclusion in the secret society Skull & Bones to seek counsel from another member, W. Averell Harriman, the diplomat who had done a turn as governor of New York. Harriman invited him for lunch at his home on the Upper East Side of Manhattan.
When Schwarzman confided that he entertained thoughts of a political career, Harriman, then nearing eighty, posed a question: “Young man, are you independently wealthy?”
“No,” Schwarzman replied.
“Well,” Harriman told him, “that will make a great difference29 in your life. I advise you, if you have any interest in politics whatsoever, to go out and make as much money as you can. That will give you independence if you ever decide you want to go into politics. If my father wasn’t E. H. Harriman of the Union Pacific Railroad, you wouldn’t be sitting here talking to me today.”
Schwarzman forged a career on Wall Street. He started at the lowest rungs30 of the investment bank Donaldson, Lufkin & Jenrette, occupying a cockroach-infested, fourth-floor walk-up apartment on Manhattan’s Lower East Side. When an older colleague invited him to dinner at her family’s Park Avenue apartment31, where the library displayed de Kooning paintings, Schwarzman recognized a superior way of living.
He landed at Lehman Brothers, where he made partner in only six years, and cultivated a bond32 with the company’s then-CEO, Peter G. Peterson, who had served as secretary of commerce in the Nixon administration.
When Peterson was forced out of Lehman in a purge, he and Schwarzman joined forces to start their own shop. Blackstone, launched in 1985, took its name as an amalgam of its founders—schwarz, which means “black” in German, plus stone, derived from the Greek meaning of “Peter.”
The business they pursued, so-called private equity, was a sanitized term that replaced its disgraced predecessor, the leveraged buyout industry. Its corporate raiding techniques had been a hallmark of the 1980s and its poster child, Michael Milken33, the financier who spent nearly two years in prison for securities fraud. The outlines of the strategy were unchanged: borrow astronomical sums of money, buy companies, slash costs (often through mass firings), and extract huge dividends before flipping the assets.
Bank robbers plotted getaways; private equity magnates pursued exits.
The key to the formula was leverage. If you paid $10 for an asset and sold it for $11, that spelled a $1 profit, a mere 10 percent return. But if you borrowed nine of the ten dollars, putting down only one, the same $1 gained became a 100 percent profit.
Peterson and Schwarzman persuaded pension funds to entrust them with their savings. They tapped university endowments and medical institutions. They enticed well-heeled international players to invest, courting sovereign wealth funds stuffed with Persian Gulf oil fortunes.
One select group prospered alongside Blackstone’s executive ranks: tax lawyers, accountants, and lobbyists employed to keep the grubby hands of the government off the spoils.
Schwarzman and the rest of Blackstone’s executive ranks treated their slice of the winnings as so-called carried interest—accountant vernacular for income taxed at barely half the rate as that paid by suckers in other trades.
Blackstone expanded, launching a hedge fund that profited from volatility in the global marketplace. It started another fund to invest in real estate.
Schwarzman’s personal real estate portfolio grew in tandem. In 2000, he paid $37 million34 for a thirty-five-room apartment spread over three floors of a New York Art Deco landmark that had once been owned by John D. Rockefeller—740 Park Avenue. His neighbors in the building35 included Steve Mnuchin, the former Goldman Sachs executive who would become Treasury secretary in the Trump administration, and John Thain, the CEO of the ill-fated investment house Merrill Lynch.
Three years later, Schwarzman paid nearly $21 million for a 13,000-square-foot British Colonial–style mansion in Florida. It was designed by the Palm Beach architect Maurice Fatio and designated a historic landmark, but Schwarzman had it dismantled and reassembled in larger form, much to the consternation of local preservationists. Three years after that, he spent $34 million for a place in the Hamptons, adding it to a collection of beach houses that included an estate in St. Tropez and a waterfront spread in Jamaica.
“I love houses,”36 he once said. “I’m not sure why.”
Blackstone would soon tap the stock market, filing the paperwork for an initial public offering in early 2007. The process required that the firm open its file cabinets for public perusal, revealing it had $78 billion in assets37 on its balance sheet.
The world soon learned what the IPO was worth for Schwarzman—$677 million in cash, plus 24 percent of the stock, for a stake valued at $8 billion. He and the other beneficiaries harnessed the power of creative accounting to shield $3.7 billion in income38 from taxation.
By then, the zeitgeist had moved against him, casting Schwarzman as a symbol of the excesses of the age. The press hailed him as the new king of Wall Street, especially as Blackstone closed the largest private equity deal in history, paying $39 billion for a trophy case of American commercial real estate. His executive chef in Florida confided to the Wall Street Journal that entertaining Schwarzman for a weekend entailed spending $3,000 on groceries39, including stone crabs that ran $40 a claw. Schwarzman had once interrupted his poolside sunbathing to complain that an employee was not wearing the requisite black shoes with his uniform.
Peterson, displaying his political savvy, tried to warn his younger partner to avoid ostentatious displays of wealth. But that advice was overwhelmed by Schwarzman’s visions for his sixtieth birthday.
He and his wife, Christine Hearst Schwarzman, rented a brick-fronted armory that occupied an entire block on Manhattan’s Upper East Side. They decked it out with orchids and palm trees, while adorning the walls with replicas of Schwarzman’s private art collection, including a full-length portrait of the birthday boy40. They hired the comedian Martin Short and the pop star Rod Stewart. The soul artist Patti LaBelle sang “Happy Birthday.” The guests included41 a real estate magnate named Donald Trump, the billionaire and New York mayor Michael Bloomberg, and several Wall Street CEOs, among them Jamie Dimon. The cost of the party was estimated at somewhere between $3 million and $5 million. Schwarzman would later describe it as “a celebration with six hundred people42 we cared about.”
A century earlier, a New York socialite, Cornelia Martin, had left her own mark on the Gilded Age with a notorious soiree at the Waldorf Hotel. The guest list ran to almost eight hundred, the ruling elite of the time decked out in homage to the icons of affluence among their European forebears. More than one attendee dressed up as Marie Antoinette43, whose lavish spending had helped lead the nation into insolvency—and her neck to the guillotine. The revelers did not present their comforts as a sign of a just society. “We are the rich,”44 one guest declared. “We own America. We got it. God knows how, but we intend to keep it.”
Schwarzman and his fellow Davos Men were not satisfied with mere wealth. They demanded that society ratify their privilege as morally sound. Schwarzman enjoyed the hedonistic pleasures of a maharajah while claiming standing as an everyman.
“I don’t feel like a wealthy person,”45 he once said. “Other people think of me as a wealthy person, but I don’t.”
Others certainly did. Shortly after Blackstone’s stock offering, the Senate Finance Committee introduced a bill that sought to dramatically increase taxes on private equity firms. It diminished the carried interest bonanza. Nicknamed “the Blackstone bill,”46 its four bipartisan cosponsors included a young senator from Illinois named Barack Obama. Another bill in the House47 produced similar results, threatening to increase Blackstone’s tax rate from 15 to 35 percent, while providing the Treasury with an additional $26 billion over the next decade.
Schwarzman stayed true to the plan that he had hatched decades earlier with Harriman. He had amassed wealth as a means of wielding influence. Now, he used his influence to protect his wealth.
He joined with other industry players and formed a trade association, the Private Equity Council. The council and its member companies unleashed a battalion of twenty lobbying firms. Blackstone alone would spend nearly $5 million on lobbying in 200748.
They trained their attention on Senator Chuck Schumer, a Democrat from New York, the state that was, not incidentally, home to Wall Street. Schumer deployed a novel means49 of pretending to champion public interest regulation while guaranteeing the maintenance of the status quo: he recast the bill to broaden its reach, making it applicable to real estate, which guaranteed wider opposition. The bills died.
Even in victory, Schwarzman did not stand down. He bolstered his armor by hiring Washington insiders drawn from Republican and Democratic administrations alike. Between 2011 and 2020, Blackstone and its employees donated nearly $54 million to candidates for federal offices and their so-called super PACs, pools of campaign cash stocked with corporate proceeds.
