Davos Man, page 5
But Schwab was not satisfied by ordinary wealth. He entrusted his nephew, Hans Schwab, with the construction of a series of for-profit businesses, tapping the Forum as his personal venture capital fund.
His nephew had been overseeing the logistics of the Forum’s events when, in the mid-1990s, he joined forces with a contractor to create a new company, Global Events Management. The Forum supplied about half of the startup capital. From inception, the new business enjoyed a contract from the Forum to manage all of its events, a deal worth several million dollars a year.
Klaus Schwab was so delighted by the success of the business that he told Hans that he was entitled to 5 percent. His nephew asked if he should prepare a legal document making this official. His uncle waved him away. “We’re family,” he said.
Schwab was cognizant that running a for-profit company on the side of a nonprofit could bring unwanted scrutiny from the authorities. Yet he was so proud of his entrepreneurial exploits that he pressed Barbara Erskine, the communications chief, to write about the events business in the Forum’s annual report. When she balked, suggesting that this would constitute an admission that the Forum was taking liberties with its nonprofit status, Schwab was not grateful for her counsel.
“He was furious,” Erskine told me. “He sat me down and said, ‘Look, I want to be regarded as a businessman.’”
Schwab soon dispatched his nephew to Boston to run his new obsession—Advanced Video Communications, a startup that was building a videoconferencing system. At Schwab’s direction, the Forum had invested roughly $5 million into the venture.
For two years, Hans Schwab oversaw the refining of the product while raising more funds. He brokered a deal under which a publicly traded technology company, USWeb Corp., purchased the video startup, handing over stock that valued it at about $16 million. The company elevated Klaus Schwab36 to its board while awarding him stock options worth as much as $500,000.
As USWeb’s shares soared in value, the Forum’s initial $5 million investment became worth at least $20 million. Just before the merger closed, Klaus Schwab called his nephew and demanded a last-minute change. The Forum’s shares in Advanced Video Communications had been transferred to a new entity—the Schwab Foundation for Social Entrepreneurship. The foundation was to receive the proceeds.
Hans Schwab was taken aback. A last-minute change of ownership threatened to derail the transaction. But his uncle was adamant.
“He said, ‘This needs to get done right now,’” Hans Schwab told me. “I had never heard of the Schwab Foundation, and I suddenly had to change all of the contracts. I knew it was his little thing that he was cooking up. Suddenly, in the last hour, he could see that there was going to be huge sums of money involved, the sort of money that he had never seen before, and he wanted to put it in a structure over which he had 100 percent control.”
According to its website, the foundation was Hilde Schwab’s undertaking. The organization promotes small-scale enterprises that address issues of social importance—extending the reach of clean water and electricity in the developing world, and creating opportunities for women. Where the money has gone is effectively unknowable. Swiss authorities require minimal disclosure.
The same year of the USWeb deal, Publicis Group, a French advertising and public relations giant, purchased the events business in a deal that fetched 6 million Swiss francs. Hans Schwab approached his uncle to ask about his promised 5 percent.
“He said, ‘We can’t do that,’” the younger Schwab recalled. “It doesn’t look good.”
Schwab’s ultimate talent, say those who have worked with him, is an ability to cater to the narcissistic tendencies of the powerful. He displays faith in the veracity of his statements, even when they are at odds with reality and the ethos of the Forum. This has allowed Schwab to celebrate authoritarian leaders as champions of the public good, while raking in partnership revenues from companies hungry for access to the markets they rule.
This particular year, Schwab had scored an especially monetizable coup. He had persuaded China’s president, Xi Jinping, to attend Davos and deliver a keynote speech.
Xi’s speech was the highlight of the 2017 meeting. Jack Ma occupied a front-row seat in the auditorium. So did the outgoing American vice president, Joe Biden, nursing regrets that he had not run against Trump.
Xi used his turn at the podium37 to lay claim to credentials as the ultimate defender of the rules-based international trading system, a committed devotee to international cooperation.
That the president of China could portray himself this way underscored the astonishing extent to which the traditional order had been upended. China had long been accused of subsidizing state industries, exploiting its workers, and dumping its products at unfairly low prices on world markets. Xi ruled not by dint of having won an election, but in accordance with the dictates of the Chinese Communist Party. On his watch, Beijing had mounted a brutal crackdown on dissent.
Thrilled by Xi’s participation, Schwab bestowed the one currency he could pay—laundered legitimacy.
“In a world marked by great uncertainty and volatility, the international community is looking to China to continue its responsive and responsible leadership,” Schwab declared as he introduced the Chinese leader.
In a central irony of the Forum, the founding Davos Man was hosting an event crammed with lectures about transparent governance while bowing to a Chinese dictator, all the while running his own operation in a fashion uncomfortably akin to a Chinese state-owned enterprise.
None of this was new. To attend Davos and dip into its various currents has always involved participating in a none-too-subtle form of stagecraft.
But this year, with the world listing toward illiberalism, Davos Man and his annual celebration of himself felt especially unmoored from reality.
Inside a fondue restaurant, at a cozy dinner organized every year by the writer Anya Schiffrin and Financial Times columnist Rana Foroohar, I decompressed with journalist and economist friends. We were fellow adventurers, huddled around the campfire to relate our sightings—Davos Man in his native habitat.
Joe Stiglitz, the economist, was respected enough to gain entree to gatherings of billionaires, yet grounded in the troubles of wage earners, making his impressions valuable. We compared notes on the Forum. So much talk of inequality. So little discussion of policies that could shift wealth from Davos Man to everyone else.
Stiglitz rattled off what a reasonable approach might include: bolstering the power of workers to bargain for better wages, and redistributing wealth through progressive taxation.
“More rights to bargain for workers, that’s the part where Davos Man is going to get stuck,” Stiglitz said. “The stark reality is that globalization has reduced the bargaining power of workers, and corporations have taken advantage of it.”
This was a point that Stiglitz had been making for years. The global economy was not some product of random events. Its beneficiaries had engineered it to serve their interests.
People often discussed globalization like it was so complex that no one was really in charge, while presenting it as an all-or-nothing proposition: We could have global supply chains and modern medicine, or we could go back to sleeping on cave floors and eating grubs. We could accept widespread economic inequality as the unavoidable price that society paid for wonders like iPhones and air-conditioning, or we could wind up like Venezuela.
Davos Man was not the originator of this formulation. More than a century earlier, Robber Barons like Carnegie had portrayed inequality as the inevitable by-product of human progress.
“We cannot evade it,”38 Carnegie wrote in 1889. “It is best for the race, because it ensures the survival of the fittest in every department. We accept and welcome, therefore, as conditions to which we must accommodate ourselves, great inequality of environment; the concentration of business, industrial and commercial, in the hands of a few.”
But Davos Man had advanced the idea from a defensive justification for his station to an offensive weapon in pursuit of more wealth. Here was the central component of the Cosmic Lie, the argument that innovation only thrived when the rewards were dramatic, as if winner-take-all marketplaces were a requirement for any wins at all.
“The way we have managed globalization has contributed significantly to inequality,” Stiglitz said. “But I have not yet heard a good conversation about what changes in globalization would address inequality.”
That night, a handful of major American financial executives gathered for cocktails at a private event. The conversation turned to Trump and his unorthodox approach to governance. Were they worried about a trade war? About confrontation with Iran or North Korea? About the breakdown of the liberal democratic order?
They shrugged. They were not thrilled about Trump’s proclivity to bully people on Twitter, threatening American companies that invested overseas. They could live without his talk of renouncing American public debt, as if the United States Treasury were a giant Trump casino staring down a creditor. But they were delighted by the elevation of a man who valued what they valued: money. Trump had promised to deliver tax cuts, and he was poised to deliver, given that Republicans were in charge of both chambers of Congress. Like everything else in Trump’s world, they would be amazing, huge, unprecedented.
Inequality was a subject for panel discussions. Privately, Davos Man was anticipating the ineluctable feeling of more money landing in his accounts, beyond the purview of any pain-in-the-ass tax collector.
Chapter 2
“The World That Our Fathers in World War II Wanted Us to Live In”
How Davos Man Poisoned Globalization
As a sixth grader in Houston1, Jeff Bezos designed a student survey to assess the effectiveness of the teachers at his school, yielding a graph of their relative performance. Years later, as a single twentysomething2 in New York City, he took ballroom dancing classes on the assumption that it would increase his “women flow,” breaking down dating the way that investment bankers analyze deals.
Stories about Bezos’s obsessive analytical tendencies are so numerous that they constitute their own genre. They resonate as the explanation for how a nerdy kid from American suburbia took a simple idea for how to sell books and grew it into an empire so vast that it has refashioned modern life.
More than any other Davos Man, Bezos is the embodiment of success in an age defined by innovation, iconoclasm, and net worth. Budding entrepreneurs mine his biography with cultish reverence. Bezos has played along, serving up anodyne “Jeffisms” that are embraced by the business world as the secrets to effective management. (“The keys to success are patience, persistence, and obsessive attention to detail.”) He touts Amazon’s leadership principles, including “Customer Obsession,” “Hire and Develop the Best,” and “Insist on the Highest Standards.”
Amazon’s dominance surely reflects its founder’s formidable skills of execution, but the company’s statement of principles is missing key elements that have been integral to its rise. The complete list would have to include amassing monopoly power and applying it to crush competitors; relentlessly squeezing workers for productivity; and gaming the tax system to avoid surrendering money to the government.
These are the less celebrated ingredients that have allowed Bezos to capture an outsized share of the gains from globalization, amassing a personal fortune exceeding $200 billion, including the trophies of the Davos Man lifestyle: a triplex penthouse with two swimming pools on Manhattan’s Fifth Avenue, a $165 million mansion in Beverly Hills—the most expensive property ever sold in California—a 27,000-square-foot home in the nation’s capital, along with a $66 million Gulfstream jet and a custom-built 417-foot-long yacht worth $500 million. Bezos constructed a miraculously efficient marketplace and distribution network, connecting factories around the world with millions of consumers. Along the way, he bestowed once-unimaginable convenience on humanity while erasing the traditional limits of time and space, pervading the sense that virtually anything can now be purchased nearly everywhere. But the benefits of this grand accomplishment have flowed overwhelmingly into Bezos’s own pocket, while the costs have been borne by laborers around the globe, whose wages and working conditions have been relentlessly pressured by Amazon.
The magnitude of Bezos’s winnings may be an outlier, but his mode is representative. This is how Davos Man looted an American economy that once lifted fortunes for everyone, capturing wealth that previously flowed to ordinary people.
And this is how many American workers—especially the white working class—became so enraged by globalization that they came to see trade as a conspiracy, embracing a president who threatened to blow the whole thing up.
Amazon’s astonishing scale reflects its unrivaled success in utilizing crucial elements of the global economy—not least, the explosion of international trade in the decades after World War II. But Bezos’s near-limitless wealth alongside the desperation of his workers provides a potent illustration of why globalization has come to be depicted as a malevolent force in many countries, a sentiment exploited by political movements offering fake solutions to very real problems.
The erosion of faith in international trade is a dangerous development, a threat to a vital legacy. Trade has been central to rising living standards across major economies for generations. And trade has proved a crucial component of a world order that has discouraged armed conflict.
At the end of World War II, as the victorious powers engineered a new order, they leaned heavily on the notion that communities whose livelihoods are dependent on trade have an abiding interest in peace. They turned lethal combatants into lucrative business partners, creating jobs, lifting incomes, and diminishing the appeal of nationalism.
This is what Davos Man has threatened by hogging the bounty of globalization.
The descent into World War II had been hastened by trade hostilities.
In 1930, as the United States confronted the Great Depression, the Republican-controlled Congress unleashed the infamous Smoot-Hawley Tariff Act to insulate American factories and farms from foreign competitors. The law imposed steep tariffs on hundreds of products, from sugar to iron.
Outraged international trading partners responded with their own tariffs on American-made goods. Tit became tat, and world trade collapsed, intensifying the Depression globally.
When the Democrats took over Congress two years later, they repealed the law, but Britain, France, Germany, and other European countries maintained their tariffs, entrenching the nationalist animosity that exploded into war.
Some 85 million dead later, the soon-to-be victorious Allies gathered at a hotel in Bretton Woods, New Hampshire, in July 1944 to plot the postwar order. They emerged three weeks later with an agreement designed to avoid the reawakening of nationalistic hostilities. They would make their currencies freely exchangeable. They formed the International Monetary Fund to aid countries facing financial duress. And they embraced a proposal for an organization that would promote international commerce.
“The peoples of the earth3 are inseparably linked to one another by a deep, underlying community of purpose,” declared the head of the American delegation, Treasury Secretary Henry Morgenthau. “A revival of international trade is indispensable if full employment is to be achieved in a peaceful world and with standards of living which will permit the realization of men’s reasonable hopes.”
Successive American administrations would champion open trade as a magnanimous vehicle of liberty for people around the world—an easy sell during the Cold War, when the repressive Soviet-style system could be depicted as the inevitable alternative. But no small measure of self-interest guided the policy. The United States had emerged from the war as a superpower. Its economic output had roughly doubled as its factories produced the armaments for battle. Half of the world’s manufactured wares4 were produced inside American plants. Its financial reserves were second to none. If money and goods were allowed to move freely around the globe, no country would prosper more than the United States.
The three decades that followed the end of World War II did not eradicate deep-seated racial and gender discrimination in the United States. They included a disastrous war in Vietnam and extreme social ferment. Yet within those thirty years, the United States saw broad economic advancement. Tax rates exceeding 70 percent5 for the wealthy coincided with robust economic growth that averaged 3.7 percent a year. That translated into jobs and rising wages for virtually every slice of the population—whites, Blacks, Latinos, Asians; men and women; people with high school educations and those with advanced degrees. The benefits were far from equal, but the old dictum that a rising tide lifts all boats had operative force.
The trade organization conceived6 at Bretton Woods was abandoned in 1950, as the United States objected to its rules taking precedence over domestic policy. But it was replaced by a more limited yet enduring entity known as the General Agreement on Tariffs and Trade, a broad pact to reduce barriers to commerce. By 2000, the volume of trade7 between members of the GATT and its successor institution, the World Trade Organization, had swelled to twenty-five times the volume of the half century earlier. The result was a consumer windfall, and an expanded array of export opportunities for businesses around the world, generating jobs.
In previous centuries, countries generally looked abroad only for items that they could not produce at home. Oceans were vast and full of pirates, tempests, and other terrors.
Transportation was expensive and prone to mishaps, while communication was plagued by misunderstanding. But the advent of so-called container shipping8—which put finished wares inside standardized crates that were easily transferred to trucks and rail—dramatically accelerated the pace of loading and unloading. The emergence of global banking and the internet further shrank the globe.
With the risks of trade tamed, multinational brands were supplied a compelling opportunity to reduce their costs by making their goods in low-wage countries.
