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Book review: The High-Beta Rich — How the Manic Wealthy Will Take Us to the Next Boom, Bubble and Bust

This review ran in the Nov. 21 edition of the Hamilton Spectator.

The High-Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble and Bust

By Robert Frank

Crown Business ($30)

Tim Blixseth grew up poor in rural Oregon with a rusty spoon in his mouth. Edra was a single mom at 17 who worked the night shift at a diner.  They met back in the 1970s at a restaurant Edra managed.

Fast forward to 2006. The former welfare kid was now one of America’s wealthiest men with a net worth estimated at $1.2 billion. The Blixseth’s had made their fortune on timber and real estate and ran an exclusive golf and ski resort in Montana for millionaires and billionaires.

The Blixseth’s owned seven homes, a private island in the Caribbean, a castle in France, two yachts, Gulfstream jets and his and her Rolls Royce Phantoms.  They employed 110 staff.

The Blixseth’s had taken up residence with other freshly minted billionaires and millionaires in a nation that author and Wall Street Journal reporter Robert Frank calls Richistan.

Richistan is home to the high beta rich. They’re the by-product of a financial system that rewards extreme risk-taking, borrowing, speculation and spending. The super-rich no longer make things or own businesses. They owe their fortunes to stocks, deals and financial engineering.

Frank says the fortunes of the high beta rich have become as monumental and seemingly permanent as their 30,000 square foot fortresses that they call home.

But their success and wealth is built on an illusion. The high beta rich are like human tech stocks, prone to wild swings and rapid cycles of value creation and destruction. Back in 2008, the value creation cycle kicked into a downward spiral. The residents of Richistan panicked. 

By mid-2009, America’s millionaires had lost about a third of their fortunes in the greatest one-time destruction of wealth since the 1930s. Incomes for the top one per cent of earners in the U.S. fell three times as much as they did for American earners as a whole.

By the winter of 2010, the party was over for the overextended Blixseth’s. The real estate market crashed. The Montana resort went under and was sold for less than 10 per cent of its appraised value.  They couldn’t cover a $375 million loan. Their 110 staff were let go. Even the phone service was cut off. Tim and Edna divorced and Edna filed for personal bankruptcy, going from rags to riches to rags.

While it’s hard to shed a tear for the Blixseth’s, Frank says we should all be afraid of what’s happening to the high beta rich. Very afraid.

“While these shocks may seem irrelevant and even amusing to the rest of us, they will increasingly reverberate through our financial and political life as the rich dominate more and more of the economy and funding for governments. Rather than viewing the financial crisis as a narrow escape for the rich, it may have been a warning that the worst is yet to come.”

While trickle-down economics is dismissed in most quarters, trickle down losses are proving very real. “As go the high-beta wealthy, so goes the rest of the country.”

By 2010, the top-earning five per cent of American households accounted for 37 per cent of all consumer outlays. The wealthy are the dominant spenders in the U.S. consumer economy.  So when the rich suddenly stop spending by choice or circumstance, the economy takes a massive hit and lots of us wind up out of work.

The high beta rich also backstop governments. In the U.S., the top one per cent of Americans pay more than 38 per cent of federal income taxes while the bottom 40 per cent pay little or no tax.

An increasing share of government programs will depend on the fortunes made and lost by a minority of high beta rich. “The masses at the bottom require increased funding for entitlements and social programs,” says Frank. “But those at the top, who are increasingly paying for those programs, will exert an outsize influence on politicians through their money and will lobby for lower taxes. The result is that governments will have more booms and busts and permanent deficits.”

Unfortunately, there’s no easy fix for high beta wealth. “To solve the problem requires solving two much bigger problems: the financialization of wealth and rising inequality,” says Frank. Governments show little interest in reigning in financial markets and economists can’t agree on a cause, much less a solution, to economic inequality.

“The issues get reduced to oversimplified debates about taxing the rich or shrinking government or punishing Goldman Sachs – all of which may be politically satisfying and maybe even helpful, but far from a solution.”

Frank does offer some survival tips for those of us not living in Richistan.

To better predict where spending, taxes and jobs are headed and avoid nasty surprises, we need to watch the stock market rather than traditional economic measures. 

Governments, companies and individuals need to take money off the table, saving more during booms so we can ride out busts.

We need to stop acting rich and being fooled by all that glitters. Wealth doesn’t solve problems; it just creates different ones and not only for the residents of Richistan.

“These tips won’t rid us of high-beta wealth or its contagion,” says Frank. “But they might allow us to build better financial and psychological levees to protect us against the coming storms and floods.”

Book review: The Coming Jobs War

This review first ran in the Nov. 7 edition of The Hamilton Spectator.

The Coming Jobs War

By Jim Clifton

Gallup Press


If you go by the results from the latest Forum Research poll, 65 per cent of us will be voting for a new mayor in Hamilton's 2014 municipal election.

That gives us 36 months to find ourselves a candidate.

Some of us will settle for a recycled politician or media personality who could bring some measure of name recognition to the mayoral race. 

But what if we broke with tradition and instead recruited a business leader from the private sector?

A leader who'd bring a wealth of senior executive experience, business acumen and an entrepreneurial spirit to council chambers.

A leader who’d be a champion of entrepreneurs and small business owners.

A leader who’d make our city the start-up capital of Canada, where small business was the business of Hamilton.

A leader who'd have a singular focus on creating good-paying, sustainable, knowledge economy jobs for Hamiltonians.

A leader who wouldn't spend a dime of taxpayer money on anything that didn't create jobs.

And a leader who’d rally business and civic leaders to drive down high school drop-out rates and build up a highly skilled, entrepreneurial workforce.

This is exactly the sort of leader who'd win the vote of author and Gallup chairman Jim Clifton.

“If you have a weak mayor, your city is going down,” warns Clifton. “If you have mediocre city council members, your city is going down. If you have a humble set of leaders on your school board, your city is going down.”

Sounds extreme but Clifton says the stakes are high. We’re heading into an all-out global war for good jobs. Right now, there are 1.2 billion full-time, formal jobs in the world. But there are three billion people who are working or looking for work. That leaves us 1.8 billion jobs short.

“If you were to ask me, from all the world polling Gallup has done for more than 75 years, what would fix the world – what would suddenly create worldwide peace, global wellbeing, and the next extraordinary advancements in human development, I would say the immediate appearance of 1.8 billion jobs – formal jobs. Nothing would change the current state of humankind more.”

Cities will be on the frontlines in the global war for jobs, says Clifton.  Cities are where entrepreneurs connect with innovators, commercialize ideas, launch start-ups and grow the small and medium-sized private sector companies that create the majority of new jobs.

To win the jobs war, a city needs to get its act together. All the key players  — all politicians, every business and local institution – need to be on the same page, fully engaged and aligned.

“Everybody in charge of anything needs to focus on job creation. If they divert their attention, vote them out. Be ruthless. If the bike path doesn’t have anything to do with job creation, there is no bike path. The jobs war is what should get city leaders up in the morning, what they should work on all day and what should keep them from getting to sleep at night.”

Cities that win the jobs war won’t be looking to other levels of government for handouts, says Clifton. “Free money eventually makes you more dependent. Free money, entitlements, more bureaucracy, less of your control – all these things make individual initiative, meritocracy and free enterprise weaker and less competitive. You have to jumpstart your city yourself.”

Winning cities will have mobilized what Clifton calls their local tribal leaders.  “All prosperous cities have a self-organized, unelected group of talented people influencing and guiding them. These are people who care very much about the success of their city.” Tribal leaders are loyal, highly successful, usually wealthy, respected and well-known. They have the influence, money, connections, speed and access to create jobs.

And along with waging an all-out war for jobs, winning cities will open a second front to battle high school drop-out rates. Clifton says cities should aim to cut drop-out rates in half by doubling student hope.

“Gallup has found that kids drop out of school when they lose hope to graduate. The reason they lose hope of graduating is because they don’t feel excited about what’s next in their lives. Having no vision or excitement for the future is the cause of dropping out of school.

“Parents, teachers and mentors would be wise to consider managing a student’s confidence and hope as much as or more than the mechanics of division and multiplication. And the prize for a student is not graduating but rather a job – even better, an exciting career.”

Along with building confidence and hope, cities need to foster an entrepreneurial spirit within their young people. “The scarcest, rarest, hardest energy and talent in the world to find is entrepreneurship. Innovation by itself has no value until it is chosen by talented entrepreneurs.

“If the image of free enterprise and entrepreneurship is going up among your youth, you will experience job creation. If it is trending down, may God be with you.”

The Coming Jobs War should be required reading and a call to action for Hamilton’s tribal leaders. If Clifton has it right, this is the group that will decide whether Hamilton wins or loses the global jobs war.  We’ll never be the best place to raise a child if we’re not the best place to get a job, start a business and grow a company.

For Hamilton to win the jobs war, we desperately need our tribal leaders to lead the charge in cutting high school drop out rates in half, fostering an entrepreneurial spirit in our next generation of Hamilton employees and business owners, and recruiting a 2014 mayoral candidate who will make job creation job one.