Squeezing the middle class so the Superclass prospers

Posted Apr 9th 2008 11:00AM by Peter Cohan
Filed under: Rich in America, Housing

The New York Times reports that in 2007, the median family made less -- $60,500 -- than it did in 2000 -- $61,000. Meanwhile, that family's costs have spiked -- oil is up 342%; wheat, milk, and egg prices have doubled or tripled. And the dollar has lost 65% of its purchasing power. But no worries -- hedge funds are making out well. DealBook reports that John Paulson, who famously profited from selling subprime short last year, made $3 billion in 2007. I don't know how much he made in 2000, but I'd bet that he's better off now than he was then.

Newsweek reports that people like Paulson are part of a new Superclass that's prospered in the last seven years. The Superclass is a group of a few thousand government and business people who control most of the world. How many and how much? Newsweek notes: "The top 50 control almost $50 trillion in assets. The heads of the world's biggest corporations are also members; the top 2,000 support perhaps 500 million people, generate almost $30 trillion in sales and have well over $100 trillion in assets."

Thanks to tax cuts passed in 2001, Paulson probably paid a lower tax rate on his $3 billion than the median American paid on his or her $60,500. Specifically, Paulson could have paid 15%, the long-term capital gains rate, on his income from shorting subprime. The median family paid a 25% rate on its income. That capital gains rate was 20% in 1997 so Paulson may have paid $150 million less in taxes thanks to that 15% rate. But the most interesting part is how Paulson profited.

DealBook reports that Paulson profited while the typical homeowner suffered. It notes that, "By standing conventional wisdom on its head and deciding that housing prices could decline on a national level, and that investment-grade mortgage bonds would be subject to default in record numbers, Mr. Paulson, 52, set a new record for payouts on Wall Street..." And since he's part of that Superclass, Paulson can afford to hire self-pitying former Fed Chair Alan Greenspan as an advisor.

Meanwhile, DealBook cites an IMF estimate that the loss of value that lined Paulson's pocket may hit $1 trillion. That global loss in value springs from the disaster in the subprime market which will likely result in millions of home foreclosures in America. The Superclass will probably need to find new ways to make its billions this year because the word is out on the subprime short trade.

And for those who voted the current regime into office, if you're not in that top 2,000 people, you voted against your own economic interests. The miracle is that a country of 300 million people was hijacked by a tiny elite that was able to persuade millions of voters to give them power in order to implement economic policies that favored the Superclass at the expense of the average American.

I admire Paulson's prescience and nerve in profiting from the subprime collapse. I just think it's interesting that he is paying less tax on his $3 billion in earnings than the typical American on the losing end of that subprime trade.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Tags: featured, John Paulson, JohnPaulson, subprime, superclass

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Reader Comments (Page 1 of 1)

4-09-2008 @ 12:00PM

mk in dc said...

If true, this is a disturbing development. But before I buy in, I'd like to see some more objective analysis. Relying on an NYT analysis of these trends is akin to reading back the points made in a DNC press release; there's just no credibility in their examination of any affairs under the Bush admin.

Next, there are contraindicators to this finding everywhere you look. Look around you, Peter: avg. home sizes up 100% in 20 yrs., 2 massive SUVs in every driveway, hdtvs in every other room, 3 stores in every mall selling $300 xboxes and other silly toys to those with excess disposable income. The materially affluent lifestyle -- on a level not imaginable for those who grew up in the 30s and 40s -- is everywhere...not just for the lucky few in the "superclass" or whatever term the latest bitter journalist making $55k wants to us to call it.

Okay, so some of this material wealth is financed by those with too much of an appetite for credit, living beyond their means...blah blah blah. The fact is the American economy remains the single largest and most productive, and American government one of the least intrusive. There are those who seem to want to change this equation in favor of those who really need more pie - to paraphrase Comrade Michelle Obama from another one of her whinefests yesterday.

If you really think the boom of the 80s - 00s was confined to the lucky few, just look at her -- Mrs. Grievance. A girl from the southside of Chicago from a family of limited means, gets a nice degree or two, gets a job at the big law firm and marries a striving, if low paid, pol. Now she's making $300k plus, got the big house, the nanny, the private schools. Still, somehow, America owes her more.

You and Michelle Obama are hugely successful and still don't seem to get it: The opportunity in this country is still there, for those who have the desire to compete. The left needs to stop bitching about how unfair it all is, as government can do NOTHING to solve this "problem." Stop the whining, tell people to go out and get an education, hustle a little on the job. Don't commit a crime, get married, stay married, look after your health, save a bit here and there, and you'll do fine. Easy.

4-09-2008 @ 12:09PM

PATRICK said...

miss information...distortion... out of context

Well that pretty much sums up this report Mr. Cohan.
Mr. Paulson made money from his investments. This was available to everyone. I missed out on it.
Good for Mr. Paulson . Too bad for me.

?? Now if Mr. Paulson lost all of his investment on his short.. Well that would have been too bad.
I believe Mr. Paulson made his investment starting in early 2007 and cashed out in late 2007, long term capitol gains would not be in effect for this.
He would have paid max income tax on his gain...

Mr. Cohan , you state a median income taxpayer would have "paid 25%". This is another miss information. The income tax rate for income is a graduated rate. A portion of the median income is 0 % ( first $4,500 of income). To state that their tax rate is 0% is as missleading as saying rate of25%.
You hide a insult behind a compliment... admire his prescience and nerve... then state he paid less taxes than a median taxpayer...
If, a big if, Mr. Paulson did profit $ 3 billion .. even at the losest rate (15%) that equals to $450,000,000. So if the median income , $60,000 , person pays more income tax than Mr. Paulson did. Wow that guy sure is in debt..

I feel you, Mr. Cohan , have taken some liberties with the truth... YOU LIE...
But then , if you tell enough lies to enough people ... some one might believe you ..

Patrick, proud to be an American

4-09-2008 @ 12:44PM

brazen said...

wow mr. cohan. you seem awfully bitter. you are taking an awful lot of liberties with your article. it is most likely the average 60k family, after deductions and credits, pays less than 10% on income taxes. mr. paulson probably paid short term capital gains not long term and therefore the highest tax rates. even if by some chance he did only pay 15%----that is $450 million dollars; you should be cheering him. the sad tale is this 450 million he paid to our countries treasury will be misspent by the "superclass" politicians who do not have a clue how much a gallon of milk or a loaf of bread cost. It scares me to think what you must be teaching those young minds at college.