From his perch at The Wall Street Journal, Robert Frank has become one of the nation's leading chroniclers of the 1%. He has been the newspaper's wealth reporter for eight years, writing about the lives, culture, economy, spending and investing of the wealthy. His blog, The Wealth Report, was recently named by Time magazine as one of the nation's most influential business blogs.
Following the success of his 2007 best-selling book, Richistan, Frank has published a new book on the American wealthy called The High-Beta Rich, which profiles millionaires and billionaires who lost their fortunes during the financial crisis. Yet the book also introduces the world to a new economic phenomenon: the increased volatility of today's large wealth.
While the top 1% used to be the most stable group on the income and wealth ladder, they are now the most unstable, prone to sudden booms and busts. Frank calls them the "high betas," the Wall Street term for stocks that have extreme highs and lows.
What caused this change in the world of wealth and how does it affect the rest of the economy?
We recently caught up with Frank to get the answer and to learn more about the high betas.
Prince: What's the thesis of The High-Beta Rich?
Frank: High-Beta tells the story of the increasingly manic nature of today's wealth. Conventional wisdom tells us that the rich just keep getting richer and we often hear in the media about how the wealthy are a protected species that is always getting bailed out. In fact, wealth today is more like a roller coaster than an escalator, and there are people constantly falling into and out of the 1%.
To tell the story, I interviewed more than 100 people with net worths or former net worths of more than $10 million. I tell several of their stories in colorful detail, rolling in stats and analysis from a new area of economic research that looks at the instabilities of modern wealth.
Prince: But hasn't that always been true? Haven't there always been people who get rich quick and lose it just as quickly?
Frank: To a degree, there has always been churn in the world of wealth. Austrian economist Joseph Schumpeter called it "creative destruction," where one sector of the economy replaces another because of business and product cycles. But the cycles of wealth are now far more rapid, extreme and frequent. The old saying used to be "shirtsleeves to shirtsleeves" in three generations. Now it can happen in three years.
Before the 1980s, the top 1% used to be the flat line on the income charts-rising and falling less than the rest of America during economic cycles. Suddenly, in the early 1980s-1982 to be exact-the 1% started jumping off the charts, soaring far higher than the rest of the country during good times and crashing harder during recessions. They became like the binge drinkers of the economy.
Prince: What caused this?
Frank: Economists don't know. The rise in inequality in America started the same year as high beta, so they are clearly linked. I try to find the answer by interviewing the high betas themselves. And what I found were three principal reasons. First, more fortunes are tied to the stock market. The Dow Jones rose from under 1,000 in 1981 to 11,000 and change today. That fueled the creation of the largest number of new millionaires and billionaires ever in America, with the rise of stock-based pay-and entrepreneurs who started and sold companies, either through IPOs or mergers. Those fortunes, however, are far less stable, since the stock market is up to 20 times more volatile than overall economic growth.