Chrystia Freeland

Today at 11am, Chrystia will interview Alan Simpson live on YouTube. She and the former senator will discuss the Obama administration’s proposed budget for the next fiscal year as well as his new memoir, Shooting from the Lip: The Life of Senator Al Simpson. You can watch the whole thing here:

In an age of rising income inequality, one of the big questions is what impact the growing gap will have on democracy. Francis Fukuyama worries about it in this month’s Foreign Affairs, in an essay that bears the worrying subtitle, “Can Liberal Democracy Survive the Decline of the Middle Class?” President Barack Obama, as he signaled again with his budget this week, is putting the issue at the center of his re-election campaign.

The powerful connection between money and politics is also on vivid display in the roller-coaster Republican race, where Rick Santorum owes his surge in part to the generosity of the Wyoming multimillionaire Foster Friess, whose “super PAC” helped keep Santorum’s candidacy alive by running TV ads on his behalf.

I interviewed Friess a few days ago, before he made his headline-grabbing remark about women using aspirin as contraceptives in his earlier days (“The gals put it between their knees, and it wasn’t that costly.”) He’s a folksy, white-haired, septuagenarian charmer whose Web site features a photo of him astride a horse and “Foster’s Campfire Blog.” He also has unequivocal views about the proper relationships among the wealthy, the state and politics.

Friess’s most striking observation was about the value of what he called “self-taxation,” as opposed to taxes levied by the state.

“People don’t realize how wealthy people self-tax,” Friess told me when I asked whether, given the country’s economic troubles, it was fair to ask the rich to pay a bigger share. “You know, there’s a fellow who was the CEO of Target. In Phoenix, he’s created a museum of music. He put in around $200 million of his own money. I have another friend who gave $400 million to a health facility in Nebraska or South Dakota, or someplace like that. You look at Bill Gates, just gave $750 million, I think, to fight AIDS.”

Friess’s point is that the common good is better served when the wealthy “self-tax” by supporting charities of their own selection, rather than paying taxes to finance government spending.

“I think we should get rid of taxes as much as we can,” Friess told me. “Because you get to decide how you spend your money, rather than the government. I mean, if you have a certain cause, an art museum or a symphony, and you want to support it, it would be nice if you had the choice to support it. Where we’re headed, you’ll be taxed, your money taken away, and the government will support it.

“It’s a question: Do you believe that the government should be taking your money and spending it for you, or do you want to spend it for you?” Friess explained.

As for the idea that an economic age like our own, which is conducive to creating vast fortunes, should also be one in which taxes are high, Friess considers that absurd. “If you look at what Steve Jobs has done for us, what Bill Gates has done for society, the government ought to pay them. Why do they collect money from Gates and Jobs for what they’ve contributed? It’s ridiculous.”

Indeed, Friess is unconvinced by the entire 99 percent paradigm. In his view, it is the Americans at the bottom of income distribution who are getting the free ride.

“I’m just so amazed at this concept that President Obama says, ‘I’m not going to let half the American people, that pay no taxes, bear the unfair burden of the other half, who are not paying their fair share.’ It’s pretty comical, when you think about it,” he said. “About 46 percent of the American public pay no income taxes.”

By contrast, Friess believes we all rely on the 1 percent and should respect them accordingly.

“It’s that top 1 percent that probably contributes more to making the world a better place than the 99 percent. I’ve never seen any poor people do what Bill Gates has done. I’ve never seen poor people hire many people,” he said. “So I think we ought to honor and uplift the 1 percent, the ones who have created value.”

Given these views, you probably won’t be surprised to learn that Friess’s main concern about the role of money in U.S. politics is that it is too hard for the wealthy to directly support their preferred candidates.

“I do dislike the system now, because when I give money to the Red, White and Blue Fund” — the super PAC that has been backing Santorum’s candidacy — “I have to be very, very careful not coordinating with the campaign. I have to be careful what I say. I think the best system would be if we all had unlimited free speech and spending our money the way we want, but give directly to the candidates,” he said. “There’s just too much jumping through too many hoops. And I’m not happy with that process.”

Having said that, Friess added, “the role of money is overplayed.” Meg Whitman’s millions, he pointed out, had been insufficient to win the governor’s seat in California. Santorum, he said, owed his ascent more to his tour of 381 towns in Iowa in a Dodge Ram truck than to Friess’s money.

Moreover, Friess argued that the 1 percent was not exclusively bankrolling the right. “If money was able to make things happen, I think there’d be more Republicans, if they’re theoretically the people with money. But I think the Democrats have more billionaires than we do.”

Even so, Friess couldn’t resist bragging a little about how effective his own investment in the Republican race had been so far. “Sheldon put up, I’m told, close to $10 million to back Gingrich, who’s kind of struggling right now, and I put up much, much less than that to help Rick Santorum,” he said, referring to casino magnate Sheldon G. Adelson. “So I like to tease that I’m the investor and Sheldon is the casino guy.”

If you want to get a finger-tip feel for one of the most important transformations in our world today, read The Fear Index, Robert Harris’s new thriller.

Harris has been widely praised for his adept portrayal of the hedge fund universe in which his novel is set. “The greatest pleasure of this book is that it gets the finance right,” cooed Felix Salmon, the Reuters finance blogger whose keyboard often oozes acid.

He is right that Harris’s hedgies are a welcome and realistic departure from the Masters of the Universe of most popular fiction. For one thing, these are the alpha geeks, the nerdy doctorate-holders whose testosterone is channeled into equations instead of frat-house swagger.

And Harris knows his superrich. As they are being wooed to make a billion-dollar investment, over a 1995 Latour in a fine Geneva restaurant, an international group of investors energetically discusses the ways that their national governments oppress them. Dr. Alex Hoffmann, the billionaire hedge fund manager protagonist who is making the pitch for their cash, reflects: “He was remembering now why he didn’t like the rich: their self-pity. Persecution was the common ground of their conversation, like sport or the weather was for everyone else.”

But the most valuable intellectual takeaway from this riveting novel is the element that has been widely dismissed by reviewers as familiar and unpersuasive: VIXAL, the intelligent machine at the heart of the story that torments its human creator and may be trying to rule the world. Michiko Kakutani, writing in the New York Times, gave The Fear Index a thumbs up, but deemed the machine takeover “silly and contrived.” VIXAL, the evil genius computer, “seems less like a plausible villain than like a metaphor for the greed and heedlessness that overtook Wall Street,” she wrote.

Kakutani’s dismissal of VIXAL as an unoriginal and uncompelling reworking of the Frankenstein template misses the most important point. VIXAL and the parallel world the computer program creates by interacting with other machines is worth reading about — but not for the usual pulp fiction pleasure of entering a vividly rendered imaginary world.

The Fear Index is fun to read because Harris is a great novelist, but VIXAL is worth getting to know not as a fictional character, but because so much of what it does is already happening in real life.

Futurists and fantasists have been dreaming about the rise of intelligent machines for centuries. Now it is actually starting to happen.

For a drier but in many ways even more astonishing account of what is going on, read “The Second Economy,” an essay in the McKinsey Quarterly by W. Brian Arthur, a visiting researcher at the Intelligent Systems Lab at the Palo Alto Research Center in California.

Arthur’s contention is that a second, machine-to-machine economy is emerging and that it will bring deep economic, social and political change comparable to the transformation wrought by the Industrial Revolution.

“Business processes that once took place among human beings are now being executed electronically,” Arthur writes. “They are taking place in an unseen domain that is strictly digital. On the surface, this shift doesn’t seem particularly consequential — it’s almost something we take for granted. But I believe it is causing a revolution no less important and dramatic than that of the railroads. It is quietly creating a second economy, a digital one.”

Arthur describes this economy as “vast, silent, connected, unseen and autonomous (meaning that human beings may design it but are not directly involved in running it).” The second economy is manifest in transactions as quotidian as checking in for a flight with a machine and as esoteric as the algorithm hedge funds of Harris’s thriller, which use information produced by machines to trade with other machines.

Economists and novelists aren’t the only people musing about the rise of the machine-to-machine economy and its transformative potential.

Yuri Milner is one of the savviest technology thinkers in the world; he was a pioneering investor in Facebook, a bet that was wildly vindicated last week.

Milner has a presentation in which he describes the nine most important changes in the world today. Three of them are about what Arthur has dubbed the second economy: the rise of what Milner calls “the Internet of things,” or the machine-to-machine economy; the growing power of artificial intelligence; and the emergence of a “global brain,” which is the network of all of the people and the machines in the world and their connections to one another.

The one aspect of The Fear Index that is tired and familiar is its depiction of the rise of the machine-to-machine economy as murderous and menacing. That time-worn worry that the smart machines will turn on their creators isn’t one I share. I am a fan of the machine-to-machine economy and of all the ways it makes my human life easier and less expensive.

But I am concerned about something Harris only hints at. At the end of The Fear Index, VIXAL changes its hedge fund’s mission statement. The first lines of the new, machine-written version, read: “The company of the future will have no workers.”

I’m not afraid our smart machines will try to exterminate us, but I do worry that the second economy may be a jobless one.

Arthur doesn’t offer much comfort on that score. In an exchange with a reader after his essay was published, the economist wrote: “Since the second economy began, in the early and mid-1990s, we’ve had wave after wave of downsizing and layoffs, and now we have ongoing structural joblessness. I hope jobs will be created, and maybe they will. More likely, the system, as so many times before in history, will have to readjust radically. It needs to find new ways to distribute the wealth.”

Mitt Romney’s thumping victory in the Florida primary this week is bringing us closer to a Romney-Obama face-off in the autumn. While we do not know for sure if Romney will clinch the Republican nomination, if he does, we can already say what the central question in November will be: Is the United States one nation under God, or has it become a country where the government needs to secure a better deal for the 99 percent?

We know Romney’s view. In a television interview last month, he explained: “When you have a president encouraging the idea of dividing America based on the 99 percent versus 1 percent — and those people who have been most successful will be in the 1 percent — you have opened up a whole new wave of approach in this country which is entirely inconsistent with the concept of one nation under God.”

Meanwhile, in his State of the Union address, the president opted explicitly for the 99 percent perspective. Restoring their fortunes is “the defining issue of our time,” he said. “No challenge is more urgent. No debate more important. We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules.”

The Obama analysis gets a lift from “The China Syndrome,” a recent paper on the impact of trade with China by a powerful troika of economists: David H. Autor, David Dorn and Gordon H. Hanson. The empirical study, which was cited in an important speech on inequality a few weeks ago by Alan Krueger, chairman of the president’s Council of Economic Advisers, is particularly significant because it marks a shift in consensus thinking in the academy.

In the debate about the causes of growing income inequality, U.S. economists have tended to opt for technology as the driving force. Indeed, in his remarks, Krueger referred to a survey he did of those economists, who overwhelmingly cited technological change as the most important factor.

But drawing on detailed data from local labor markets in the United States, the authors of the “The China Syndrome” argue that globalization, and in particular trade with China, is having a huge impact on blue-collar U.S. workers: “Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment.”

The deleterious effects go beyond those workers who lose their jobs. In communities hit by the China Syndrome, wages fall — particularly, it turns out, outside the manufacturing sector — and some people stop looking for work. The result is “a steep drop in the average earnings of households.” Uncle Sam gets hit, too, especially in the form of increased disability payouts.

Autor, Dorn and Hanson are no protectionists. But in a challenge to the “one nation under God” view of the world, they offer a sharp reminder that the costs and benefits of trade are unevenly shared. As they put it, their finding does not “contradict the logic” of arguments favoring free trade: “It just highlights trade’s distributional consequences.”

When I raised the issue with Joseph E. Stiglitz, the Nobel economics laureate and longtime doomsayer about the downside of globalization, he practically crowed with vindication. “The economic theory is very clear,” he said. “What happens when you bring together countries which are very different, like the United States and China, is that the wages in the high-wage country get depressed down. This was predictable. Full globalization would in fact mean the wages in the United States would be the same as the wages in China. That’s what you mean by a perfect market. We don’t like that.”

The truth is we are no longer living in “one nation under God”; we are living in one world under God. Globalization is working — the world overall is getting richer. But a lot of the costs of that transition are being borne by specific groups of workers in the developed West.

We are accustomed to thinking of the left as having an internationalist perspective. Liberals are the sort of people who worry about poverty in Africa or the education of girls in India. The irony today is that the real internationalists are no longer the bleeding-heart liberals, they are the cutthroat titans of capital.

Here, for instance, is what Steve Miller, the chairman of insurance giant American International Group and one of Detroit’s legendary turnaround bosses, had to say about globalization and jobs. “Well, first off, as a citizen of the world, I think everyone around the world, no matter what country they’re in, should have the opportunities that we have gotten used to in the United States. Globalization is here. It’s a fact of life; it’s not going away. And it does mean that for different levels of skill, there’s going to be something of a leveling out of pay scales that go with it, particularly for jobs that are mobile, if the products can be moved, which is not everything.”

No matter what passport you hold, if you run or own a global company, that is not really a big deal. But as Autor, Dorn and Hanson show, if you are a U.S. worker, that “leveling out” can be painful indeed.

Smart policy, however, can make a big difference. Europe may not seem to have much to teach the rest of the world at the moment, but as Chancellor Angela Merkel leads a group of German industrialists to Guangzhou this week, Americans might want to study how Germany has turned the China Syndrome to the benefit of both its chief executives and its blue-collar workers.

In an interview at the World Economic Forum in Davos, Bank of Canada Governor Mark Carney tells Chrystia that the implementation of the Volcker Rule in the U.S. will have unintended consequences in the international bond markets and that JPMorgan Chase chief Jamie Dimon is wrong to say that the Basel Committee’s decision to increase capital requirements is “anti-American.”

DAVOS, Switzerland–George Soros is a traitor to his class. That’s not an insult or a tabloid exaggeration. It is, instead, a direct quote from my conversation with the billionaire investor and philanthropist at the World Economic Forum here.

‘‘I am a traitor to my class,’’ Soros said. ‘‘I think that the income differentials are too wide and ought to be narrowed,’’ he added, which is why he favors a bigger hit on those, like himself, at the very top.

But among his plutocratic peers, he said, that is very much a minority opinion. In fact, Soros, who helped spearhead the muscular Wall Street support for Barack Obama in the 2008 presidential election, particularly among hedge fund and private equity investors, believes the president’s call for higher taxes is the reason he has been ditched by the financiers: ‘‘That has led my hedge fund community to abandon Obama in favor of any Republican, because they don’t like to be taxed.’’

Henry Blodget, a former (and formerly disgraced) Wall Street analyst who has been resurrected as one of the smartest writers on business and politics, agrees that the financial class is strongly attached to its tax breaks. After his Wall Street friends have had a few drinks, he said, ‘‘they are cackling that they have fooled everybody into thinking that there’s some justification for this.’’ ‘‘This’’ is the carried interest tax provision, which allows some private equity and hedge fund managers to pay tax at 15 percent.

But the cackling may be coming to an end — and the hostility toward the president mounting — following his State of the Union speech on Tuesday. A centerpiece of that address, and most likely a central theme on the campaign trail over the next nine months, was Obama’s insistence that the 1 percent must pay up.

‘‘Right now, because of loopholes and shelters in the tax code, a quarter of all millionaires pay lower tax rates than millions of middle-class households,’’ Obama said, in an oblique attack on the carried interest tax break and on Republican candidate Mitt Romney, who paid an effective tax rate of 13.9 percent on income of $21.6 million in 2010.

‘‘Tax reform should follow the Buffett Rule,’’ the president said. ‘‘If you make more than a million a year, you should not pay less than 30 percent in taxes.’’ And, like Soros, the president has decided not to duck charges of class war: ‘‘Now you can call this class warfare all you want. But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense.’’

And not just Americans. Davos is all about identifying the common challenges the global business community faces. One of the big ones this year is governments reining in their plutocrats in the most painful possible place — their bank accounts. In Britain, for example, the week began with proposals from Vince Cable, the business secretary, on how to bring down salaries for top executives.

‘‘We cannot continue to see chief executives’ pay rising at 13 percent a year while the performance of companies on the stock exchange languishes well behind,’’ Cable told Parliament on Monday. ‘‘And we can’t accept top pay rising at five times the rate of average workers’ pay as it did last year.’’ Chilling words for the City, especially since Cable serves in the cabinet of a Conservative prime minister.

Another one of the annual tropes at Davos is an emphasis on the softer side of business. This is a time of year for chief executives to wax poetic about their companies’ initiatives to educate the rural poor in India or provide clean water in Africa. But alongside these carefully crafted tales of corporate social responsibility, there is plenty of grumbling about government overreach. Three and a half years after the 2008 financial crisis, a particularly popular notion is the idea that the pendulum of financial regulation has swung too far, endangering not just the banking sector, but the sluggish economic recovery more generally.

There is also a powerful sense that businesspeople are being blamed for structural issues that aren’t their fault. One British executive told me it was wrong to criticize executives for their high salaries. Those were the fault of their boards and compensation committees: ‘‘The CEO,’’ the executive said, ‘‘really has no say.’’

In a similar vein, the private equity chief David M. Rubenstein, who served in the administration of President Jimmy Carter, said during a panel discussion that businesspeople like Mitt Romney shouldn’t be blamed for paying low taxes — that’s the government’s fault. ‘‘You change the law, and they’ll pay the taxes,’’ said Rubenstein, a co-founder and managing director of the Carlyle Group. ‘‘Romney said — and I’m not his defender — he’s paying whatever the law required. If you change the law, change the law. But don’t criticize him for paying the taxes that the law requires him to pay.’’

There’s some truth to that argument. After all, even Warren Buffett, the inspiration for Obama’s Buffett Rule, and the class traitor Soros today pay only those taxes required of them. Their point, as Soros told me, is that the tax rate should be higher. But of himself and Buffett, he added, ‘‘the Republicans are trying to save us from taxation — against our will.’’

Yet the Rubenstein defense goes only so far. The low tax rates for millionaires are neither a natural law nor an act of God. They are the result of a political process that, since the late 1970s, has pushed rates, particularly at the top, hugely downward. Business has been instrumental in that shift, both as a matter of general ideology and in fighting doggedly and skillfully for sector-specific tax breaks, like the carried interest provision.

It is pleasant to spend a few days in snowy Davos eating fondue, skiing and talking up creative examples of social entrepreneurship. It can even be fun to muse on one of the big questions the World Economic Forum has designated for collective cogitation: how to ‘‘redesign’’ capitalism.

But the hard part is embracing higher taxes or a lower salary. ‘‘I personally believe that when it comes to policy, you shouldn’t be pursuing self-interest but the public interest,’’ Soros said. But Davos Man prefers to believe in a world of ‘‘kumbaya’’ capitalism, where self-interest and the public interest would coincide. Openly insisting that this is not always the case is how Soros really has betrayed his class.

Watch George Soros tell Chrystia why he thinks it will take years for Germany to realize that Europe needs additional stimulus and why he would be loading up on Italian government bonds if he were still an active investor.

Watch as the billionaire investor tells Chrystia why the hedge fund community has abandoned President Obama and why there’s not a huge gap between the views of the president and Republican front-runner Mitt Romney.

Among old Russia hands, the smart thing to say about Mikhail D. Prokhorov, the billionaire who is running for president, is that he is a puppet of the Kremlin. He’s not a real opposition politician, the argument goes, he is merely a liberal-sounding insider who has been given Prime Minister Vladimir V. Putin’s blessing to compete to make the race look more legitimate and to split the liberal vote.

All of this is true. But when I interviewed Prokhorov in Moscow a few days ago, I realized that it missed the most important point — what Prokhorov’s candidacy, and the man himself, tells us about the battle raging today inside the Russian governing elite.

When people take to the streets to challenge their regimes, particularly in societies that had been dismissed as apathetic, the most exciting story is the protesters. Many of them are fresh faces, and they can be painted in the idealistic colors of the outsider.

The opposition is certainly important — and it usually also has the virtue of being right. But the fate of the protest movement is very often decided not on the raucous streets where the opposition marches, but in the grim offices where the governing establishment decides how it will respond and how it can hang on to the loot it acquired while in power.

That was the case in the Soviet Union 20 years ago, when three career Communist Party officials gathered in a hunting resort in Belarus to sign the death warrant of the regime that created them. It was true of the Orange Revolution in Ukraine, which was led by a man who had served as prime minister and central bank chief for the president he was defying. And it was decisive last year in Egypt, where Hosni Mubarak lost the support of the military.

Prokhorov’s decision to run in the presidential election in March is, in the words of the man himself, a sign that the Russian elite, too, is seriously divided.

Prokhorov made no bones about being a political neophyte and a candidate of the elite. “It’s not easy to pass all the barriers,” he said, referring to the intentionally onerous criteria a candidate must meet to contest the presidency. “You need to have more or less a green light to pass to the ballot.”

When I asked if he meant a green light from the Kremlin, Prokhorov insisted that politics at the top were more complicated. “It’s more difficult,” he said. “You need to have a green light from a majority of the Russian elite.”

But that elite, Prokhorov said, is not monolithic: “The Kremlin is not, like, one person or two people — there are wings, liberal wings and conservative wings. It’s an ongoing fight between them. This is the nature of Russia right now, that even within the parties, within the government, in the Kremlin, we have these wings. So it is a fight between the liberal and conservative wings: What is the future of Russia.”

Prokhorov said the conservative wing was “very cynical.” “They need stability at any price. And they are ready to pay any price, even instead of future development,” he said. “They are afraid of competition, they are afraid of development.”

But the liberals are ascendant: “I think that the liberal part of the elite is bigger and bigger from day to day, because I have a lot of calls from different levels, and they really express their support for my candidacy.”

These establishment liberals, of whom Prokhorov is very much one, believe “the era of managed democracy is over.” As Prokhorov said, “We now have all the pieces in place to move very fast to being a real democratic country.”

But Prokhorov wants that shift to happen by consensus within the elite. When I asked him if an Orange Revolution could happen in Russia, he was aghast.

“I am against any revolution, because I know the history of Russia. Every time we have a revolution, it was a very bloody period,” he said. “So I like very fast evolution.”

That evolution should be achieved, he believes, by a deal within the governing elite: “We need to sit at the table — the liberal wing and conservative wing. We need to sit together, to speak in a very open way, and make a decision — what is the future of Russia.”

To the leaders of the Russian protest movement, this vision of a cozy, elite-driven evolution is wishful thinking at best. Grigory Chkhartishvili, a best-selling Russian novelist who writes under the pen name Boris Akunin, predicted this week that Putin would be forced out of power in March.

But even if, as in Cairo last year or Kiev in 2004, the street ultimately does triumph, the elite battles Prokhorov embodies remain critically important.

Garry Kasparov, the chess champion and opposition leader, told me these internal divisions were a reason to hope that the Kremlin did not have the stomach for severe repression.

“This option is taken very seriously in the Kremlin,” Kasparov said. “But it is all about the balance of power within the ruling elite, because now they all understand, if Putin goes, maybe 10, 15, maybe 20 percent of those who are surrounding him and making this core of the elite, they will be facing trial; they can lose money. But most of them — 80 percent at least, maybe more — will be making deals with the new government. Maybe giving up some money, but securing their fortunes. If they go into oppressive mode, then the numbers will change and any revolutionary explosion will blow them up.”

If it comes to a choice between hanging on to political power or hanging on to at least some of their Swiss bank accounts, Kasparov is betting that 80 percent of the elite will be prepared to do a deal. Prokhorov’s political debut could be a very important sign that Kasparov is right.

As you may have heard, Chrystia has a new talk show on YouTube called the Freeland File. Each week, Chrystia and her guest roster of marquee policymakers, business leaders and thinkers will be providing commentary and analysis that illuminate the world’s most pressing issues.

Thanks to a Christmas miracle, Chrystia’s Russian visa arrived in time for her to travel to Moscow and interview Mikhail Prokhorov for the Freeland File’s debut episode. In the three clips below, watch as the Russian billionaire and presidential candidate tells Chrystia why he would be a better leader than Vladimir Putin; how his political career started with his 2007 arrest over a prostitution ring in France; and what he plans to do with his NBA team if he wins the election in March.