PLUTOCRATS AND THE REST OF US
If you really wanted to examine percentage-wise who was hurt the most on their income, it was Wall Street brokers.
—Alan Greenspan, shortly after his appointment as chairman of Gerald Ford’s Council of Economic Advisers in 1974, explaining the impact of inflation
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 for everyone else.
—Robert Harris, The Fear Index
A stranger to human nature, who saw the indifference of men about the misery of their inferiors and the regret and indignation which they feel for the misfortunes and sufferings of those above them, would be apt to imagine that pain must be more agonizing and the convulsions of death more terrible to persons of higher rank than to those of meaner stations.
—Adam Smith, The Theory of Moral Sentiments
If you ever have to work at a call center, make sure it is Zappos. The online retailer has built a business around the idea of, as founder Tony Hsieh put it in his bestselling advice book cum autobiography, Delivering Happiness, the unlikely premise that buying and selling stuff over the phone can be an emotionally nurturing experience for both parties. In pursuit of that goal, Zappos has created a corporate culture so widely admired that the online shoe seller now has a business sideline teaching others how to operate the Zappos way—for $5,000 and two days of your time, you and your top team can be trained on how to bring the Zappos culture back to your own cubicles.
A cheaper option is to take one of the free company tours Zappos offers to anyone who wants one, including complimentary pickup and return on a bus driven by one of the characteristically upbeat members of what they call “the Zappos family.” When I stepped outside my hotel on the Las Vegas strip and got on board on a blisteringly hot day in August 2010, a vacationing family of three from Virginia were already seated. They had been recruited to make the visit the day before while hiking in one of the canyons outside the city. There they met an evangelical Zappos employee—there is no other kind—who urged them to visit.
On the outside, Zappos’s headquarters in Henderson, Nevada, a suburb of Las Vegas, is a typically nondescript, low-rise building in a corporate park surrounded by desert and freeways. But inside you can start to see what all the fuss is about. Visitors are greeted by a popcorn machine, hula hoops, a take-what-you-like bookshelf, and badges with an array of colorful markers and the instruction “Pimp your name tag.” The mood is part self-improvement seminar—the bookshelf is heavy on the works of Jim Collins and Clay Christensen—part wacky college dorm, and part low-rent version of luxe Silicon Valley firms like Google and Facebook. Zappos, too, has free food and a concierge desk for employees, but neither is quite up to the swish standards of the Valley.
When we meet for lunch at a steakhouse a five-minute drive away (this is one of those neighborhoods without sidewalks), Hsieh tells me he moved Zappos from San Francisco to Las Vegas because the city has “a call center population” and a twenty-four/seven culture. That’s a nice way of saying this is a place where you can find the lower-skilled, lower-paid workers you need for customer service. Within that universe, though, Zappos really does deliver on its promise of being “free from boring work environments, go-nowhere jobs, and typical corporate America!”
Our tour guide—he proudly informs us that you need to know two hundred things about Zappos to be a certified host—says, “I was working at a call center that was kind of the opposite of this—kind of a sweatshop” before joining two and a half years earlier. A year and a half earlier he’d recruited his better half: “I was having great days and my wife wasn’t, so I got her a job here.”
Part of the appeal is that Zappos—core value number three: create fun and a little weirdness—encourages its employees to let their freak flags fly: when you walk past the cubicles of the recruiting team, they blast you with music and wave barbells in time, brightly colored mullet wigs and feather boas are a favored work accessory, and the otherwise grim rows of cubicles and windowless meeting rooms are enlivened with homemade decor that includes bright balloons, streamers, and Chinese dragons.
A lot of life at Zappos is about “WOW”—core value number one: deliver Wow through service—and that delight starts with making employees feel privileged to work at Zappos. In my two days in Henderson I was told a dozen times that “you have a better chance of getting into Harvard than getting a job here.” On a “WOW!” wall—writing on the walls is, of course, positively encouraged—someone had written, “I am WOW’ed that people want to tour my job.” There is a “Royalty Room,” complete with throne and crowns, because “when you see yourself as royalty, you will treat yourself and other people better.”
Members of the Zappos family are taught to deliver WOW by going “above and beyond the average level of service to create an emotional impact on the receiver and give them a positive story they can take with them the rest of their lives.” Everyone at Zappos has a personal tale of WOW—our tour guide’s is sending flowers to a caller because her daughter had been in a car accident—and performing these small acts of kindness seems to be as delightful for the giver as it is for the receiver.
“I’m completely happy answering the phones—and that sounds insane,” Michael Evon, a forty-year-old mother of two with braces, blond hair, and blue eyes, told me. “They really let me accommodate the customer. There are a lot of exceptions made and it gives you a great feeling—you are able to help someone.”
Sometimes, that help is just having a good, long chat. Zappos employees pride themselves on marathon conversations with shoppers—an astonishing and humanizing goal in a line of work where getting off the phone as quickly as possible is usually the goal. Evon’s longest is six hours—a little short of the record seven and a half hours—with a customer who called to return a pair of shoes and ending up buying a bathing suit and bonding. “She was fifty and I just happened to be the same astrological sign as the guy she’s dating,” Evon said. “It was things I love—fashion, travel, and psychology.”
Evon’s best WOW was straight out of a Jodi Picoult novel: the mother of an autistic girl called because the shoes she had purchased for her daughter didn’t fit. But simply returning the shoes and replacing them with a more comfortable pair would be a problem because the autistic girl would be upset to be parted from the ill-fitting pair. A compassionate Evon let the customer keep the old shoes and sent her the right-size pair at no extra cost. Courtney, the mother, sent Evon a grateful e-mail, which she proudly shared with me: “She was very sympathetic of my situation and I was very grateful and appreciative of the service and attention she showed me.… With customer service agents like that, I will definitely continue to shop with Zappos.… Oh, and the replacements fit GREAT!! Thank you Michael and thank you Zappos!”
The Zappos family makes a point of flattening the corporate hierarchy. The company’s ruling troika are described as “our monkeys” on the corporate Web site (the third most powerful executive, Fred Mossler, has no title at all), everyone pitches in answering the phones during peak holiday periods, and there is no dress code. On the day I visited, top bosses, including Hsieh, had posed in a dunk tank, allowing themselves to be dumped in a pool in the parking lot to raise money for charity. There are no corner offices at Zappos. The executives sit in the same rows of cubicles as everyone else; Hsieh and his then CFO, Alfred Lin, had decorated their row of desks with streamers and stuffed animals chosen to evoke a jungle theme.
For wage slaves from elsewhere, Zappos exerts a powerful appeal. “I’m moving here. I’m done,” said Greg, the Virginia father, who works as a paralegal in Washington, D.C., and was in Las Vegas for a law conference. “I love that—the CFO just has a desk on the floor.”
“Yeah, it’s like that at your firm, isn’t it,” Joanne, his wife, said sarcastically.
Hsieh and his team have performed a miracle humanizing what can be one of the most alienating jobs in the service economy. If you are a Zappos customer—I, too, have had my WOW with the magical provision of a hard-to-find pair of running shoes—you are a beneficiary of the happy workers their approach inspires.
But if you look closely enough inside Zappos, you can see another story, too. That is the tale of the 1 percent and the 99 percent and how sharply their lives and life prospects differ—even if they sit at the same row of cubicles and eat in the same cafeteria.
Inside the Zappos family, the 99 percent are inordinately proud of working at a place that is harder to get into than Harvard. But while Evon attended local community college without getting a degree, Zappos’s effective founders actually went to Harvard—Hsieh and Lin met as undergraduates at Quincy House, where the former was struck by the latter’s vast appetite for pizza. Slacking off was never an option—both are the children of Tiger Mother immigrants from Taiwan.
Lin recalls that his parents told him and his brother, who went on to trade derivatives for Credit Suisse, that they would be “temporarily poor” in their first years in the United States. The boys both attended Stuyvesant High School, one of New York City’s top, application-only public schools, where they were such enthusiastic members of the math club they now contribute to its support. Lin studied applied math at Harvard and went on to start a PhD at Stanford, until he was rescued from the academic grind by Hsieh, who cajoled him into joining him at his first company, LinkExchange. They sold it to Microsoft two years later for $265 million.
Hsieh likes to depict himself as something of a rebel against the Tiger upbringing. In his autobiography he proudly describes evading violin practice by playing a tape of himself to convince his alert mother he was hard at it. But Hsieh was enough of a scholar to study computer programming at Harvard and get a first job at Oracle, before deciding, less than a year out of college, that the real opportunity was in starting his own business and being part of the Internet revolution.
Not yet forty, Hsieh and Lin are already multimillionaires—Amazon bought Zappos in 2009 for $1.2 billion in stock—for whom life has become a series of appealing choices. When I was in Henderson, Lin had just accepted an offer from Michael Moritz, the legendary Silicon Valley venture capitalist, to return to the West Coast and join his firm. Hsieh was about to go on a cross-country bus tour to promote his book.
Evon’s shift starts at six a.m.—being a few minutes late is a firing offense—and her workweek includes Saturdays and Sundays. She isn’t complaining: “It’s okay. When you are hired here they say if you take this position we need you when we need you.” Unemployment was nearly 15 percent in Nevada and her husband was working as a real estate agent in a market where house prices had fallen by a third over the past two years. One of the perks at Zappos is free lunch, and many of the parents who work there, at a call center starting salary of $11.50 an hour, told me they made a point of eating their main meal at work to spare their family grocery budget.
At Zappos, where everyone wears jeans and no one has an office, the chasm between the top and the bottom is as sharp as it gets. This paradox of an egalitarian culture coexisting with extreme economic and social inequality is a crucial and often overlooked part of the relationship between the super-elite and everyone else.
Most of today’s “working rich” plutocrats didn’t start out hugely privileged. And many of them operate in worlds—Silicon Valley and also the trading floors of Wall Street and its service firms such as Bloomberg, where one of the biggest corporate faux pas is to demand an office—in which the cultural dividing lines between the tribunes and the hoi polloi are intentionally blurred. But, of course, even if the billionaire is in a T-shirt and drives his own car, his universe is very different from that of a call center worker. Below is an exploration of what the plutocrats think of the rest of us.
Pittsburgh was one of the smelters of America’s Gilded Age. As the industrial revolution took hold there, Andrew Carnegie was struck by the contrast between “the palace of the millionaire and the cottage of the laborer.” Human beings had never before lived in such strikingly different material circumstances, he believed, and the result was “rigid castes” living in “mutual ignorance” and “mutual distrust” of one another.
The twenty-seven-story Mumbai mansion of the Ambani family, rumored to have cost a billion dollars, is just seven miles away from Dharavi, one of the world’s most famous slums, and the gap between these two ways of life is even wider than anything Carnegie could find in the Golden Triangle. So, for that matter, is the difference between Bill Gates’s futuristically wired 66,000-square-foot mansion overlooking Lake Washington, which is nicknamed Xanadu 2.0 and whose library bears an inscription from The Great Gatsby, and the homes of the poor of Washington State, where unemployment in 2012 was slightly above the national average.
Even so, the correct etiquette in today’s plutocracy, particularly among its most admired tribe, the technorati of the U.S. West Coast, is to downplay the personal impact of vast wealth. In April 2010, when MIT students asked him how it felt to be the richest person in the world, Bill Gates suggested it wasn’t a very big deal. “Well, the marginal return for extra dollars does drop off,” Gates said. “I haven’t found any burgers at any price that are better than McDonald’s.” He admitted there were some great perks, like flying on a private jet, but said that after a “few million or something, it’s all about how you’re going to give it back.”
If you traveled to Mountain View to visit Eric Schmidt when he was CEO of Google, you would have found him in a narrow office barely big enough to hold three people. The equations on the whiteboard may well have been scribbled by one of the engineers who works next door and is welcome to use the chief’s office whenever he’s not in. And while it is okay to have a private jet in the Valley, employing a chauffeur is frowned upon. “Whereas in other cultures, you can drive your Rolls-Royce around and just sort of look rich and have a really good time, in technology it’s not socially okay to have a driver who drives you to work every day,” Schmidt told me. “I don’t know why, but you’ll notice nobody does it.”
This egalitarian style can clash with the Valley’s reality of extreme income polarization. “Many tech companies solved this problem by having the lowest-paid workers not actually be employees. They’re contracted out,” Schmidt explained. “We can treat them differently, because we don’t really hire them. The person who’s cleaning the bathroom is not exactly the same sort of person. Which I find sort of offensive, but it is the way it’s done.”
When he was CEO of Bain Capital and building his current net worth of about $200 million, Mitt Romney drove a Chevrolet Caprice station wagon with red vinyl seats and a beaten-up fender. Carlos Slim’s trademark look is slightly scruffy casual wear, and he loves to tell journalists he doesn’t own any homes outside his native Mexico. But even when he dresses down, a billionaire inhabits a world apart. A little more than a decade ago, I asked Mikhail Khodorkovsky, at that moment the richest man in Russia (and, as it happens, also someone who favored casual clothes and lived in a modest house), what he thought of the rest of us. “If a man is not an oligarch, something is not right with him,” Khodorkovsky told me. “Everyone had the same starting conditions, everyone could have done it.” (Khodorkovsky’s subsequent experiences—his company was appropriated by the state in 2004 and he is currently in prison for fraud and embezzlement—have tempered this Darwinian outlook: in jail cell correspondence he admitted that he had “treated business exclusively as a game” and “did not care much about social responsibility.”)
This worldview is straight out of the pages of Ayn Rand, but Khodorkovsky told me his uncompromising position was based not on literature but on life experience. During the 1998 Russian financial crisis some of his non-oligarch minions had made mistakes that had cost Khodorkovsky hundreds of millions. With hindsight, he blamed himself—they weren’t oligarchs, therefore something was wrong with them, therefore they shouldn’t have been trusted to make such big decisions.
Remember the line about Björn Borg, of whom Ilie Nastase said, “We’re playing tennis, he’s playing something else”? The extreme self-confidence you hear in Khodorkovsky’s comment is partly the product of believing you have an extreme aptitude for making money, one that is probably largely independent of time and circumstance.
The robber barons felt that way, too. “That this talent for organization and management is rare among men is proved by the fact that it invariably secures enormous rewards for its possessor, no matter where or under what laws or conditions,” Carnegie wrote. “The experienced in affairs always rate the man whose services can be obtained as partner as not only the first consideration, but such as render the question of his capital scarcely worth considering: for such men soon create capital; in the hands of those without the special talent required, capital soon takes wings.”
If you have that special talent, you have a special regard for others who possess it, too. Khodorkovsky trusted only fellow oligarchs. Steve Schwarzman thinks they are likely to make good presidents. “We ended up making twenty-four times our money” from a joint investment, Schwarzman told Bloomberg TV when asked why he had decided to host a fundraiser for Mitt Romney’s presidential bid at his triplex home at the storied apartment building at 740 Park Avenue. “In finance, that’s the way to make friends.”
The flip side of that high opinion of fellow plutocrats can be a lack of sympathy, shading sometimes into disdain, for everyone else. For the super-elite, a sense of meritocratic achievement can inspire self-regard, and that self-regard—especially when compounded by their isolation among like-minded peers—can lead to obliviousness and indifference to the suffering of others.
Eric Schmidt, the chairman of Google, admitted to a journalist in December 2011 that no one in his world thought much about Occupy Wall Street and the discontent of the 99 percent. “We live in a bubble,” he said. “And I don’t mean a tech bubble or a valuation bubble. I mean a bubble as in our own little world.… Companies can’t hire people fast enough. Young people can work hard and make a fortune. Homes hold their value.” What is striking about those remarks is that the unemployment rate in Santa Clara County, where Google’s Mountain View campus is located, was 8.6 percent, slightly higher than the national average. And some of the most violent and controversial Occupy demonstrations were in Oakland, a forty-five-minute drive from Schmidt’s office.
Matt Rosoff, a business journalist based in San Francisco, argues that even in Silicon Valley, the epicenter of the West’s second gilded age, Schmidt’s perspective reflects the particular experience of the 1 percent. “I recently talked to an IT engineer at a midsize financial services company downtown and he complained that his budget is being slashed every year, as he’s expected to do more with less,” Rosoff wrote on his Business Insider blog. “He’s over forty and sees no chance of getting hired at one of these sexy start-ups run by 20-somethings and funded by VCs who are younger than him. So maybe Eric Schmidt and the people he talks to really don’t discuss the Occupy movement. But that’s not a Silicon Valley thing—that’s just the circles he travels in.”
The plutocratic bubble isn’t just about being insulated by the company of fellow super-elites, although that is part of it. It is also created by the way you are treated by everyone else.
One financier, speaking about his friend who is one of the top five hedge fund managers in the world, said, “He’s a good man—or as good as you can be when you are surrounded by sycophants.” A few days after Dominique Strauss-Kahn’s arrest on accusations of assaulting a hotel maid in New York, I happened to share a car with a U.S. technology executive. The American technologist thought he understood the IMF chief’s psychology. The thing was, he told me, when you ascend to a certain level of the super-elite, you come to inhabit a world in which all of your needs are catered to. That, he said, can lead to a dangerous sense of entitlement. As an illustration, he told me that on a recent holiday he had stayed in a Four Seasons hotel. The service was exceptional—at one point, as he was sitting by the pool and dropped the spoon he was using to eat his melon, a waiter instantly appeared with a choice of three differently sized replacement spoons. The Silicon Valley executive said that readjusting to ordinary life had been hard: he had become impatient and rude when confronted by the slightest delay or discomfort. “When you are used to being catered to twenty-four/seven, you start to feel the world should be built around you and your needs. You lose all sense of perspective,” he told me. “I think that is probably what happened to Strauss-Kahn.” His point was that the impact of privilege was unconscious. A few minutes earlier, he had provided another, unintended example. We had struggled for a few minutes to find the car and driver that had been arranged to take him (I was cadging a ride) from the airport to our conference. He had fumed about the wait, berating himself for breaking with his usual practice of having his Mountain View–based assistant be on call no matter what the hour (it was morning at Heathrow Airport) to ensure smooth transfers.
A recent family of academic studies suggests that my acquaintance may have been on to something when he pointed to the coarsening effect of privilege. Paul Piff, a psychologist at UC Berkeley, and four other researchers devised seven different experiments to test the impact of affluence on how we treat others. “Is society’s nobility in fact its most its most noble actors?” the researchers ask. Their answer is a resounding no: “Relative to lower-class individuals, individuals from upper-class backgrounds behaved more unethically.” Their explanation for the behavior of these ignoble nobles was an echo of the Silicon Valley executive’s Heathrow observation: “We reason that increased resources and independence from others cause people to prioritize self-interest over others’ welfare and perceive greed as positive and beneficial, which in turn gives rise to increased unethical behavior.” One of the experiments studied San Francisco intersections. The team found that the drivers of new, expensive cars were twice as likely to cut off other vehicles or pedestrians as the drivers of old, cheap cars. In another test, experimental subjects with higher real-world incomes were more likely to deceive a hypothetical job applicant in order to persuade him or her to accept a lower salary—an accomplishment that earned the manager in the experiment a bonus. Even imagining you were rich changed the way experimental subjects behaved. In another study, participants were prompted to think of themselves as either very rich or very poor, and were then invited to take candy from a jar that afterward would be given to children in a nearby lab. The subjects who had imagined they were very rich took more candy.
Or consider the view of some Western members of the plutocracy concerning the strains imposed on the American middle class by globalization. In a dinner speech in New York on a gloomy evening in the autumn of 2011, one Greenwich-based hedge fund manager observed that “the low-skilled American worker is the most overpaid worker in the world.” He seemed genuinely worried about the high unemployment and falling wages that were the likely consequences of that circumstance (if you doubt this claim of hedge fund compassion, perhaps the fact that he grew up in Scandinavia will help persuade you), but he said business couldn’t fail to take it into account.
The U.S.-based CEO of one of the world’s largest fund managers told me that his firm’s investment committee often discussed the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.
I heard a similar sentiment from the Taiwanese-born, thirtysomething CFO of a U.S. technology company. A gentle, unpretentious man who went from public school to Harvard, he’s nonetheless not terribly sympathetic to the complaints of the American middle class. “We demand a higher paycheck than the rest of the world,” he told me. “So, if you’re going to demand ten times the paycheck, you need to deliver ten times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.”
And even those plutocrats who are sympathetic to the plight of the U.S. middle class feel compelled to contribute to it. One private equity investor invited me to lunch at Michael’s, the restaurant that is practically a canteen for the New York media set, to talk about income inequality. When we moved on to other subjects, he told me about a recent deal his firm had done to acquire an Indian outsourcing company. A fringe benefit was that he could now use it to outsource his own company’s research. The result was better work, more motivated employees, and lower costs. “We were paying University of Connecticut BAs $120,000 a year to do dead-end jobs,” he told me. “Now we pay Indian PhDs $60,000 and they are thrilled to work for us.”
You wouldn’t hear comments like these in many middle-class U.S. households. What’s striking, though, is how similar these views are to the perspectives of plutocrats in the emerging markets.
“You know, historically, economic activities tend to migrate because people who don’t have it have a lot more urge to have it, they’re willing to work harder for less money, and that’s part of life,” B. N. Kalyani, the chairman of Bharat Forge, India’s largest exporter of motor parts, told me. “You had your golden period; now, hopefully, we’ll have ours.”
Kris Gopalakrishnan, the cochair of Infosys, told me bluntly that the per capita consumption of the Western middle class would have to decline as the developed and developing worlds “meet somewhere in the middle.”
When I asked one of Wall Street’s most successful investment bank CEOs if he felt guilty for his firm’s role in creating the financial crisis, he told me with evident sincerity that he did not. The real culprit, he explained, was his feckless cousin, who owned three cars and a home he could not afford. One of America’s top hedge fund managers made a near identical case to me, though this time the offenders were his in-laws and their subprime mortgage. And a private equity baron who divides his time between New York and Palm Beach pinned blame for the collapse on a favorite golf caddy in Arizona, who had bought three condos as investment properties at the height of the bubble.
It is this not-our-fault mentality that accounts for the plutocrats’ profound sense of victimization in the Obama era. You might expect that American elites—and particularly those in the financial sector—would be feeling pretty good, and more than a little grateful, right now. Thanks to a $700 billion TARP bailout and trillions of dollars lent nearly free of charge by the Federal Reserve (a policy Soros himself told me was a “hidden gift” to the banks), Wall Street has surged back to precrisis levels of compensation even as Main Street continues to struggle.
But instead, many of the giants of American finance have come to, in the words of a mystified administration economist, “hate” the president and to believe he is fundamentally opposed to them and their well-being. In a much quoted newsletter to investors in the summer of 2010, hedge fund manager—and 2008 Obama fund-raiser—Dan Loeb fumed, “So long as our leaders tell us that we must trust them to regulate and redistribute our way back to prosperity, we will not break out of this economic quagmire.” Two other former Obama backers on Wall Street—both claim to have been on Rahm Emanuel’s speed dial list—recently told me that the president is “antibusiness”; one went so far as to worry that Obama is “a socialist.”
In some cases, this sense of siege is almost literal. In the summer of 2010, for example, Blackstone’s Schwarzman caused an uproar when he said an Obama proposal to raise taxes on private equity firm compensation—by treating carried interest as ordinary income—was “like when Hitler invaded Poland in 1939.”
However histrionic his metaphors, Schwarzman (who later apologized for the remark) is a Republican, so his antipathy for the current administration is no surprise. What is perhaps more surprising is the degree to which even former Obama supporters in the financial industry have turned against the president and his party. A private equity manager who is a passionate Democrat and served in the Clinton administration proudly recounted to me his bitter exchange with a Democratic leader in Congress, who was involved in the tax reform effort. “Screw you,” he told the lawmaker. “Even if you change the legislation the government won’t get a single penny more from me in taxes. I’ll put my money into my foundation and spend it on good causes. My money isn’t going to be wasted in your deficit sinkhole.”
Indeed, within the private equity fraternity, which would be hardest hit by a change in the tax treatment of carried interest, this is very much the majority view. When I met him in his boathouse on Martha’s Vineyard, the cofounder of a private equity firm warned that raising the taxes on his industry would “kill” investment in this country and drive the money overseas. He also said it was morally unjust because private equity professionals like himself put their own money at risk and so did not deserve to have their profits taxed like regular income. Finally, he argued that raising the tax would actually be fine for him—he was near retirement and had already made his billion—but would be “unfair” to his junior partners. They earned $500,000 or so a year and accepted such moderate compensation only in the hope of huge, and lightly taxed, payouts after a decade or two of work. This white-haired grandfather had voted for Obama in 2008, though he was backing Jon Huntsman in 2011. Like so many of his peers, he came from a humble background—his father was a Pennsylvania steelworker.
The fight over carried interest is fascinating because it offers such clear insight into the power of self-interest to shape ideology. On a human level it is hard not to have at least a little sympathy for the fierce defenders of the current system—after all, a 20 percentage point tax hike is hard to stomach no matter how rich you are—but intellectually their position is close to indefensible. One piece of evidence came in a November 2011 speech Mike Bloomberg delivered in Washington. Bloomberg is, of course, himself both a plutocrat and one of the country’s most prominent financial entrepreneurs. As New York’s mayor, he has defended Wall Street with the hometown zeal of a Detroit politician supporting the carmakers or a prairie leader backing farmers.
Nonetheless, here was Bloomberg on carried interest: “Since fair is fair, tax loopholes in the financial industry that are outdated should be closed, too, such as taxing carried interest at ordinary income rates. And I say this even though many of the people who would be affected are my constituents—so I assume I will get some phone calls later this afternoon.”
Carried interest is a very specific issue that touches a very specific group of people. The rise of Occupy Wall Street has brought a broader critique of the 1 percent to the fore, and in doing so has spurred some of the plutocrats to mount a more general self-defense.
On October 11, 2011, Occupy Wall Street protesters marched past the Upper East Side homes of some of New York’s wealthiest residents, including John Paulson, the hedge fund manager who earned billions betting against subprime mortgages. Paulson & Co. issued a statement pointing out: “The top 1 percent of New Yorkers pay over 40 percent of all income taxes, providing huge benefits to everyone in our city and state.… Paulson & Company and its employees have paid hundreds of millions of dollars in New York City and New York State taxes in recent years and have created over 100 high-paying jobs in New York City since its formation.” In response, Occupy Wall Street protesters left a mock tax refund check outside Paulson’s house.
Jamie Dimon, the highest-paid Wall Street CEO, earning $23 million in 2010, is another unapologetic defender of the 1 percent. “Acting like everyone who’s been successful is bad and because you’re rich you’re bad—I don’t understand it,” Dimon said when asked about public hostility toward bankers at an investors’ conference in New York in December 2011. “Sometimes there’s a bad apple, yet we denigrate the whole.”
Peter Schiff, CEO of a Connecticut-based broker-dealer and unsuccessful candidate in the 2010 Republican primary for a Senate seat in that state, took the message straight to Zuccotti Park, walking through the square with a video camera and a handwritten sign that announced: “I am the 1%.”
I heard similar sentiments at a public interview I conducted with GE’s Jeff Immelt that month. During the question-and-answer session a white-haired gentleman sitting almost exactly in the middle of the room rose to speak. He admitted that his comments would be “not a question, it’s almost a statement.” It was one he assumed Immelt had sympathy with, but that “you can’t make given the position you sit in.” He went on to warn: “Our problem frankly is, as long as the president remains antiwealth, antibusiness, antienergy, anti–private aviation, he will never get the business community behind him.… The rhetoric is so poisonous … and the problem and the complication is 40 or 50 percent of the country are on the dole that support him.”
The speaker was Leon Cooperman, a sixty-nine-year-old self-made billionaire. Son of a South Bronx plumber, Cooperman made it to Columbia Business School, then Goldman Sachs, then founded his own hedge fund. A few weeks after he made his statement to Immelt, Cooperman expanded on his views in an open letter to President Barack Obama, which instantly became the talk of Wall Street. In it, Cooperman complained the 1 percent were being unfairly caricatured: “Capitalists are not the scourge that they are too often made out to be”; the wealthy are not “a monolithic, selfish and unfeeling lot who must be subjugated by the force of the state.” Instead, Cooperman urged the president and his supporters to remember that they needed the rich: “As a group, we employ many millions of taxpaying people, pay their salaries, provide them with health care coverage, start new companies, found new industries, create new products, fill store shelves at Christmas, and keep the wheels of commerce and progress (and indeed of government, by generating the income whose taxation funds it) moving.”
Foster Friess, the Wyoming mutual fund investor who shot to national prominence as the backer of the main super PAC supporting Republican primary candidate Rick Santorum, made the same point when I spoke to him in February 2012.
“People don’t realize how wealthy people self-tax,” Friess told me when I asked him 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 fund 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, that 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 unpersuaded by the entire 99 percent paradigm. In his view, it is the Americans at the bottom of the income distribution who are getting the free ride. “I’m just so amazed at this concept that President Obama says, ‘I’m not gonna 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 told me. “About 46 percent of the American public pay no income taxes.”
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 told me. “So I think we ought to honor and uplift the 1 percent, the ones who have created value.”
Friess is very conservative, but among the plutocrats, his views about the oppression of the rich are not unusual. In a rare interview with the Chicago Tribune in the spring of 2012, Ken Griffin, a Chicago-based billionaire hedge fund manager, complained that plutocrats don’t have enough of a voice in American politics and that political engagement is an onerous burden it is their duty to bear.
“I think [the ultrawealthy] actually have an insufficient influence,” Griffin, who donated more than $1 million to Republican political causes in the 2012 election cycle, told the Chicago Tribune. Over time, the Griffins have given roughly $1.5 million to the conservative causes supported by David and Charles Koch. “Those who have enjoyed the benefits of our system more than ever now owe a duty to protect the system that has created the greatest nation on this planet.”
Griffin also complained about the necessity of lobbying: “I spend way too much of my time thinking about politics these days because government is way too involved in financial markets these days.” That dependence on government regulation, Griffin worries, is limiting the free speech of the rich. “This is the first time class warfare has really been embraced as a political tool. Because we are looking at an administration that has embraced class warfare as being politically expedient, I do worry about the publicity that comes with being willing to both with my dollars and, more importantly, with my voice, to stand for what I believe in. As government gets bigger every single day, how does my willingness to stand up for what I believe is right become eclipsed by my dependency on institutions that are ultimately controlled by the government? Remember, I live in financial services, and every bank in the United States is really under the thumb of the government in a way it’s never been before.”
Like so many of today’s working rich, Griffin, who was a billionaire before his fortieth birthday, thinks of himself as a self-made man: “I started my career with myself, two employees, and a one-room office. Nothing was given to me per se, except for a great education—my college degree [at Harvard]—and a country that allows somebody to just go for it.” Griffin is proud his firm, like all hedge funds, didn’t need government money to survive the crisis, and he doesn’t see himself as a beneficiary of the bailout that rescued the financial sector more broadly.
One day in November 2011, Dennis Gartman, a former commodities analyst and foreign exchange and bond trader, devoted his daily investment note to a rousing defense of the 1 percent:
We celebrate income disparity and we applaud the growing margins between the bottom 20 percent of American society and the upper 20 percent for it is evidence of what has made America a great country. It is the chance to have a huge income … to make something of one’s self; to begin a business and become a millionaire legally and on one’s own that separates the U.S. from most other nations of the world. Do we feel bad for the growing gap between the rich and the poor in the U.S.? Of course not; we celebrate it, for we were poor once and we are reasonably wealthy now. We did it on our own, by the sheer dint of will, tenacity, street smarts and the like. That is why immigrants come to the U.S.: to join the disparate income earners at the upper levels of society and to leave poverty behind. Income inequality? Give us a break. God bless income disparity and those who have succeeded, and shame upon the OWS crowd who take us to task for our success and wallow in their own failure. Income disparity? Feh! What we despise is government that imposes rules that prohibit or make it difficult to make even more money; to employ even more people; to give even more sums to the charities of our choice.
Much of this pique stems from simple self-interest. In addition to the proposed tax hikes, the financial reforms that Obama signed into law in the summer of 2010 have made regulations on American finance more stringent. But, the rage in the C-suites is driven not merely by greed but by an affront to the plutocrats’ amour propre, a wounded incredulity that anyone could think of them as villains rather than heroes. Aren’t they, after all, the ones whose financial and technological innovations represent the future of the American economy? Aren’t they doing, as Lloyd Blankfein quipped, “God’s work”?
You might say that the American plutocracy is experiencing its John Galt moment. Libertarians (and run-of-the-mill high school nerds) will recall that Galt is the plutocratic hero of Ayn Rand’s 1957 novel, Atlas Shrugged. Tired of being dragged down by the parasitic, envious, and less talented lower classes, Galt and his fellow capitalists revolt, retreating to “Galt’s Gulch,” a refuge in the Rocky Mountains. There, they pass their days in secluded splendor, while the rest of the world, bereft of their genius and hard work, collapses.
That was, of course, a fiction, and one with as much bodice ripping as economics. But versions of Galt’s Gulch are starting to show up in more sober venues. James Duggan, a founding principal of a Chicago firm of tax and estate planning lawyers, believes “wealth is fleeing the country.” Some of the self-exiled rich are, Mr. Duggan argues, “conscientious objectors”: “There are those who are simply going offshore to make a statement. Their level of discontent with the current circumstances in our country, coupled with attacks on the wealthy, has created a distinct sense of rebellion among many wealthy citizens. While they may love the country, they are objecting to the current trends and responding by moving themselves or their assets, or both, away from the cause of the problem.”
On December 8, 2011, two days after Barack Obama made income inequality the theme of a speech in Osawatomie, Kansas, Ed Yardeni, an economist and investment adviser, devoted his influential daily post to a 1 percent fantasy of extraterrestrial immigration: “We may need an escape plan if Europe blows up and if President Barack Obama spends the next eleven months campaigning rather than presiding. Just in the nick of time, NASA yesterday announced that its Kepler space telescope has found a new planet, Kepler-22b. It is the most Earth-like yet.… Those of us who favor fiscal discipline, small governments and low taxes might consider moving there and starting over.”
Meanwhile, a few modern-day plutocrats are actually trying to build a real Galt’s Gulch here on earth. This is the project of the Seasteading Institute, which is hoping to construct man-made islands in the international waters of the ocean, beyond the legal reach of any national government. These oases, where the rich would be free to prosper unrestrained by the grasping of the 99 percent, are the brainchild of Milton Friedman’s grandson and are being funded in part by Silicon Valley billionaire and libertarian Peter Thiel.
Not all plutocrats want to escape to a Seastead. Paul Martin and Ernesto Zedillo are members in good standing of the global elite. Martin is a former Canadian prime minister, finance minister, deficit hawk, and, in his life before politics, a multimillionaire businessman. Zedillo is a former Mexican president, holds a doctorate in economics, directs Yale University’s Center for the Study of Globalization, and serves on the boards of the blue chips Procter & Gamble and Alcoa. Yet when I interviewed the two of them in a wide-ranging public conversation in Waterloo, Canada, they sounded an awful lot like the kids camped out in Zuccotti Park.
“I have yet to talk to anybody who doesn’t say that they aren’t reflecting a disquiet that they themselves feel,” Martin said. “I think really the powerful thing is that Occupy Wall Street has hit a chord that really is touching the middle class—the middle class in Canada, the middle class in the United States, the middle class right around the world—and I think that makes it actually very, very powerful.”
Zedillo thought OWS should widen its sights: “I could argue as an economist it’s not only about Wall Street. They should have an Occupy G20.”
Martin and Zedillo would be welcome at any corporate dining room on Wall Street, or at any financier’s dinner party on the Upper East Side, but it was striking how strongly their views of Occupy Wall Street differed from the conventional wisdom among American business elites, especially financiers.
That dissonance was not lost on Martin. He started out diplomatically—“I think that most people have basically given them [the protesters] a fair amount of credit”—but then couldn’t resist, adding, “I don’t want to pick on U.S. bankers, but the reaction, the one that really got me, was the banker who basically said, ‘You know, these are just a bunch of welfare bums. What we’ve got to do is cut welfare.’ A New York banker saying we’ve got to cut welfare is staggering to me. Why doesn’t he just look in the mirror? I think that actually what’s happened is that the inability of some people to defend their position has become so manifest that it’s actually added to the power of Occupy Wall Street.”
Some plutocrats are worried about the eventual political consequences of the intellectual divide between their class and everyone else. Mohamed El-Erian, the Pimco CEO, is a model member of the super-elite. But he is also a man whose father grew up in rural Egypt, and he has studied nations where the gaps between the rich and the poor have had violent resolutions. “For successful people to say the nasty end of the income distribution doesn’t apply to me is shortsighted,” he told me. “I don’t know how you opt out of the world economy, but some people think we should try to do that. And in some unequal societies, confiscation can become a policy tool.”
El-Erian told me that in June 2010. In the fall of 2011, after the launch of the Occupy Wall Street movement, he went further. “No nation can tolerate for long excessive shifts in income and wealth inequalities as they tear at the fabric of society,” he wrote to me in an e-mail. “Think of this simple analogy—that of an increasingly fancy house in a poor and deteriorating neighborhood. The well-being of the house cannot be divorced from that of the neighborhood as a whole.”
El-Erian worried that his fellow plutocrats weren’t paying enough attention to the foreclosures down the block, though: “Some elites live astonishingly sheltered lives.”
Mark Carney is not most people’s idea of a radical. In Ottawa, where he has lived for the past eight years, the trim forty-seven-year-old is known as an uxorious husband and hands-on dad to his four daughters. The Canadian capital is hardly a party town, but even there he has a reputation as a homebody for whom an exciting night out is a school concert. At Harvard, he played hockey (he is Canadian, after all), but he never rose beyond backup goalie. He spent more time in the library than on ice, earning a magna in economics. At Oxford, where he got his PhD, this son of a high school principal and a schoolteacher is remembered by his classmates for his studiousness: Carney always sat in the front row at lectures many of the other students didn’t even bother to attend. From there, he went to Goldman Sachs, spending thirteen years at the firm’s offices in London and New York and Toronto. When Carney decided to go home, his first job was as a highly competent but self-effacing civil servant in the Bank of Canada before joining the finance ministry in 2004. And today, as governor of the Bank of Canada, he devotes most of his time to pondering such wonkish matters as how to measure global liquidity and the need for countercyclical regulation.
But in the fall of 2011, Carney became a protagonist in a central battle between the plutocracy and the rest of us—a crucial fight over the regulatory power of the state. The showdown took place on a Friday afternoon in September in Washington, D.C. It was the weekend of the biannual meeting of the IMF and World Bank, a gathering of the world’s central bankers and finance ministers that takes place in the U.S. capital every fall and spring. The meetings have been on the calendar since these Bretton Woods institutions were first formed, and gradually a number of private sector conclaves have come to be held on their fringes.
In 2011, one of those fringe meetings was organized by the Financial Services Forum, a bankers’ association. Its chairman, Goldman Sachs chief Lloyd Blankfein, invited Carney to address the group of about thirty bankers. They were particularly interested to talk to the Canadian not only because of his strong performance in the financial crisis—Canada was the only G7 country that didn’t need to bail out its banks—but also because Carney was tipped to become the next head of the Financial Stability Board, a body of international regulators that comes closest to being the world’s banking boss. The FSB’s big job at the moment is refining and implementing new international bank capital rules. These regulations, known as Basel III, have taken on particular importance because a lack of capital in many U.S. and European banks was a central cause of the 2008 financial meltdown.
Meetings of bankers are generally pretty dry affairs, and relatively large international gatherings of this sort, whose participants don’t know one another well, are usually even more decorous. But this particular conversation soon heated up.
Jamie Dimon, CEO of JPMorgan Chase, told Carney he thought the proposed Basel III rules were “cockamamie nonsense.” In fact, the bank chief said, the rules ran counter to the national interest. “I have called it anti-American,” Dimon said, according to one participant. “The only reason I am calling it anti-American is because I am American. I also think it’s anti-European.”
Another participant remembered Dimon’s remarks slightly differently. In his recollection, Dimon insisted that Carney’s view was “anti-American,” a phrase Dimon had floated in a newspaper interview a few weeks earlier and which, he allegedly told the Washington group, had resonated with a lot of people, “so I’m going to keep on using it.” At a time when multinationals, including JPMorgan, which earns around a quarter of its revenue outside North America, are increasingly global concerns, explicitly determined to go wherever the money is, it is noteworthy, to put it kindly, to hear a bank boss depict himself as a beleaguered national champion.
At first, Carney responded calmly: “I hear what you are saying. I don’t think it will surprise you that I am taking a different view. These are reasonable responses to the financial crisis.”
As Dimon’s tirade continued, his fellow bankers nervously tried to lower the temperature. Rick Waugh, the CEO of Scotiabank and a Canadian who has had his own disagreements with Carney, tried to intervene in their increasingly heated exchange.
But Dimon was unstoppable and soon Carney got mad. Visibly angry, the Canadian central banker abruptly left the room.
The other bankers, including Blankfein and Josef Ackermann, then the CEO of Deutsche Bank, looked uncomfortable, though it was Dimon’s tone, not his message, that concerned them. Ackermann tried to smooth things over by saying that Carney had left because of a tight schedule. (This was untrue: Carney was late for a press conference.)
After the meeting Blankfein sent Carney—remember, he is a Goldman alumnus—an e-mail to patch things up. Dimon, who stands by the substance of his remarks, realized the tone and forum had been inappropriate, and phoned Carney on Saturday to apologize. He didn’t reach him. Dimon called again when Carney was back home in Ottawa on Monday. This time they spoke and, according to a JPMorgan executive, Dimon said he was sorry. “Jamie knew he messed up,” the executive said. “It wasn’t the right place and it wasn’t the right tone.” He told the Canadian he had the utmost respect for him and thought the world of him.
By then, though, the battle had been joined. The day before the Dimon apology, a Sunday, Carney was the first speaker at the annual meeting of the Institute of International Finance, another international banking lobby group. He was introduced cordially by Waugh, a sparring partner back home who nonetheless told the audience, “He’s my governor and I’m very proud of that fact.”
But neither Waugh’s courtesy nor Dimon’s bellicosity persuaded Carney to temper his message. “It is hard to see how backsliding would help. If some institutions feel pressure today, it is because they have done too little for too long, rather than because they are being asked to do too much too soon,” Carney said.
“Everyone is claiming to be a Boy Scout while accusing others of juvenile delinquency,” he said. “However, neither merit badges nor detentions will be self-selected but, rather, determined by impartial peer review and mutual oversight.”
Dimon and Carney were fighting about a lot of money: the Basel III requirements would significantly increase JPMorgan’s cost of doing business and could cut into its profits. But much more is at stake than JPMorgan’s balance sheet. That weekend exchange is a telling moment in the story of the plutocrats’ relationship with the state—more significant, even, than high-profile wrangling over taxes on the plutocracy, like carried interest or the charge on large estates.
Here’s why. Even the most ardent right-winger agrees the state has the right to levy taxes—the fight is about who pays and how much. The battle between Carney and Dimon gets at a bigger and more contentious issue: Are the interests of the state and its big businesses synonymous? If not, who decides? And if they do clash, does the state have the right—and the might—to curb specific businesses for the collective good?
This dispute has been around for a long time—remember the assertion of General Motors CEO Charlie Wilson, controversial from the moment he uttered it, that what is good for General Motors is good for America? And it is being fought everywhere there is private business. Carlos Slim’s relative economic power is so overwhelming that many local observers believe that even if the government of President Felipe Calderón wanted to regulate his businesses more aggressively, it would lack the muscle to do so. In the late 1990s, Russia’s oligarchs boasted that they controlled the Kremlin—a state of affairs that helped Vladimir Putin win public support for a repressive reassertion of state power. China’s plutocrats don’t fight the state because they are the state—and when any of them forget that, they are treated with summary brutality: between 2003 and 2011, at least fourteen Chinese billionaire businessmen were executed.
In the West, particularly in the United States, the rise of the super-elite coincided with a strengthening of the conviction that what was good for business was good for the economy as a whole—and that business was in the best position to judge what worked. As Jed Rakoff, a New York judge and former federal prosecutor who has been pushing the SEC to be more exacting in its policing, reflected in an interview, “In the 1990s, of course, free enterprise, capitalism, and so forth were glorified to a degree. Some of that was political. We had finally won the battle against the Iron Curtain and part of the reason we won was because our economic system was a lot better than theirs. But I think maybe it was an overglorification of capitalism. I don’t mean to suggest that I’m personally for socialism. I’m not. But I am personally for some regulation.”
That glorification extended to the masters of the universe on Wall Street. Donald Kohn, a former vice chairman of the Federal Reserve and a central banker whom Alan Greenspan called “my first mentor at the Fed,” now believes that this equation of the private interest with the public interest has gone too far. In fact, he, like Greenspan, has come to the view that it was a mistake even to think that bankers would be skilled at defending their own interests—that the markets could, as the prevailing theory had it, regulate themselves. At a British parliamentary hearing in May 2011, Kohn testified, “I placed too much confidence in the ability of the private market participants to police themselves.”
The Fed’s excessive faith in the bankers it regulated was caused by a phenomenon Willem Buiter has dubbed “cognitive state capture.” Like Carney, Buiter is no wild-eyed flamethrower. A former academic economist who served on the Monetary Policy Committee of the Bank of England, Buiter has himself joined the ranks of the global super-elite: born in Holland and possessor of British and American passports, since 2010 he has been chief economist for Citigroup. But in a paper delivered at the Federal Reserve’s annual economic conference in Jackson Hole in August 2008, Buiter argued, “The Fed listens to Wall Street and believes what it hears, or at any rate, the Fed acts as if it believes what Wall Street tells it. Wall Street tells the Fed about its pain, what its pain means for the economy at large, and what the Fed ought to do about it.”
Buiter readily admits that during the financial crisis “Wall Street’s pain was indeed great—deservedly so in many cases.” But he asks, “Why did Wall Street get what it wanted?” His answer is cognitive state capture.
“It is not achieved by special interests buying, blackmailing, or bribing their way toward control of the legislature, the executive, or some important regulator or agency, like the Fed, but instead through those in charge of the relevant state entity internalizing, as if by osmosis, the objectives, interest, and perception of reality of the vested interest they are meant to regulate and supervise in the public interest,” Buiter explains. “There is little room for doubt, in my view, that the Fed under Greenspan treated the stability, well-being, and profitability of the financial sector as an objective in its own right.”
With hindsight, some of the leaders of the Fed during those years have become openly repentant. As Kohn said at the British parliamentary hearing, “I have learned quite a few lessons, unfortunately for the economy, I guess, in the past few years.” He added later, “I deeply regret the pain that was caused to millions of people in the United States and around the world by the financial crisis and its aftermath.”
On Wall Street, though, the need for a more assertive state is not obvious. And if Dimon expresses this point of view with particular passion, that may be because he is one of the bankers who has the most right to it: he was, after all, one of the few CEOs who was actually pretty good at self-policing. Under his stewardship, JPMorgan, which is essentially a creature of Dimon’s deal-making genius, deftly avoided many of the most toxic assets that wrecked the balance sheets of other Wall Street firms. Dimon’s JPMorgan was strong enough to help Tim Geithner, then head of the New York Fed, in March 2008 by saving Bear Stearns (admittedly at a fire sale price); Dimon even left his own star-studded fifty-second birthday party to make the transaction happen. Dimon insisted from the start that his bank took the TARP bailout money only as a favor to the Treasury, which worried that unless the rescue was collective it would further stigmatize Wall Street’s weakest players. In 2009, the New York Times described Dimon as President Obama’s favorite banker, and his chief of staff at the time, Rahm Emanuel, even promised to speak at a JPMorgan board meeting. (Emanuel changed his mind after his plans were reported and the White House reconsidered such a visible demonstration of coziness with a specific Wall Street firm.)
All of which not only adds to Dimon’s natural cockiness (he, too, is another largely self-made plutocrat, who ascended from Queens to Wall Street via Harvard Business School), it fuels his conviction that business will do a better job running the economy if the government, with its burdensome rules, stays out of the way.
Hence, a few months before his dispute with Carney, Dimon enlivened a public question-and-answer session in Atlanta with his own regulator, Fed chairman Ben Bernanke, by warning of the dangers of higher capital requirements. For one thing, Dimon argued, “Most of the bad actors are gone.” For another, he cautioned, in an inversion of the Charlie Wilson line, that what was bad for JPMorgan would be bad for the country as a whole. “I have this great fear that someone’s going to write a book in ten or twenty years, and the book is going to talk about all the things that we did in the middle of the crisis to actually slow down recovery.… Has anyone bothered to study the cumulative effect of all these things [regulations] and do you have a fear like I do that when we look back and look at them all, that they will be a reason it took so long that our banks, our credit, our businesses, and most importantly job creation start going again? Is this holding us back at this point?”
That wasn’t the first time Dimon went public with his skepticism of the government’s ability to manage the economy. In January 2010, at the hearings of the Financial Crisis Inquiry Commission in Washington, D.C., he said, “My daughter called me from school one day and said, ‘Dad, what’s a financial crisis?’ and without trying to be funny, I said, ‘It’s the kind of thing that happens every five to seven years.’ And she said, ‘Then why is everybody so surprised?’ ”
That couldn’t be more different from Mark Carney’s worldview. He obliquely dismissed Dimon’s daughter anecdote in Berlin nine months later, not referring to Dimon by name but alluding to his remarks and charaterizing the attitude they betrayed as “jaded.” Carney asked why the rest of us “should be content with the dreary cycle of upheaval” the unnamed bank CEO had described. In the Washington speech he delivered forty-eight hours after his direct clash with Dimon, Carney challenged what he called Wall Street “fatalism” head-on: “In no other aspect of human endeavor do men and women not strive to learn and to improve. The sad experience of the past few years shows that there is ample scope to improve the efficiency and resilience of the global financial system. By clarity of purpose and resolute implementation, we can do so. The current reform initiatives mark real progress.”
Carney also took on another shibboleth of the banking lobby—that new rules would make little difference because they would always be arbitraged away. This is a polite way of saying bankers and their lawyers will always outsmart their regulators. It is a familiar poacher/gamekeeper argument—you can make the same point about terrorists and security regulations—with the added oomph of money and meritocracy. With bankers outearning their regulators by more than 100 to 1 (the ratio of Dimon’s salary to Bernanke’s), surely the bureaucrats will be hopelessly intellectually outmatched?
The gap appears not just in the pay slips but in resources. One White House official who had earned as much as $5 million a year in the private sector was dismayed to learn he was expected to fly economy class to meetings in Asia, a significant discomfort and one that, at more than fifty, he felt made it hard for him to do his job. On a trip from Washington to New York in the spring of 2011, CFTC (Commodity Futures Trading Commission) officials took the Megabus (thirty dollars per person round-trip), rather than Amtrak or the Delta shuttle, saving more than a thousand dollars. To avoid the cost of hotels, SEC staffers sometimes try to squeeze in trips to New York, where most of the banks they regulate are based, into a single day. In the movies the underdog on the bus beats the plutocrat on the private jet, but it is hard to see why that should happen in real life with any regularity.
Carney, who earns $500,000 a year, less than one-twentieth the 2011 compensation of Canada’s most highly paid Bay Street banker, explained why bankers’ outsmarting the system only made regulation even more important: “New and better rules are necessary, but not sufficient. People will always try to find ways around them. Some may succeed, for a while. That is why good supervision is paramount. Rules are only as good as the supervisors who enforce them, and good supervisors look beyond the letter of the rules to their spirit.”
Eight months later, Dimon inadvertently bolstered Carney’s case. On May 10, 2012, JPMorgan revealed that a trader known as the London Whale had made a bet on credit derivatives that went sour, leading to a loss of at least $2 billion, and which analysts close to the bank believed could rise to $6 billion. Wall Street, led by Dimon, had spent the previous three years warning that Washington’s regulatory overreach was stifling the financial system. The London Whale’s trades suggested that the real danger was still too much risk. As Congressman Barney Frank put it, “The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today.”
In the fight over capital requirements, the bankers would be delighted if the Fed returned to its Greenspan-era reliance on market self-regulation. But the bigger issue of the relationship between plutocrats and the state can’t be reduced to business battling for smaller government. Often, a big, intrusive state is the plutocrat’s best friend—true of state capitalist regimes like China and Russia and of industries, like the defense business, that live on state largesse, or of companies, like the U.S. steel industry under George W. Bush, that have lobbied for and won protectionist legislation. In 2008 and 2009 it was true of Wall Street, too, when the bankers pushed for and got a massive government bailout to save their companies—the biggest state intervention in a national economy, as a percentage of GDP, since Lenin’s nationalization. In fact, even the most ardent believer in small government and free enterprise can also think it is the duty of business to cut the best possible deal with the state. As Ken Griffin, the billionaire hedge fund manager who supports conservative super PACs, explained, “CEOs have duties to their shareholders. If the state’s willing to hand out gifts, there are many who feel compelled to go get them.” So this isn’t just a question of big versus small government.
The issue, instead, is whether the interests of business and of the community at large are always the same and, if they aren’t, whether the government has the will, the authority, and the brains to defend the latter, even against the protests of the former. That’s why Carney wanted to raise capital requirements. As he reminded his Sunday morning Washington audience, “Four years ago, manifest deficiencies in capital adequacy, liquidity buffers, and risk management led to the collapse of some of the most storied names in finance and triggered the worst financial crisis since the Great Depression. The complete loss of confidence in private finance—your membership—could only be arrested by the provision of comprehensive backstops by the richest economies in the world. With about $4 trillion in output and almost twenty-eight million jobs lost in the ensuing recession, the case for reform was clear then and remains so today.”
Carney then cited a Bank of Canada calculation that found that “even if Basel III were to reduce slightly the probability of such crises in the future,” the economic value of that decreased risk to the G20 countries would be about $13 trillion. In other words, this may hurt your business a little, but it will help the economy as a whole a lot.
Luigi Zingales, a professor at the University of Chicago’s Booth School of Business, frames this as the choice between being promarket and being probusiness. Super-elites are often the product of a strong market economy, but, ironically, as their influence grows they can become its opponents.
Here is how Zingales, an ardently patriotic immigrant to America and a passionate defender of the market economy, describes the dynamic: “True capitalism lacks a strong lobby. That assertion might appear strange in light of the billions of dollars firms spend lobbying Congress in America, but that is exactly the point. Most lobbying seeks to tilt the playing field in one direction or another, not to level it. Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition. Open competition forces established firms to prove their competence again and again; strong successful market players therefore often use their muscle to restrict such competition, and to strengthen their positions. As a result, serious tensions emerge between a pro-market agenda and a pro-business one.”
In January 1977, America’s boardrooms and universities were jolted by an unexpected piece of news. Henry Ford II, chairman and chief executive of the Ford Motor Company and grandson of the original Henry, had resigned from the board of the Ford Foundation.
A former naval officer known for his aggressive and blunt management style—he rejected Lee Iacocca’s proposal to put a Honda engine in a Ford car on the grounds that “no car with my name on the hood is going to have a Jap engine inside”—Ford laid out the reasons for his departure in a blistering resignation letter that he released to the press:
The Foundation exists and thrives on the fruits of our economic system. The dividends of competitive enterprise make it all possible. A significant portion of the abundance created by United States business enables the Foundation and like institutions to carry on their work. In effect, the Foundation is a creature of capitalism—a statement that I am sure would be shocking to many professional staff people in the field of philanthropy. It is hard to discern recognition of this fact in anything the Foundation does. It is even more difficult to find an understanding of this in many of the institutions, particularly the universities, that are the beneficiaries of the Foundation’s grant programs.… I am just suggesting to the Trustees and the staff that the system that makes the Foundation possible very probably is worth preserving. Perhaps it’s time for the Trustees and staff to examine the question of our obligations to our economic system; and to consider how the Foundation, as one of the system’s most prominent offspring, might act most widely to strengthen and improve its progenitor.
The departure of the Deuce, as Ford was known, had no direct repercussions for the foundation that carried the family name. It had been created by his grandfather and his father, Edsel, in 1936, largely as a tax shelter and a vehicle to ensure continued family control over the car business. That structure worked, but it also meant that by 1977 the founding family had only moral authority over the philanthropy.
In the social and cultural tumult of the 1970s, that didn’t count for much. McGeorge Bundy, then president of the Ford Foundation, responded with lofty unconcern to the public rebuke from the family scion: “He has a right to expect people to read his letter carefully, but I don’t think one letter from anyone is going to change the foundation’s course.”
But Ford’s departure turned out to be a turning point. That was partly because of the prominence of the man, his company, and his family’s philanthropy. At that moment, Ford was the second-highest-paid CEO in America and the Ford Motor Company the country’s fourth-largest corporation by sales. In its universe, the Ford Foundation cast an even longer shadow. It was by far the nation’s biggest philanthropy; in 1954 it outspent runner-up Rockefeller fourfold and third-place Carnegie ten times over.
Most important, Ford’s letter crystallized a fear that had been growing in the minds of many American businesspeople—that they were losing the national battle of ideas. Ford’s Greatest Generation had won the Second World War, and when they came home they had helped create two decades of unprecedented, and widely shared, national prosperity. But they now feared that the institutions that created the country’s intellectual and ideological weather—its universities, its foundations, and its newsrooms—had turned hostile to business and to capitalism.
Irving Kristol captured what he described as this battle between “the academic and business communities” in a seminal essay he published three months after Ford’s cri de guerre. “It is a fact that the majority of the large foundations in this country, like most of our major universities, exude a climate of opinion wherein an anti-business bent becomes a perfectly natural inclination.”
Judged by today’s standards, that is certainly the case. The marginal tax rate on top earners was 70 percent, capital gains were taxed at a maximum rate of 49 percent, and Wall Street, constrained by the separation between investment and retail banking of the Glass-Steagall Act, was still the rather sleepy handmaiden of industry. Like their philanthro-capitalist successors, the foundations of the 1960s and 1970s hoped to leverage their projects into influence on government policy.
But rather than bringing the techniques and skills of the private sector to the social sector, the foundations of that era hoped to transform private charity into state largesse. As Paul Ylvisaker, a Harvard social theorist who became an influential Ford staffer, later explained, the job of the foundation was to promote “programs and policies, such as social security, income maintenance, and educational entitlement, that convert isolated and discretionary acts of private charity into regularized public remedies that flow as a matter of legislated right.”
Kristol said business needed to fight back. Different corporations, he wrote, could well have different views of their social responsibility, but they would all surely agree that it included keeping the world safe for capitalism and capitalists: “Most corporations would presumably agree that any such conception ought to include as one of its goals the survival of the corporation itself as a relatively autonomous institution in the private sector. And this, inevitably, involves efforts to shape or reshape the climate of public opinion—a climate that is created by our scholars, our teachers, our intellectuals, our publicists: in short, by the New Class.”
Kristol concludes his essay with a modest proposal. To change public opinion, business needed to support those “dissident” elements of the New Class “which do believe in the preservation of a strong private sector.” Unless it recruited its own army on the intellectual battlefield, business would surely lose the political and ultimately economic wars, too: “In any naked contest with the New Class, business is a certain loser. Businessmen who cannot even persuade their own children that business is a morally legitimate activity are not going to succeed, on their own, in persuading the world of it. You can only beat an idea with another idea, and the war of ideas and ideologies will be won or lost within the New Class, not against it. Business certainly has a stake in this war—but for the most part seems blithely unaware of it.”
Kristol was, of course, one of those dissident members of the New Class—he concludes his essay by urging businessmen to seek out intellectuals like himself “to offer guidance,” just as they would hire competent geologists to help find oil—and over the next thirty years he, his fellow conservative intellectuals, and the business leaders who bankrolled them did a remarkable job of building up a network of conservative think tanks, foundations, elite journals, and mass media outlets. But what is really striking isn’t the rise of what Hillary Clinton once dubbed the “vast right-wing conspiracy,” it is the extent to which the climate that Kristol complained of so bitterly in 1977 is today so much more conducive to his ideas.
Just take a look at the pages of America’s leading newspapers. In April and May of 2011, when unemployment was 9 percent and the ten-year rate on U.S. Treasury bills—the American government’s cost of borrowing money—hovered around a historically low 3 percent, the five largest papers in the country published 201 stories about the budget deficit and only sixty-three about joblessness. The left won the great culture wars of the 1960s, but the right has succeeded in setting the terms of the economic debate. A good outcome for the 1 percent.
The life choices of Democratic first families tell a similar story. Amy Carter, who came of age in the White House, took part in anti-apartheid protests at the South African embassy in 1985 (for which she was arrested). She met her husband at an Atlanta bookstore where he was a manager and she was a part-time employee. Chelsea Clinton, the next Democratic daughter, has worked at a hedge fund and as a management consultant. Her husband, a fellow legacy Democrat, worked at Goldman Sachs before they married and went on to set up his own hedge fund.
One reason Kristol’s wing of the New Class won is that they were right. Capitalism works, and its triumph became a global fact with the collapse of the Soviet Union.
The demise of communism was, of course, tremendously encouraging for the free market intellectuals of America’s New Class, but it had an even more profound impact on the New Class in the emerging markets. The intellectuals in most of those markets have lived through some version of central planning, ranging from the repressive Soviet model to the freer but also inefficient Indian version. You could argue that, as a group, the New Class didn’t do too badly under communism—that, after all, was the thesis of Djilas as well as Szelényi and Konrád—but to most people who actually experienced it, that theory doesn’t stand up to the routine humiliations of life in a dictatorship. In the emerging economies, the scorecard is even starker. In India and China, the past three decades of freer markets have lifted hundreds of millions of people out of poverty, a feat the previous three decades of left-leaning development economics had singularly failed to accomplish.
The result is the intellectual dominance of the sort of thinking Kristol described as a dissident view in 1970s America. In the 1990s, the brightest intellectuals in the former Warsaw Pact, from Warsaw itself to Tallinn to Moscow, were those figuring out how to transition from communism to capitalism. The smartest Chinese were working on the same question. Today the most famous African intellectual outside that continent is Dambisa Moyo, whose big idea is that foreign aid is self-serving and disempowering.
In the United States, that self-proclaimed capitalist tool Forbes magazine is suffering the slow, sad decline that seems to be the fate of most print magazines; meanwhile, it now publishes fifteen international editions, including versions in three former Soviet republics, India, China, and the Middle East. The Harvard Business Review, the proudly dry bible of the C-suite, has eleven foreign editions and can be found in most kiosks in the Moscow subway.
The Kristol wing of the New Class is globally ascendant for a more material reason, too. In Kristol’s day, left-leaning intellectuals could get comfortable, socially prestigious jobs at the like-minded institutions whose ideological climate Kristol so deplored—elite universities, think tanks, the media. Today, the finances of universities and the mainstream media are in pretty rough shape, particularly by comparison with the bank balances of the plutocrats. (The publisher of the Financial Times once remarked to me ruefully that in a very good year the media group’s entire profit was equal to one midlevel Wall Street trader’s bonus.) Some think tanks are in rude health, but those are very much under the sway of their engaged philanthro-capitalist founders.
Those members of the New Class Kristol most feared—academics in the humanities—are those who today are most hard-pressed. Indeed, getting a doctorate in the humanities, once a ticket to the top tier of the New Class, is today such a wretched business one disappointed academic has created a popular Web site called 100 Reasons NOT to Go to Graduate School. Emory English professor Mark Bauerlein, a former staffer of one of those New Class institutions most demonized by the right, the National Endowment for the Arts, told the Yale Daily News: “It just doesn’t make sense for people to go to school in the humanities.”
Meanwhile, super-elites prosper and their spending on what they like to call “thought leadership” grows, with a predictable impact on the climate of the institutions of the New Class. In her inaugural commencement address, Harvard president Drew Faust observed sadly that the obvious reason so few Harvard graduates were pursuing careers in the humanities and so many were going to Wall Street was, “as bank robber Willie Sutton said, that’s where the money is.”
Awareness of those changed incentives has wrought a powerful cultural change. In 1969, radical Harvard activists rallied together to force ROTC off campus. But when some Harvard students walked out of former Bush adviser Greg Mankiw’s class, the Harvard Crimson, training ground for the New York Times masthead, condemned the protesters in an editorial titled “Stay in School.” A half dozen students staged a walk-in in support of their professor, and were greeted with applause and shouts of “We love Greg Mankiw.” Professor Mankiw, himself an adviser to the Romney campaign, noted that today’s undergraduates are less concerned with social justice than his cohort had been. “My first reaction was nostalgia,” he wrote in an op-ed about the protest. “I went to college in the late 1970s, when the Vietnam War was still fresh and student activism was more common. Today’s students tend to be more focused on polishing their resumes than on campaigning for social reform.”
Many of Professor Mankiw’s students will go to work on Wall Street. But among those who remain in the New Class, the ones most closely connected to the super-elite will be the ones who prosper. The best way to earn a living as an intellectual is as a teacher of the super-elite, or an employee. The only four fields where average professor salaries are in the six figures are law, engineering, business, and computer science.
Most important, academics in fields the plutocracy values can multiply their salaries by working as consultants and speakers to super-elite audiences, often in the emerging markets. As Niall Ferguson told me, during a whirlwind weekend when he had given a speech to a private equity conference hosted by a Turkish plutocrat in Istanbul, followed by a speech in Yalta for Ukrainian plutocrat Victor Pinchuk, the roads out of Cambridge, Massachusetts, get jammed on Thursday afternoons as Harvard Business School professors rush to the airport to get to their international speaking gigs. A bestselling New York nonfiction writer likes to tell his more literary—and less well-off—friends that his secret is to write books businesspeople can read on a transatlantic flight.
Even as they cash their speaking fees from the super-elite, these academics shape the way all of us think about the economy. That is mostly through their work in the classroom and at their computers, but also in their role as “independent” experts in legislative debates. A 2010 study by three of my colleagues at Reuters found that of ninety-six testimonies given by eighty-two academics to the Senate Banking Committee and the House Financial Services Committee between late 2008 and early 2010—a crucial period when lawmakers were debating their response to the financial crisis—roughly one third did not reveal their ties to financial institutions.
Politicians are sometimes described as another branch of the New Class, and they are even more dependent on the super-elite than are their academic brethren, who, after all, can still rely on the comforts of the tenure system (even if it is growing rather threadbare). This, again, is true of politicians as a group, not just of those on the right. Fund-raising is the biggest part of the story, of course, but the connections are deeper than a disclosure form.
For one thing, an increasing number of politicians are members of the super-elite themselves. Nearly half of all members of Congress—250 in all—were millionaires in 2010, and their median net worth was $913,000, more than nine times the national average. American legislators are getting richer: their net worth increased 15 percent between 2004 and 2010. At least ten lawmakers are full-fledged plutocrats, with fortunes of more than $100 million.
One academic study has suggested that serving in Washington helps these leaders get rich. Professor Alan Ziobrowski of Georgia State and his colleagues found that the stock portfolios of House members beat the market by 6 percent, while senators’ investments outperformed by 12 percent. The economists attributed this investing prowess to a “significant information advantage”; helpfully, lawmakers were not subject to insider trading laws until April 4, 2012, when President Obama signed into law a bill forbidding the practice. But a different study by LSE and MIT researchers challenged that conclusion, finding that legislators were actually lousy investors, doing less well than the market average. In either case, though, the financial gap—and the difference in perspective it brings—between U.S. politicians and their constituents is growing.
One thing that isn’t in dispute is the material value of a political career after leaving elected office. Politicians can’t fully monetize their plutocratic networks until they retire. When they do, they can become multimillionaires. Between 2000 and 2007 the Clintons earned $111 million, nearly half of it in Bill’s speaking fees, many of them paid by global plutocrats like Pinchuk. Tom Daschle, the former Democratic Senate majority leader, spent four years on the payroll of private equity investor Leo Hindery, earning more than $2 million and perks including one now notorious chauffeured car.
These connections occasionally create a political scandal—like Daschle’s car, or the consulting fees earned by the academic economists who made the mistake of agreeing to be interviewed in the hit 2010 documentary film Inside Job—but the real story isn’t one of individual corruption. It is, as Buiter argues, about systemic capture.
The vampire squid theory of the super-elite is entertaining and emotionally satisfying. It can be fun to imagine the super-elites who went to Wall Street and their Harvard classmates who became economics professors and those who became U.S. senators participating in a grand conspiracy (hatched ideally, at the Porcellian Club) to rip off the middle class. But the impact of these networks is much less cynical, and much more subtle, though not necessarily of less consequence.
Consider, for instance, the striking impact of income on how likely a U.S. senator is to respond to the views of his or her constituents. Research by politician scientist Larry Bartels showed that senators were 50 percent more likely to react to constituents in the top third of the income distribution than constituents in the middle third. Those at the bottom had almost no chance of being heard. Again, remarkably, Bartels found no measurable difference between Democrats and Republicans.
You could see the power of these networks in a remarkable private lunch Hank Paulson, then the secretary of the U.S. Treasury, attended in New York in July 2008, in the midst of the financial crisis. The lunch was hosted by Eric Mindich, a Goldman Sachs alumnus and founder of the Eton Park hedge fund, at his Third Avenue office. A dozen or so other hedge fund managers, at least five of them also veterans of Goldman Sachs, where Paulson had been CEO until moving to the Treasury in 2006, were there, too. As a Bloomberg journalist discovered three years later, thanks to a Freedom of Information request and dogged reporting, over lunch Paulson outlined his plans to put Fannie Mae and Freddie Mac under conservatorship, bringing the quasi-private firms fully under government control. Seven weeks later, that’s what he did.
The men in the room were in a position to benefit materially from this insight into the secretary’s plans. One was so acutely aware of the value of this private information he immediately called his lawyer to ask if it would be legal to trade on it; the lawyer said no. It is impossible to tell if the other diners were equally fastidious, but if they weren’t they would have made a killing. Fannie and Freddie shares dropped to less than a dollar, a fraction of their former value, when Paulson put the companies into receivership in September, a windfall for anyone who had sold the stock short.
The most astonishing thing about the lunch is that it took place in plain sight. With so many participants—many of them mere acquaintances—Paulson surely would not have expected the gist of the discussion to remain secret for long. Indeed, some experts interviewed about the lunch afterward speculated that Paulson’s intention in discussing his plans was to informally warn the broader market of what was coming and thus prevent a disruptive reaction.
Nor is Hank Paulson a neophyte who might be expected to make this sort of public misstep. His appointment as Treasury secretary in 2006 wasn’t Paulson’s first stint in D.C. In his early twenties, Paulson worked at the Pentagon, and then in Richard Nixon’s White House. Throughout his thirty-year career at Goldman Sachs Paulson was renowned for his political savvy both inside the firm and far beyond its old headquarters at 85 Broad Street, deftly building an influential network of connections as far afield as China. He made his career in the relationship business of investment banking, and within Goldman Sachs, Paulson was known as an expert operator. “When he ran the Chicago office, he managed to get the entire firm to work for him,” one Goldman Sachs partner who had worked closely with Paulson told me admiringly.
So how did this smart, experienced leader come to participate in such an ill-judged lunch, the sort of insider meeting that is the stuff of fantasy for the Goldman haters? Zingales, the Republican professor at the university that is the intellectual home of free market economics, subscribes to Buiter’s theory of cognitive state capture.
“The proportion of people with training and experience in finance working at the highest levels of every recent presidential administration is extraordinary. Four of the last six secretaries of Treasury fit this description. In fact, all four were directly or indirectly connected to one firm: Goldman Sachs,” Zingales writes. “There is nothing intrinsically bad about these developments. In fact, it is only natural that a government in search of the brightest people will end up poaching from the finance world, to which the best and brightest have flocked.”
But these hardworking meritocrats are subject to Charlie Wilson’s misapprehension. “The problem is that people who have spent their entire lives in finance have an understandable tendency to think that the interests of their industry and the interests of the country always coincide. When Treasury Secretary Henry Paulson went to Congress last fall arguing that the world as we knew it would end if Congress did not approve the $700 billion bailout, he was serious and speaking in good faith. And to an extent he was right: His world—the world he lived and worked in—would have ended had there not been a bailout,” Zingales argues. “But Henry Paulson’s world is not the world most Americans live in—or even the world in which our economy as a whole exists.”
The distortions of a very specific worldview are magnified by the human factor the Eton Park lunch reveals. “Compounding the problem is the fact that people in government tend to rely on their networks of trusted friends to gather information ‘from the outside,’ ” Zingales explains. “If everyone in those networks is drawn from the same milieu, the information and ideas that flow to policy makers will be severely limited.”
By way of further illustration, Zingales turns to France, where, thanks to the power of the École Polytechnique as a feeder for the political elite—a meritocratic grip much stronger than that of the Ivy League in the United States—many of the country’s leaders were trained as engineers, especially in the field of nuclear engineering. And, sure enough, France’s political leaders turn out to have been cognitively captured by the nuclear industry: more than half of the electricity France uses is produced by nuclear power, a higher percentage than in any other country.
The power of cognitive capture is that it is fully internalized. Critics, especially on the left, sometimes like to think of the super-elite in Orwellian terms, as masters of Doublethink who heartlessly pursue their own self-interest in full knowledge that the underclass will suffer as a consequence. The reality is much less nefarious: most super-elites genuinely are convinced that the policies that happen to serve their own interests, or those of their firm, or of their industry, are also right for everyone else.
In the spring of 2010, as the lobbying around the Dodd-Frank financial regulation bill was reaching a fever pitch, I moderated a business panel. One of the participants was a senior executive at JPMorgan who complained in heartfelt terms about how time-consuming and expensive it was for her company to “educate” the lawmakers in Washington.
Duke’s Dan Ariely has done research to gauge this very human tendency to come to believe in what suits us. He has found that when something is in our personal best interest, we come to see it not just as “good for me” but as unqualifiedly “good.” “It turns out that if I pay you lots of money to see reality in a certain way, you will,” he told me. “Imagine I paid you $5 million a year to view mortgage-backed security as a good product. Now, I’m sure you could pretend to like them, but the question is, would you really start believing that they are better products than they really are. That turns out to be the case. People actually can change their deeply held beliefs.
“When you have a financial incentive to see reality in a certain way, you will see it that way, not because you’re bad, but because you are human,” Professor Ariely said.
And we wear spectacles shaded not only by our self-interest, but also by that of our friends. “We are deeply social animals,” Professor Ariely told me. “We see things from the perspective of our friends, not of strangers. One of the things that inequality does is it creates not a single society, but it creates multiple societies. It might be that inequality is creating another layer of separation between the in group and the out group.”
Jane Austen lived at the dawn of the industrial revolution, before the leisured, landed gentry faced the coming full assault on its position from the rising meritocrats of manufacturing and commerce. But even then, and without the assistance of experimental setups like Ariely’s, she was an acute observer of this human tendency to self-justification.
Recall the opening scene of her 1811 novel Sense and Sensibility. John Dashwood promises his father on his deathbed to treat his stepmother and three half sisters generously. At the time, he sincerely intends to do so. “ ‘Yes, he would give them three thousand pounds: it would be liberal and handsome! It would be enough to make them completely easy. Three thousand pounds! He could spare so considerable a sum with little inconvenience.’ He thought of it all day long, and for many days successively, and he did not repent.”
But as the newly minted squire of Norland Park talks it over with his wife in the ensuing weeks, John gradually reduces the intended amount: “Perhaps, then, it would be better for all parties if the sum were diminished by one half.—Five hundred pounds would be a prodigious increase to their fortunes!” Note that the reduction is in the interests of “all parties.”
Then John wonders whether an annuity, paid solely to his stepmother, might not be best: “A hundred a year would make them all perfectly comfortable.”
Upon further thought, he decides that would be excessive, too. “I believe you are right, my love,” he tells his wife. “It will be better that there should be no annuity in the case; whatever I may give them occasionally will be of far greater assistance than a yearly allowance, because they would only enlarge their style of living if they felt sure of a larger income, and would not be sixpence the richer for it at the end of the year. It will certainly be much the best way. A present of fifty pounds, now and then, will prevent their ever being distressed for money, and will, I think, be amply discharging my promise to my father.”
By the end, John decides that even this is too much: “He finally resolved, that it would be absolutely unnecessary, if not highly indecorous, to do more for the widow and children of his father, than such kind of neighborly acts as his own wife pointed out.”