Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else

by Chrystia Freeland

  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.

  WINNER-TAKE-ALL POLITICS

  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.

  LUNCH WITH SECRETARY PAULSON

  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 c
risis. 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.”

  JOHN DASHWOOD’S HALF SISTERS

  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.”

  CONCLUSION

  We may have democracy, or we may have wealth concentrated in the hands of the few, but we cannot have both.

  —Louis Brandeis

  The society that puts equality before freedom will end up with neither. The society that puts freedom before equality will end up with a great measure of both.

  —Milton Friedman

  The lagoons off the north Adriatic coast that eventually became Venice were first settled by refugees from more salubrious inland cities fleeing successive invasions by the Huns and sundry Germanic tribes. These marshy islands, plagued by fog in the winters and insects in the summer, made a good hiding spot—not only were they hard to reach, they were so grim and inhospitable there was no point in sacking them.