by Don Peck
The recession, meanwhile, has put downward pressure on common wages and enabled faster, more brutal restructuring and offshoring, leaving many corporations with lower production costs and higher profits—and their executives with higher pay. “It looks like every year we move toward greater inequality,” Saez told me, “and every year the market forces driving inequality seem stronger. I don’t think there’s necessarily a limit, short of triggering a policy response. The market itself doesn’t impose a limit on inequality, especially for those at the top.”
Anthony Atkinson, an economist at Oxford University, has studied the effect of recent financial crises on income distribution—and found that in their wake, the rich have usually strengthened their economic position. Atkinson examined the financial crises that swept Asia in the 1990s as well as those that afflicted several Nordic countries in that same decade. In most cases, he says, the income of the middle class suffered for a long time after the crisis, while the top 1 percent were able to protect themselves—using their cash reserves to buy up assets very cheaply once the market crashed, and emerging from the crisis with a significantly higher share of assets and income than they’d had before. “And I think we’ve seen the same thing to some extent in the United States” since the 2008 crash, he told me. “Mr. Buffett has been investing.” The Boston Consulting Group found that the percentage of America’s wealth held by its millionaires increased to 55 percent in 2009—a higher level than it had reached before the recession began.
“The rich seem to be on the road to recovery,” says Saez, while those in the middle, especially those who’ve lost their job, “might be permanently hit.” Coming out of the deep recession of the early 1980s, Saez notes, “you saw an increase in inequality … as the rich bounced back, and unionized labor never again found jobs that paid as well as the ones they’d had. And now I fear we’re going to see the same phenomenon, but more dramatic.” Middle-paying positions, in which some American workers have been overpaid relative to the cost of offshore labor or technological substitution, “are being wiped out. And what will be left is a hard and a pure market,” with the many paid less than before, and the few paid even better—a plutonomy strengthened and perfected in the crucible of the post-crash years.
ONE OF THE more curious aspects of the times in which we are living is the unmistakable disjuncture between how the American economic elite is faring and how some of its members are behaving. As executives and—especially—financiers have recovered from the hiccup in their fortunes, no small number have adopted a profound sense of aggrievement as they have resumed their ascent.
Since the crash and the bailout that followed, New York magazine, the New York Observer, and other publications have sent their reporters out prospecting for stories of continuing greed, entitlement, and hubris on Wall Street. And Wall Street’s titans have continually obliged them with gem after gem. In a 2009 New York article aptly titled “The Wail of the 1%,” financiers making seven- and eight-figure incomes complained bitterly to Gabriel Sherman about the prospect of paying somewhat higher taxes. “The government wants me to be a slave!” declared one hedge-fund analyst. Said another, “I’m not giving to charity next year! When people ask me for money, I tell them, ‘If you want me to give you money, send a letter to my senator asking for my taxes to be lowered.’ ”
“No offense to Middle America,” a Citigroup executive e-mailed a colleague, “but if someone went to Columbia or Wharton, [even if] their company is a fumbling, mismanaged bank, why should they all of a sudden be paid the same as the guy down the block who delivers restaurant supplies?”
In the weeks that followed the fall of Lehman Brothers, Treasury committed some $700 billion to propping up the nation’s banking system through the Troubled Asset Relief Program, or TARP, by far the largest bailout program in American history. The Fed, meanwhile, began an intervention without precedent, making almost $7 trillion available for troubled-asset purchases, new lending, and direct company bailouts. To help stabilize financial institutions, the Fed had already dramatically widened access to its discount window, and has since kept interest rates near zero. Without these and other measures—some of which have come at extraordinary expense to taxpayers and savers—Wall Street’s survivors would not have survived at all. Because of these actions, along with an implicit guarantee that the government will rescue the large banks should they get into trouble again, they have quickly returned to rude health. (In 2009, Wall Street’s five largest banks—Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, and Morgan Stanley—earned $147 billion before taxes and employee compensation. The banks saved $31 billion for investment and balance-sheet strengthening and distributed $2 billion to their shareholders; the rest, $114 billion, went to their employees.)
In return for this largesse, the federal government has demanded relatively little. Government officials decried some 2009 bonus payments by AIG, placed some limits on compensation during the time that banks were being propped up by government TARP funds, and considered closing a loophole that allows hedge-fund managers to pay income taxes at a rate of just 15 percent. After decades of continual financial deregulation, regulatory authority has been increased, as have capital requirements, but the basic structure of the industry remains intact; no banks have been broken up, and few executives have been sacked (at least at the government’s behest). President Obama, despite a few populist jabs against the “fat cats” on Wall Street, has acted with remarkable restraint given the political circumstances, and has gone out of his way to say, for instance, that he didn’t begrudge Jamie Dimon and Lloyd Blankfein—the CEOs of JPMorgan and Goldman Sachs, respectively—their wealth and success.
Wall Street’s response has been largely graceless. New York magazine’s John Heilemann wrote that at a dinner he attended with ten financial-industry executives in early 2010, Obama was described as a “vilifier” and a “thug.” Another industry insider, Heilemann reported, called him a “Chicago mob guy.” Stephen Schwarzman, cofounder of the Blackstone Group, called the proposal to close the 15 percent tax loophole an act of war, comparing it to “when Hitler invaded Poland.” Daniel S. Loeb, the founder of the hedge fund Third Point, intimated in his August 2010 investor letter that the pattern of government actions toward high financiers (including a lawsuit against Goldman Sachs) amounted to a violation of the U.S. Constitution’s protections against the “persecution of the minority.” After the January 2010 announcement of a White House proposal to cap the size of banks in order to limit the fallout from any future failures (with the cap set higher than any bank’s current size), the CEO of one of the nation’s biggest banks told Heilemann, “For a lot of us Wall Street people, it was like, ‘Okay, first you slap us in the face, now you kick us in the balls. Enough is enough. I mean, we’re done.’ ”
The public-relations initiatives of top financiers since the crash and bailout have been tin-eared, to say the least. In November 2009, Blankfein sat for a long interview with the Times of London, in which he claimed to be “doing God’s work” by making investment capital available to companies. The prior month, in a speech at St. Paul’s Cathedral in London, Brian Griffiths, another Goldman executive, also described Wall Street’s benevolent purpose in religious terms. Defending the huge bonuses his firm was planning to pay that year, he said, “The injunction of Jesus to love others as ourselves is a recognition of self-interest.… We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all.” On April 30, 2010, Blankfein told Charlie Rose, “We’re very important, but the public doesn’t see that.”
In 1895, in the midst of a potentially catastrophic run on gold that had the U.S. government teetering on the brink of default, J. P. Morgan took the train down to Washington and offered to gather and supply some 3.5 million ounces of gold from within and outside the country to staunch the panic, in return for U.S. government bonds (the value of which was uncertain); he did, and the panic ended. Years later, during the panic of 190
7, Morgan and a handful of other financiers stopped a potentially catastrophic bank run by pouring loans and deposits into the banks that might be strong enough to survive, again staunching the panic. Morgan also bailed out several trusts, the stock exchange, and the government of New York City during that crisis. (In the midst of the panic of 1929, the next generation of New York bankers also pooled money to try to support the stock market, though their efforts failed.)
Morgan was pompous, vain, and ruthless in search of profit, and the industry titans who were his peers were called robber barons for a reason; shameless avarice and other bad behavior among the powerful are hardly new phenomena. And ultimately, Morgan did make money as a result of the transactions of 1895 and 1907. But as the economic historian Richard Sylla, an expert on the history of the financial industry, told me, “People like Morgan realized that they did have a responsibility for the system.” In times of national crisis, Sylla said, Morgan acted with a mixture of public and private motives, “taking risk and exercising public responsibility,” even though “things might have gone wrong” for him. Above all, when the stakes were highest, he “wanted to save the system. I think he did feel a higher responsibility.”
In this respect, the actions of Wall Street’s current titans do not resemble those of their forebears. In the spring of 2008, as economic warning signs began to flash red, Morgan’s namesake firm did buy Bear Stearns, which was collapsing, in a deal brokered by the Treasury Department; but as Simon Johnson and James Kwak note in their book, 13 Bankers, JPMorgan agreed to pay only about as much as Bear Stearns’s building was worth, and that was only after the government agreed to assume almost all of the downside risk on $30 billion of Bear Stearns’s illiquid securities; to many observers, the deal looked like a gift. A few months later, when Treasury and the Fed tried to convince Wall Street’s titans to pitch in and rescue Lehman without substantial federal guarantees, they were given the coldest of shoulders, despite the enormous systemic risk that Lehman’s failure would pose.
The most public-spirited action taken by the heads of America’s major financial firms during the crisis involved taking money. On the heels of Lehman’s collapse, they agreed to take billions in TARP money from the federal government. Without these funds, some financial institutions would have failed almost immediately; others, notably JPMorgan and Goldman Sachs, claimed they didn’t need the cash, though there seems little doubt that if the implosion of the financial sector had continued unabated, these firms would have failed, too. In any case, it was essential that all the big banks take TARP money, because if only a few did, investors would have concluded that they were the weakest, prompting runs that might have pulled those firms down, despite the intervention.
In the end, the banks agreed to take injections of federal cash, but with no small drama. “People did what [Treasury Secretary Henry] Paulson asked,” Sylla noted, “but almost immediately, there was a sense of resentment.” Concerned with the optics of the bailout, the Obama administration put temporary restrictions on the pay of executives of TARP institutions while they were being supported by TARP funds. That, it seems, was simply too much for the financial elite to swallow silently. When the current head of JPMorgan, Jamie Dimon, eventually repaid the TARP funds in 2009, he read aloud from a fake letter he’d written to Timothy Geithner, who’d succeeded Paulson as Treasury secretary: “Dear Timmy,” he said, “we are happy to be able to pay back the $25 billion you lent us. We hope you enjoyed the experience as much as we did.”
The Federal Reserve did not exist in Morgan’s day, so he and his banking peers could not rely on the federal government to stop panics if they didn’t themselves. And because the big investment banks are now public companies, their partners and CEOs have to consider their duty to shareholders and creditors, substantially muddying the ethics of public-spirited action; if the government truly expected an entirely private rescue of Lehman, it was expecting too much. Still, the behavior of the financial sector’s leaders in this crisis stands out in troubling ways. Faced with overwhelming evidence that their recklessness had nearly destroyed the economy, and following an unprecedented federal bailout, they generally “didn’t admit that they made terrible mistakes, and then seemed to resist reforms,” Sylla told me. “I have a sense that they were less responsible than in the past.”
Bankers make easy targets today, and many of the hedge-fund managers and investment bankers who complain that they are being tarred indiscriminately are right. Many—indeed, most—successful financiers played no role in the crisis, and the idea that Wall Street as a whole is fundamentally parasitic is wrong. Nonetheless, the widespread failure among rich financial professionals to come to grips with the causes of the financial crisis, to empathize publicly with the millions of people who have taken much harder blows than themselves as a result, and to subsume their own interests—even for a moment, even in the worst economic calamity of our lifetimes—is difficult to miss and disheartening to watch.
Well before Wall Street’s meltdown, students of the rich and powerful in America had been noticing that elite attitudes seemed different from those in past generations—that the rich and powerful appeared more inwardly focused and less concerned with public matters. Barbara Kellerman, a professor at Harvard University’s Center for Public Leadership, told me that executives today don’t have it easy—they face more scrutiny, from a more skeptical public, than leaders in the past. But, she said, at least some of that skepticism may be warranted. When we think of the generations that came of age in the 1930s and ’40s and ’50s, she said, “what we generally have a sense of … is an elite that was at least in the mind’s eye more concerned with the public good and the common good than we generally assume now.” Kellerman has written that even within the companies they lead, many executives have become too distant to be completely effective: the yawning income gap between executives and rank-and-file employees—and the perception that executives are rewarded even when they or their companies perform poorly—has begun to hurt morale and productivity (in part by engendering a more mercenary attitude throughout the organization, discouraging employees from building company-specific skills that their next employer may not value).
Even David Brooks, in his perceptive and generally positive anthropology of the new rich, Bobos in Paradise, voices doubts about the sense of social responsibility felt by today’s best and brightest. “By and large they have not devoted their energies to national life,” he writes. “When we look back at the postwar ruling class, we see some mistakes and some hubris. But we also see a group of men and women who made genuine commitments to America that sometimes overrode their self-interest.” Brooks listed a few of them—George C. Marshall, Dwight Eisenhower, Dean Acheson, John McCloy; people who understood that “to those who are blessed much is expected.” Which of us, Brooks wrote, “doesn’t long for an updated version … of that sober patriotism?”
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LEAVING ASIDE THE question of whether the modern rich have well and truly earned their money (the answer, of course, will vary dramatically from person to person), the defining characteristic of today’s elite is its unshakable belief that it deserves every penny (and is perhaps underpaid). The rise of the meritocracy—in which the rich and powerful win their standing through uncommon hard work, intelligence, and chutzpah in a sort of grand economic tournament open to all—is a narrative now deeply ingrained in the U.S. culture. And indeed, society’s winners are drawn from more-diverse backgrounds than they used to be, while hereditary advantages have diminished. Ivy League classes look more colorful today than they did in the 1960s, and are populated more consistently with the nation’s smartest and most disciplined students. And after college, those who prosper the most do so as a result of their own labor, not a trust fund; the lion’s share of income earned by the top 1 percent comes from their career.
In the United States, the rise of the meritocracy has typically been met with celebration, and in most respects it should be. But this rec
ession has underscored the meritocracy’s less savory characteristics. In his final book, The Revolt of the Elites and the Betrayal of Democracy, published posthumously in 1995, the social critic Christopher Lasch painted a dismal picture of the destination toward which meritocratic progress may lead. Precisely because modern elites believe their status is the exclusive result of their own efforts, Lasch argued, they lack their predecessors’ sense of social obligation. “Although hereditary advantages [still] play an important part in the attainment of professional or managerial status,” he wrote, “the new [upper] class has to maintain the fiction that its power rests on intelligence alone. Hence it has little sense of ancestral gratitude or of an obligation to live up to responsibilities inherited from the past. It thinks of itself as a self-made elite owing its privileges exclusively to its own efforts.”
The rise of the meritocracy has coincided with—and is inseparable from—the disintegration of boundaries between both local communities and nations, and the evolution of a more transient lifestyle for the best-educated and most-successful Americans. Overwhelmingly, today’s elites have uprooted themselves from the towns of their birth and congregated in a handful of power centers and creative enclaves both within and outside the United States—New York, San Francisco, Seattle, London, Hong Kong, Shanghai, and so on. They circulate frequently among these cities. Globally connected, many of them associate and identify more with meritocratic winners of foreign nationality than they do with ordinary workers at home. Patriotism, Lasch wrote, “does not rank very high in their hierarchy of virtues.” And the far-flung networks that are their primary social and professional communities bear “little resemblance to communities in any traditional sense of the term.”