The Meritocracy Trap

by Daniel Markovits

  new franchise operators: Geoff Williams, “Hamburger U: Behind the Arches,” Entrepreneur, January 2006, accessed November 18, 2018, www.entrepreneur.com/article/81692.

  Indeed, the school increasingly focuses: “McDonald’s Celebrates 50 Years of Training and Developing Employees at Hamburger University,” Market Wired, April 5, 2011, accessed November 18, 2018, www.marketwired.com/press-release/mcdonalds-celebrates-50-years-training-developing-employees-hamburger-university-nyse-mcd-1422879.htm. Hereafter cited as “McDonald’s Celebrates 50 Years.”

  Even its U.S. campus: “McDonald’s Celebrates 50 Years.”

  “More and more of the labor”: DePillis, “Minimum-Wage Offensive.”

  Burger King and Wendy’s: Mona Chalabi, “What Do McDonald’s Workers Really Make Per Hour?,” FiveThirtyEight, May 22, 2014, accessed November 18, 2018, http://fivethirtyeight.com/datalab/what-do-mcdonalds-workers-really-make-per-hour/.

  dispense with the need for mid-skilled workers at street level: The transformation even blocks street-level workers from making the leap into management not by rising through the ranks but by buying a franchise. Whereas a midcentury worker might open a franchise using loans, McDonald’s now requires franchise applicants to verify a minimum of $750,000 of liquid assets. Other fast-food chains demand still greater wealth: Taco Bell, for example, requires new franchisees to possess a minimum net worth of $1.5 million. See National Employment Law Project, Going Nowhere Fast: Limited Occupational Mobility in the Fast Food Industry (July 2013), Figure 5, www.nelp.org/wp-content/uploads/2015/03/NELP-Fast-Food-Mobility-Report-Going-Nowhere-Fast.pdf.

  has never done full-time nonmanagerial work in the restaurant business: Lara O’Reilly, “The New McDonald’s CEO Is British—Here’s Everything We Know About Him,” Business Insider, January 29, 2015, accessed November 18, 2018, www.businessinsider.com/everything-you-need-to-know-about-mcdonalds-new-ceo-steve-easterbrook-2015-1.

  (about $1.2 million in 2018 dollars): See McDonald’s Corporation, “Notice of Annual Meeting of Stockholders,” April 8, 1969.

  a full-time minimum-wage worker: The federal minimum wage in 1965 was $1.25 per hour, which yields an annual income (based on working forty hours per week for all fifty-two weeks of the year) of $2,600 in 1965 dollars. “History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938–2009,” Wage and Hours Division, U.S. Department of Labor, accessed October 22, 2018, www.dol.gov/whd/minwage/chart.htm.

  (about $4 million in 2018 dollars): McDonald’s Corporation, Form 14A: Proxy Statement (April 12, 1996), 26, accessed October 22, 2018, http://d1lge852tjjqow.cloudfront.net/CIK-0000063908/805ecc39-014d-49f9-a69b-febfa96a6ab5.pdf.

  more than 250 times the full-time minimum-wage income: The federal minimum wage in 1993–95 was $4.25 per hour, which yields an annual income (based on working forty hours per week for all fifty-two weeks of the year) of $8,840 in mid-1990s dollars. “History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938–2009,” Wage and Hours Division, U.S. Department of Labor, accessed October 22, 2018, www.dol.gov/whd/minwage/chart.htm.

  makes roughly $8 million: McDonald’s Corporation, Form 14A: Information Required in Proxy Statement (April 15, 2016), 33, accessed October 22, 2018, http://d1lge852tjjqow.cloudfront.net/CIK-0000063908/3fb68a12-ebe5-47c5-bd39-2f6e0b5fe9c0.pdf.

  more than 500 times the minimum wage: The federal minimum wage is $7.25 per hour, which yields an annual income (based on working forty hours per week for all fifty-two weeks of the year) of $15,080. See U.S. Department of Labor, “History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938–2009,” Wage and Hours Division, accessed October 22, 2018, www.dol.gov/whd/minwage/chart.htm. For a report of ratios of the CEO’s income to the income of a full-time minimum-wage worker, see Leslie Patton, “McDonald’s $8.25 Man and $8.75 Million CEO Shows Pay Gap,” Bloomberg, December 12, 2012, accessed November 18, 2018, www.bloomberg.com/news/articles/2012-12-12/mcdonald-s-8-25-man-and-8-75-million-ceo-shows-pay-gap.

  account for the CEOs’ enormous pay: See the discussion of management below.

  the market for workers: According to one estimate, increased intensity in research and development accounts for 49 percent of the rise in worker productivity in the United States between 1950 and 1993. See Charles I. Jones, “Sources of U.S. Growth in a World of Ideas,” American Economic Review 92, no. 1 (March 2002): 230. See also Claudia Goldin and Lawrence Katz, The Race Between Education and Technology (Cambridge, MA: Harvard University Press, 2008), 41. Hereafter cited as Goldin and Katz, The Race Between Education and Technology.

  technology’s divergent influences: New technologies may actually be increasing the wages of the least skilled workers, and this effect might contribute, alongside the social welfare programs inaugurated in the Great Society, to the declining poverty rates observed earlier. (Note, however, that the bulk of innovation’s upward pressure on low-skilled wages might well be indirect, as newly flush superordinate workers increase the demand for services—housekeeping, for example, or personal care—that the least skilled provide.) See David H. Autor and David Dorn, “The Growth of Low-Skill Service Jobs and the Polarization of the US Labor Market,” American Economic Review 103, no. 5 (August 2013): 1559 (“If consumer preferences do not admit close substitutes for the tangible outputs of service occupations—such as restaurant meals, house-cleaning, security services, and home health assistance—non-neutral technological progress concentrated in goods production (by which we mean non-service occupation activities) has the potential to raise aggregate demand for service outputs and ultimately increase employment and wages in service occupations.”).

  “the world’s most respectable declining industry”: “Has Banking a Future?,” The Economist, January 26, 1963, 331. The full quotation from that article is “Can the bankers, after complacently relying on inflation to expand their deposits for so long and having wearied more recently of initiatives inadequately followed through, rise to the occasion now? It needs faith to believe they will, even if some of them see danger in presiding over the world’s most respectable declining industry.” The 1963 story was referenced in a 2013 Economist story on banking called “Twilight of the Gods.” See “Twilight of the Gods,” The Economist, September 2, 2013, accessed November 18, 2018, www.economist.com/news/special-report/21577189-investment-banking-faces-leaner-humbler-future-says-jonathan-rosenthal-though. Hereafter cited as “Twilight of the Gods.”

  went to work on Wall Street: Fraser, Every Man a Speculator, 473. The Great Depression had badly discredited finance, and the leisure-class bankers’ near-uniform opposition to the New Deal and their eventual bitter defeat sealed Wall Street’s fate for a generation. “White-shoe Wall Street,” one commentator observed, “suddenly seemed no better than a gang of common criminals, skimmers, double-dealers, and confidence men.” Fraser, Every Man a Speculator, 431. And financiers appeared “not only narrow-mindedly selfish, but foolish, frail, and inept,” so that “they were made fun of and stripped of every last vestige of moral authority and heroic virility they once laid claim to.” Fraser, Every Man a Speculator, 439 (first quotation), 431 (second quotation), xix–xx, 415, 439, 441, 474.

  the private-sector workforce: Until 1980, finance workers were only 2.5 percent more likely to hold college degrees than other private-sector workers. These percentages are derived by calculating the share of work hours provided by college-educated workers in each sector. See Thomas Philippon and Ariell Reshef, “Skill Biased Financial Development: Education, Wages and Occupations in the U.S. Financial Sector,” NBER Working Paper No. 13437 (2007), 7–8, www.nber.org/papers/w13437. Hereafter cited as Philippon and Reshef, “Skill Biased Financial Development.” From 1960 to 1980, elite finance workers earned roughly the same amount as elite manufacturing workers, 25 to 50 percent more than elite health sector workers, and 20 percent less than elite legal sector workers. By 2000 and into 2010, they earned abou
t 60 percent more than elite manufacturing workers, more than double elite health workers, and around the same amount as elite legal sector workers. See also Thomas Philippon and Ariell Reshef, “Wages and Human Capital in the U.S. Finance Industry: 1909–2006,” Quarterly Journal of Economics 127, no. 4 (November 2012): 1563–64, Figure III. Hereafter cited as Philippon and Reshef, “Wages and Human Capital.”

  exemplify meritocratic inequality: Overall the real incomes of finance workers with more than a BA were 130 percent higher in 2005 than in 1970, and these data are top-coded and so ignore the highest incomes and underestimate true growth among the narrow elite. Private-sector workers generally top-coded at rate of 1 percent, banking workers at 2 percent, insurance workers at 2.5 percent, and other finance workers at 13 percent. See Philippon and Reshef, “Skill Biased Financial Development,” 12, Figure 6.

  has grown roughly tenfold since the 1970s: See Posner and Weyl, “Against Casino Finance.” See also David A. Zalewski and Charles J. Whalen, “Financialization and Income Inequality,” Journal of Economic Issues 44, no. 3 (2010): 757–77, focusing on the twenty-five highest-paid hedge fund managers and the CEOs of the S&P 500. Both articles cite a study by Steven N. Kaplan and Joshua Rauh on the composition of the top 0.01 percent, 0.001 percent, and 0.0001 percent of the income distribution. See Kaplan and Rauh, “Wall Street and Main Street.”

  the fifty richest Americans: According to Forbes, twelve of the fifty richest Americans in 2013 were financiers, asset managers, or investors. In 2018, thirteen of the fifty richest Americans in 2013 were financiers, asset managers, or investors. See Kroll and Dolan, “Forbes 400.”

  About a fifth of all billionaires now work in finance: In 2012, of the 1,226 people on Forbes’s billionaires list, 77 were financiers and 143 were investors. Cited in Freeland, Plutocrats.

  investable assets of more than $30 million: Many of the numbers in this paragraph come from Freeland, Plutocrats, 120.

  might reach $425,000: Ho, Liquidated, 262–63, citing Erica Copulsky, “Ka-Ching!,” New York Post, December 11, 2006, which lists ranges of $600,000 to $1,300,000 for directors, $500,000 to $925,000 for vice presidents, $325,000 to $525,000 for third-year associates.

  $500,000 per professional employee: Duff McDonald, “Please, Sir, I Want Some More. How Goldman Sachs Is Carving Up Its $11 Billion Money Pie,” New York Magazine, December 5, 2005, accessed November 18, 2018, http://nymag.com/nymetro/news/bizfinance/biz/features/15197/. Hereafter cited as McDonald, “Please, Sir, I Want Some More.”

  $150,000 in a good year: McDonald, “Please, Sir, I Want Some More.”

  70 percent more income than other workers: Philippon and Reshef, “Wages and Human Capital,” 1605.

  rising wage inequality in the economy overall: Philippon and Reshef, “Wages and Human Capital,” 1552.

  have actually fallen recently: See Nelson D. Schwartz, “Gap Widening as Top Workers Reap the Raises,” New York Times, July 24, 2015, accessed November 18, 2018, www.nytimes.com/2015/07/25/business/economy/salary-gap-widens-as-top-workers-in-specialized-fields-reap-rewards.html (reporting data gathered by the payroll company ADP for the first quarter of 2015).

  character and standing in the community: Rajan, Fault Lines, 128 (“These assessments were not just based on hard facts; they also included judgment calls such as whether the borrower seemed well mannered, cleanly attired, trustworthy, and capable of holding a job.”).

  “guidelines for credit underwriting”: North Carolina Housing Finance Agency, Loan Originator’s Guide (1977), section 502.

  “special consideration”: North Carolina Housing Finance Agency, Loan Originator’s Guide (1977), section 502.

  solidly middle-class status: Joseph Nocera, A Piece of the Action: How the Middle Class Joined the Money Class (New York: Simon & Schuster, 1994), 22 (“Every time a man came into the branch to get a loan . . . he had to sit down with the loan officer and fill out his family history, even if he’d just been there a few months before. The loan officer had to reevaluate the man’s fitness to get a loan. The man had to return to the branch with his wife to sign a note. Only then would the loan officer transfer the funds to the man’s account.”). Norman J. Collins, “Credit Analysis: Concepts and Objectives,” in The Bankers’ Handbook, ed. William H. Baughn and Charles E. Walker (Homewood, IL: Dow Jones-Irwin, 1966), 279–89 (emphasizing the many questions that a loan officer must ask the potential borrower, from the “C’s of Credit” of “character, capacity, capital, collateral, and conditions” to government legislation that could affect the success of the borrower’s enterprise). Edward J. Palkot, “Personnel Administration,” in The Bankers’ Handbook, 81–97 (highlighting the importance of “strong relationships with high schools and colleges” to employee referrals—it would be quite rare to find a finance firm hiring at high schools these days). See also Robert A. W. Brauns, Jr. and Sarah Slater, Bankers’ Desk Reference (Boston: Warren, Gorham & Lamont, 1978), 161–73, 278–87 (describing the intricate process loan officers should go through in evaluating the creditworthiness of borrowers, but also stressing the importance of “reliable financial data”).

  process a given volume of loans: For numbers of loan officers, see Occupational Outlook Handbook, 2016–17 edition, “Loan Officers,” Bureau of Labor Statistics, December 17, 2015; Deniz O. Igan, IMF, Report on the United States, June 17, 2015. The BLS does not make it easy to calculate the number of loan officers, as the categories used to sort workers change over time. A reasonable guess concludes that there were roughly 170,000 loan officers in 1990, 213,000 in 1997, 237,000 in 2003, and 302,000 in 2013. In 1997, the average loan officer originated $3.8 million in loans. This number spiked to $16 million per officer in 2003 and fell back again to $6.6 million per officer in 2013.

  A blunderbuss approach, which simply calculates the number of bank employees (of all sorts) per residential loan, validates this conclusion. In 1987, there were seven bank employees per residential loan; in the most recent decade, there has been just one. See Federal Deposit Insurance Corporation, Balance Sheet, Aggregate Time Series Data 1984–2017 (2017), www5.fdic.gov/idasp/advSearch_warp_download_all.asp?intTab=4. The data are insufficiently fine-grained to give any independent meaning to these numbers, but they nevertheless serve as a confirmatory reality check on the earlier calculation.

  rote repetition rather than independent judgment: Rajan, Fault Lines, 128 (“All that seemed to matter to the investment banks and the rating agencies were the numerical credit score of the borrower and the amount of the loan relative to house value. These were hard pieces of information that could be processed easily and that ostensibly summarized credit quality.”).

  the accuracy of the loan decisions: Second Amended Complaint at 4, U.S. ex rel. Edward O’Donnell v. Countrywide Financial Corp. (S.D.N.Y. 2012) (“To further ensure that loans would proceed as quickly as possible to closing, Countrywide revamped the compensation structure of those involved in loan origination, basing performance bonuses solely on volume.”).

  the model of an assembly line: Rajan, Fault Lines, 128 (“But as investment banks put together gigantic packages of mortgages, the judgment calls became less and less important in credit assessments: after all, there was no way to code the borrower’s capacity to hold a job in an objective, machine-readable way. Indeed, recording judgment calls in a way that could not be supported by hard facts might have opened the mortgage lender to lawsuits alleging discrimination. All that seemed to matter to the investment banks and the rating agencies were the numerical credit score of the borrower and the amount of the loan relative to house value. These were hard pieces of information that could be processed easily and that ostensibly summarized credit quality. Accordingly, the brokers who originated loans focused on nothing else.”).

  made any other approach practically impossible: Second Amended Complaint at 3, U.S. ex rel. Edward O’Donnell v. Countrywide Financial Corp., 83 F.Supp.3d 528 (S.D.N.Y. 2015).
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  “A loan officer at a bank”: Linda Fiorella, “Secrets of a Mortgage Loan Officer,” Forbes, July 17, 2013, accessed November 18, 2018, www.forbes.com/sites/learnvest/2013/07/17/secrets-of-a-mortgage-loan-officer/.

  “previously considered unqualified”: See Complaint-in-Intervention, U.S. ex rel. O’Donnell v. Countrywide Financial Corp., 83 F.Supp.3d 528 (S.D.N.Y. 2015); U.S. ex rel. O’Donnell v. Countrywide Financial Corp., 83 F.Supp.3d 528, 535 (S.D.N.Y. 2015), rev’d, 822 F.3d 650 (2d Cir. 2016) (describing how Countrywide, which Bank of America merged with in 2008, “replac[ed] trained underwriters with entry-level ‘loan specialists’”).

  to be constructed and traded: Perhaps most important, the 1960s inaugurated regulatory innovations, for example the weakening and eventual repeal (in 1990) of the Glass-Steagall Act, which had since 1933 limited collaboration between commercial and investment banks. See, for example, David H. Carpenter, Edward V. Murphy, and M. Maureen Murphy, The Glass-Steagall Act: A Legal Analysis (Washington, DC: Congressional Research Service, January 19, 2016), https://fas.org/sgp/crs/misc/R44349.pdf.

  to value such securities: The 1950s and 1960s witnessed fundamental theoretical advances in the construction and pricing of financial instruments—including the capital asset pricing model that grew out of Harry Markowitz’s work on portfolio allocation and the Black-Scholes model for pricing options and other derivatives. See Mark Rubenstein, A History of the Theory of Investments (Hoboken, NJ: John Wiley & Sons, 2006), 167–75; Fischer Black and Myron Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy 81, no. 3 (May–June 1973): 637–54.

  to trade complex varieties at scale: The innovations in computing and information technology that make it possible to collect, store, analyze, and quickly communicate the vast quantities of data on which securitization depends are well known. Other innovations are less familiar, but no less important. It is less well appreciated that modern finance would be impossible without them. Indeed, a credible case can be made that the spreadsheet was an essential trigger for the financial revolution.