We Look Out for Our Own

FILE - This Feb. 2, 2012 file photo shows then Treasury Secretary Timothy Geithner during a news conference at the Treasury D
FILE - This Feb. 2, 2012 file photo shows then Treasury Secretary Timothy Geithner during a news conference at the Treasury Department in Washington. Geithner will write a book focusing on his response to the financial crisis, The Associated Press has learned. Geithner, 51, will be represented by Washington-based attorney Robert Barnett, who confirmed Wednesday, Feb. 6, 2013, that Geithner would be meeting with publishers, but otherwise declined comment. Barnett has negotiated deals for President Obama and former Secretary of State Hillary Rodham Clinton. (AP Photo/Carolyn Kaster, file)

In our first article we wrote about how today's American elite has two characteristics that powerfully impact how it rules the United States. It is self-perpetuating, and it is homogenous. It is self-perpetuating because its members pass on their advantages to their children, making it difficult for anyone who isn't from an elite background to break in, and much easier for anyone who is to maintain their status. It is homogenous because most members of the elite have passed through a relatively small number of schools and corporations which give them a common worldview and set of assumptions.

Elites derive their power -- and their importance -- from the fact that they run our most significant societal institutions. The government, companies, nonprofits, unions -- all of them were created for a purpose, and all have a relatively small group of people at their summit who have considerable discretion over what they will do. The elites who control these institutions thus must face a constant choice -- they can devote their full attention to helping the institution do its job as well as possible, or they can succumb to the temptation to use their power to divert some of the surplus generated by the institutions they control to benefit themselves, instead of the purpose for which the institution was created.

Unfortunately, this problem gets steadily worse over time even without any particular corruption or decay on the part of the elites. Every time the leader of an institution distorts it -- even a tiny bit -- for his or her own benefit, he or she creates a new status quo for his or her successors, who, if they do the same, will make the situation even worse. There is thus a steady erosion, with each succeeding generation of elites constantly tempted to benefit just a little bit more than their predecessors, while still maintaining power despite the institutional rot. Perhaps the most striking example of this is in Congress itself, where generations of gerrymandering have left more than 90 precent of representatives virtually immune to an electoral challenge even as the popularity of the Congress as a whole plunges toward single digits.

As the sociologist Robert Michel noted a century ago, the tendency towards elite capture is inevitable, but the self-perpetuating and homogeneous character of the modern American elite make this tendency far stronger. If elites are worried about losing their positions, this provides a powerful check on their tendency to capture institutions. Turnover can act as a "reset" on capture; the threat of turnover makes elites want to keep non-elites happy in order to avoid it, and if the next set of elites will be very different from the current set, there will naturally be less desire to hand them a particularly advantageous situation. The self-perpetuating nature of our elite, due to low social mobility and weakening mechanisms of elite accountability, however, means that none of these factors come into play.

Even more dangerous, however, is the homogeneity of the American elite. The other great check on elite capture is intra-elite conflict, whether within or between institutions. The United States Constitution makes this the central guard against tyranny through the separation of powers. These sorts of conflicts exist, however, in every part of society. The government polices business, non-profits police the government, and so on. The system breaks down, though, if the elites of every major institution see themselves and their interests in the same way. When this happens, those parts of American society that are most dominated by, and associated with, the elite are likely to steadily increase their wealth and power, not by contributing, but simply by siphoning wealth towards themselves. Moreover, this homogeneity gets transferred to the next generation as elites increasingly pass their social and economic advantages to their offspring. The passing along of privilege does not come from a pernicious place. Rather it springs from parents doing what only comes naturally: trying to give their children as many advantages as possible. This shows up in ways as ordinary, and yet powerful and pervasive, as the desire to buy homes in good school districts or the willingness to pay for SAT prep courses to help one's children get into a prestigious school. In a knowledge-based society like ours, elite reproduction is more subtle than the inherited aristocracies or caste systems of the past. It now happens through the transfer of social connections, know-how, a particular cultural perspective, and children sharing the status position of their parents in society.

We can clearly see how this worked before, during, and after the 2008 financial crisis. Banking has always been more dominated by elites -- both the old, inherited one, and the new pseudo-meritocratic one -- than any other industry. Before the crisis the enormous growth of the sector was enabled by a deregulatory philosophy supported by both political parties, driven by economists who were, almost exclusively, resident in the same universities that trained the very bankers who were being given free rein. When the crisis happened, there was an overwhelming consensus among American elites (one not shared in the least by most Americans) that the banks needed to be rescued, something that was achieved by giving them enormous amounts of capital with little or no accountability. Once the crisis was over, the American government passed a bill, Dodd-Frank, that was meant to prevent such a crisis from ever recurring. In the face of such government action, it's reasonable to expect that the banks themselves would fight tooth and nail against tighter regulation, no matter how much damage they had just done to the country. What is surprising is that, as Sheila Bair, the head of the FDIC, described in her book Bull by the Horns, Timothy Geithner, President Obama's Secretary of the Treasury, and someone we described in our first blog as a perfect example of the new elite, consistently took positions that were maximally favorable to the large banks. Even though the Dartmouth-educated Geithner had spent little time actually working in the financial sector, his positions were essentially the same as those of his Dartmouth-educated predecessor Hank Paulson, who made his career at Goldman Sachs before joining the Bush Administration.

Perhaps even more surprising is the extent to which there was simply no accountability for the elites whose mistakes and misdeeds created the crisis. This goes far beyond the simple -- if dismaying -- fact that very few bankers have gone to jail for their actions before the crisis, or that, similarly, frauds like the LIBOR scandal or even for helping the government of Iran to launder money have resulted in nothing more than the firms that perpetrated them paying civil penalties without prosecutions. The problem is far more profound than that. In 1998, Brooksley Born, whom President Clinton appointed to head the Commodities and Futures Trading Commission, proposed regulating over-the-counter derivatives -- exactly the financial instruments which would play a crucial role in the crisis. She was prevented from doing so by, among others, Robert Rubin, then the Secretary of the Treasury, and Larry Summers, who would soon replace Rubin in that role. After the crisis, it was not Born but Summers who took a major role on the Obama administration's economic policy team, while Rubin's protégé, Geithner, became Treasury Secretary -- even though Geithner's job before the crisis was as president of the Federal Reserve Bank of New York, making him the government official most directly responsible for maintaining the stability of the financial system. Elites who went along with the mainstream consensus thus prospered even though that consensus was disastrous.

None of this is about anything as simple as corruption. Geithner, for example, to the surprise of many, took up a position at the Council on Foreign Relations after leaving the Treasury instead of cashing in on his governmental connections by joining a financial services firm. But people are naturally inclined to believe arguments that favor their own interests and those of people who are like them. If you are employed in the financial sector, of course you believe that allowing and unfettered freedom to construct opaque and risky financial products is the best thing for the country as a whole. Why would you believe otherwise? There are powerful arguments produced by people in the best schools to justify your belief, after all. Meanwhile, the academics producing those arguments know, consciously or subconsciously, that ideas favored by the financial sector will be richly rewarded by consulting contracts and speaking fees paid by the financial sector. Of course they will produce (and honestly believe!) theories and ideas sympathetic to its interests. Meanwhile, if you're in government, who are you likely to have more sympathy for -- the bankers who went to the same schools, worked in the same companies, and believe in exactly the same things that you do, or the average Americans whose life experiences are so entirely different from your own that they might as well be those of people from another planet? Given that, is it so surprising that the government was willing to allow banks to pay enormous bonuses to their employees with taxpayer money but has so far done nothing particularly effective to help Americans with underwater mortgages?

This isn't just about financial reform. The United States currently has a remarkable level of income inequality, one substantially higher than it was only a few decades ago. The problem is so severe that from 2009-2011, when the economy was supposed to be recovering from the financial crisis, the incomes of the top 1 percent captured 121 percent of all income gains. Yes, everyone else went down. Major explanations for this sort of change include the vastly higher salaries paid to senior executives at companies, the enormous compensation paid to members of the financial sector, the lower taxes paid by those at the top of the income spectrum, and the very low taxes paid by those who gain most of their income through capital gains instead of labor. Whatever the other arguments for these things, every one of these phenomena is an example of elites benefiting themselves far more than the society from which they spring.

Even American immigration policy can be explained as something crafted to benefit elites instead of the public as a whole. Immigrants can be thought of as divided into two categories: low-skilled and high-skilled. High-skilled immigrants have an enormously positive impact on the nation's economy. For example, they pay far more in taxes than they consume in government services and they are highly likely to found companies. The impact of low-skilled immigrants, on the other hand, is more difficult to assess. It is at least possible that they are likely to consume more in government services than they pay in taxes. You might expect that this would lead the United States to have an immigration policy favoring high-skilled immigrants, right?

Add in one other factor. Low-skilled immigrants, by adding to the supply of low-skill labor, allow the upper middle class and above in the United States to have goods and services (like homes built with inexpensive, and often illegal, immigrant labor, or housekeepers, or nannies) that they could not possibly otherwise afford. So low-skilled immigration may tend to increase income inequality and benefit elites at the expense of the average American. High-skilled immigrants, on the other hand, tend to compete for the same jobs as American elites and, by founding companies that employ low-skilled Americans, drive up the cost of labor. So high-skilled immigration tends to decrease income inequality and benefit most Americans while hurting elites. Given that, is it surprising that American immigration policy results in large numbers of low-skilled immigrants, while it is often impossible for even the best educated immigrants to enter, even though most Americans favor exactly the opposite policy? As a rule of thumb, if something is happening in the United States that doesn't seem to make sense, you generally won't go too far wrong by looking to identify the elite that benefits from it and has, most of the time, constructed elaborate intellectual justifications for why it's really the right thing to do.