Click here to read [1] the Too Much weekly edition, as emailed to readers on November 2, 2009.
This Week in Too Much
If you’re so smart, goes the classic American put-down, why aren’t you rich? Let’s try to follow this logic train out a bit. If you’re rich and connected to America’s most prestigious university, by this logic, you must be really smart.
This proposition, we can now safely report, does not hold. Great wealth and a great university, taken together, do not guarantee wisdom — or even prevent incredible foolishness. How can we be so sure? We’ve been following the bizarre unfolding of what may be the biggest investment debacle in academic history.
We have the story of this fiasco — at Harvard of all places — in this week’s Too Much. Why should the rest of us care about what happened at Harvard? Here’s one reason: The Harvard president who let this disaster blossom just happens to now work at the White House, as our nation’s top economic policy adviser.
Greed at a Glance
In New York City, where voters are going to the polls this Tuesday, billionaire Michael Bloomberg has now spent over $85 million on his bid for a third mayoral term. Those record millions, the New York Observer noted [2] last week, have bankrolled a campaign “heavy on focus-group-approved drivel and hard-edged attack ads.” The 67-year-old mayor currently ranks eighth [3] on the latest Forbes 400 list of America’s richest, with a fortune worth $17.5 billion. Bloomberg’s personal net worth, estimates Forbes, has increased by $1.5 billion [4] since last March. In other words, the mayor could have upped his campaign spending this year by tenfold — to $850 million — and still ended 2009 with more money to his name than he had when the year started . . .
Billionaire Warren Buffett isn’t running for office, but the maverick investor is still doing his best to influence public policy. Last week, in a BBC interview, the 79-year-old Buffett called for “a very progressive tax on income.” Society, he noted [5], ought not “count entirely on the goodwill of the rich” to decide how much of their wealth gets funneled back into the society that made that wealth possible. Explained [6] the “Sage of Omaha”: “I was lucky at birth. I shouldn’t delude myself into thinking I am some superior individual. Most of the rich people in the United States and the UK, they wouldn’t have done quite as well if they were in Bangladesh or some place like that.”
The more income concentrates at a society’s summit, two new studies suggest, the better men do. In 2008, says a Corporate Library report [7] released last week, American men in CEO slots made 3.5 times more in bonuses than CEO women and received twice as much in perks. Overall, CEO women last year averaged just 58 percent of the total pay that went to CEO men. Only one woman, United Therapeutics chief exec Martine Rothblatt, ranked among 2008’s 150 top-earning CEOs. Here in 2009, reports the World Economic Forum’s newly released Global Gender Gap Index [8], the Nordic nations that have the world’s most equal distributions of income and wealth “continue to have the smallest equality gaps between men and women.” Finland, Norway, and Sweden rank two, three, and four on the new gender equality index. The United States ranks 31st . . .
Will the super rich eventually evolve [9] into “a completely separate species”? Silicon Valley’s “favorite futurologist,” Stanford University’s Paul Saffo, now considers that unsettling thought a distinct possibility. In coming decades, Saffo told [10] an interviewer earlier this month, only the ultra wealthy will likely be able to afford advances that enable them “to grow their own replacement organs, take specially designed drugs made just for them, and use genetic research tools to alert them of any possible health dangers.” Advises Saffo: “Think what that means about wealth and power and the advantages that you pass on to your children.” The combination, he warns, would be “social dynamite.”
America’s richest taxpayers, analysts believe [11], are using offshore tax havens to evade $100 billion in taxes a year. Might that free ride soon be ending? IRS Commissioner Douglas Shulman last week launched a new Global High Wealth Industry task force that will target taxpayers [12] with over $30 million in assets. As part of this long-overdue crackdown, the IRS is opening [13] three new overseas offices — in Beijing, Panama City, and Sydney. On Capitol Hill, the chairs of the House and Senate tax committees are moving [14], too. They introduced legislation last Tuesday that would levy [11] a 40 percent penalty on taxpayers who hold over $50,000 in assets overseas and don’t declare them to the IRS. Who deserves the credit for this growing crackdown? Maybe Bradley Birkenfeld, the 44-year-old American who turned himself in two years ago after helping the Swiss banking giant UBS conceal mega millions in U.S. deep-pocket assets. Birkenfeld, the Los Angeles Times noted [15] last week, converted one “U.S. client’s money into diamonds, then smuggled the gems across the Atlantic in a toothpaste tube.”
New Wisdom on Wealth
Sam Pizzigati, Have the Rich Won? [16] Dollars & Sense, November/December 2009. In this 35th year anniversary issue of a top U.S. progressive economics magazine, the editor of Too Much explores why America’s rich had so little, relatively speaking, in the mid 20th century and so much today.
Max Fisher, Does Class Inequality Cause Bubbles? [17] Atlantic Wire, October 28, 2009. A fine summary of the reasons why the concentration of wealth so often generates over-the-top speculation and economic instability.
Steven Pearlstein, This Wall Street fairy tale doesn’t have a happy ending [18], Washington Post, October 30, 2009. The Post’s chief economics columnist spins a fascinating fable that illustrates how excessive pay drove us into a Great Recession.
Quote of the Week
“What does it say about us, what does it say about our values, that only the super-rich, or those who pander to them, can ever aspire to hold our highest elected offices?”
Bruce Lowry, In politics and baseball, money still matters [19], Bergen Record (N.J.), October 29, 2009
In Focus
A Rich University’s Mad Dash to Get Richer
Wild chases after vast riches, last fall’s global meltdown reminded the world, can destroy economies — and corrupt entire societies. Great universities, in theory at least, can serve to slow these chases. They offer a refuge from marketplace passions, a place where sober scholars can reflect thoughtfully on the damage frenzied speculation can do and how that damage can be undone.
America’s greatest university — Harvard — hasn’t enabled much of that reflection lately. The reason? Harvard has been too busy chasing riches.
[20]
Now that chasing has left Harvard, the world’s wealthiest university, enveloped in an embarrassing financial debacle [21] that has cost hundreds of university employees their jobs, frozen the salaries of many others, and stopped campus development projects dead in their tracks.
“Harvard’s investment managers played some of the same reckless games as the big banks,” says historian David Kaiser, a Harvard alumnus. “The difference is that Harvard isn’t eligible for a bailout.”
Kaiser and other Harvard grads from the class of 1969 have been critiquing Harvard investment practices since they learned six years ago that officials in the Harvard Management Co., the university office that invests Harvard’s endowment, were pulling in enormous Wall Street-style bonuses. In 2002, just six of these investment managers pocketed [22] a combined $107.5 million.
To go about grabbing those millions, Harvard’s financial managers were investing university endowment dollars in exotic “derivatives” that promised high, double-digit annual returns. The higher the returns, the higher the rewards for the investment managers — and the greater the incentive to keep plowing endowment dollars into even shakier investments.
But the risk taking went beyond endowment dollars. Harvard actually began investing general operating funds in the same risky investments, in the process, observed [21] the Boston Globe, violating “one of the most basic rules of corporate or family finance: Don’t gamble with the money you need to pay the daily bills.”
And what were Harvard’s grown-ups doing while all this was happening? They were looking the other way. In May 2002, a staffer at Harvard Management wrote then Harvard president Lawrence Summers a confidential letter to warn about the investing recklessness she saw all around her. Nothing changed. Two months later, she was fired [23] for making “baseless allegations.”
Summers, a controversial figure at the university in his own right, would leave Harvard in 2006. He resurfaced, after last November, as the director of the new Obama administration’s National Economic Council.
By that time, the global financial industry had collapsed. In the wake of that tumble, Harvard’s celebrated endowment — worth $36.9 billion at its peak two years ago — lost nearly $11 billion [24] in just a year. The Harvard general operating fund lost another $1.8 billion.
More bad news came earlier this month. Harvard officials revealed they had shelled out just under $500 million, in the university’s last fiscal year, to a host of big Wall Street banks to cover [24] a “failed bet that interest rates would rise.”
University officials, notes the Class of 1969 Ad Hoc Committee on Harvard’s Endowment, have responded to some alumni complaints. The university, for instance, several years ago significantly increased student financial aid. But Harvard, alumni critics charge, is still refusing to “acknowledge any fundamental mistakes.”
These alumni now want the university to cap investment manager earnings.
“We continue to believe,” the Class of 1969 committee noted in a recent letter to Harvard president Drew Faust, “that no Harvard employee should earn more annually than the president of the university and that multi-million dollar bonuses are inappropriate in nonprofit institutions.”
The alumni critics also want Harvard to report how many university dollars have gone to the outside investment firms that have, in recent years, managed as much as two-thirds [25] of the university’s endowment investing.
Outside investment managers typically receive a flat 2 percent annual fee on the billions they invest and a 20 percent cut of the profits they make buying and selling invested assets.
Absolutely “no one,” adds the alumni letter to Harvard’s president, “should be compensated on such an enormous scale for managing nonprofit funds.”
But the angry alumni are seeking an even broader change. They want Harvard to start acting as a great university should.
The reckless investment moves that have cost the university so dearly, the alumni note, essentially mirror “the practices that in the same period brought down most of our major financial institutions, with enormous short-, medium and long-term costs to the United States and the entire world economy.”
“Surely Harvard,” they note, “can find the intellectual, moral, and financial capital to face this fact squarely and begin a public discussion of the weaknesses of our financial practices, not only for the sake of the institution, but to help the society which it serves.”
In the end, the Harvard financial fiasco helps make clear, financial maneuvers that pump up endowment jackpots — and rewards for endowment investment managers — don’t contribute to academic greatness. They undermine it.
Indeed, the staggering concentration of wealth in the Harvard endowment — from $4.7 billion in 1990 to $36.9 billion in 2007 — has taken place over years that have witnessed the overall deterioration of American higher education.
The public colleges and universities that deliver most of that education have been steadily cutting academic services and raising tuition beyond the means of average working families, in no small part because tax cuts for America’s wealthy — the same wealthy who donate so prodigiously to their elite alma maters — have helped drive down state budget support for higher education.
The total average annual cost of attending a public four-year college, the College Board reported earlier this month, has now hit $15,213.
“The level of debt we’re asking people to undertake,” agonizes [26]Patrick Callan of the National Center for Public Policy and Higher Education, “is unsustainable.”
The lesson in all this? In both academe and society at large, as the most learned Sir Francis Bacon pointed out over four centuries ago, wealth — like manure — only does good when you spread it around.
In Review
Daring to Diss ‘Equality of Opportunity’
A Review of Rebecca Hickman, In Pursuit of Egalitarianism: and why social mobility cannot get us there. Compass, London. September, 2009. 28 pp.
Just over a half-century ago, in 1958, a progressive British political activist wrote a futuristic satire entitled The Rise of the Meritocracy. The author, Michael Young, imagined himself in the year 2034, in a society where an “aristocracy of talent” had replaced “an aristocracy of birth.”
Young meant his work as a warning [27] — against letting those “judged to have merit of a particular kind” calcify into a smug new ruling elite.
But Young’s satire never stuck. Instead, the word he coined — “meritocracy” — has become a shorthand for the society that we’re all supposed to want to see.
“I believe in equality of opportunity,” our politicians intone whenever they’re angling for a cheap applause line. “I don’t believe in equality of results.”
Enter Rebecca Hickman, a public policy analyst who used to run the government relations office for London’s mayor. Hickman no longer mindlessly applauds when politicos earnestly pledge to help people — of “talent and resolve” — climb the “ladder of opportunity.” In this masterfully argued new pamphlet [28], she explains why, in a punchy prose that leaves no prisoners.
“By its own logic,” Hickman notes early on, “equality of opportunity as both goal and method does not make sense.”
Today’s elected leaders, Hickman relates, regularly employ “meritocracy” as a rhetorical hook for avoiding issues around the distribution of income and wealth. But real equality of opportunity, she shows, requires that “everyone starts from the same point and has equal prospects of progressing.”
And that requires, for a truly “fair” race up the economic ladder, a high level of equality right at the outset.
Hickman’s pages delightfully demolish the sloppy reasoning of those who tout “opportunity” as the ultimate yardstick for social decency. Along the way, she also introduces questions that force us to face the morality of fixating on opportunity at the expense of all else.
“Meritocracy,” she writes, “fails to create a more just society because at best it is about removing the obstacles from the paths of those who have the energy and luck to be able to make the most of their talents, and at worst, it is about social Darwinism, the survival of the fittest and the demise of the rest.”
So what’s the alternative to meritocracy? Hickman outlines a dozen steps, from affordable higher education to progressive taxation, “to put right the accidents of birth,” to ensure everyone the “freedom to be valued and to know dignity.”
“Social justice must go so much deeper than simply clearing the way for those who are able and tenacious,” she observes. “It is above all about how we look after those who may have less to contribute, who encounter bad luck, or who simply make mistakes.”
And if we took this broader responsibility seriously, everyone would benefit, even the awesomely affluent who might become somewhat less awesome.
A redistribution of society’s resources “that enables the poorest in our society to have access to the external sources of dignity — a decent income, a comfortable home, a pleasant neighborhood, first-class education, and health care — will cost the wealthiest in terms of their disposable income,” as Hickman points out, “but not in terms of their happiness.”
“Redistribution and collective responsibility are not zero-sum games where the more we share with others the less we have for ourselves,” sums up this engaging brief [28] for equality. “They are ways of living and of being that mean we are all better off.”
Stat of the Week
The health care reform legislation [29] that will hit the floor of the House of Representatives this week would, if enacted, raise the tax rate on million-dollar incomes to their highest point since 1986. The legislation adds a 5.4 percent surtax to income over $1 million on joint returns. But the 0.3 percent of U.S. households that will face this new tax levy will still be paying taxes at less than the half the tax rate on high incomes in effect over the two decades after World War II. For most of those two decades, income over $400,000 faced [30] a 91 percent tax rate.