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
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 crisis. 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 Ecole 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
