Inside Job (46 page)

But in addition to growing inequalities in income and wealth, America exhibits growing inequality of
opportunity
, both economically and in all the determinants of a healthy, happy, secure
life, ranging from health care to nutrition.

There are many facets to the decline in fairness and opportunity in American life. Perhaps the worst are the conditions now imposed upon young children born into the underclass and subjected to
the recent evolution of the educational system. They are related, and they reinforce each other; their combined result is to condemn tens of millions of children, particularly those born into the
new underclass, to a life of hardship and unfairness. For any young child whose parents don’t have money, or who is the child of a migrant agricultural worker and/or an illegal immigrant,
prenatal care, nursery, day care, after school, school nutrition, and foster-care systems are nothing short of appalling. And then comes school itself.

The “American dream”, stated simply, is that no matter how poor or humble your origins—even if you never knew your parents—you have a shot at a decent life.
America’s promise is that anyone willing to work hard can do better over time, and have at least a reasonable life for themselves and their own children. You could expect to do better than
your parents, and even be able to help them as they grew old. More than ever before, the key to such a dream is a good education. The rise of information technology, and the opening of Asian
economies, means that only a small portion of America’s population can make a good living through unskilled or manual labour. But instead of elevating the educational system and the
opportunities it should provide, American politicians, and those who follow their lead around the
globe, have been going in exactly the wrong direction. As a result, we are
developing not a new class system, but, without exaggeration, a new
caste
system—a society in which the circumstances of your birth determine your entire life.

As a result, the dream of opportunity is dying. Increasingly, the most important determinant of a child’s life prospects—future income, wealth, educational level, even health and
life expectancy—is totally arbitrary and unfair. It’s also very simple. A child’s future is increasingly determined by his or her parents’ wealth, not by his or her
intelligence or energy. To be sure, there are a number of reasons for this. Income is correlated with many other things, and it’s therefore difficult to isolate the impact of individual
factors. Children in poor households are more likely to grow up in single-parent versus two-parent households, exposed to drugs and alcohol, with one or both parents in prison, with their
immigration status questionable, and more likely to have problems with diet and obesity. Culture and race play a role: Asian children have far higher school graduation rates, test scores, and
grades than all other groups, including whites, in the US; Latinos, the lowest. So, yes, it’s complicated.

But it’s also simple, really. The largest single factor is the decline in educational opportunity and achievement, which are driven by money. If you don’t have money, you
lose—through the declining quality of public education in poor school districts, insufficient day care, inadequate preschool programmes, financial and social pressure to quit school
prematurely, and the soaring cost of university, both public and private. The historical accident that American state schools are funded through local property taxes plays a huge role here. As
income inequality grows, so does the disparity between poor and wealthy school districts in the tax receipts available to fund schools.

So now, if your parents make enough money, they can live in a good school district, and if they’re really wealthy, they’ll send you to private schools. The food will be good. You
won’t face pressure to drop out to take care of your younger sister; they can send her to day care or hire a childminder. They’ll buy you a computer, and piano lessons. Someone
will be home, and you won’t be left to fend for yourself on the streets. But if your parents don’t have the money and they need to work two jobs, or if your
parents have succumbed to alcohol or drugs, none of those nice things will happen, and you’ll go to bad schools, and probably drop out of school.

Increasingly, America has three parallel educational systems. There is an extremely high-quality, elitist, extremely expensive private system for the upper 5 percent or so. Second, there is a
r
easonably good
system for comfortably middle-class professionals who can live in good state school districts and send their children to university. And then, there is a truly awful system
for everyone else. The “everyone else” is now at least a quarter, and by some criteria may be nearly half, of the American population. That’s a lot of people to waste.

Is this a system to emulate?

Further, America’s high school graduation rate is difficult to estimate accurately, in part because government statistics at all levels—national, state, local—often cover up
the situation. But despite estimates that range surprisingly widely, the basic facts are clear. America’s school graduation rate is much lower than it should be, and it is
declining
,
both absolutely and relative to the rest of the world. So is the quality of government-provided education, even for those who do graduate. Anyone from Asia, and most of Europe, will opine that most
American schools are a joke. And America’shigh school graduation rate is already inferior to that of most other developed nations, including those where graduating from school means much more
than it does in America. The best estimates place the current US school graduation rate at 75–80 percent. Since graduation rates from exclusive private schools are nearly 100 percent,
America’s
state-run
school graduation rate is probably under 75 percent, and may be as low as 70 percent. In contrast many European and Asian nations have graduation rates of around 90
percent.

Again, is this a system to emulate?

And, as with private planes and private lifts, so with private education; there has arisen an increasingly segregated system of private primary and secondary schools for the wealthy. It’s
not very subtle. Where
does John Paulson send his children to school? His twin daughters attended preschool at the 92nd Street Y, which costs over $20,000 per student per
year—yes, for nursery. Paulson is on their board. He also manages some of their investments, which he has guaranteed against losses. Many other board members have sent children to the school;
four of them also manage money for the institution. This is not unusual. One of Mr Paulson’s daughters, having left nursery behind, now attends Spence, another exclusive private school in
Manhattan. Mr Paulson is on their board too.
¹⁶

Equally disturbing are trends in higher education. When I attended the University of California, Berkeley, in the mid-1970s, tuition for California residents was less than $700 per year. In 2011
undergraduate tuition for state residents was $14,260. Private universities have displayed similar changes. When I entered MIT as a first-year PhD student in 1978, annual tuition was $4,700. For
the 2011–12 academic year, it was $40,460. In that same year, Harvard’s tuition was $36,305. Harvard estimated its total annual costs (tuition, fees, room and board, supplies) at
$52,652; so the total cost of sending your child to Harvard for four years, even assuming no further cost increases, was already over $210,000.

Harvard, and most other elite private schools, claim that their admissions are merit-based and need-blind, and that everyone who qualifies will receive enough financial aid to attend. This is
bullshit, of course. If your parents went to Harvard (or another Ivy League university, such as Yale, Princeton, etc.) and have donated money, or if your father runs a huge global bank or is prime
minister somewhere, your chances are surely somewhat improved. But forget about that—just look at the money and the students. In the 2011 academic year, Harvard’s administration proudly
announced that slightly over 60 percent of its undergraduates received some level of financial aid and also stated that no student whose family earned less than $180,000 per year would be required
to pay more than 10 percent of their total costs.
¹⁷

Think about that for a minute. If you’re a Harvard student who receives no financial aid at all, you come from a family that makes
much
more than $180,000 per
year. Let’s say the eligibility cutoff for receiving any financial aid at all is $300,000 (Harvard doesn’t reveal the number). This means that nearly 40 percent of Harvard
undergraduates came from families whose income is at the very upper end of the American income distribution. This means that Harvard’s income distribution is probably even more skewed than
America’s: in the nation as a whole, in 2010 the top 1 percent of families received about 20 percent of all annual income.

At the same time as tuition is rising, there is a widening gulf in quality and resources between private universities and the state universities and community colleges that have traditionally
provided the majority of educational opportunity for poor students. As income inequality has grown, donations to private universities have grown, as have their endowments, while government support
for public education has stagnated or declined. As a result, between 1999 and 2009, spending per student at private universities grew from about $29,000 to nearly $36,000, while spending per
student at community colleges remained nearly flat at about $10,000 per student. Since 2008, the situation has worsened; tuition at public universities and community colleges has increased sharply,
while spending per student has declined, in some cases by more than 20 percent.
¹⁸
The University of California, the largest and best state university in
the world, has seen its budget cut by over 20 percent since the financial crisis.

Should anyone want to emulate the tuition costs and bifurcated system of the American higher education system?

But there is yet another way in which America has become less fair, and it is even more disturbing than the growth in economic and educational inequality. It is this: increasingly, you make more
money by being crooked and destructive than you do by being productive and honest. Thankfully this isn’t true everywhere—brains, work, and reputation still count in many places. (Once
again, high technology stands out.) But in a sharply increasing, already frighteningly high percentage of society, honesty is now a major professional and financial liability.

This pattern started, not surprisingly, in the same place as today’s
economic decline: the highly concentrated industries that had become severely inefficient by the
1980s. The people who mismanaged America’s car, steel, and telecommunications industries did not, in general, suffer for their incompetence. They stayed in their jobs and kept their
perquisites, while their companies deteriorated. But now, with the financial sector and its friends free from risk of prosecution, looting has moved to a whole new level.

ANYONE WHO HAS
ever lived or worked in a corrupt dictatorship knows what happens. When the system is rigged, when ordinary citizens are powerless, and
when whistle-blowers are pariahs at best, three things happen. First, the worst people rise to the top. They behave appallingly, and they wreak havoc. Second, people who could make productive
contributions to society are incented to become destructive, because corruption is far more lucrative than honest work. And third, everyone else pays, both economically and emotionally; people
become cynical, selfish, and fatalistic. Often they go along with the system, but they hate themselves for it. They play the game to survive and feed their families, but both they and society
suffer. This issue is rarely mentioned in public or in the US or European media, but in my personal experience it is increasingly discussed in private conversation.

Consider now the high-income, high-education sectors that are the principal subjects of this book: financial services, academia, politics, and policy making. Over the last several decades, the
financial sector has sharply increased its share of GNP, total corporate profits, and employment. Its income per employee is now double the national average, and people at the top of the financial
world today make phenomenal amounts of money. Over the same period, the industry’s ethical standards deteriorated sharply.

Over the last decade executives, salespeople, and traders in the
financial sector made truly obscene sums, by doing truly obscene things. With a few exceptions, the worst
offenders made the most money. None of them have been prosecuted, and none of them have been forced to return the money. Most of them have kept their jobs. Even those who destroyed their own firms
have remained both free and extremely wealthy. Jimmy Cayne saw his net worth decline from about $1.5 billion to a mere $600 million or so after Bear Stearns collapsed, but he can probably survive
on that. Stan O’Neal received a severance of $161 million for being greedy and incompetent at Merrill Lynch. Henry Paulson made something like half a billion dollars turning Goldman Sachs into an organization that made money betting
against its customers, and his successor Lloyd Blankfein hasn’t done badly either. Angelo Mozilo still has his half a billion too. And so on.

Even worse, consider what it was like to be an honest person in one of those firms. We don’t know if anyone ever knocked on Lloyd Blankfein’s door and said, Listen, Lloyd, it
isn’t very nice to tell the world to buy this stuff when we know it’s awful and we’re making billions of dollars betting against it. And you shouldn’t lie to Congress about
it, either. Did anyone ever say that to Lloyd? Probably not. But if someone ever
did
tell him that, I rather doubt that he or she received an immediate promotion and a big bonus. And we do
know what happened to a number of people, in various firms including Citigroup, Merrill Lynch, Countrywide, AIG, and others, who tried to call attention to the unethical and unsustainable behaviour
they saw. Almost without exception, they were severely penalized for it.