A few months after Bain Capital purchased GST Steel, it went bankrupt. Before that happened, though, Bain put $125 million of debt on GST's books and used that money to pay itself a dividend of $36.1 million. Seven-hundred and fifty workers lost their jobs and the federal government spent $44 million to save some of their pension. For its original $8 million investment, Bain received $12 million along with another $4.5 million in consulting fees.
This isn't about Mitt Romney. Everything that happened was not just legal -- it was normal. Few of Bain's rival private equity firms would have acted differently. Yet it seems wrong. The problem is not that the deal failed. Layoffs and failures are part of business. The problem is that the fortunes of Bain and Romney were decoupled from those of the people they employed. Bain's partners guaranteed themselves profits without creating value, and did so by taking actions that significantly increased the likelihood their employees would suffer.
Bain's GST deal is emblematic of a deeper problem. Today's elite is decoupled from the broader society and has captured key institutions for its own benefit, thus undermining their broader social purposes.
An elite governs every society. Before the Second World War, schools like Harvard and Yale admitted their students largely from the scions of the New England aristocracy. Their graduates went on to positions of prominence, as they do today, but there was no pretense that they were the best America had to offer. Both John F. Kennedy and George H.W. Bush were products of this system.
The old elite was mainly born into it, leavened by some self-made strivers. There was no guaranteed path into the elite except birth. No one spent their formative years aiming at the right school or the right company. Elites were largely defined in regional, not national terms. The old elite was uniform in ethnicity but diverse in perspective. Depending on where they lived, they were products of many schools (or no school), backgrounds, and industries. Other than race and gender, there was little that unified the worldviews of its members.
America's meritocratic revolution changed that. After World War II, schools like Harvard began to try to identify and admit the nation's best students. Meritocracy was a national project. Combined with the GI Bill, this opened roads into the elite to unprecedented swathes of the population. This was, in both ambition and execution, vastly more just than the old system. For a while it worked. President Obama, the child of a single mother who graduated from Columbia and Harvard Law, is a product of this system. So is Bill Clinton.
Today there's a clear (if rigorous) path into the American elite. Go to a top school, secure a job in one of a handful of companies -- most in finance, consulting, or law -- and keep applying the skills you've perfected over a lifetime. Each step is a difficult filter, but if you can make it, your odds of securing a place at the top are excellent. The new elite is overwhelmingly made up of people who have followed this path.
So what's the problem? The first issue is that members of the new elite use their power to solidify their position and maximize their children's prospects. MSNBC host and author Chris Hayes dubbed this tendency "The Iron Law of Meritocracy." Admissions preferences and elites' ability to purchase enormous advantages for their kids (like SAT prep courses and homes in the best, and therefore most expensive, school districts) mean that the student bodies of the selective private universities that are the most important steps on the path to the top consist overwhelmingly of the children of the elite. In a truly meritocratic society this would be impossible, but this is what we have.
Even more important is the homogeneity of the new elite. This is a problem because of the unique worldview produced by the schools and corporations that act as the elite's feeders. It's a phenomenon that dominates both parties. When Barack Obama (Columbia and Harvard) needed to assemble his economic team, to whom did he turn? Larry Summers (Harvard and MIT), the son of two professors and the nephew of two Nobel Laureates and former Secretary of Treasury, and Timothy Geithner (Dartmouth and Johns Hopkins), the son of a director of the Ford Foundation who worked at Kissinger Associates and for the Treasury and Federal Reserve.
So put yourself in their shoes -- or in Romney's, the son of a CEO and governor who attended Stanford, BYU, Harvard Business School, and Harvard Law School before Bain. For all practical purposes, your world consists of people from the nexus of finance, consulting, and law. Most of your peers are children of the meritocratic elite. Like you, they have moved from expensive private schools and rich public ones, to selective universities, to one of a few companies. Few have ever worked in a factory, designed an airplane, engineered a gene, or programmed a computer.
You aren't just wealthy and powerful -- you deserve to be! After all, you might have been born with a head start, but you worked hard, and so did your peers. There might have been others who worked just as hard and didn't have the same advantages and so didn't make it into your world -- but they're invisible to you, precisely because they didn't. Plus there are always a few people who made it on their own, so it's easy to believe that the system is fair.
A homogenous and self-perpetuating elite would, on its own, be a bad thing for any society, and particularly for the United States. Alone among nations, after all, the United States envisions itself as the place where citizens can and should rise as far as their combination of talents and hard work can take them.
In our next post, however, we'll talk about how the pathologies of today's elite have distorted almost every aspect of American society, ranging from the growth of income inequality, to the coddling of the financial sector, to even issues as seemingly unrelated as immigration policy.