A Pew Research Centre poll in December found only 50 per cent of Americans reacted positively to the term ‘capitalism’.  Photo: Louie Douvis

With greed running rampant, employees must fight the urge to feed from the trough, writes  Nicholas Kristof.

WHEN I spoke at Swarthmore College recently, I was startled by a question: is it immoral for students to seek banking jobs?

The corollary question, with Republican US presidential hopeful Mitt Romney’s business career under attack even by staunch party members, is this: is it unethical to make millions in private equity?

My answer to both questions: no.

Likewise, the attacks on private equity seem over the top. Private equity firms such as Bain Capital, where Romney worked, aren’t about destroying companies and picking over the carcasses. Rather, the aim is to acquire poorly managed companies, make them more efficient (sometimes by firing people but often by rejiggering the business model) and then resell them at a profit. That’s the merciless, rugged nature of capitalism.

Liberals should also be wary of self-selecting out of certain occupations. After Vietnam and revelations of CIA abuses in the 1970s, many university students avoided the military and the intelligence agencies. So slots were filled by ideological conservatives in a way that undermined everyone’s interests. We would have been better off if more Swarthmore idealists had become generals and CIA officers – and we may be better off if some idealists become bankers as well.

Now for my caveats.

When young people go into finance, I hope they’ll show judgment, balance and principles instead of their elders’ penchant for greed and rigging the system. Just as communists managed to destroy communism, capitalists are discrediting capitalism.

A Pew Research Centre poll in December found only 50 per cent of Americans reacted positively to the term ”capitalism” while 40 per cent reacted negatively. Among Americans aged 18 to 29, more had a negative view of capitalism than a positive view. Those young Americans actually viewed socialism more positively. In other words, America’s grasping capitalists are turning young people into socialists.

The  Financial Times  recently published a series about ”capitalism in crisis”. It noted that the Edelman Trust Barometer survey found only 46 per cent of Americans had confidence in business to do the right thing (and only 25 per cent trusted banks).

Public scepticism is warranted. Corporations have vastly overpaid CEOs, handsomely rewarding not only success but failure. Banks that helped cause today’s financial mess lobbied successfully for bailouts; they privatised profits and socialised losses.

Meanwhile, more than 4 million families have lost their homes to foreclosure, according to Zillow.com, a real estate company. Bankers and shareholders found a safety net, but not working-class families. One reason is that the campaign finance system allows financiers to buy access and special favours. If you’re a tycoon, your best investment often is a lobbying firm in Washington to create a tax loophole for you. The past few years have been a showcase of crony capitalism.

Romney’s average tax rate, which he says is about 15 per cent, exemplifies the problem. He benefits because capital gains tax rates have been cut to 15 per cent, much lower than rates on labour income.

Then there’s the most egregious tax loophole of all, for ”carried interest”. A triumph of lobbying, it allows private equity and hedge fund managers to pretend that their labour income is a capital gain. So they sometimes pay a tax rate of just 15 per cent, compared with up to 35 per cent for almost everyone else.

Granted, young people haven’t been pouring into finance in recent years to reform this rigged system but to milk it. In 2007, on the eve of the financial crisis, 47 per cent of Harvard’s graduating class headed for consulting firms and the financial sector – a huge misallocation of human capital. However well-meaning these graduates are initially, they often end up caught in the scramble at the trough.

In the postwar years, labour unions became greedy and rewarded themselves with featherbedding and rigid work rules – turning much of the public against them. Likewise, Wall Street featherbedding is tarnishing the image of banks and business and undermining confidence in capitalism.

When financiers rig the system, they should remember the warning of John Maynard Keynes: ”The businessman is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to society.” So university students would be wrong to mock their classmates who choose Citigroup over CARE. Banking and private equity aren’t evil, and I would never urge university students to stay away. Maybe today’s young socialist sympathisers, along with healthy regulation and a loud public outcry, can help rescue capitalism from the crony capitalists.

NEW YORK TIMES