Megan McArdle

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Forever Unequal

10 Aug 2009 04:12 pm

I am astonished, and not a little disgusted, with how much bankers seem to be planning to pay themselves this year.  Unsurprisingly, so are the left bloggers.  Kevin Drum writes:

There's something to this, and since the share of national income hoovered up by the super-rich is about three times higher today than it was 30 years ago, I don't have a big problem with taxing that income at a higher rate.  But there's a limit to how effective that can be.  For a whole bunch of reasons, marginal tax rates higher than 50% or so are pretty unlikely, and effective tax rates at that level are probably impossible.  After all, those Wall Street guys are pretty good at tax planning, too.

Overall, there's not much question that Wall Street bankers are going to continue to be paid astronomical sums as long as the firms they run are making astronomical profits.  And that's the key problem.

Actually, we don't know how much income the super-rich hoovered up compared to the rest of us.  We won't know for a while, because the latest tables available are from 2006 and 2007.  What we do know is that financial crises like the one we just went through tend to be disproportionately destructive to high incomes, reducing inequality.  So actually, the share of national income going to the very wealthy has probably dropped. 

Nor do I think a huge financial sector is a given.  While the pay going to individual bankers will be high this year, the number of bankers has fallen precipitously.  Maybe that will turn around.  I see two possibilities:  one, like the Great Depression, the markets are going to be much, much more cautious about credit and bubbles.  That effect will last, if not as long as the fallout of the Great Depression, at least for a decade or so. 

The other possibility is that by helping us skirt utter ruin, Ben Bernanke, Hank Paulson, and Timothy Geithner have convinced people that nothing bad ever happens.  In a year or so, when GDP begins growing robustly, those people will go back to borrowing money they can't repay, and bankers will start making irresponsible decisions about credit--first tenatively, and then with the same frenzy that brought you the tech bubble and the housing boom. 

I think the former is more likely.  But I'm not counting the latter out.  Since I share Matt Yglesias' pessimism about financial regulation, this worries me.

Comments (50)

The Ninja Zombie

Indeed, at least part of what happened was that financial firms cut the chaff. The people who are still employed are much better than those who were laid off, so average quality of worker went up.

Additionally, firms now need to work hard to retain the people they have. If you've cut your team to the bone, there is no slack; you can't afford for anyone else to leave. (New recruits will take a while to bring up to speed.)

It would be unsurprising if average compensation (of those who still have a job) went up commensurately in such an environment.

Calvin Jones and the 13th Apostle

In a year or so, when GDP begins growing robustly, those people will go back to borrowing money they can't repay, and bankers will start making irresponsible decisions about credit--first tenatively, and then with the same frenzy that brought you the tech bubble and the housing boom.

And your proof for robust GDP growth is where? What do you consider robust growth? 3%? Higher?

aMouseforallSeasons (Replying to: Calvin Jones and the 13th Apostle)

Good idea, let's be inveterate pessimists instead. Then things are certain to go our way!

Calvin Jones and the 13th Apostle (Replying to: aMouseforallSeasons)

It's not being an inveterate pessimist. It's being a realist. Do you think anything can be learned from history? What do you see that will lead to such growth? Real estate? Manufacturing?

aMouseforallSeasons (Replying to: Calvin Jones and the 13th Apostle)

(c) Normal cyclical trends of an economy?

I mean, the only way this could go to pieces overnight is if the Treasury and Fed screw up confidence in the US money markets while the president generates massive uncertainty by nationalizing a major industry and demagoguing about nationlizing another, and...that is...uh...

Aw, crap.

Calvin Jones and the 13th Apostle (Replying to: Calvin Jones and the 13th Apostle)

Nationalizing what other industry? Health care? Have you been paying attention? At any rate, what are your suggestions on fixing the health care crisis? You do realize we are the only advanced country that does our health care this way, right?

Calvin, FWIW, the fact that we are the only advanced country that does health care this way is hardly an argument to do it some other way.

I'm rarely with Calvin, but this time I'm behind him 100%. I've asked the question "where is the engine of economic growth that is going to pull us out of this?" at least 10 times here, on different threads.

Nano is nowhere ready.

Alternative energy is closer, but still at least 10 years out - and there are real questions around how much of an eco-boost it will be, once we offshore all of the manufacturing (which, of course, we will)

Anybody keeping an eye on this week's auctions? Anyone want to bet against i going past 4%?

Had we let the weak institutions fail, the recession would be deeper - but at least we could point to a rebirth in Finance as a potential engine of growth.

Who really believes that even half of the "chaff" was let go? Doesn't anyone here work in a major US company? The only way you shake-up bad leadership at the top is to let the thing collapse. Otherwise, the good-ol-boys throw everyone else under the bus, just to save their own @sses.

Sure, there were plenty of weak VP's and Directors who were removed - but the inept leadership core of most of these institutions are still there. Worse: they are now obliging to DC.

Sure, why not presume a recovery in a few months? Everything looks great... if you like long, sputtering, malaise.

Calvin Jones: There is no "health care crisis". There is a chronic problem with the cost of health care. A crisis is more likely to either have serious new, negative repercussions in the short term, or to be effectively dealt with. A chronic problem doesn't have the same potential for a dramatic disaster, but its often harder to deal with in a decisive way.

RobM1981 (and I guess Calvin) - The engine that's going to pull us out is the normal growth after a recession. We will have resources and people available to use for all sorts of new purposes. Its possible that one or two will be particularly significant, but that isn't necessary in order for economic growth to resume.

I guess her "proof" (by the way, she's not claiming something empirical, so it's not "proof") is that history says the economy will recover "robustly" once it's done recessing :)

And she was vague about it, as "in a year or so"

This thread calls to mind that section of (the Greatest Investing Book ever) The Intelligent Investor, when Ben Graham, writing for the last time in 1974, suggested that inflated securities valuations resulted from young people trading securities with no perspective of history, ignorantly convincing themselves that "the old rules don't apply".

Since I'm at work I unfortunately don't have the page reference, but suffice it to say that Graham writing in 1974 could have been speaking almost verbatim to Young Turks growing the NASDAQ bubble in 1999, or those who ignored Case-Shiller in driving up house prices in the mid-2000's.

As such, our best bet to avoid another catastrophic bubble is fresh, painful memories. But that might be a topic for a psychology blog, perhaps more so than an economics blog.

wiredog (Replying to: PeteL)

that might be a topic for a psychology blog, perhaps more so than an economics blog.

There's a difference?


I for one have no problem with people making large amounts of money per se. If they've invented a better light bulb, or a better mouse trap, or a better computer operating system that buyers think add considerably to the quality of their life, more power to them. We need more Edisons now like we've never needed them before, as a matter of fact. But like most people, I have a lot of problems with individuals making large amounts of money who have done nothing to earn it.

I think it's pretty safe to say that in any other than a rather weak form, EMH is dead, dead, dead, and that yes, your average 27-year-old slacker living in their parents basement and delivering pizzas part-time did more for the economy than Angelo Mozilo ever did. Yes, it's true that for an incredibly wide range of products and services price signaling is much more efficient at conveying accurate information than any sort of command economy could ever hope to be.

But it's also true that the market sometimes fails - quite spectacularly - at accurately pricing certain products and services, among them, CEO pay.

Sigh!... once again, ... The "rich" do not "hoover up" money from the economy. They earn their money in the private sector through payments from their customers who freely choose to do business with them. In doing so they take nothing from you or me. Nothing.

Until leftists learn this basic fact, their economic arguments should be regarded as uninformed rantings of economically illiterant theocrats, which is what they are. The rest of us need to stop pretending that they make any sense. They do not.

The only economics a leftist understands is to try to take what I make through my own efforts and give it to person B so that person B will vote for a Socialist/Democrat leftist. They also beleive that I will continue to work just as hard to pay B as I would to pay myself or my family, which is also economic insanity. However, the truth is slowly being revealed. We will no longer continue to work to pay for the priveledge of producing income to pay B to vote to destroy our freedoms.

Calvin Jones and the 13th Apostle (Replying to: Basil)

They earn their money in the private sector through payments from their customers who freely choose to do business with them. In doing so they take nothing from you or me. Nothing.

Not necessarily. There are things like the electric company. The cable company(though there is some competition in some places .. but not enough). Second, you really have no clue what a Socialist it. And a lot of the Democratic Senators are actually DINO's. So get your facts straight.

aMouseforallSeasons (Replying to: Calvin Jones and the 13th Apostle)

Most public utilities in the US, aren't. They tend to be owned and operated either by private enterprise, or as consumer-owned cooperatives, in either case under regulation by a public utilities commission to ensure that service is reasonably consistent and rates are set equitably. Taking the other side of the argument, if you feel excessively burdened by single-sourcing your utilities, feel free to install an off-grid wind+solar/battery system, or perhaps a 20kW continuous duty genset and an LPG or diesel tank, and alter your appliances and/or consumption habits to suit.

And cable television is a really lousy example seeing as how broadcast television and satellite programming are well known and usually available over a much broader range.

Calvin Jones and the 13th Apostle (Replying to: aMouseforallSeasons)

You missed the point. If you live in NYC, for example, can you go anywhere else but Con Ed. for electricity to run all the gadgets in your home?

Calvin Jones and the 13th Apostle (Replying to: Basil)

I forgot to add, with out taxes, how do you pay the police and fire department? The military?

Nice straw man Calvin, who's saying "there should be no taxes". I haven't seen anyone making anarcho-capitalist arguments here, just a mix of conservatives, liberals, and relatively moderate libertarians, no anarchists.

Nelson Alexander (Replying to: Basil)

Oh, sigh... poor Basil.

Since the days of the pharaohs it has been so hard to explain to all the dumb and envious helots why some people must, according to the laws of nature, be enormously rich and others dreadfully poor. It is all meritocracy, you see. Now sometimes it is the merit of birth, the merit of violent power, the merit of divine favor, the merit of Darwinian selection, the merit of gender racial fate. But whatever it is, you can be sure it is a meritocracy. There was never a ruling class in history that did not rule, in their own minds, a meritocracy.

Now, we know a priori that every rich person in a "Free Market" society is rich because of their special merit. They make money. They create wealth. They "add value." I mean, where do you think value comes from? From the government? From laborers? Ha! Rich people create it and give it to the rest of us. How? It all there in the supply curves. They invest. When their investments "create value" money is produced. Why do they give it the rest of us? Actually, as we see, they just loan it to the rest of us. But still, that is very fair of them.

But this is not merely meritocracy. It is mathematics. That is why Basil just blows a fuse at these "losers" who never read Walras, Marshall, Mises or Solow. It is a matter of numerical meritocracy. Numbers don't lie, after all. Many economists have demonstrated mathematically why one short trader like Paulson is worth more than all the schoolteachers and firemen on the East Coast. It's the market. Markets don't lie. Traders like Paulson produce value! He take nothing from the rest of us. Nothing, you idiots! He created the money! As a result of his hard work we can distribute far more debt to many mid-level corporations, while also cutting ten thousand costly jobs. So, you see, we are all better off.

Value is value. Prices do not lie. That is why "central planning" doesn't work. Never! Only the Free Market can accurately and fairly price mortgages, derivatives, credit swaps, oil, and factory labor. Planning can't do it. Just look at Stalin! Read Mises, you idiots! Yes, values may get a little confusing sometimes. Like recently. And in 1929, 1907, 1873, etc. back to John Law, father of fractional reserve speculation. Today, once again, the bankers know they created value. That is what rich people do! But something is wrong with... well, the price signals. Just a temporary problem. Just hoover in a few trillion in tax dollars, cut state budgets, reduce employment, hoover a few trillion over the China, hoover a few trillion into some flash trades, hoover a few billion into oil stockpiles, hoover a few million into congress, and see... the bankers were right all along! After all, it is their job to know value. That is their merit and that is why they are so much more valuable than the rest of us!

Anyway, Basil, I tried. You can explain it better, I'm sure. Everyone knows, we are the fairest, richest nation on earth. And could we be that rich if we didn't have rich people? Of course not! Case closed!

Don't be jealous. It shows.

Nelson Alexander (Replying to: bf)

Yes, Nietzsche demonstrated that all moral thinking is nothing but the resentment of the weak and pitiful. Ayn Rand, Hayek, and other market brutalists turned it into economic dogma.

Now every boiler room stock trader has an answer to arguments from the left. "Duh, you are just jealous!" Sounds like the intelligent rebuttals of High School prom queens. And, just to widen the principle, it is also a lot like Bush's analysis of the root causes of terrorism and communism. "They are jealous of us... because we are free." Now, that's connecting the dots!

Well, NF, it is a hard charge to answer. As conservatives know, there is one side to every issue. So if someone criticizes you there can only be one logical explanation. "They are just jealous of me." Sorry it was so obvious.

Nelson Alexander

As a form of peudoscience and political ideology, economics usually reveals more about its practitioners than about historical facts. One of the main psychological distinctions in economics is between those who instinctively empathizes with the underdogs and those who, like McArdle, reflexively sympathize with the overdogs.

McArdle's title "Forever Unequal" has the ring of wishful thinking, based on her implicit sense that the rich are the one's who have really lost the most. It reminds me of a raving alpha trader I saw on MSNBC at the height of the crisis who screamed, "it's us short sellers who are the real victims here!" Libertarian and econometric, McArdle is quick to sense the unfairness of it all, the ruthless predations of the "subprimes" and the suffering of the bankers.

It is just as well no data are available to test her conviction that "probably" inequality has been reduced, since many bankers lost jobs. Aside from the obvious absurdity of this contention, it hinges on a disingenuous blurring of "averages" and "means." If a half million minimum wage workers lose their jobs... well, that too reduces income "inequality."

As for the bonuses and the immense political and social power now held by a minority of financial traders, that simply cannot be controlled unless we dismantle and restructure our current financial system. As long as our national currency is backed by taxpayers (the ones without UBS accounts) and controlled by a private monopoly of banks, little can be done. Congress won't touch it. Inequality will continue to rise until it finally destabilized the basic governing structure, if it hasn't already.

Historically, gross inequalities of private wealth always undermine societies, with the Roman Republic, Bourbon France, and the American Plantation South among the classic examples. We are heading that way once again, in part because libertarians like McArdle (or at least I believe she is one) think that inequality is dictated by natural law and the only true sign of liberty. The freer we are, the more unequal our society should naturally get. That is how we know we are free. Thus the title of this ridiculous blog. The slogan of libertarian America: Inequality Forever!

aMouseforallSeasons (Replying to: Nelson Alexander)

Thanks Miss Cleo.

bombloader (Replying to: Nelson Alexander)

I love the smell of burning straw men in the morning.

Just two quick comments: first, it is important to disaggregate "Wall Street". There are all kinds of activities that go on in finance - trading, brokering, providing advice, being part of senior management, managing money for outside investors, lending it out, underwriting an offering, arranging a derivative, one could go on. And there are thousands or millions of examples of each such activity. Some people get guaranteed bonuses to move or stay but there is usually a merit evaluation in them. In many cases, the large bonuses you see are simply fractions of the money someone made for the institution, or someone's business unit made for it. Then there are the comp systems where the bonus gets locked up in equity for 5 years. The debate suffers when people fail to see the variations involved because they wind up slinging apples at oranges. The one really intelligent question to ask is whether someone's comp fully reflects the risk adjusted capital backing the individual's activity.

Otherwise, I think Drum has a worthy insight that the size of the industry is a big driver of the size of comp numbers. If you manage billions, it takes only a small fraction that someone may be willing to lop off to make you very rich.

Basil -

I had the same reaction. To view the economy as a zero sum game where all income earned by one person is effectively taken from the pocket of someone else is a twisted, unproductive outlook on life (as evidenced by the pathetically weak, confused responses your comment has generated). Yes, some people are luckier than others by being born smarter or healthier or more physically attractive, or simply by being born to rich parents. The market is far from perfect, and life isn't fair, but the fact remains that wealth has to be created somehow and by someone. Confiscation only gets society so far.

Nelson Alexander (Replying to: Ann)

No, the economy is not a zero sum game. Not even on the global level, where all the zero-sum propensities of "national economies" get deferred and displaced.

But it is far, far closer to zero sum than our ideological fog machines allow us to see. This partly accounts for the massive, slaughtering "mark downs" of fictitious value that have come up regularly about every ten years for the last century or so. Pocket the fees, dump the leverage.

The problem is that no one can tell you how much of the economy is real "productive gain" of some sort and how much is, indeed, zero sum, Pareto optimal, where "earnings" are pure exploitation. Take, 9/11, Katrina, or any other calamity, which basically registers as a large gain in GDP. And a potential profit to smart short sellers or "calamity bond" traders. Separating out the fictitious value from real production is especially hard in the financial sector, where there is no visible product except ingenious new forms of debt and leverage. Much of it is abstractly appropriating and "cashing out" the future labor of every four year old.

Sure, financial "production" can produce rising equity values. But how much of this is simply attraction of funds in an advanced global Ponzi variation? Apparently, many of the best minds in banking can't tell us, can't even come close to valuing the sum of their transactions. And since they live off transaction fees, a pure quantitative churning of transactions with new debt tranches every go round makes measurable, balance sheet "value" out of relentless computational abstraction. Can anyone seriously deny that?

It amazes me that in face of so much history and present evidence to the contrary the faith in price theory remains undeterred in its confident pronouncements. Well, Ann, if you or Basil can tell me roughly how much of the GDP (or the financial sector earnings or equity values or whatever) exceeds the "zero sum" of social reproduction, I will happily accept the charge of "pathetically weak and confused." (Did you get that from Ayn "Eat the Weak" Rand?) No wonder Ricardo, Galbraith, Sorros, and others made fortunes off the delusional overconfidence of market boosters and fundamentalists.

mischief (Replying to: Nelson Alexander)

No one can tell.

So when things go crashing to a halt because you decided to tax what proved to be real production, it's not your fault?

Of course it is. It's your job not to do things you know might be harmful.

Nelson Alexander (Replying to: mischief)

Not to do things you know might be harmful? Uh. Well, yes, that's a very good policy. I suggest you promote it to all your favorite corporations and bankers. Or is it just government should never act, because, you know... things are so uncertain? You might accidentally tax away the very market incentive that would have cured cancer. In fact, I am sure that is happening at this very moment! When you think through all the implications, it is a miracle there was any civilization before Milton Friedman. How did they do it?

mischief (Replying to: mischief)

And whyever can't I promote it to one Nelson Alexander?

Tim Fowler (Replying to: Nelson Alexander)

9/11 and Katrina did not register as a large gain in GDP. Sure there is reconstruction work (which does add to the measured GDP despite not increasing real wealth over the pre-destruction baseline), but the destruction directly does nothing to GDP, and the lost commerce in the aftermath of the damage lowered measured GDP. The fed eased after 9/11 which tends to increase measured GDP, but I wouldn't say 9/11 did it but rather that the Fed did it, and in any case there wasn't any quick increase in GDP.

All of which has little connection to what seems to be your main point, that the economy is close to a zero sum game. Obviously enormous amounts of new wealth, in as real of terms as you want to measure, have been created over the years, so the total can increase. And most people who have fairly large incomes do so in positive sum ways.

Nelson Alexander (Replying to: Tim Fowler)

First, you are quite right. There is such a thing as progress, new wealth, etc. There is real production, real added value, an increasing total.

But the way we measure this is very deceiving. We switch the terms social value, economic value, national economy, and economy like a three card monte player. Just follow the cards. Now, where is the value? (Apparently the banks even confused themselves.)

My main point, as you say, is that we are much closer to a zero sum game than our ideological rhetoric implies. When we measure national GDP, for example. we measure the "value" of transactions but this is not what most would call social "value." When we note the increase in wealth in the national economy, we conflate "nation" with "economy," though the latter extends basically to the entire global workforce.

Rising incomes in Manhattan financial sectors are not unrelated to job loss in the Midwest, collapse of employment in Russia, or falling labor costs and rising third world pollution in the global distribution of of industrial production. If you follow, for example, the fate of female textile workers from 19th century New York to the present, you see that the problems were not as much solved, as our history book imply, as simply relocated to a larger scale. Out of sight, out of mind.

Much of the "market's" vaunted powers of wealth creation depend on where you choose to look. Market libertarians have a strange way of marveling at how vast, intricate, and global economic systems are, then turning around and isolating one small view to collect the data on beneficial results.

So, yes, I stand by my claim that that it is "closer to zero sum" than we imagine, and much "wealth creation" is simply coming out of other, unseen pockets. Best estimates of "real growth" are 2 to 3 percent, though this is still very historically and geographically selective. When Goldman Sachs makes 40 percent returns a year, perhaps 37 percent is being wrung out of someone's hide in future layoffs or falling real wages.

As to your "enormous amounts of new wealth"... I would ask, whose? where? when? Globally, the pie grows a lot, lot slower than the upper tier slices.

Tim Fowler (Replying to: Tim Fowler)

Nelson - You are correct that GDP is not a measure of total well being. It isn't even a measure of all production (it doesn't count non-traded production, mow your lawn and nothing is added, pay a law service to do the same thing and GDP grows). But the that doesn't make it very deceiving, its just defining what is being measured. Total production is much more difficult to measure than traded production. Total well being includes many subjective and/or unmeasurable concerns. But there is a positive correlation between GDP and actual total production, and I submit there is also one between GDP growth and well being/social value.

- "Rising incomes in Manhattan financial sectors are not unrelated to job loss in the Midwest, collapse of employment in Russia, or falling labor costs and rising third world pollution in the global distribution of of industrial production"

Well in the broadest sense of "non unrelated" that's probably true. The world is very connected so one factor affects many others. Of course a negative relation is still a relation, as is a very minor positive one. By saying "non-unrelated" you seem to imply a significant positive connection. If you mean to make that point perhaps it would be better if you explicitly made it, and better yet if you supported it.

- "If you follow, for example, the fate of female textile workers from 19th century New York to the present, you see that the problems were not as much solved, as our history book imply, as simply relocated to a larger scale. Out of sight, out of mind."

The decedents of 19th century textile workers are almost all better off now. Meanwhile people in other countries have taken over much of the low paying textile work, but by doing so they have also become better off.

- "So, yes, I stand by my claim that that it is "closer to zero sum" than we imagine, and much "wealth creation" is simply coming out of other, unseen pockets. Best estimates of "real growth" are 2 to 3 percent, though this is still very historically and geographically selective. When Goldman Sachs makes 40 percent returns a year, perhaps 37 percent is being wrung out of someone's hide in future layoffs or falling real wages."

That doesn't logically follow. If X industry or Y company produces more and gains more wealth, it doesn't mean everyone else is producing less. Your logic would imply that most people would be better off if we eliminated the fastest growing parts of our economy.

As for falling real wages, the favorite stat of people who want to say things haven't improved in the last several decades seems to be household wages. Its true they haven't increased much but households have gotten smaller and wages are not total compensation. Total compensation per individual has not stagnated on that time scale.


I'd like to "hoover" up some of that bonus money!

The question I keep asking myself (and no reporters answer for me) is why we haven't seen a single bank conclude that the lesson of the past two years is that bankers aren't irreplaceable geniuses and that banks should pay far less to employees and far more to shareholders.

I don't expect top executives to deprive themselves, but I don't understand why they agree to pay seven-figure salaries to near entry-level traders who aren't any smarter than anyone else at Wharton. Google does not give million-dollar bonuses to programmers who create great ideas. (It gave huge amounts of stock when it was a tiny company pre-IPO, but it doesn't anymore.) Boeing won't give millions to the guy who fixes the "Dreamliner." Why do CEOs at the banks keep giving it away?

And why do shareholders accept it? It's not like the majority of banking shares are held either by insiders or by individual investors who do what boards tell them. The majority of shares in any big financial services firm is held by institutional investors who presumably would like those extra billions padding their return figures.

Obviously there's something that prevents even one bank (or it's shareholders) from experimenting with the no-bonus culture. Can you write a post on that -- or at least link to an existing post on this topic?

Nelson Alexander (Replying to: Scoop)

Good point. I don't know, but I'd say the "something" is power and mystique. Banks have an effective distribution and pricing monopoly over the national currency, so they are not like other businesses. It's as if you gave a few firms complete control of all the water in the world and told them to set the prices themselves. And the more leverage a super-computer system can justify, the more they are simply printing money. I can't remember which corporate chief it was who back in the 1940s retired and took a position on a bank board. "My god, why didn't someone tell me about this racket before?" he said. Henry Ford said, "If Americans ever understood the banking system, there'd be a revolution in this country." Part of banking is socially productive and useful, but nobody knows which part.

mj (Replying to: Scoop)

There are plenty of banks who made this decision even before the crisis. We know most of them as community banks.

Scoop (Replying to: mj)

Yes, but community banks don't exactly provide the same sort of services. I'm asking why none of the big banks have tried cutting compensation.

The incentives for shareholders (and thus stock valuations) are hardly trivial. Goldman made $4.3 billion in the first half of the year and set aside $11.4 billion for salaries.

In other words, if the company cut salaries in half, to just $190,000 per worker, then net profits would just about double. We're talking nearly $9 in EPS.

Yes, I understand that Goldman execs would say that each high-earning employee is uniquely talented and that slashing salaries would cause these uniquely talented employees to flee and cost the company more than it saved.

That said, I'd challenge anyone to find any proof from any independent source that suggests any employee at any investment bank can ever beat any market in any respect over any long period of time.

To my knowledge there's zero research that suggests the folks on Wall Street are uniquely talented, so Goldman execs/board/shareholders may well be able to double profits and thus double share price at a stroke of a pen.

Tim Fowler (Replying to: Scoop)

If your manageing billions you try hard to get the best people to do it. Which means there is a lot of competition for those people. Sometimes you make mistakes and don't get the best, other times markets go in to bubbles that pop, or otherwise in to situations where most people in a particular market (or in multiple markets) lose money, but that doesn't change the fundamental dynamic of a lot of demand chasing a limited supply.

If you thought is that supply isn't limited because a very large number of people can handle these jobs with no drop off in performance, than I submit you are wrong.

I'd challenge anyone to find any proof from any independent source that suggests any employee at any investment bank can ever beat any market in any respect over any long period of time.

1 - Tons of individuals have beaten the market over long periods of time. They may have just been lucky (its hard to be that lucky for a long period of time but remember there are lots of people in the market), rather than good, and maybe they won't beat the market in the future, but your challenge would in its direct term be easily answered by anyone with the right detailed information about individuals and their trading history.

2 - Beating the market isn't the issue. These highly compensated individuals represent or control a very large portion of the market, not being able to out compete their peers doesn't mean they wouldn't be able to do a better job than a random person off the street.

None of which necessarily implies they aren't over paid, but if they are that's an issue for the shareholders of the company, not a national/government issue.

anirprof (Replying to: Scoop)

On that point, there was a Financial Times op ed a few weeks ago by an exec from one of the big banks, arguing in favor of even more of a share going to management / employees and less to owners. He said something to the effect of, "What have shareholders ever done to create value?" and went on to argue that wealth is created by staff talent so therefore they should get to keep all the gains.

Scoop (Replying to: anirprof)

I'd love to see him try to raise money to launch such a bank.


Isn't part of the problem the power and influence of the banks to control any limitations by government on their profitable operations? The banks are working very hard right now to control how credit default swaps will be managed from this point forward. They do not want public trading and they do not want the equivalent of ISO standard insurance forms,since both limit their opportunities to control information flow and their profits.

They most definitely are fighting any effort to limit 'naked' cds transactions,transactions that are pure gambles on the credit worthiness of companies. In a perfect world such bets would be managed in Las Vegas sports betting operations on the Strip, not on Wall Street.

There is a big difference between Wall Street and the Strip. The Strip operators know that they will have to manage to limit the downside,since they don't have a sugar daddy. Wall Street knows,and wants to keep ,its sugar daddy,so it has the upside growth and the downside protection.

Iron Chef Oklahoma

Nelson, Calvin:

Bart Connor and Nadia Comaneci operate a gymnastics school close to where I live. They and their students would be envious at the backflips, evasions, and rolls you two have executed in your comments.

Basil's point boils down to this: Calvin and Nelson don't get to decide how much other people get paid. Period. Yes, the bankers are jerks. Yes, they're overpaid. And @#$@ yes, they shouldn't have gotten a thin dime from the American taxpayers.

I'll ask this question: do either of you really want to live in a society where your pay is set by someone else's idea of societal "value"? Really? Care to guess who'll be setting that value? And what their underlying motives will be?

Nelson Alexander (Replying to: Iron Chef Oklahoma)

Sorry to say, but everyone's pay is set by "someone else's idea of societal value." It's just that we can't vote for those people. They are called bankers and financial traders. They arbitrage away "value differentials" which largely hinge on the "value" of labor.

I really wish Americans would begin to consider more closely and historically what they mean by that metaphysical entity The Market. Some market functions work nicely. But tell me, what is The Free Market? It is an enormous complex of property laws, infrastructures, police systems, tariffs, national fiat currencies, and administrative functions. They were not created by god or nature. You can read the history of how they were created. You can go to K Street and see them being created right now.

The whole belief system erected around The Market vs. The Government is a recent invention, simply inaccurate, and increasingly irrational. Most Americans just belief in The Market for the same reason people born in Iran believe in Allah. As for pay and value. We are paid in money. But it is the banks who decide how much that money will be worth and how much will be "replaced" over the years by debt.

Really, I am not trying to be gratuitously radical, but the vague axiom "The Market" as used to McArdle and so many others has done serious damage to the ability of Americans to deal with their real situation in the world. Financial bubbles may have burst, but we Americans are still living in a serious cognitive bubble. Anyone who can look at the "pricing" for "capital markets" in the recent financial debacle and think otherwise mystifies me.

Tim Fowler (Replying to: Nelson Alexander)

No, Nelson, not many (at least as a percentage of the workforce) get their pay set by someone's idea of social value. To an extent people get paid by someone else's idea of the monetary value of the goods or services they provide to the payer, but that isn't "social value". Also that value is really a limit to the compensation, if someone can get the goods or services for much less than they value them they will.

It is an enormous complex of property laws, infrastructures, police systems, tariffs, national fiat currencies, and administrative functions. They were not created by god or nature.

Not exactly. They work in the market and are used by the market, but that doesn't mean they are what the market is. A more primitive and limited market would exist (and has existed) without them.

Also even under my more limited statement tariffs, and many administrative functions don't belong. They aren't necessary for the market or on the whole even beneficial to it (even if they are beneficial to specific operators in the market, who thus lobby for them).

More generally the fact that government intervenes a lot in the market, doesn't define what a market is, or make much of an argument against primarily relying on market forces to determine distribution of scarce resources. The same holds for bubbles. Bubbles clearly show that markets are imperfect, but not that government has done or will do better, or that greater reliance on the political process to allocate resources would be a good idea.

Nelson Alexander (Replying to: Tim Fowler)

My point is that "market" remains a metaphysical term that constantly shifts its historical and ideological content. What is it?

You are right, there have always been "markets," submerged in larger social institutions, Greek agora, medieval fair markets, etc.

The modern use of "market" generally means the system in which land and labor can both be sold as commodities, which is relatively new. From this enormous institutional changes arise, such as the government licensing of joint stock companies and the introduction of state fiat currencies.

And national borders with tariffs. Always. What was called "The American System" devised by Hamilton, Friedrich List, H. Carey, and others used tariffs to develop our "infant industries" and out "internal markets." It was called that to distinguish it from the "British System" of laissez faire trade championed by Smith and others.

Most estimates claim that government accounts for some 40% of our national economy, and obviously that cannot be disentangled from the "private" sphere or other national economies. This is why debates over the superiority of "market solutions" are so disingenuous. Again, what is the "market"? As far as I can tell, the closest thing to a pure, autonomous "market" is the cocaine and heroin trade.

Tim Fowler (Replying to: Tim Fowler)

Nelson, its not a metaphysical term, just not a very concrete one. Its not one specific item or action, its a term to describe a complex interplay of facts, decisions, and relationships.

The modern use of "market" generally means the system in which land and labor can both be sold as commodities, which is relatively new.

You can have markets in any sort of good or service. Even if land or labor, or even both, can not be sold as commodities, you still have markets just more restricted ones. You might not have a "free market" in the strongest sense of the term, but you still have markets and market forces.

Also its really not new. Labor particularly has been sold for money, probably as long as we've had money, and for non-monetary compensation before that. Land has often been restricted, but the fact that there have been lots of restrictions against or prohibitions of the free market in land at certain times and places, doesn't mean selling land is new.

And national borders with tariffs. Always.

Always is an exaggeration but your right that tariffs are and have been very common. But the fact that they are and where so common does not mean that the tariffs themselves are part of the operation of a free market. They are rather government intervention in the market.

Most estimates claim that government accounts for some 40% of our national economy

Now your getting closer to a zero sum game. Its not totally zero, some of its positive (for example markets would not function as well with out the government keeping the peace and dealing with some forms of serious disputes), some negative, some zero, on the whole a net positive (our government isn't so bad as to be worse than anarchy), but not 40% positive.

Much of the federal government's spending, and part of the spending at lower levels is simply transfer payments. Transferring trillions of dollars isn't the same as creating trillions in wealth. Counting that as real production would be like saying that when Goldman Sachs handles a billion dollars (in whatever time period it would take it to handle or manage that much money) that it adds a billion to our countries wealth. It may add a fraction of that amount as a useful service (certainly people who contract with Goldman think it will be useful because they voluntarily do so, unlike those who pay for government programs through involuntary taxation.), but not the whole amount.

Even considering only actual services provided by government - Much of the spending could be eliminated without us being any poorer.

The size of the government doesn't make it part of the market, much of its a large parasite on the market, with the more useful bits having a more symbiotic rather than parasitic connection.

This is why debates over the superiority of "market solutions" are so disingenuous. Again, what is the "market"?

Market solutions are allowing people to make their own economic decisions in response to market forces, rather than deciding things politically.

Is there some fundamental difference between the financial sector and healthcare that makes this different from Kamen's argument, highlighted by you only a couple of days ago? Why are profits in the healthcare sector good, but profits in the financial sector bad?

If the market has set their compensation, aren't things working as intended? Is it desirable that the govenment set salaries and bonuses? Should taxes go up on this braket? Is this level of income good or bad simply because of what one does for a living? What's the difference?

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