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.