"Bankers Should Make More Money Than Average People"
Because it's winter or something, I've been spending (too much of) my time these days going back to first principles. Like: why are there sidewalks? Why do we like bread so much? Why did some buildings in New York get torn down and why not others? What is the deal with cats getting domesticated? So this pullback on assumptions, by James Kwak, about how humans get paid, in a discussion about Goldman Sachs bonuses, is striking: "Investment bankers are overpaid. Now, before all the bankers get all indignant on me, let me say that bankers should make more money than average people, at least according to the normal rules of our society; for one thing, they are, on average, better educated than most people. (As I've written before, I don't think there's any moral reason why people should make more money simply because they are better educated, or have unique skills, or are more intelligent, or work harder; but that's the way the world works, and most people are OK with that in principle.)"
I'm stuck on that. Like, stuck for the day on that. Yes, no, maybe so?
If you are interested, he goes on, from there, regarding the specific instance of Goldman:
You would expect wages in finance to be about 30% higher than in the economy at large because of higher education and lower job security; yet… wages in finance were over 70% higher than average earlier this decade. 40 percentage points divided by 1.7 implies that wages should come down by about 25%. This is an industry-wide figure, however, and recent wage growth has been much higher in investment banking than in the rest of the industry (largely banking and insurance), so 25% is probably a very low figure for investment banking. But without more data, that's the best I can do.
Now, Philippon and Reshef's data only go through 2006. In 2006, Goldman paid $16.5 billion out of $31.1 billion of its profits to employees (53%, the same as in 2007), which worked out to about $620,000 per employee. (In 2007, that figure was about $660,000.) Subtracting 25%, we get that Goldman employees should have earned abut $470,000 on average. This is probably still much too high, because that 25% figure is undoubtedly far too low for investment banking. But it's a starting point.
I am intrigued. If we paid absolutely everyone the same amount of money, how much would we all get? Also, do you think there is any reason some people should make more money than others?
Yes, some people should make more money than others. I know plenty of worthless leeches and squatpunks and if they're happy where they are then fine, but keep your fucking hand out of my pocket.
Conversely, there are many many many hardworking people who should be making much more money than they do.
Hey, I'm totally fine with the concept that people who are smarter / more talented / more hard-working should get paid more money, because I think I'm smart and talented and hard-working. And everyone else thinks they are too, and hence … I dunno, communism? Unfettered capitalism? Bad driving? Someone smarter and more talented than me, finish this off for me. I'm going to take off for lunch.
The average per employee metric is meaningless. Get me the median, and then I'll decide whether or not to indulge myself in some class envy.
Obviously, my transition from the bonus-based to the word-based pay model is complete.
First, one of my biggest peeves about these articles and the bogus analysis that flows from them:
There are precious few average employees at an investment bank. A median number would be more useful. Because the admins and back office and non-revenue-generating employees get much less than the actual "bankers" themselves, who, in turn, may get less, even, than some traders. An order of magnitude less. It might make sense to plot these bonuses on a log scale.
And then we can talk about whether 10 IT VPs getting a couple hundred thousand dollar bonus is too high or too low, but only after we reflect on whether $1-2-3mm is too much for a 30-yo FIG VP coasting through the bailout economy.
Here's the thing: I enjoy getting into a good Marxist snit as much as the next guy (really, I do!). But if so long as we live on this side of the revolutionary millenium, in a functioning economy the salaries of private sector employees are or ought to be based on their economic productivity. So, yeah, even though investment bankers are infinitely more loathsome than, say, bloggers, said bankers (in theory anyway) produce gobs of money for their clients with their financial wizardry, so they get a cut of that and make insane salaries.
One of the problems I have with the hand-wringing post-collapse is that people have been approaching the high earning of these assclowns as a moral calculus. I.e., they're bad people, they do crafty mysterious nonproductive things with money, therefore they shouldn't make as much as they do. Sometimes people throw in things to make it look like their quantifying matters, like Kwak does with "higher education and lower job security", which, dude, I have an Ivy League degree and a master's from Berkeley, and I have zero job security whatsoever, and yet I don't get to just arbitrarily multiply my fucking salary by 1.3 as a result, because my job does not involve turning large piles of money into extra-large piles of money.
The tactic to take with knocking down the salaries of these high-earning assholes is not, is seems to me, moral indignation, because you can't sustain morality as a guide to private sector earning power in a capitalist economy. You just can't. And you get people who otherwise might respond to your arguments, like my populist/borderline tea party relatives, who honestly think "If the government can tell them how much they earn, why won't they do it to us"?
To me, the tactic to take is to point out that these jackholes' salaries honestly don't reflect their economic output. A good i-banker — one who fattens the coffers of his employers and his clients — will of course fatten his own bankroll as well. What happened in the oughts was essentially a scheme whereby investment bankers created fake bubble money that they turned into real money and paid themselves with, leaving their clients and the rest of the economy holding the bag. Rather than calling them greedy — because don't you want the guy investing your money to be kind of greedy, at least on your behalf — we should be calling them frauds and embezzlers, who looted their own institutions to buy themselves nice things.
This deserves some kind of performance bonus.
Yep. At least a 1.3 multiplier.
Aren't there already mechanisms in place governing such behaviors as fraud and embezzling?
Pitchforks.
Precisely. Except: If they keep making gobs of money for everyone involved, no one is going to call them on their fraud. You can't limit their pay. But you can put regulations in place that will monitor how their business does transactions. The problem now is, everyone hates the government. Populist Republicans always want to shrink its role in business and let the markets shake out the way they do. (Of course, being complete hypocrites, they didn't let that happen.) So if no one's able to check the banks and regulate them, it's basically a license to steal. My theory is based on the movie Casino, but the debacle basically plays out the same way. The house always wins. And in America, we've let the corporations become the house. The government works for them now as security.
If they keep making gobs of money for everyone involved, no one is going to call them on their fraud. You can't limit their pay. But you can put regulations in place that will monitor how their business does transactions.
Yes, sorry, this was my ultimate point, which I failed to articulate. The time to impose said regulation, with popular support if you framed it like this, was early last year. I fear that Obama's sudden populist rabble-rousing on this point is too little too late.
I'd always assumed they paid themselves more because they got to sit on the same side of the counter as the cash drawer.
A study to consider:
http://www.neweconomics.org/publications/bit-rich
I've always found, from my very first weekend job to the one I'm currently "working" at while writing this, that the money I make is inversely proportional to the amount of work I do.
I thought it was proportional to who you slept with.
Either way you're going to get carpal tunnel syndrome.
I don't get a lot of the banker bonus outrage. Lets say the compensation was lowered to an 'acceptable' level, whatever that is. Why is it so much preferable for the bankers employers to get a larger share of the loot?
Its the crime that is important, not how the crooks divvy up the spoils between themselves.