Justin Fox is editorial director of the Harvard Business Review Group and author of The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street.
Email Tweet This Post to Facebook Share on LinkedIn PrintGene Sperling, the longtime Bill Clinton aide and West Wing archetype/writer, is President Obama's new top economic adviser. He's replacing the controversial and sometimes cranky Larry Summers, and has a reputation for being less controversial and even less cranky. I've had a few encounters with Gene through the years, and he's always struck me as an endearing (and rare) combination of policy wonk, political operator, and genuine mensch. Meaning that this appointment would seem to be good for Gene, good for America.
Sperling is catching flak, though, for something that was first disclosed in 2009 — the fact that he was paid $887,727 in 2008 by Goldman Sachs. Summers had reaped even bigger Wall Street paydays — $5.2 million in one year from the hedge fund D.E. Shaw, and $135,000 for one speech at Goldman Sachs. But Sperling is supposed to be a change of pace, and here he was on Wall Street's payroll as well.
So now there's a controversy. Jacob Weisberg thinks it's silly, and decries the "Main Street Puritanism" of Sperling's critics. Felix Salmon decries the "institutionalization of the revolving door." And so on.
There doesn't have to be a problem with a revolving door between government jobs and non-government jobs. The fact that people in the U.S. can easily pop back and forth between government, academia, and the private sector has for most of the nation's history been more strength than weakness. There has been a growing problem over the last few decades with lawmakers and legislative aides leaving government and then immediately taking lucrative positions lobbying their former colleagues — with various attempts to stymie such behavior that haven't quite worked, but are at least attempted.
The Wall Street connection is something different. Goldman wasn't paying Sperling to lobby, it was paying him to work on a philanthropic endeavor (educating girls and women in poor countries) that was and is close to his heart. At D.E. Shaw, Summers wasn't just a big-name figurehead, but actually involved himself with the firm's investment strategies (or so I've heard both from Summers and people at D.E. Shaw). There's really nothing all that disturbing about the work that Sperling and Summers did on or with Wall Street. What is curious, though, is how much they got paid.
As David Corn tells it, Sperling suggested that Goldman fund a $100 million program to teach business skills to 10,000 women in poorer countries. Goldman asked him to help get it started, and he asked them to pay him what they "might pay a top lawyer or dealmaker." They paid him $70,000 a month. Now I'm sure many of you HBR.org readers make that much money every day before breakfast, but it sounds like a lot to me, and it's definitely high pay for philanthropic work. It's not that Goldman was necessarily trying to corrupt Gene Sperling. It's simply that the firm is accustomed to flinging spectacular amounts of money at its employees — far more than people, other than CEOs and superstars, can expect to make in just about any other line of work. This gap between what employees of Goldman and its Wall Street peers (including hedge funds, private equity firms, etc.) make and the money to be earned in government or other sectors of the economy is huge — and it cannot help but have consequences.
A parallel that springs to mind is the deleterious impact that Western aid and development agencies have often had in Africa, at least in the past when they favored big-dollar projects. The money the Western do-gooders had at their disposal was of a different order of magnitude from the sums generated by the local economy. So as soon as it began to be doled out, it skewed economic incentives and sucked talent and resources away from everything else — eventually leaving the locals addicted to aid and in many cases worse off.
For a decade or two now, the financial sector has been doing something similar to the rest of the economy, especially but not exclusively, in the U.S. and UK. The increasing rewards to work in finance were for a long time defended as evidence that the financial sector was creating more value than the rest of the economy. After the crisis of 2007 and 2008, though, that became a pretty tough argument to make. It seems more likely that the combination of massive risk-taking in the financial sector and government backstops and bailouts when those bets go bad has created a situation where financial sector pay is kept artificially high.
How artificially high? Finance scholars Thomas Philippon and Ariel Resheff have actually tried to calculate how much financial-sector workers are overpaid relative to those with similar skills in other professions. About 40%, they say. That's for the financial sector as a whole, not the fancier precincts of Wall Street. There the percentage would seem to be more along the lines of, say, 2,919% (the gap between Summers' pay at D.E. Shaw and what he made at the White House).
With that kind of pay differential, Wall Street inevitably begins to emit a giant sucking sound as it hoovers up smart, self-interested people. This is apparent at top business schools, in physics Ph.D programs — and in Washington, where smart out-of-office (or just burned-out) government officials who want to secure their family's financial future before either retiring or heading back into public service now flock to Wall Street jobs. Larry Summers did. Rahm Emanuel did too. John Snow did. Bill Daley did. Phil Gramm did. Harold Ford Jr. did. Peter Orszag is doing it. Heck, I'd probably do it if I were in their shoes. Gene Sperling, to be fair, didn't go so far as to become a banker. But on the whole, if you believe that people respond to economic incentives, you have to believe that Wall Street's artificially high pay scales have come to have a big impact on decisionmaking in Washington — and that this is an unhealthy development for our democracy and our economy. So making a stink over Sperling's Goldman paychecks is, under the circumstances, a perfectly appropriate thing to do.
It is is also, of course, a mostly ineffectual thing to do. He's got the job. But now that he's got it, maybe he should try to figure out what to do about the chasm between Wall Street pay and compensation in the rest of the economy. Got any suggestions for him?
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Sperling is catching flak, though, for something that was first disclosed in 2009 — the fact that he was paid $887,727 in 2008 by Goldman Sachs. Summers had reaped even bigger Wall Street paydays — $5.2 million in one year from the hedge fund D.E. Shaw, and $135,000 for one speech at Goldman Sachs. But Sperling is supposed to be a change of pace, and here he was on Wall Street's payroll as well.
So now there's a controversy. Jacob Weisberg thinks it's silly, and decries the "Main Street Puritanism" of Sperling's critics. Felix Salmon decries the "institutionalization of the revolving door." And so on.
There doesn't have to be a problem with a revolving door between government jobs and non-government jobs. The fact that people in the U.S. can easily pop back and forth between government, academia, and the private sector has for most of the nation's history been more strength than weakness. There has been a growing problem over the last few decades with lawmakers and legislative aides leaving government and then immediately taking lucrative positions lobbying their former colleagues — with various attempts to stymie such behavior that haven't quite worked, but are at least attempted.
The Wall Street connection is something different. Goldman wasn't paying Sperling to lobby, it was paying him to work on a philanthropic endeavor (educating girls and women in poor countries) that was and is close to his heart. At D.E. Shaw, Summers wasn't just a big-name figurehead, but actually involved himself with the firm's investment strategies (or so I've heard both from Summers and people at D.E. Shaw). There's really nothing all that disturbing about the work that Sperling and Summers did on or with Wall Street. What is curious, though, is how much they got paid.
As David Corn tells it, Sperling suggested that Goldman fund a $100 million program to teach business skills to 10,000 women in poorer countries. Goldman asked him to help get it started, and he asked them to pay him what they "might pay a top lawyer or dealmaker." They paid him $70,000 a month. Now I'm sure many of you HBR.org readers make that much money every day before breakfast, but it sounds like a lot to me, and it's definitely high pay for philanthropic work. It's not that Goldman was necessarily trying to corrupt Gene Sperling. It's simply that the firm is accustomed to flinging spectacular amounts of money at its employees — far more than people, other than CEOs and superstars, can expect to make in just about any other line of work. This gap between what employees of Goldman and its Wall Street peers (including hedge funds, private equity firms, etc.) make and the money to be earned in government or other sectors of the economy is huge — and it cannot help but have consequences.
A parallel that springs to mind is the deleterious impact that Western aid and development agencies have often had in Africa, at least in the past when they favored big-dollar projects. The money the Western do-gooders had at their disposal was of a different order of magnitude from the sums generated by the local economy. So as soon as it began to be doled out, it skewed economic incentives and sucked talent and resources away from everything else — eventually leaving the locals addicted to aid and in many cases worse off.
For a decade or two now, the financial sector has been doing something similar to the rest of the economy, especially but not exclusively, in the U.S. and UK. The increasing rewards to work in finance were for a long time defended as evidence that the financial sector was creating more value than the rest of the economy. After the crisis of 2007 and 2008, though, that became a pretty tough argument to make. It seems more likely that the combination of massive risk-taking in the financial sector and government backstops and bailouts when those bets go bad has created a situation where financial sector pay is kept artificially high.
How artificially high? Finance scholars Thomas Philippon and Ariel Resheff have actually tried to calculate how much financial-sector workers are overpaid relative to those with similar skills in other professions. About 40%, they say. That's for the financial sector as a whole, not the fancier precincts of Wall Street. There the percentage would seem to be more along the lines of, say, 2,919% (the gap between Summers' pay at D.E. Shaw and what he made at the White House).
With that kind of pay differential, Wall Street inevitably begins to emit a giant sucking sound as it hoovers up smart, self-interested people. This is apparent at top business schools, in physics Ph.D programs — and in Washington, where smart out-of-office (or just burned-out) government officials who want to secure their family's financial future before either retiring or heading back into public service now flock to Wall Street jobs. Larry Summers did. Rahm Emanuel did too. John Snow did. Bill Daley did. Phil Gramm did. Harold Ford Jr. did. Peter Orszag is doing it. Heck, I'd probably do it if I were in their shoes. Gene Sperling, to be fair, didn't go so far as to become a banker. But on the whole, if you believe that people respond to economic incentives, you have to believe that Wall Street's artificially high pay scales have come to have a big impact on decisionmaking in Washington — and that this is an unhealthy development for our democracy and our economy. So making a stink over Sperling's Goldman paychecks is, under the circumstances, a perfectly appropriate thing to do.
It is is also, of course, a mostly ineffectual thing to do. He's got the job. But now that he's got it, maybe he should try to figure out what to do about the chasm between Wall Street pay and compensation in the rest of the economy. Got any suggestions for him?
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var zflag_nid="675"Gene Sperling, the longtime Bill Clinton aide and West Wing archetype/writer, is President Obama's new top economic adviser. He's replacing the controversial and sometimes cranky Larry Summers, and has a reputation for being less controversial and even less cranky. I've had a few encounters with Gene through the years, and he's always struck me as an endearing (and rare) combination of policy wonk, political operator, and genuine mensch. Meaning that this appointment would seem to be good for Gene, good for America.
Sperling is catching flak, though, for something that was first disclosed in 2009 — the fact that he was paid $887,727 in 2008 by Goldman Sachs. Summers had reaped even bigger Wall Street paydays — $5.2 million in one year from the hedge fund D.E. Shaw, and $135,000 for one speech at Goldman Sachs. But Sperling is supposed to be a change of pace, and here he was on Wall Street's payroll as well.
So now there's a controversy. Jacob Weisberg thinks it's silly, and decries the "Main Street Puritanism" of Sperling's critics. Felix Salmon decries the "institutionalization of the revolving door." And so on.
There doesn't have to be a problem with a revolving door between government jobs and non-government jobs. The fact that people in the U.S. can easily pop back and forth between government, academia, and the private sector has for most of the nation's history been more strength than weakness. There has been a growing problem over the last few decades with lawmakers and legislative aides leaving government and then immediately taking lucrative positions lobbying their former colleagues — with various attempts to stymie such behavior that haven't quite worked, but are at least attempted.
The Wall Street connection is something different. Goldman wasn't paying Sperling to lobby, it was paying him to work on a philanthropic endeavor (educating girls and women in poor countries) that was and is close to his heart. At D.E. Shaw, Summers wasn't just a big-name figurehead, but actually involved himself with the firm's investment strategies (or so I've heard both from Summers and people at D.E. Shaw). There's really nothing all that disturbing about the work that Sperling and Summers did on or with Wall Street. What is curious, though, is how much they got paid.
As David Corn tells it, Sperling suggested that Goldman fund a $100 million program to teach business skills to 10,000 women in poorer countries. Goldman asked him to help get it started, and he asked them to pay him what they "might pay a top lawyer or dealmaker." They paid him $70,000 a month. Now I'm sure many of you HBR.org readers make that much money every day before breakfast, but it sounds like a lot to me, and it's definitely high pay for philanthropic work. It's not that Goldman was necessarily trying to corrupt Gene Sperling. It's simply that the firm is accustomed to flinging spectacular amounts of money at its employees — far more than people, other than CEOs and superstars, can expect to make in just about any other line of work. This gap between what employees of Goldman and its Wall Street peers (including hedge funds, private equity firms, etc.) make and the money to be earned in government or other sectors of the economy is huge — and it cannot help but have consequences.
A parallel that springs to mind is the deleterious impact that Western aid and development agencies have often had in Africa, at least in the past when they favored big-dollar projects. The money the Western do-gooders had at their disposal was of a different order of magnitude from the sums generated by the local economy. So as soon as it began to be doled out, it skewed economic incentives and sucked talent and resources away from everything else — eventually leaving the locals addicted to aid and in many cases worse off.
For a decade or two now, the financial sector has been doing something similar to the rest of the economy, especially but not exclusively, in the U.S. and UK. The increasing rewards to work in finance were for a long time defended as evidence that the financial sector was creating more value than the rest of the economy. After the crisis of 2007 and 2008, though, that became a pretty tough argument to make. It seems more likely that the combination of massive risk-taking in the financial sector and government backstops and bailouts when those bets go bad has created a situation where financial sector pay is kept artificially high.
How artificially high? Finance scholars Thomas Philippon and Ariel Resheff have actually tried to calculate how much financial-sector workers are overpaid relative to those with similar skills in other professions. About 40%, they say. That's for the financial sector as a whole, not the fancier precincts of Wall Street. There the percentage would seem to be more along the lines of, say, 2,919% (the gap between Summers' pay at D.E. Shaw and what he made at the White House).
With that kind of pay differential, Wall Street inevitably begins to emit a giant sucking sound as it hoovers up smart, self-interested people. This is apparent at top business schools, in physics Ph.D programs — and in Washington, where smart out-of-office (or just burned-out) government officials who want to secure their family's financial future before either retiring or heading back into public service now flock to Wall Street jobs. Larry Summers did. Rahm Emanuel did too. John Snow did. Bill Daley did. Phil Gramm did. Harold Ford Jr. did. Peter Orszag is doing it. Heck, I'd probably do it if I were in their shoes. Gene Sperling, to be fair, didn't go so far as to become a banker. But on the whole, if you believe that people respond to economic incentives, you have to believe that Wall Street's artificially high pay scales have come to have a big impact on decisionmaking in Washington — and that this is an unhealthy development for our democracy and our economy. So making a stink over Sperling's Goldman paychecks is, under the circumstances, a perfectly appropriate thing to do.
It is is also, of course, a mostly ineffectual thing to do. He's got the job. But now that he's got it, maybe he should try to figure out what to do about the chasm between Wall Street pay and compensation in the rest of the economy. Got any suggestions for him?
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Gene Sperling, the longtime Bill Clinton aide and West Wing archetype/writer, is President Obama's new top economic adviser. He's replacing the controversial and sometimes cranky Larry Summers, and has a reputation for being less controversial and even less cranky. I've had a few encounters with Gene through the years, and he's always struck me as an endearing (and rare) combination of policy wonk, political operator, and genuine mensch. Meaning that this appointment would seem to be good for Gene, good for America.
Sperling is catching flak, though, for something that was first disclosed in 2009 — the fact that he was paid $887,727 in 2008 by Goldman Sachs. Summers had reaped even bigger Wall Street paydays — $5.2 million in one year from the hedge fund D.E. Shaw, and $135,000 for one speech at Goldman Sachs. But Sperling is supposed to be a change of pace, and here he was on Wall Street's payroll as well.
So now there's a controversy. Jacob Weisberg thinks it's silly, and decries the "Main Street Puritanism" of Sperling's critics. Felix Salmon decries the "institutionalization of the revolving door." And so on.
There doesn't have to be a problem with a revolving door between government jobs and non-government jobs. The fact that people in the U.S. can easily pop back and forth between government, academia, and the private sector has for most of the nation's history been more strength than weakness. There has been a growing problem over the last few decades with lawmakers and legislative aides leaving government and then immediately taking lucrative positions lobbying their former colleagues — with various attempts to stymie such behavior that haven't quite worked, but are at least attempted.
The Wall Street connection is something different. Goldman wasn't paying Sperling to lobby, it was paying him to work on a philanthropic endeavor (educating girls and women in poor countries) that was and is close to his heart. At D.E. Shaw, Summers wasn't just a big-name figurehead, but actually involved himself with the firm's investment strategies (or so I've heard both from Summers and people at D.E. Shaw). There's really nothing all that disturbing about the work that Sperling and Summers did on or with Wall Street. What is curious, though, is how much they got paid.
As David Corn tells it, Sperling suggested that Goldman fund a $100 million program to teach business skills to 10,000 women in poorer countries. Goldman asked him to help get it started, and he asked them to pay him what they "might pay a top lawyer or dealmaker." They paid him $70,000 a month. Now I'm sure many of you HBR.org readers make that much money every day before breakfast, but it sounds like a lot to me, and it's definitely high pay for philanthropic work. It's not that Goldman was necessarily trying to corrupt Gene Sperling. It's simply that the firm is accustomed to flinging spectacular amounts of money at its employees — far more than people, other than CEOs and superstars, can expect to make in just about any other line of work. This gap between what employees of Goldman and its Wall Street peers (including hedge funds, private equity firms, etc.) make and the money to be earned in government or other sectors of the economy is huge — and it cannot help but have consequences.
A parallel that springs to mind is the deleterious impact that Western aid and development agencies have often had in Africa, at least in the past when they favored big-dollar projects. The money the Western do-gooders had at their disposal was of a different order of magnitude from the sums generated by the local economy. So as soon as it began to be doled out, it skewed economic incentives and sucked talent and resources away from everything else — eventually leaving the locals addicted to aid and in many cases worse off.
For a decade or two now, the financial sector has been doing something similar to the rest of the economy, especially but not exclusively, in the U.S. and UK. The increasing rewards to work in finance were for a long time defended as evidence that the financial sector was creating more value than the rest of the economy. After the crisis of 2007 and 2008, though, that became a pretty tough argument to make. It seems more likely that the combination of massive risk-taking in the financial sector and government backstops and bailouts when those bets go bad has created a situation where financial sector pay is kept artificially high.
How artificially high? Finance scholars Thomas Philippon and Ariel Resheff have actually tried to calculate how much financial-sector workers are overpaid relative to those with similar skills in other professions. About 40%, they say. That's for the financial sector as a whole, not the fancier precincts of Wall Street. There the percentage would seem to be more along the lines of, say, 2,919% (the gap between Summers' pay at D.E. Shaw and what he made at the White House).
With that kind of pay differential, Wall Street inevitably begins to emit a giant sucking sound as it hoovers up smart, self-interested people. This is apparent at top business schools, in physics Ph.D programs — and in Washington, where smart out-of-office (or just burned-out) government officials who want to secure their family's financial future before either retiring or heading back into public service now flock to Wall Street jobs. Larry Summers did. Rahm Emanuel did too. John Snow did. Bill Daley did. Phil Gramm did. Harold Ford Jr. did. Peter Orszag is doing it. Heck, I'd probably do it if I were in their shoes. Gene Sperling, to be fair, didn't go so far as to become a banker. But on the whole, if you believe that people respond to economic incentives, you have to believe that Wall Street's artificially high pay scales have come to have a big impact on decisionmaking in Washington — and that this is an unhealthy development for our democracy and our economy. So making a stink over Sperling's Goldman paychecks is, under the circumstances, a perfectly appropriate thing to do.
It is is also, of course, a mostly ineffectual thing to do. He's got the job. But now that he's got it, maybe he should try to figure out what to do about the chasm between Wall Street pay and compensation in the rest of the economy. Got any suggestions for him?
Posting Guidelines We hope the conversations that take place on HBR.org will be energetic, constructive, free-wheeling, and provocative. To make sure we all stay on-topic, all posts will be reviewed by our editors and may be edited for clarity, length, and relevance. We ask that you adhere to the following guidelines.
All postings become the property of Harvard Business School Publishing
The editors
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