A piece at Bloomberg today confirms that the financial crisis did nothing to shift the gap between what someone can earn on Wall Street versus more worthwhile lines of work:
Wall Street traders discouraged by declining bonuses this month can take solace: They still earn much more than brain surgeons and top U.S. generals.
An oil trader with 10 years in the business is likely to earn at least $1 million this year, while a neurosurgeon with similar time on the job makes less than $600,000, recruiters estimated. After a decade of deal-making, merger bankers take home about $2 million, more than 10 times what a similarly seasoned cancer researcher gets (see table below).
The pay gap between finance and other professions widened between the 1980s and 2006, exceeding the record set before the Great Depression, according to a 2009 study by Thomas Philippon, a professor at New York University's Stern School of Business. After the 2008 financial crisis, Wall Street started paying a larger portion of bonuses in stock and restricted cash. Yet there's little sign the gap with Main Street is narrowing.
"I don't think it's healthy for the economy to be this skewed," said Stephen Rose, a 63-year-old professor at Georgetown University's Center on Education and the Workforce. "I believe there's some sort of connection between value added to the economy and pay. Everyone is losing sight of any fundamentals."
It’s important to stress that this is a new pattern. In the stone ages of my youth, top earners in investment banking were on a par roughly with top heart surgeons and when someone became a partner at Goldman, his cash compensation fell sharply. The old line was that partners lived poor and died rich.
And their aspirations were modest by contemporary standards: a nice apartment in the better sections of the Upper East side, having their kids in private schools, and having a summer home, likely in the Hamptons (which were much cheaper then than now).
One of the perverse elements of the pay escalation in finance is that more dollars are being thrown at social signaling. Anthropologists would have a field day. To a significant degree, top end goods have been repriced upwards to reflect competition for the same assets (paintings, luxury goods, prime residential real estate), with admittedly some new creature comforts now on the list (private jets).
But a much uglier element is how this trend continues to suck “talent” into socially destructive activities (if you think that’s an overstatement, read this post from yesterday). And it is becoming institutionalized, not just due to the pay gap between jobs in TBTF financial firms, but also due to the seemingly unending rise in the costs of higher education, well outpacing inflation for more than 20 years. As Jamie Galbraith pointed out in his book The Predator State, there’s a fallacy in thinking that having more people get more advanced education leads them to higher levels of lifetime earnings. While that can be true for individuals, if large numbers of people adopt the same strategy, more credentialing simply becomes a new normal (look at how many college and even advanced degree graduates take jobs that don’t require their level of educational attainment).
So the result is increasingly costly higher education, due to more and more people going to college and grad schools, and students being less price constrained due to student loans. So students who don’t have affluent parents are forced to be mercenary in their career choices or risk having huge problems in contending with their school loans (which can’t be discharged in bankruptcy). A widely discussed article in the New York Times pointed out how law school is now a bad investment, and also described “Enron-type accounting” on behalf of the law schools themselves in misrepresenting the value of their degrees.
So the normal avenues to upward mobility or even normal middle class prosperity are eroding, and demanding and socially valuable careers that were once highly respected are now falling in relative standing in increasingly Plutocratic America. This is not a blueprint for economic success or rising social well being.
Another reflection of this sorry trend was an article in the Atlantic, “The Rise of the New Global Elite,” which was admirably shredded by reader paper mac:
The cherry-picked anecdotes of blue-collar, self made executives used to suggest that entry into the ranks of the ultra-rich is somehow "meritocratic", despite extensive evidence showing that the relationship between heriditary wealth, education, and socioeconomic status is strengthening; the suggestion that these elites somehow "produce wealth", despite the clear evidence than in fact most of them do little but extract it; the absolutely laughable assertion that attending elite wank-fests like TED talks or Davos conferences somehow constitutes engagement with serious ideas; the absurdity of claiming that the handful of billionaires with significant philanthropic contributions to their pet causes shows us that the ultra-rich are legitimately attempting to better the condition of their inferiors- I'm amazed this trash got past any editor, anywhere.
Freeland is clearly far too close to her subjects. She spends most of her 7 pages fellating a handful of executives she had access to (include a puke-worthy passage suggesting that Lloyd Blankfein is, after all, just a regular, salt-of-the-earth boy)….
It's nonetheless worth pointing out a few bits that provide some insight into the psychopathology of the subjects and the author. One that struck me was this:
"The clincher, Peterson says, came from the wife: "She turns to me and she goes, "?You know, the thing about 20'""”by this, she meant $20 million a year"”""?is 20 is only 10 after taxes.' And everyone at the table is nodding.""
In what way is this person not mentally ill? In what world is this not simple addiction to money? Who in God's name needs 20, or even 10 million dollars a year? If we lived in a sane society, this person would be the object of pity and ridicule- someone so completely given over to their wealth addiction that they will literally never have enough. It is people like this who will kill us.
There’s also an interesting fallacy that at least some members of this cohort subscribe to:
Our light-speed, globally connected economy has led to the rise of a new super-elite…Perhaps most noteworthy, they are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home. Whether they maintain primary residences in New York or Hong Kong, Moscow or Mumbai, today's super-rich are increasingly a nation unto themselves.
To the extent that members of this group have wealth that depends on assets or operations located in, say, China or Russia, their assumption that they can operate above states is a tad optimistic. They are effectively projecting their success in capturing the American government apparatus and assuming that other states will also hew to their will. But America is an empire in decline, hence ripe for exploitation. And American has long had plutocratic tendencies, while the elites in other countries, notably China are keenly sensitive to foreign exploitation, having been on the wrong side of that trade far too often, and are likely to turn the tables outsiders once they cease to be of use to them. They probably won’t wind up as badly as Mikhail Khodorkovsky, but their optimism that they can continue to operate unfettered, beyond the reach of governments is more than a tad optimistic.
I believe the medieval name for ‘trick down’ is ‘droit du seigneur.’
The lord gets the first shot at the maiden and then passes on down to the peasants.
Cruel and inhuman indeed.
Despite the hype, that’s 2,000 years of zero progress.
“they will literally never have enough” Indeed, because it is all, as Yves points out, about social signaling. It ceased to be about money (as means of getting something else) quite some time ago. Long time ago, the social signaling was about who your grand-grand-grand… -grand mother slept with (or something similar), but given the inbreeding of population, that sort of stopped working (say if you’re at least part European, it’s virtually certain that Charlemagne was amongst your ancestors, just by the law of large numbers).
On the other hand, unless we invent a different way of social signaling, I doubt it’s a problem that can go away. And, given that it would have to be signaling that money can’t buy, it’s damn hard..
I suggest that higher ed in the United States may not be over-priced. Could elite universities charge more than 50k/yr and still attract sufficient numbers of applicants? The answer may be yes, if for example we posit that their product features include admission to the ruling, hyper-monied class. If there are sufficient numbers of applicants who are willing and able to pay substantilly more than 50k for an elite degree then are the elite organizations under-pricing their products?
I suggest that there would be at least 3 reasons for them to underprice:
1. To disarm criticism of their marketing, i.e. of their target group setting – at 50k they can still claim to be a stretch for middle class Americans.
2. To limit questions about non-profits with large endowments.
3. To maintain market power. Elite organizations control the price of higher ed in the USA. If they were to charge the price they could get they would de-couple themselves from the pricing of other institutions and allow brands to develop that could threaten the long-term dominance of the elite.
Those 30 and 50k a year schools are now only an entre to nanny and fast food jobs.
I think you are wrong. Entrance to a specific college or law school is exactly how you enter this ‘hyper meritocracy’ if you arent born into it. the top 1/3rd of the class at Princeton or Harvard, if they wanted to, can go work in a bank or a hedge fund and get a lot of money.
Ditto about that law school are a scam thing; they are scam, unless you got into a top law school and finished in the top 3rd of your class. Then you are probably alright.
I don’t believe in elite educations. I believe these people are a cartel, that if you get in, you join the cartel. That is, if you can fit in the cartel. I have a cousin that is a judge. His daughter went to law school and landed a pretty good job out of school. No telling what her connection to the judge had to do with her getting a job, but I would venture she had some contacts. Her father wasn’t so lucky in private practice. The kid started out at the fathers judge salary.
I went to college, got out in 4 years and hardly studied. But, the different group projects showed I was near the top of the class in what I was able to put together in my education in finance. The cost was next to nothing in the 1970’s. Relative cost is about double today.
The big problem is that the central bank of the US is over a barrel with these guys. Had Rubin and Greenspan not enabled this stuff in the late 1990’s, few of these people would be making squat. Their game is issuing debt and manipulating markets and anyone that deals with them is going to pay the price. They send people into government to further feather their nest. Normal Americans can’t see past what is going on. But, then again, many of our jobs now hang in the balance due to what these criminals have done.
To the extent that The Atlantic article reaches a wide audience (a feat by no means assured), perhaps some reality will begin to seep into the consciousness WRT “just how wealthy” the obscenely wealthy are. I believe most Americans think that “the wealthy” are people like their boss (not Lloyd Blankfein), but say, a guy who runs a car lot or a construction company. Maybe even the top of the local insurance company or something, or a CEO they read about for a local outfit.
They have NO IDEA that these people, whom they would consider to be very wealthy because they are pulling down six figures (or maybe just 1M), are minnows in the world of the Obscenely Wealthy.
Until we break this illusion, very little will change, I’m afraid, and few Americans will realize how deeply they’ve been hoodwinked – and by how few thieves.
Agree.
And just as anecdote, last summer I was in a rural, ag community. I could tell the public mood was souring when people said – partly under their breath, with their eyes rolling – that they’d lost $150,000. Knowing these are stoic folk, I assume if that’s the number they were willing to state publicly, they probably lost several multiples of that figure, but would never admit what they’ve actually seen evaporate from portfolios nurtured over 25+ years. But to them, ‘rich’ means a million. Really, really rich means five million. When they start to realize the numbers involved in the Wall Street bonuses, I see political implosion.
There is on conceivable way, even if PR firms stretched to the next galaxy, that Wall Street will ever explain to these folks what they do to ‘earn’ their incomes.
Show’s not over yet, but I see last Nov elections as not so much about ‘jobs’, but rather still amorphous wrath about economic inequality and fury about government being handmaiden to banks. If “Accountability” were listed on any exchange, I’d buy. Big Time. I think it has a very promising future.
I think to some degree this is an inevitable consequence of measuring self-worth by how much money we make. This is a common viewpoint in much of Western society, especially in the USA, and not just among the elite. The goal of earning money is not to cover your expenditures, but to prove your worth as a person. The more money you earn, the better (and more successful) a person you are. If you earn $20 million a year while your friend earns only $2 million, you are ten times the person that he is. On the occasions when NC has been trolled by Wall Street types in comments, they have sometimes said this in as many words (e.g. by speculating on the puniness of other commenters’ net worth, in the confident expectation that this will be taken as a mortal insult).
I think this is also why some professions such as teaching are not highly regarded by a certain segment of society. People often become teachers because they believe it’s an important job and they want to make a difference, but that increases supply and drives down salaries, so teachers don’t earn much compared to many other professions. This leads to them being devalued under the line of thinking above (”Those who can do, those who can’t teach.”)
For people like this, there is no such thing as enough when it comes to money, since the accumulation of it amounts to the betterment of oneself as a person. I believe it also helps explain why they seem so impervious to criticism and blind to public opinion at times. Only people who have demonstrated their value as a person (i.e., other super-rich) are worth listening to. You wouldn’t bother listening to the opinions of the poor any more than you would invite a kindergarten student to speak at a conference on theoretical physics.
People like this are the inevitable outcome of a society that uses wealth as the primary measure of self-worth. They may be monsters, but we created them.
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