Tuesday, April 21, 2009

Another argument for less inequality...

Perhaps after a certain economic disparity, the ability to appreciate the point of view of those so much further down the economic ladder atrophies.  It would appear this happened in New York.

A few weeks ago, I had drinks with a friend who used to work at Lehman Brothers. She had come to Wall Street in the mid-eighties, when the junk-bond boom spawned a new class of globe-trotting financiers. Over two decades, she had done stints at all the major banks—Chase, Goldman, Lehman—and had a thriving career directing giant streams of capital around the world and extracting a substantial percentage for herself. To her mind, extreme compensation is a fair trade for the compromises of such a career. “People just don’t get it,” she says. “I’m attached to my BlackBerry. I was at my doctor the other day, and my doctor said to me, ‘You know, I like that when I leave the office, I leave.’ I get calls at two in the morning, when the market moves. That costs money. If they keep compensation capped, I don’t know how the deals get done. They’re taking Wall Street and throwing it in the East River.”

Now, a lot of people in New York have BlackBerrys, and few of them expect to be paid $2 million to check their e-mail in the middle of the night. But embedded in her comment is the belief shared on Wall Street but which few have dared to articulate until now: Those who select careers in finance play an exceptional role in our society. They distribute capital to where it’s most effective, and by some Ayn Rand–ian logic, the virtue of efficient markets distributing capital to where it is most needed justifies extreme salaries—these are the wages of the meritocracy. They see themselves as the fighter pilots of capitalism.

Wall Street people are not moral idiots (most of them, anyway)—it’s not as if they’ve never pondered the fairness of their enormous salaries. “One of my relatives is a doctor, we’re both well-educated, hardworking people. And he certainly didn’t make the amount of money I made,” a former Bear Stearns senior managing director tells me. “I would be the first person to tell you his value to society, to humanity, is far greater than anything that went on in the Bear Stearns building.”
That said, he continues, “We’re in a hypercapitalistic society. No one complains when Julia Roberts pulls down $25 million per movie or A-Rod has a $300 million guarantee. We have ex-presidents who cash in on their presidencies. Our whole moral compass has shifted about what’s acceptable or not acceptable. Honestly, you can pick on Wall Street all you want, I don’t think it’s fair. It’s fair to say you ran your companies into the ground, your risk management is flawed—that is perfectly legitimate. You can lay criticism on GM or others. But I don’t think it’s fair to say Wall Street is paid too much.” [More]

I struggled with the whole article - which was beautifully written - as it carefully explored the attitudes of Wall Street executives.  I think it is fair to say virtually all those interviewed honestly believed they were the only folks who could work as hard or be as smart as they are.  Not could any of them fathom what their compensation looks like from any other perspective.

These folks deep-down believe they are worth the competition they were paid. The inability to appreciate any other viewpoint may spring from complete ignorance of what other lives and values are.

This is a product, I think of enormous economic inequality.  And I think it creates structural deficiencies of mistrust that are becoming evident and which will hamstring the recovery of our economy.

I also think it will become a bigger issue in grain farming, as we have discovered at TP.


From Virginia said...

To say that doctors have a higher value to society than do investment banks is really short sighted.

Who floats the bonds that are issued to build the hospital where the doctor performs surgery? Who moves the commercial paper that finances the pharmaceutical company that provides the doctor with the latest chemistry? Who provides the venture capital for the start up company that is working with nano technology so the doctor can work his art internally in the body?

While conceding definite excesses in banking as well as in every other part of our society (including medicine), I would caution that we should not make artificial or superficial distinctions of value among professions.

John Phipps said...


Fair points. But, 10X and 100X salary differences are hardly superficial. And we now know, as Taleb pointed out, these guys were not geniuses, they were lucky.

The idea that current investment bankers are the only people capable of doing their work is hard to swallow.

Finally, if their pay is justified by their performance, what should it be today? What percentage of the losses should factor into their bonuses? Or do you support continued bonuses to honor employment contracts while their firms are reneging on their contracts with investors?

Brian in OH said...

"Our whole moral compass has changed about what's acceptable or not acceptable." He's not talking just i-bankers, but all of society, which is the exact point I made to you in my comment on a previous similar post. Liberals are so uptight about income inequality, but fail to see how much their own influence on cultural self-control (or the lack there-of) is part of this issue.

I think you are late to this party anyway. Top earners are just getting killed in this current depression. Your linked article is one example of what's happening on wall street. Employment in the highest flying businesses is down 30-50%. Fortune 500 profits are down 90% year to year in their last round of reporting. Yes, there's plenty of pain to go around, but this economic contraction is working its way from the top down.

Americans have always been willing to accept wealth inequality as long as they felt that the system gave everyone a fair shot relative to their own ability and ambition. I share your concern over structural mistrust, but I don't think it comes from inequality per se. I think it stems from the appearance that many enriched themselves from self-dealing and fraud. In earlier posts, you belittled those who wanted justice - you called it revenge. But in a perfect world, share-holder lawsuits would punish the incompetent, and the law would go after the fraudsters. I fear the political pipeline connecting lower manhattan and capitol hill is our greatest threat.

Finally, you say you want something actionable. Well how about this: spend more time working on creating your own wealth and less time thinking about redistributing others'. If all else fails, get a copy of Atlas Shrugged.

John Phipps said...


Presenting the problem in digital terms - this or that - ignores for me a wide range of solutions.

Redistribution need not be a matter of taking 100% from the rich, but I don't have a problem with upper marginal rates close to the Reagan era.

I don't think Americans readily accept very high levels of inequality, and ascribe passing some vague tolerable level to be a major factor in the moral value breakdown you cite. In other words, could the causal arrow point in the opposite direction for these trends?

Besides, if we accept the moral failure argument then (after mandatory reading of Rand) what should we do? You seems to suggest more aggressive law enforcement, unnamed political reform, and ...what exactly? All of which strike me with more than a little alarm.

I do not find appeals to pull yourself up and stop worrying about the top 1% to be all that effective, and certainly not politically possible. My point is this, if we do not accept some reasonable mechanisms of redistribution, the likelihood of drastic political change are much greater. The refusal to bend from absolute positions of self-determination (which is what I have always read in Rand) simply hastens the day of such unfortunate consequences.

On top of all this, it now becomes pretty clear that much of the wealth the folks in the article talked about creating was fictitious, or at least incredibly fragile, dependent on a collective suspension of disbelief.

Rand would not have looked back at today's Wall Street "losers". I can agree with her on that.

Brian in Central IL said...


I really feel like any sort of income distribution will cut the top off of our potential for the future and exagerate our potential lows with the thinking of- why try harder I can get help.

I know you are an avid reader so I think in light of what is happening could I please ask you to read the book The 5,000 Year Leap and give me your thoughts not only on the book itself, but how you feel then our nation should move forward.

Brian in OH said...


Your point about the direction of the causal arrow is well taken. President Obama also used a moral paradigm in his speech on the economy last week. He views our current predicament as the result of "irresponsible" behavior.

Which top income tax rate of the Reagan era do you want? It was 70% when he took office, was lowered to 50% in 1981, and 28% in 1986. The current level of federal gov't borrowing makes increased taxes a foregone conclusion.

If we can't prosecute fraud, which is an old and well established concept, then what good is our legal system? And if shareholders can't claw back management compensation based on "fictitous" performance, then something is wrong with the corporation's charter. I do not see what is alarming here.

And speaking of alarming, your stated rational for the inequality discussion has been the potential for "drastic political" upheaval if we fail to redistribute. What is your scenario? What signals do you see now that indicate this is in our future?

Finally (again), I saw the story about all the money bloggers are making. So of course there is some personal wealth creation going on. :) 100,000 unique visitors per month seems to be the threshold - how are we doing?

Keep up the good work.

Anonymous said...

Obama and our left leaning Congress scare me. Many of the policies they are trying to push through are poorly thought out and short sighted at best....socialist at worst.

Why do we need wealth redistribution? I am a young college graduate who returned to the family farm. Some may think that I have it made, it being a family business and all. To the contrary, things aren't easy. Our farm is incorporated an I am paid a very meager salary...much less than our hired hands. I could qualify for food stamps and other gov't services. I am not wanting for anything, yet my income qualifies my family as living in poverty. If this is what poverty is, the world is in better shape than I thought. I want no part of those gov't services I mentioned. I was taught that you worked hard to better your lot in life, not let someone else take the risk and work hard and then give the money to you. With that attitude, since returning to the farm, I have helped to grow our operation by 25%. That is the kind of wealth redistribution I like. Get creative to make your business more profitable and efficient than the next guy's.

On another note about redistribution, I have a legal immigrant that works for me. His income is low enough that he pays no Federal Income Tax. Today he received a letter from the IRS that he will get a $4300 tax refund. How's that for redistribution?

John Phipps said...


I'm glad you asked. I think a top rate of 40% or so on income over $5M would work and a VAT tax to manage consumption (I know it's regressive), and a carbon tax offset by payroll tax reductions.

I would also cut ag subsidies, end the mortgage deduction, remove the capital gains exemptions on homes, means-test SS and Medicare, and move our defense spending in the direction Gates is headed - away from a few costly weapons and toward quantity.


Plenty of folks share your opinions. And yes, we do have income redistribution already in place.

But we have been until recently unable to overcome growing wealth concentration, which I think we are pushing the cultural limits on.

The comparison of poverty now versus poverty twenty years ago strikes me as saying we have addressed the problem adequately. My belief is even those at the top gain when we continue to raise the standard of living for the lowest. For one thing, how much of your employeee's refund got spent? Probably more than the ~30% most of us did with our refunds last summer.

If you want our economy to start growing again, raising the wages of the lowest is one of the most efficient.

Finally, many of the ideas that have been mentioned - addressing health care, retirement and college costs may strike you as more reasonable in a few years.

Anonymous said...


I didn't mean to imply that the issue of poverty has been adequately addressed. My point was that my standard of living is pretty darn comfortable, so perhaps we should adjust the level of where poverty begins.

The employee that I mentioned spent 0% of his refund in America. He lives a frugal life, spending his money only on food and clothing, while sending the rest back to Mexico to his family. That is his perogative, and I am fine with that, so long that he works for that money. Where I do have a problem is that he pays 0 in federal taxes, gets a $4300 "refund" (read handout) from the federal government, and in turn sends 100% of that "refund" out of the country. Tell me how that stimulates our economy, or redistributes wealth from the rich to the poor in America. If this scenario doesn't make anyone question the judgement of our elected officials, then I think our country could be too far gone to save. I hope this isn't the case. America is and has been the greatest country this planet has ever seen, all of which was built on capitalism and pull yourself up by the boot straps attitudes, not socialist redistribution policies.