dagblog - Comments for "Why Bankers Make So Much Money"

Does it really matter whether

DF — Sat, 24 Oct 2009 16:55:00 +0000

Does it really matter whether their primary motivation is political? There's an incredibly sound argument for doing it. It's simply the responsible thing to do. How often do politicians do things that are responsible, but not politically motivated? I'm not going to hold my breath on that count, so I'll accept the coincidences as happy events when they occur.

I'm skeptical because I

Michael Wolraich — Fri, 23 Oct 2009 21:20:00 +0000

In reply to I'm not sure of the reason

I'm skeptical because I assume that much of what the government does is for political reasons, and there's heavy political pressure from the left to punish the greedy bankers. That doesn't mean that politics is the only rationale, and I've course, I'm not privy to an White House meetings.

With regard to statism, I'm going off the rhetoric from pundits. Limbaugh and others now call taxes "wealth redistribution." Wealth redistribution would offer economic benefits to the non-rich, but non-rich conservatives still fiercely oppose it, just as they fiercely oppose rolling back Bush's tax cuts for the rich. I also recently read a "Robin Hood" reference from some conservative, as in "Robin Hood was a thief", but I can't remember where. Again, Robin Hood steals from the rich, gives to the poor. Statism is also a common theme, but I've seen it more in highbrow doctrinal explanations. That said, I haven't studied the conservatives' recent economic position that much, and I'm sure that my perspective on this just reflects what I've happened to read.

I'm not sure of the reason

DF — Fri, 23 Oct 2009 20:32:00 +0000

In reply to I don't have a problem with

I'm not sure of the reason for your skepticism. If we accept that incentivizing poor, risky decisions is the core of the problem, then it seems to follow that we address said problem by changing the incentives. In this light, changing the incentives doesn't have anything to do with making some judgment as to what is "deserved" by anyone, but rather about incentivizing better choices. Understood this way, the merit v. market argument is broken on both sides because it's not about merit and, as I've described, compensation is not, in fact, subject to the market, primarily thanks to the TBTF doctrine. The problem is that they are insulated from failure. The individuals making these decisions cannot be so insulated if we're to have an honest expectation of sound decision-making. Buying 80% of AIG and allowing them to maintain the same incentive structure is tantamount to insanity.

I'm likewise not sure why you think that's what moves the rank and file. When I talk to people that hold these views, they don't seem to be overly concerned with business people somewhere doing well. They're concerned with themselves. They've been told that taxes are crushing them, despite the fact that tax levels haven't appreciably changed while wages are failing to keep pace with inflation. Even so, they know that they're working harder and getting less for it. They've just been lied to about why.

To be clear, I'm not claiming that I know better than you, but that just hasn't been what I've encountered. I'd very interested to hear more about why you see it that way.

Sure, I understand the

Michael Wolraich — Fri, 23 Oct 2009 20:24:48 +0000

In reply to You have clarified it some

Sure, I understand the semantic differences, but it's my post, dammit, and I defined merit value the way I did to make a point. Write your own post about your version of "merit value." :)

I don't have a problem with

Michael Wolraich — Fri, 23 Oct 2009 20:21:23 +0000

In reply to Heh. Well, apologies for

I don't have a problem with the salary caps. I just don't think that they accomplish much, and I'm highly skeptical that the primary rationale was shareholder responsibility.

Fair enough, anti-statist and big government aren't the same thing, and anti-statism does better describe current conservative doctrine, but I'm more concerned with the rhetoric than with the doctrine. What seems to get rank-and-file conservatives most incensed is the idea that the government is "stealing" what rightfully belongs to hard-working businesspeople.

You have clarified it some

Nebton — Fri, 23 Oct 2009 20:14:43 +0000

In reply to No, I think that you

You have clarified it some for me, but our difference of opinion still differs mainly in how we're defining "merit value". For my definition, "merit value" is tied to the employee's actual value to the company, divorced from how little the boss can get by with paying him/her, whereas "market value" includes that last little bit (which is one reason women get paid less than men).

Heh. Well, apologies for

DF — Fri, 23 Oct 2009 20:03:00 +0000

In reply to I can always tell a DF

Heh. Well, apologies for being so verbose, but I've been thinking about and studying a lot of this stuff lately and your post got the wheels turning. So, it's your fault!

The UK and Iceland were outliers in the European zone. Iceland's was the worst economic collapse in recent memory, but it's because they couldn't do what we can: Create more money to pay debts. It's the same reason that states have had so much trouble under conditions where the federal government can just roll alaong. The UK, especially the London financial center, is not appreciably different than the NYC financial center. Let's not forget that AIGFP is in London, not NYC. The fact remains that these outliers bore more resemblance to our system and they did worse. Those that have saner systems fared much better.

The salary caps alone don't solve the entire problem, but they aren't simply red meat for the rabble. The American taxpayer owns 80% of AIG at this point. 30% of Citi, etc. Changing the incentive structure away from the one that enabled this mess is nothing but sound corporate governance. We want to incentivize decisions that will protect our long-term interest as shareholders. That's what's supposed to happen. No further argument for doing so is required.

RE: taxes, I don't think that distrust of big government gets it. The whole concept of "big government" is a ruse. Those who decry "big government" don't mind it when they see it as a benefit, ex. defense. Really, I think that anti-statist is the correct descriptor for the rhetoric that I was referring to.

No, I think that you

Michael Wolraich — Fri, 23 Oct 2009 19:40:55 +0000

In reply to I think the disagreement

No, I think that you misunderstand what I mean by merit value. Merit has to do with personal qualities, not social or economic contributions. We tend to think that someone who is smart, well-educated, hard-working, and experienced deserves to be paid more than someone who is stupid, uneducated, lazy, and inexperienced, regardless of the job, but the stupid, lazy person may actually have more market value depending on the respective careers of the two individuals.

I can always tell a DF

Michael Wolraich — Fri, 23 Oct 2009 19:33:43 +0000

In reply to Very well written, G. You

I can always tell a DF comment at first glance because it goes below the scroll. Thanks for the detailed response. I don't disagree with you about the dominance of the short-run, which you have laid out elegantly as usual. I only briefly alluded to it not because it's not important, but because I consider to to be a separate question. Unchecked markets are subject to disastrous extremes, and governments should regulate them in order to avoid unhealthy spirals. But from that point of view, the problem is not that bankers make more than they deserve; it's that their compensation structures are bad for the economy. This gets at the social value that Nebton raised, not the merit value that seems to generate the most anger from Wall Street haters. Consider the possibility that banks reduce bonuses in favor of straight salaries--which they have been doing to an extent. That would help with the market problem, but it would not appease critics who are concerned about the merit issue.

Of course, the market problem will not be solved by token measures at bailed out banks either, but the 500K salary cap doesn't even address it. It's just red meat for the angry rabble. So let's at least honestly acknowledge that compensation is distinct from merit and focus our efforts on actions that keep the market moving smoothly.

Regarding Europe, CEO income is certainly lower there, but I don't think that average banker compensation is that much lower, which is why American banks are worried about losing talent to Deutsche Bank and UBS. British and Icelandic banks didn't do particularly well in the collapse either. In any case, insofar as there are differences, it could be that the market has pushed U.S. salaries artificially high, in which case they will come back down, or it could be that cultural factors dampen the market pressure in Europe. If the latter, you could make a case for re-establishing cultural dampeners here, but I don't know how you would accomplish it.

You are correct that conservatives also dislike taxes because they distrust big government, but the question of the government's tax authority falls back on the term you highlight, "robbing." Taxation only seems like robbery if you regard income that you have yet to receive as rightfully your own, and "wealth redistribution," as Limbaugh likes to call it, only seems evil if you believe that people naturally deserve everything that someone is willing to pay them.

I think the disagreement

Nebton — Fri, 23 Oct 2009 19:31:20 +0000

In reply to Yes, I thought about

I think the disagreement differs more on our definitions of "merit value". I believe your definition is a mixture of my definition of "merit value" and the "social value". If the bankers generate more money for their employers than humanities professors, then they have more "merit value", by my definition. By contrast, "market value" also factors in such things as how many bankers vs. humanities professors there are, whether those who work in that field are willing to accept lower salaries (an issue in female-dominated vs. male-dominated fields or fields with more immigrants), etc.