The Financialization of America

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Matt Yglesias says it’s unlikely we can effectively rein in stratospheric compensation levels in the finance industry.  The guys who work on Wall Street are just too smart: “You don’t get to be an important person in the world of finance without being really, really, really good at figuring out ways to pay yourself a lot of money. That’s what the field is all about.”  Then this:

That said, we compensation reform aside, we actually have a well-established method of taking market distributions of income and trying to transmogrify it into a more just, useful, and welfare-enhancing deployment of social resources — taxes and public services….It strikes me as ultimately unlikely that the political process will be able to micromanage high finance in a way that strikes people as meeting the claims of justice. But the political process very much can collect tax revenues and use that revenue to finance things that we currently “can’t afford” like more widespread provision of health care services, better rail transportation, cleaner streets, more police officers, more and better pre-kindergarten, etc.

There’s something to this, and since the share of national income hoovered up by the super-rich is about three times higher today than it was 30 years ago, I don’t have a big problem with taxing that income at a higher rate.  But there’s a limit to how effective that can be.  For a whole bunch of reasons, marginal tax rates higher than 50% or so are pretty unlikely, and effective tax rates at that level are probably impossible.  After all, those Wall Street guys are pretty good at tax planning, too.

Overall, there’s not much question that Wall Street bankers are going to continue to be paid astronomical sums as long as the firms they run are making astronomical profits.  And that’s the key problem.  Tax policy can help — though it’s a pretty broad brush — but the fundamental problem is that the finance sector in the U.S. is so damn big.  And it’s seemingly an unstoppable juggernaut: Wall Street income may have been down last year, but even the biggest economic collapse since World War II hasn’t made even a medium term dent.  A mere year later, the overall size and profitability of the finance industry is on track to be about the same size as it was during the boom years.

In the light of all this, tax policy can work only on the margins, and putting in place a “pay czar” for Wall Street will do nothing except generate a few juicy headlines here and there.  Compensation follows money flows just as surely as the tide follows the orbit of the moon, and the only way to reduce Wall Street compensation is to reduce the size and profitability of Wall Street.  Unfortunately, no one wants to talk about that.  So instead we get a pay czar.

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