The Occupy Wall Street Protests have had few unifying themes and focused demands. But the call for “social (read economic) justice” from “the 99%” poses the question: “if we are without jobs, why are the fat cats on Wall Street making so much money?” So let’s examine just why the top 1% makes so much more than the average American. Is their income justified? Is it luck, or a rip off of the system?
Let’s start with examining entry level jobs in investment finance. The average starting salary for those new college graduates lucky enough to find full time employment is about $51,000. A first year analyst at a major Wall Street firm can expect a pay package including a bonus of something around $90,000. This would seem to be a substantial sum, but because baby bankers work upwards of 90 hours per week, their hourly pay is roughly equivalent to other private sector jobs. And in order to land those jobs, those kids need to have come from a top ranked school, performed exceedingly well academically, and be preternaturally articulate.
Pay for those Wall Street jobs goes up fairly rapidly, and in about five years, those who survive the grinding schedules and perform well can progress to pay packages that might be in excess of $350,000. Of course, for these types of financial rewards, the competition is fierce, and it is a very steep up or out pyramid. Nonetheless, such a pay package would be enough to land a late twenty-something into the top 1% of income earners. For 2009, the IRS indicates that belonging to this group required adjusted gross income of about $344,000. By the time that these bankers have spent 10-15 years in the business and have become experts in their fields, they can make upwards of $10 million dollars per year. In the perception of some of the OWS protesters, many of the people who work on Wall Street are “fat cats”. Yet even in the firms themselves, it is only the superstars who can achieve this exalted level. Goldman Sachs, the most storied of these investment banks, employs over 35,000 yet only 375 or so are partners. And having achieved these rarefied heights, turnover is high. About 100 new partners are named in each two year cycle. To make room for them while keeping the partnership ranks relatively constant, some who have reached this level are “de-partnered”, while the balance are encouraged to “retire” from the firm.
So are these superstars really worth what they are paid? In the hilarious 1983 movie “Trading Places”, two greedy old fat cats force a young investment executive played by Dan Ackroyd to trade places with Eddie Murphy’s street hustler as a bet to test whether luck and circumstance on the one hand or skill on the other is the determining factor for success. Played for laughs, the answer seems to be a mix of both.
Some have suggested that banker’s pay is somewhat analogous to Pascal’s Wager. The bank might overpay in any given year for the talents of an individual who may bring it substantial gains, but the costs of doing so are relatively modest compared to the potential reward. And doing so deprives its competitors from access to this trained and (perhaps) performing individual.
Sports fans generally do not have a problem when they hear of the multimillion dollar pay packages awarded to athletic superstars. They tend to understand that sports careers at the elite level are very limited in duration. Most of the players come from modest backgrounds, and their performance is both easily measured and demonstrably better than almost anyone else. But when the public hears of enormous Wall Street pay packages for executives in the face of massive failure and federal bailouts, they become enraged. Bob Rubin at Citigroup, Stan O’Neal at Merrill Lynch, Jim Cayne at Bear Stearns and Dick Fuld at Lehman Brothers would be poster boys here. Yet even as those outrageous outcomes occurred, can anyone with any real knowledge of economics fail to grasp that if the TARP bailout was not implemented and all of these banks were allowed to fail, the resulting depression would have crushed the economic life of most of the 99%?
Major wealth which accrues to business entrepreneurs also seems to evince far less envy and disgust. We recognize that most businesses are small and their health is precarious. Business owners generally risk their own capital, and can lose it all if the business fails. Moreover, it is these new enterprises that have created over 65% of new private sector jobs in the last 17 years. It is part of the American dream to be able to succeed grandly, and many would not see that opportunity, no matter how unlikely, taken away. We lionize billionaire entrepreneurial iconoclasts like Steve Jobs, even as we revile the “greedy” investment bankers.
Perhaps part of the general public’s poor perception of Wall Street is a lack of understanding of the role bankers play in facilitating the formation, growth and everyday functioning of every other business. That they have been able over time to command such fees for their services reflects the reality that at the top, bankers are for the most part elite intellects with important and desirable skills. Derivatives trading may be blamed for the demise of the banks, but the reality is that the majority of the notional amount of such trading is for foreign exchange, without which international trade would be prohibitively more expensive, and all manner of goods and services, from fresh fruits to electronics might be beyond the reach of “ordinary” Americans.
So what do you think? Is it unacceptable in our society for some to make so much while others get so little? Or is this the price we as a society must pay for the freedom for all to have a chance to succeed, or fail? Are the bankers guilty or was the bailout caused equally, or even more so, by the failure of government regulators to dictate appropriate capital requirements, the lack of which allowed the banks to embrace higher than historical risk?