Tuesday, April 20, 2010

The Delicate Balance

Kevin Drum points to the continuing profitability of Wall Street.  He raises several propositions for why this might be the case.
rising demand, reduced competition, higher leverage, and the growth of opaque OTC derivatives that are easy to overprice because they're one-off products that can't be easily compared to each other.
He ends with a prognosis that, even with financial reform,  the sector will still be profitable for the foreseeable future.

I guess the odd thing is that most of us got a real lesson in finance after the real-estate bubble popped and we saw how connected the two were.  What seems not to make sense is how, after the housing market has completely unraveled, there's massive unemployment, and the rest of the economy is in the dumps, etc. -  the financial industry seems to be doing great. 

So why aren't they suffering along with the rest of us? (with the added moral frustration that, as the main cause of the crisis they aren't feeling its effects).

But although finance was making money off the housing bubble, it wasn't dependent on it.  I certainly have little idea how they actually make their money, but I think I'm safe in assuming that they've pretty well got their hands in multiple pots.  Minus a robust housing market, the economy is still a behemoth, and thus a large amount of financial "cream", as it were, is still there for the taking.

A common critique is that these people are parasitic; they don't add wealth but merely siphon it away via arcane structural mechanisms.  If true, the moral outrage is justifiably greater.  But I'm not sure how to really address that inequality.  Obviously, finance should not be allowed to endanger the rest of the economy.  But to the extent that it is not - yet still simply leaching away wealth, how would one go about making things more fair without imposing complicated and likely ineffective regulations? 

And what would these be other than a way to inhibit the making of money off wealth?   After all, capitalism is largely based on  model in which wealth is a sort of exponential power to make more money.  What is a landlord if not a parasite off of his renters?  The financial sector is simply an extreme distillation of this process.

I think in the end, we have two simple moral goals: we don't want people to unfairly benefit from structural means to wealth, and we want to increase access to  structural means for those who otherwise do not have it.  Classically, the main argument for allowing inequality to persist is that it provides social motivation.  While certainly true, the degree to which this dynamic exists is unclear.  For instance, how much more motivation is there in acquiring a $3 million dollar salary vs. $4 million?

 While those salaries are generally out of reach for most people, there is a large number of people who range in income from between $40k a year to $120k.  While that difference is relatively small - $80k - it represents a possible 3 fold increase in income.  Yet even then we still see a great number of people not achieving a doubling or tripling of their salary in their lifetime.  This could be because of a lack of motivation, but it seems more likely that it simply isn't possible for most people, no matter how hard they work.  And even if it were, they may simply enjoy the work they do, and are not willing to make the sacrifices required to earn considerably more. 

So even with a 300% salary increase as motivation, it still isn't enough.  One could conclude then, that the opportunity for a millionaire to increase his salary by a mere 25%.  Of course, maybe these individuals are simply more motivated by nature.  This is probably the case.  But that only weakens the idea that they would require more social motivation.  In fact, if you talk to many wealthy people, they will tell you that it is less about the actual monetary enjoyment then the sense of success.  When many in the financial industry are making hundreds of millions of dollars, one has to wonder whether this isn't very true.

So if we cannot easily change the fundamental dynamic of capitalism: that wealth = power, which obviously has many benefits but can lead to structural inequalities, then we are left with trying to limit its excesses and increasing equality of access to its rewards by the citizenry.  The former is generally done via regulations and progressive taxation, which then helps to pay for the latter.  We may not be able to ever eliminate structural inequality in capitalism without overly damaging its positive dynamic.  But we can take steps to make it more fair.

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