Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

"Why should a 35-year old banker get a $1M bonus?!"

by marco Wed Apr 8th, 2009 at 03:13:50 AM EST

It had been an unusually long string of days since my father's last outburst while reading the morning newspaper.  (Perhaps that is because the markets had been going up last week, providing a momentary reprieve to seeing his 401k drop 35% over the last six months.)  But an article titled Attacking rich hurts us all in our local paper, the Minneapolis-St.Paul Star Tribune, brought the inevitable end to these idyllic mornings.  (In fact, this article was a re-print of the April 2nd Economist's article The rich under attack.)

My father's first reaction was: "I didn't understand it."

"Yes," I replied, knowingly, "it was hard to follow.  But then again, maybe that's because the thesis was wrong to start out with."

Then he started getting up to get ready for work.  But rather than go upstairs, he milled around aimlessly for a few minutes.

"Putting it very simply," he finally said, "a 35-year old banker making a bonus of one million dollars is aberrant."

Oh, shit, I thought.  When he throws out "aberrant", that's when I know he's very perturbed, and teetering on full-on pissed.

Promoted by afew


"Everybody works hard.  Everybody is doing their best to earn a living," he began railing. "Why should these guys be making so much money?"

"Well, Dad," I began to explain to him him, "I agree with you.  But their reply would be that different people's contributions to the economy are different, and thus deserve different amounts of compensation."

"But what could they possibly be contributing that would justify that much higher compensation?!"

"Well, look at Eric [a friend of mine from childhood and college, who co-founded a search engine company and retired at 26 when the company was bought by Yahoo!]: do you think he doesn't deserve his millions?  An argument could be made that the product  he developed made life for millions of people easier and more convenient, which could justify all the money he got for it."

"Eric's case is different: he actually made something of value.  But I'm talking about bankers.  What do they make?  Nothing!  All they do is play games with other people's money that those people worked hard for.  And look at the mess they have made for the rest of us now!"

Well, as with previous tirades, I could only nod in assent, having tried to represent "the other side" in a futile (in fact, backfiring) effort to defuse his anger.

I diary this because of the article, which put my father in such a bad mood, and one paragraph in it which I wanted to get some clarity on:

... what makes the rich's behaviour so galling for many critics is that their two greatest crimes were committed in broad daylight, as they were part of the system itself. <...>

The second charge is that the bankers and fund managers were not doing anything useful. Unlike the "deserving" rich entrepreneurs who set up Microsoft and Google, the "undeserving" traders and brokers just shuffled money around the system to nobody's profit but their own. The faster the money went round, the larger the financial sector loomed in the rich countries' economies. At its peak it contributed 41% of domestic American corporate profits, more than double the rate two decades ago. As finance grew, the banks got ever bigger--too big to fail, eventually, so when they tottered taxpayers had to prop them up. Far from epitomising capitalism, the undeserving rich undermined it: it was socialism for the wealthy.

These two charges run together, but the second has much less justification. Enormous though the cost of bailing out the banks has been, there is nothing inherently undeserving about finance; even in their flawed state, more liquid markets have brought huge benefits to the rest of the economy. The lower cost of capital has made it easier for industry to invest, innovate and protect itself against interest and exchange-rate risk. Trying to single out financiers from entrepreneurs is a fool's errand: you will end up hurting both.

Which reminded me of Jérôme's recent diary, I am a banker. Some of us did not f*ck up..  In it, he makes a distinction which was very helpful for me to understand banking a bit better: that between banking as a utility and banking as a casino.

Remembering this distinction, I wondered whether the "deserving" functions of banking that this Economist article cites could all be subsumed under "banking as utility", i.e. bringing liquidity to markets, lowering the cost of capital, aiding and supporting entrepreneurialism, etc.

Notably, Jérôme also writes that

the banks - and maybe more importantly, the bankers - do not make extravagant amounts of money on the deals

of the type he works on.

I'll let my father read Jérôme's diary tomorrow morning.  Hopefully it will be an "other side" that will make tomorrow's breakfast more pleasant.

Display:
"Attacking rich hurts us all"

Attack?  Who's crying "class warfare" now?

Sorry, my rich friends, you are lovely people, but not because of your job or money, and so I do not hesitate to present to you:



"Talking nonsense is the sole privilege mankind possesses over the other organisms." -Dostoevsky

by poemless on Mon Apr 6th, 2009 at 02:10:27 PM EST
Oh, my wife's favorite!   She plays it for me every so often.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears
by Gringo (stargazing camel at aoldotcom) on Mon Apr 6th, 2009 at 11:08:30 PM EST
[ Parent ]
European Tribune - "Why should a 35-year old banker get a $1M bonus?!"
there is nothing inherently undeserving about finance; even in their flawed state, more liquid markets have brought huge benefits to the rest of the economy.

Like bubbles, mass unemployment, homelessness, fiscal instability, terror for the future, loss of hope, violent crime, and despair?

Aside from that obvious lie, the secondary lie here is that the finance industry has made it easier to find enterprise capital.

In practice as often as not it really hasn't. Even where it has, it's also had the effect of pushing down employee wages to make start-ups 'perform' and pretend to be 'competitive.'

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Apr 6th, 2009 at 02:27:24 PM EST
ThatBritGuy:
Aside from that obvious lie,

banks as utilities would make that true.

there's no reason why some surplus savings shouldn't be channeled into helping others.

in theory anyway!

big diff between yer local credit union and yer bear stearns & co.

if these guys are so addicted to gambling, let them play online poker with their own savings, like so many do.

what makes it all so grotesque is that they have made themselves indispensable, and now what they say goes, pretty much, at least for now.

it's really a mickey-mouse-meets-rube-goldberg way to delay the inevitable, and as more feel the downside and connect the dots whatever 'position' they take will be blown away like a bamboo shack in a tsunami.

so they're squirming on a platinum hook, trying to game that bonus into a bunker, knowing better than anyone else the report card is in the mail, and geithner's moves are the equivalent of bribing the postman to 'lose' it.

has ever a society been able to preview itself getting terminally fu+ked in full colour slo-mo before?

breaking new ground here...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Apr 6th, 2009 at 04:03:53 PM EST
[ Parent ]
Casinos hand out million-dollar bonuses; utilities don't.
by rifek on Mon Apr 6th, 2009 at 05:52:01 PM EST
[ Parent ]
Hold the phone: You're not with Bellagio Electric?

;)

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Apr 8th, 2009 at 06:53:56 AM EST
[ Parent ]
AKA Enron?
by rifek on Wed Apr 8th, 2009 at 07:48:59 PM EST
[ Parent ]
The Economist gets away with the undefined "the rich", but not all of us do: see this subthread.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Apr 6th, 2009 at 05:06:51 PM EST
You only want to be as good as the Economist?
by Colman (colman at eurotrib.com) on Mon Apr 6th, 2009 at 05:10:30 PM EST
[ Parent ]
No volition was involved in the making of that comment...
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Apr 6th, 2009 at 05:13:24 PM EST
[ Parent ]
Anyone still wondering why ET should not survive, and flourish?

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin
by Crazy Horse on Mon Apr 6th, 2009 at 05:44:09 PM EST
[ Parent ]
Why $1m bonuses? well if the idea is that it will stop people from becoming tempted from diverting the companies cash flow into something more personally profitable, it looks like that was a plan that failed badly.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Mon Apr 6th, 2009 at 09:50:20 PM EST
Eric likely profited too from the banks' spending ways. Yahoo's IPO was huge.
by Upstate NY on Mon Apr 6th, 2009 at 11:01:37 PM EST
True, perhaps, but marco's dad is right about Eric having produced something of actual value to Yahoo.  If you start a pharmacy/convenience store, and it does well (good location, good customer base, steady growth, etc), you might well get buy-out offers from Wal-Greens or CVS or whatever.

No different, really, whereas the banksters were finding, erm, interesting ways of doing math to get bigger numbers out of the same pile of money.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Apr 8th, 2009 at 06:59:10 AM EST
[ Parent ]
Drew J Jones:
ways of doing math

Particularly in view of recent banking practice, shouldn't there be an "e" in there?

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Wed Apr 8th, 2009 at 07:31:04 AM EST
[ Parent ]
Don't be silly.  Meth is the crack-cocaine of rural white people.  Something poor kids in the Plains and the Rust Belt do.

The Wall Street guys are all cokeheads.  Exhibit A: Larry Kudlow.  Prosecution rests.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Apr 8th, 2009 at 09:39:58 AM EST
[ Parent ]
Oh, just to drive home my point: One town that is a major meth zone?

Wasilla, Alaska.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Apr 8th, 2009 at 09:42:50 AM EST
[ Parent ]
When you put it that way, it's crystal clear.

I just have a tendency to crank out these kinds of comments.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Wed Apr 8th, 2009 at 10:55:54 AM EST
[ Parent ]
I think you and your father fundamentally skip the difference between renumeration for work done, and rent stemming from ownership, in this example.

The yahoo guys didn't (and still don't imho) deserve millions for anything they actually did, ie work produced personally. Nobody deserves millions (or even, say, several hundred thousand dollars a year) for the work that they do. It is simply aberrant, as your father says.

What makes the yahoo guys special is that they owned the company they founded (obviously), and that is what they sold off to investors for millions. The money invested was in return for a promise of future company revenues and worth. This promise came to pass through many people's work, and the actual yahoo guys' contribution to that work is infinitesimal.

Where bankers' bonuses are a different proposition is that a bonus is for work done rather than company shares sold. Nobody's work is worth more than a very small multiple of the median renumeration - there are simply not enough hours in the day to justify it - and bankers (or any other professional) shouldn't therefore be getting these kinds of huge bonuses.



--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Mon Apr 6th, 2009 at 11:46:44 PM EST
The bottom line is that bankers deserve multi-million dollar bonuses because we, collectively and as a culture, are dumb enough to let them get away with it.  We, collectively, would rather think that there must be a good reason for this than to think that we are a bunch of fools who have been thoroughly manipulated for at least a hundred and fifty years and have been acculturated to adulating those who benefit from that adulation--that sub set of the very wealthy who care about nothing so much as preserving and expanding their own power and position.

It is uncomfortable to take positions which go against the mainstream.  If you are effective you get labeled as an extremist and as a nut.  What we perceive as reality is a social construct, but they great majority want to think that it just is.  There have been a very small number of people who know better for a long time.  Shakespear put into Hamlets mouth the words: "Nothing is but that thinking makes it so."  His sense of the plasticity of reality is what gives such power to some of his writing, such as The Tempest and Mid Summer's Night Dream.

Certainly the Robber Barons of the 19th century understood the importance of molding views of the society and economy favorable to themselves.  That is why they endowed and supported universities such as Columbia, Cornell, Stanford and the University of Chicago.  Into the economics departments of those universities they placed the men who founded Neo-Classical Economics, which was specifically tailored to serve the needs of that group of men.  Once a suitably favorable approach was in place, it was convenient to allow lesser mortals to think that this was just how things were.  Even most of their decedents, still beneficiaries of that view, came to believe that that was just how things were.

The media were happy to cooperate.  Most of their income came from advertisements from businesses who benefited from a general acceptance of those views.  Some media institutions, such as the Associated Press, grew out of some of those fortunes, specifically that of Ezra Cornell's from Western Union.  Until the second half of the 20th century newspapers were expected to be exponents of their owner's financial interests.  In the case of the Los Angeles Times the Chandler family had financial interests in local suppliers of concrete and were involved in land speculation.  The Los Angeles Times was an effective advocate for the construction of roads and freeways and an advocate for the elimination of the Red Line urban railroad.

And the beat goes on.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Apr 7th, 2009 at 12:53:31 AM EST
[ Parent ]
The bottom line is that bankers deserve multi-million dollar bonuses because we, collectively and as a culture, are dumb enough to let them get away with it.
I do not like this use of deserve, as the word still has the connotation of credit and achievement, whereas what you're really saying is that bonuses are a symptom of failure.

The only actor in your sentence is society, which has lax standards which allow corruption to take place on a huge scale.

The bottom line is that bankers appropriate multi-million dollar bonuses because we, collectively and as a culture, are negligent enough to let them get away with it.

--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Tue Apr 7th, 2009 at 04:58:51 AM EST
[ Parent ]
The only actor in your sentence is society, which has lax standards which allow corruption to take place on a huge scale.
No. Each and every member of society over the last 150+ years are included as actors.  If we are ever to improve our dismal situation, we must, individually and collectively, take responsibility for what we have done, even if most of what was done was done without our conscious awareness.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Apr 7th, 2009 at 10:44:55 AM EST
[ Parent ]
Yet self-policing doesn't work. So if you expect some people to refrain from taking more than their share just for the hell of it, it seems to me you could be waiting a long time.

By contrast, society has the means to enforce fairness. The will to do so doesn't depend on all people, only on a large majority doing what it takes to convince their government to use all the means it has at its disposal.



--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Tue Apr 7th, 2009 at 11:21:19 PM EST
[ Parent ]
we must, individually and collectively, take responsibility for what we have done, even if most of what was done was done without our conscious awareness.
This is not an end of itself but, rather, a precondition for taking COLLECTIVE action, starting with demands on our representatives, continuing with political action in 2010.....

Accepting that one has some responsibility for the existing condition empowers one to attempt to change those conditions.  Not to say it will be easy.  To me that beats "They deceived us!  They did this to us and now we are screwed!  We are all DOOMED!  Waaahhhh! Waaahhh! Waaahhh!"


"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 8th, 2009 at 12:36:55 PM EST
[ Parent ]
Then the question is why it is not accepted that work can be worth so much whereas a single person's property can...

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Tue Apr 7th, 2009 at 04:26:13 AM EST
[ Parent ]
Work is "what you do", but property is "who you are".

--
$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Tue Apr 7th, 2009 at 04:44:48 AM EST
[ Parent ]
It's much easier to sell and buy stock than to change jobs...

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Tue Apr 7th, 2009 at 04:51:55 AM EST
[ Parent ]
For whom?

--
$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Tue Apr 7th, 2009 at 05:05:07 AM EST
[ Parent ]
For anyone. In France changing jobs takes at least a month to three months... And everywhere it may require moving.

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Tue Apr 7th, 2009 at 05:11:55 AM EST
[ Parent ]
I meant for whom is it much easier to buy or sell stocks?

--
$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Tue Apr 7th, 2009 at 05:39:19 AM EST
[ Parent ]
That's two phone calls, for somebody owning less that 5% of, say, a large bank.

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Tue Apr 7th, 2009 at 05:52:02 AM EST
[ Parent ]
I thought you were talking about the whole population. Few ordinary people have the funds available to be actors on the stock market, and would take much longer than 3 months to save enough disposable income to begin.

--
$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Tue Apr 7th, 2009 at 06:02:27 AM EST
[ Parent ]
I was not talking about becoming but about being - you said a man was his property, yet that is something quite easy to change...

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Tue Apr 7th, 2009 at 06:28:58 AM EST
[ Parent ]
Ah, I see now. So why is property easier to change for this man than his job?

In this example, you are talking about stocks, which are a fairly abstract and interchangeable kind of property. Are you also talking about more concrete property? Does the man buy and sell a full business with a single phonecall, eg sell his cinema and buy a dentist's practice? Does he buy or sell a house faster than he can change his job?

--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Tue Apr 7th, 2009 at 06:46:22 AM EST
[ Parent ]
At the scale of people making more than a couple millions a year, few property are completely illiquid - if only because at that scale buyers are much more rational and can compute value with earnings. And it's quite easy, with that level of wealth, to hire people to do the paperwork...

People owning one movie theater, one dentist practice, aren't near that level of wealth, actually.

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Tue Apr 7th, 2009 at 07:42:05 AM EST
[ Parent ]
Agreed, but how does this apply to the wider question of $1m bonuses of this diary? Since the extreme end of wealth is incomprehensible to the general population, imho the justification or condemnation of banking bonuses must be phrased in terms that "ordinary" people relate to. Otherwise, how can this shed light on the question?

--
$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Tue Apr 7th, 2009 at 07:57:26 AM EST
[ Parent ]
It's not a problem of incomprehension but one of discretion : I don't think people realise how much the top thousandth of the population is making, nor how much power it wields. It is believed the power of large scale owners is personalised, localised and relatively unsignificant, whereas the reverse is true. Traders have been blamed for the current crisis, and are now being scapegoated.

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Tue Apr 7th, 2009 at 08:49:53 AM EST
[ Parent ]
If that's the case (discretion is the main problem), then the next step forward should be only a matter of educating people (easy to say, but not impossible).

I disagree about the idea that traders are being "scapegoated". This is dangerously close to the Nuremberg defense. It suggests that their professional practices and motivations are essentially respectable, when it is plain that they aren't. Of course as a group, they are only the tip of the iceberg, but reforms have to start somewhere.

--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Wed Apr 8th, 2009 at 12:01:24 AM EST
[ Parent ]
That's not the case in the U.S., where practically every retirement plan involves a 401k or 403b. If you're employed, chances are high that you're in the stock market...
by asdf on Tue Apr 7th, 2009 at 09:38:43 AM EST
[ Parent ]
Part of an answer to these questions can be found in the works of Olivier Godechot, a sociologist who studied how traders had negociated to get their impressive bonuses...

Within a bank, traders in effect control the business : they are able to leave the bank to another one with their customers and thus the profits. Godechot studied the case of two heads of trading that had negociated huge bonuses (more 10 millions than a single one) by threatening to leave and taking their team with them. Trading is a job where social relations and intellectual capital are strong, and those are two things the traders can leave with. Indeed Jerome described this process of employee access to profit quite some time ago in a front page story.

Why is it that it seems unbearable to society that employees would get such bonuses, whereas bank owners should be able to get the much larger profits generated by the banks ? It seems our society equates being wealthy with having large wages ; but wage inequalities are much smaller than wealth inequalities, and actual access to profits comes with wealth... Something that's not talked about much. (And actual wealth inequalities are probably underestimated : it's much easier to hide wealth than wages !)

A small anecdote as told by a friend who works high up in banking : when he got married in a posh Paris area, the town clerk asked him whether he was a banker or a banking manager ; for the clerk, the bankers where those that owned the banks, not those that worked for them...

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Tue Apr 7th, 2009 at 04:51:15 AM EST
Why is it that it seems unbearable to society that employees would get such bonuses, whereas bank owners should be able to get the much larger profits generated by the banks ? l
Perhaps I can point to an easier question: why doesn't society accept wage inequalities anymore?

We have come a long way since the days of monarchy. In a monarchy, it is not ideologically unreasonable for a person to be paid more or otherwise privileged simply for who they are. The accumulation of money does not facilitate social mobility.

In our current society, money is a gateway to social mobility, but republican ideals are incompatible with privileged treatment of individuals, which these huge bonuses clearly represent.

--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Tue Apr 7th, 2009 at 05:37:38 AM EST
[ Parent ]
The first question is, why the difference between workers and owners ? And I believe a large reason is that owners are much more discreet. Wealth inequalities are less known of.

As for acceptiong wage inequalities, some are still accepted - the 1 to at most 10 ratio of, say, an unskilled manual worker and a doctor - but larger ones imply the possibility of buying a large amount of employees for personal service, something that's untasty once the monarchical ideas have lost traction. There were many servants in movies until the thirties, those have all but disappeared from popular culture now, for example.

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Tue Apr 7th, 2009 at 05:57:07 AM EST
[ Parent ]
And IMHO we should be directing our attention to the taxation of the privileges of property rights which comprise "ownership", and away from earned income.

The question is the extent to which mega-salaries constitute privilege.....I guess these people "own" the revenues they are looting in some way....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Apr 7th, 2009 at 06:16:24 AM EST
[ Parent ]
the extent to which mega-salaries constitute privilege....
A slightly different question: how does one recognize a mega salary to begin with?

As linca already mentioned, a doctor is, by most people's reckoning, deserving of a higher salary than a manual labourer in a factory. The key question is of course how much more? At some point beyond 10x, the ratio is certainly too high.

One way one might try to recognize when mega renumeration occurs to the benefit of person A is to imagine some other person B, who is equivalent to A in skillsets, and ask person B if they are willing to do the work of A for substantially less.

Conversely, where people insist on being uniquely qualified and impossible to replace, there may be cause for a second look.

--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Tue Apr 7th, 2009 at 07:00:29 AM EST
[ Parent ]
martingale: As linca already mentioned, a doctor is, by most people's reckoning, deserving of a higher salary than a manual labourer in a factory. The key question is of course how much more? At some point beyond 10x, the ratio is certainly too high.

I agree this is a key question.  Also, as discussed below (I believe), how much less than 10x is too low.

Truth unfolds in time through a communal process.

by marco on Thu Apr 9th, 2009 at 08:00:13 AM EST
[ Parent ]
There is no doubt in my mind that some wage inequalities on the order of 1-5 or 1-10 will always be acceptable to people. Such differences can reasonably correlate with individual differences in visible activity between people. Some people work hard, others not so much, etc by factors of 1-10 more or less. This is visible to co-workers etc. and forms the basis for accepting proportional renumeration differences.

However, it is clear to me that nobody in the world works more than 10 times as much as the other people, and everybody knows this. So I think that it is not possible to convince an egalitarian society that some people should be paid more than 10 times what everyone else is paid.

There is an interesting contrast with actors, especially hollywood megastars. Analogously to the case of bankers and other workers, there are simply not enough physical hours in the year to justify the huge amounts of money that a megastar collects for a two hour film. Yet with actors, there is not the same vocal outrage at the absurdity of this renumeration. How can this be explained?

--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Tue Apr 7th, 2009 at 06:32:10 AM EST
[ Parent ]
You could also give a value to the difference between the doctor and the builder through evaluation of studies costs for the doctor. A doctor may have to pay for his studies (or rather will not get money during his studies) during some eight to ten years. If you multiply these ten years by the average salary a man without qualifications would get during this time, this gives you an indication of what supplementary wealth the doctor should get during his work life.
by Xavier in Paris on Tue Apr 7th, 2009 at 09:32:24 AM EST
[ Parent ]
However, there is also the "10,000 hour rule," which has to do with how long one must work in a field before really being an expert. Since 10,000 hours converts to around five years of work time, that means that people with more than around ten years of seniority are at serious risk of being overtaken by newcomers. Plenty of people get to a point at age 40 or so where they have no clue about what's really going on in their field. I see resumes all the time from people bragging about what they did 20 years ago, but who have no clue about Java or SOAP...
by asdf on Tue Apr 7th, 2009 at 09:43:47 AM EST
[ Parent ]
That would indeed mean that the actual cost/value (for society) of a computer engineer is much higher than a mere house builder (say), because you have regularly to invest more money to keep the guy's abilities up to his field evolution, when it's not the case for  the less technical house builder.
by Xavier in Paris on Wed Apr 8th, 2009 at 02:49:44 AM EST
[ Parent ]
Not so. Both the enineer and the house builder work a commensurable number of hurs, eg if the engineer works X, and the builder works Y, then |X - Y| <2max(X,Y) say. This does not leave much leeway to claim huge renumeration differences. <p> You can view the engineer/builder as a machine, whose outputs are commensurable, whose energy inputs are commensurable, and whose initial manufacture costs are different. However, these manufacturing costs are not so different in reality to justify claims of orders of magnitude.

Consider the engineer, who first spends many years at university. The plant which manufactures the engineer, namely the university, is very expensive to run. If the university produces a single engineer, then the manufacturing cost is very high obviously, but in reality the university produces many, many, engineers, and many, many other types of people, and the costs are reduced.

Moreover, the engineering students don't get access to their teachers' time continuously, but in small slices. When you add up all those slices for a single teacher, you still only get a fixed working timespan which is comparable with other peoples' working timespans. When you add up all the slices given to all the students over all the courses, you only get the total teaching work performed by all the teachers in the university, which is independent of the number of students attending. But of course, the cost for an engineer only depends on the number of teachers he meets in his course selection, which is much smaller than the total number of teachers.

Thus it makes sense that the true cost of manufacturing the engineer to society is only a small multiple of his number of years of study, which means that the energy cost to society of producing an engineer is not more than (say) 5 times the energy cost of a construction worker today. If this is amortized over a career, it becomes impossible to justify huge (eg >5x) differences in pay. I'd expect at most 2x for the true conversion factor between an "educated" person who works the same number of hours as an "uneducated" person.

--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Wed Apr 8th, 2009 at 09:47:57 PM EST
[ Parent ]
Except that the engineer will be continually learning.

And you're only looking at costs, not benefits. The benefits of designing and building a bridge, a power station or a public transport system are very much higher than the benefits of building a single house - or even a small collection of houses.

Infrastructure is one of the best ways to increase overall prosperity. It's fundamentally different to housing, which has a much smaller social multiplier even though it's an essential need - because historically people can live in wretched housing and still work and consume effectively.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Apr 8th, 2009 at 10:19:39 PM EST
[ Parent ]
Yet the builder is also continuously learning. Building materials and procedures change, legal standards change, people specialize, etc. It takes comparable effort for an engineer to stay up to date in his field as for a builder.

And you're only looking at costs, not benefits. The benefits of designing and building a bridge, a power station or a public transport system are very much higher than the benefits of building a single house - or even a small collection of houses.
IMHO, that's a grave error, which is the root cause of much confusion. How do you measure the "benefit" of designing and building a bridge? It's a nonphysical, nebulous concept, often used to muddy the waters in an argument (not that I'm suggesting that's what you're doing). It depends directly on whom you ask, on the state of the economy, the time of day, etc. If you try to make sense of social benefits, the first thing you'll have to do is try to predict how the bridge is going to be used.

If you look at the comment, I actually phrased (or tried to do so) the costs in terms of energy and work, which are a much less ambiguous way to measure activity. In particular, they don't directly involve external quantities, such as whom you ask or what the economy is doing, etc. There is no need for prediction, it is all measurement.

--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Thu Apr 9th, 2009 at 12:25:56 AM EST
[ Parent ]
The engineer's knowledge is fundamentally different. Innovation and problem solving, which can feed back into wider social IP, are often an essential part of the job.

martingale:

IMHO, that's a grave error, which is the root cause of much confusion. How do you measure the "benefit" of designing and building a bridge?

It's not an error, it's an essential part of the cost/benefit analysis of every large infrastructure project.

Ask the people who died when I-35W collapsed. They had direct experience of why it matters.

But otherwise - stop building infrastructure. See what happens.

Stop building houses. See what happens.

The difference is obvious, surely. Or if it's not - infrastructure creates economic capacity. Housing doesn't.

Not that housing doesn't matter. But - thinking purely economically - people will live in bad and overcrowded conditions and still turn up for work.

If infrastructure is poor they're not physically able to turn up for work. Beyond a certain point it becomes too expensive for them, in time, money, or both.

I know locally people here who work in London, which is 100 miles away. That wouldn't be possible without the roads, rail lines and other support between here and there.

I can only work here because of broadband. Broadband wasn't a small or simple engineering project, and it took around ten years of continuous design effort to evolve.

You won't get broadband or rail from a builder.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Apr 9th, 2009 at 05:44:25 AM EST
[ Parent ]
The situations with actors seems similar to the situation with traders described above. Their individual, personal presence is absolutely critical to a very high-stakes financial endeavor, and so they are in a position to demand a really big personal share of the pot.

Actors and sports stars, being in the public eye as celebrities and thus as figures with whom large numbers of people adore and empathize with, know they can demand money, and so they will.

The difference between entertainment types like them and those in the financial world is that the pot of money in the entertainment world actually comes from the sale of some sort of product, entertainment.  In the financial world, the banks can create money at will, and thus are in a unique position to abuse that power for the personal benefit of its top employees, with serious consequences for everyone.

I suppose I'm not as opposed to big trader bonuses in and of themselves, but rather to a banking system which has so much loose money sloshing around in it that it can afford to pay out bonuses like that.  A situation where a young person fresh out of a relatively vapid and undemanding grad school can make a starting salary well into the six figures, with the prospect of huge bonuses, is a sign that the system as a whole is far too rich - as it's been called here on ET, it's the Anglo Disease, where finance drains the life out of the rest of the economy for its own financial gain.

by Zwackus on Tue Apr 7th, 2009 at 05:37:23 PM EST
[ Parent ]
Reposting from todays's European Salon:

The financial factor - Paul Krugman Blog - NYTimes.com

But what caused the fall and rise of inequality? A lot of very high incomes, both in the pre-1930 world and now, have been in the finance sector. A recent paper by Phillipon and Reshef (cited today by Gillian Tett in the FT) traces the path of relative compensation in finance, and ties it to regulation and deregulation. Here's the key figure:

FT.com / Columnists / GillianTett - A chance for bankers to refocus their talents

This analysis suggests that between the 1930s and early 1980s, pay and skill levels in finance were roughly comparable to those in the rest of the business and professional world. However, from the early 1990s, pay and skill levels soared until by 2006 bankers were earning 1.7 times what other comparable business employees took home. No wonder graduates flocked to finance.

But - more interestingly - the research also shows that an almost identical rise in the wage and skill levels of finance workers relative to other business spheres was also seen in the 1920s. It was only in the late 1930s, or after the Wall Street crash, that banking pay and skills fell to levels comparable with other industries (where they stayed for almost five decades).

That has two intriguing implications. First, it suggests that the ability of finance to attract smart graduates this decade had little to do with the inherent challenge of the technology of modern finance. After all, CDOs - and "rocket scientists" - did not exist in the 1920s. Instead, Philippon blames extreme deregulation, or a bubble.

But second, the data also suggest that if history now repeats itself - i.e. banking becomes a tightly regulated, low-margin business - then the relative skills and pay of bankers could stay low for years. The next decade, in other words, could look like the 1950s or 1960s, when bankers' remuneration differed little from everyone else's.



"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Apr 8th, 2009 at 04:53:46 AM EST
I'd be interested in seeing legal fees etc plotted as well, but I guess there is a symbiotic relationship between professionals and their financial sector paymasters.

No-one paid by the hour, rather than the outcome, has any interest in simple and unconflicted solutions.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Apr 8th, 2009 at 05:29:54 AM EST
[ Parent ]
Banks and companies are so crazy about talents (that would ingeniously lead the out of this mess) like the Dutch were for tulip bulbs a few centuries ago.
by das monde on Wed Apr 8th, 2009 at 09:42:42 PM EST
[ Parent ]
on the Front Page every day...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Apr 9th, 2009 at 05:13:34 AM EST
[ Parent ]
OK, correlation does not imply causation yada yada. ...

Classic Krugman.

Truth unfolds in time through a communal process.

by marco on Thu Apr 9th, 2009 at 07:54:15 AM EST
[ Parent ]
Permalink to Krugman's post.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Thu Apr 9th, 2009 at 07:56:51 AM EST
[ Parent ]
Why?  

Because there is a sucker born every minute.  

If people insist on believing compensation is based on what one "earns" (deserves) whose fault is that?  

The Fates are kind.

by Gaianne on Mon Apr 13th, 2009 at 12:55:19 PM EST


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