As the proverb has it, what goes up must come down. Over the period of the last 30 years compensation in the financial sector has outstripped compensation in the non-financial sector by nearly 100%. That accounts for a good deal of the increase in income inequality over the period. I wonder if the Occupy Wall Street protesters would be satisfied is Wall Street’s compensation fell by 59%? That may come sooner than we think:
As we already noted, Goldman turned in an ugly Q3 earnings report.
One sub-factor you’ll be interested in knowing about. Compensation collapsed.
The accrual for compensation and benefits expenses (including salaries, estimated year-end discretionary compensation, amortization of equity awards and other items such as benefits) was $1.58 billion for the third quarter of 2011, a 59% decline compared with the third quarter of 2010. The ratio of compensation and benefits to net revenues for the first nine months of 2011 was 44.0%. Total staff levels decreased 4% compared with the end of the second quarter of 2011.
Schadenfreude, as you presumably know, is a German word meaning “taking delight in the misfortunes of others”. Would the protesters be moved by schadenfreude?
I do not do that. I am no island; I mourn anyone’s woes. I would much prefer that the incomes of people in the second and third quintiles of income earners rise than that the incomes of those in the top 1% of income earners fall. However, a sharp general lasting decline in financial sector compensation while compensation in other sectors remains more or less the same will certainly increase income equality.
Uhhhmmm….what?
If
1. Incomes in the financial sector are higher than non-financial sector incomes (which I substantiated in the body of the post) AND
2. Incomes in the financial sector fall by 59% AND
3. Incomes in non-financial sectors remain the same (more or less) AND
4. All other things being equal
there will be less income inequality. That’s just mathematics. I’m not taking a position on whether it would be a good thing or not.
Dave,
I think the rate of increase of income inequality would be less given the assumptions you’ve outlined, but income inequality will still rise.
Also, interesting how this post ties into the Schwarzenegger one – it will be hard to justify the same level of compensation when investment returns drop way down or disappear altogether.
I don’t know if this was Steve’s problem, but I am so used to reading the words “inequality” that I misread that last sentence.
Ahh yes, PD is right. I first read that as income inequality rising. Since (perfect) income equality is a limit result it is highly unlikely we’d reach that point, so typically the discussion is on inequality. Or, more simply, never mind.
ditto.
“I am no island; I mourn anyone’s woes. I would much prefer that the incomes of people in the second and third quintiles of income earners rise than that the incomes of those in the top 1% of income earners fall. However, a sharp general lasting decline in financial sector compensation while compensation in other sectors remains more or less the same will certainly increase income equality.”
I think this is the mature and sober view. I’d just like to see the leveling come from elimination of the “rent seekers” in the prevailing jargon.
I don’t like the fact that a two-bit shortstop makes $5MM a year, that a two-bit actor or actress makes $5MM a movie etc. But that’s the market’s judgment, and I live with it because the alternatives don’t work. Consumers don’t have gun to their head to pay the ticket price.
What I can’t endorse is monopoly/govt given power that – as they say, socializes costs but privatizes the bennies, or enables non-market pricing. But that, of course, is my central argument for 30 years of why we must have a smaller and less intrusive government.
And yet this very day we have Democrats and OWS types arguing for a greater role for govt to rectify this, said government having set this all into motion in the first place.
Somewhere between weird and bizarre.
Perhaps, some of the OWS protestors might construe such a fall in income as being a sign that such a shortfall will somehow be redirected towards them. Redistribution of wealth does seem to be a theme running throughout much of their disconnected malcontent. And, yet what they cite to be glaring fallacies of the system, is what they also want injected into the system to make their lives better. This article seems to clarify some of the contradictory demands assembled by various OWS contingencies:
I wonder, in some of the wee-hour-morning bull sessions of this occupation, if any OWSers ever exhume or discuss such matters?
Riiiight, a government owned lock, stock and barrel by the 1% must be smaller.
That smaller government will of course still be owned lock, stock and barrel by the rich but somehow — possibly through alchemy — it won’t simply serve the interests of its owners alone.
Uh huh.
What do you suppose we’ll cut first as we downsize government? Those benefits that flow to the rich? Or those that flow to the poor?
And when we’re done cutting, who will be getting what’s left?
Drew, you’re so full of baloney you could stock your own deli.
“What do you suppose we’ll cut first as we downsize government? Those benefits that flow to the rich? Or those that flow to the poor?”
If I were King, the former. But you can’t hide from the system you advocate and how it was so predictably manipulated; nor can you hide from the fact that the solutions you advocate will lead to even more of this malformation.
BTW – I love you too, Michael, even with your incoherent positions.
Heh…
It is funny that despite what FDR did during WWII to create what would become the military industrial complex very few expressed any qualms about further expanding the size and scope of powers of the government.
Nothing. We can’t go back from here, I’m afraid. This is an omelet and it cannot be unscrambled and returned to its constituent parts.
So, it’s logical to believe that a government dominated by the rich would begin by cutting their own benefits and pay-offs.
Right.
That makes ever so much sense. Because people are forever acting against their own self-interests. Especially the rich and powerful who have probably bought all those congressmen and paid all those lobbyists for the purpose of ensuring fairness for the poor and middle class.
And I’m incoherent?
By the way, I’ll repeat a question I’ve never gotten an answer from: where is the real world example of a successful, prosperous, advanced country with what libertarians would consider a small government?
Hmmm, I don’t think I said or implied it. My beef isn’t the size so much as its scope, or as Drew puts it the intrusive nature of government. We had a massive change in the way government worked under FDR and the reinterpretation of the Commerce Clause. It basically granted government the power to regulate just about anything and everything.
They don’t exists because when they start to form they are crushed by Statists. Try reading about Nestor Makhno and the anarchist system he was setting up in Ukraine. It was going pretty well till he was wiped out by both the Red and White Russian factions. The anarchists in Spain prior to WWII were wiped out by Stalin. The one thing a Statist cannot abide is somebody saying, “Hey maybe we don’t need this thing called a State.” That guy has to be killed and killed right quick.
About one of the closest was in the early days of colonial Pennsylvania where William Penn wasn’t to careful in how he set up his government and the assembly basically said, “Okay, lets all go home and worry about our own stuff,” and there wasn’t much Penn could do (took him a couple of decades to get things back in his greedy hands IIRC).
But other than that when somebody says, “Hey maybe we don’t need these government jerks screwing things up….” That is pretty much treason from the State’s point of view.
Wait wut?
You do realize that in months past you have argued for precisely this kind of thing, right?
Gasp!!! Why….you aren’t….are you suggesting…that people are rational?!?!?
Who are you and what have you done with Michael Reynolds?! Dave, check the IP and consider calling Fox Mulder, I think Reynolds has been abducted and replaced with an extra-terrestrial lizard person in a human suit!
Well…..
“So, it’s logical to believe that a government dominated by the rich would begin by cutting their own benefits and pay-offs.
That makes ever so much sense. Because people are forever acting against their own self-interests. Especially the rich and powerful who have probably bought all those congressmen and paid all those lobbyists for the purpose of ensuring fairness for the poor and middle class.”
Thank you so much for making the point I have been making for 30 years. Big Government = Disaster. I think we are seeing the empirical results playing out as we write.
You, Michael, not me, must account for the folly of your Big Government philosophy and the inevitable result. And you, not me, must make the case for doubling down and making Big Governemnt the solution after all the financial disaster it has wrought.
Its a fool’s errand, but have at it.
“I think Reynolds has been abducted and replaced with an extra-terrestrial lizard person in a human suit!”
Nah. I think he’s in one of his depressed / drunken sot phases. His incoherent invective against me gives it away.
I think you’ve got to examine your premises in this. IF you believe that the government is “owned lock, stock and barrel by the 1%”, then it seems to me the best strategy for mitigating that would be to create a federal government of limited powers coupled with a predisposition against social and economic engineering. That doesn’t mean that you not address social welfare issues at all; it means that the states are the preferred venues for doing so.
If, on the other hand, you have full confidence in the 1%’s eagerness to address social and economic problems, you’d want to strengthen the hand of the central government to grant it the leeway to act. At least that’s the way it seems to me.
They don’t exists because when they start to form they are crushed by Statists. Try reading about Nestor Makhno and the anarchist system he was setting up in Ukraine. It was going pretty well till he was wiped out by both the Red and White Russian factions. The anarchists in Spain prior to WWII were wiped out by Stalin. The one thing a Statist cannot abide is somebody saying, “Hey maybe we don’t need this thing called a State.†That guy has to be killed and killed right quick.
The fact that the anarchist ‘governments’ always end up dead via some nearby power would be good evidence that it can’t possibly work.
Nah. I think he’s in one of his depressed / drunken sot phases. His incoherent invective against me gives it away.
Drew, it’s possible he just doesn’t like you, or that he thinks you are wrong.
The fact that the anarchist ‘governments’ always end up dead via some nearby power would be good evidence that it can’t possibly work.
In other words, it is just another system of governance that would work wonderfully if everyone agreed to behave in a manner that everyone agreed beforehand was just/equitable. All KINDS of governments work under those conditions. However, people being people, such things never work in the real world.
No, it is good evidence that there is a certain portion of the population who probably qualify as psychopaths and want to control other people’s lives and will do anything to attain that goal, up to and including killing millions of people (Mao, Stalin, Hitler, Kim, etc.). The rest of us who basically just want to go along about our own lives suffer due to these psychopaths. Here in the U.S. we’ve set up a system where the psychopaths can achieve power via methods that are not overtly violent. Is it better? Yeah, but the bar is pretty freaking low.
No, they didn’t fall apart due to internal reasons–i.e. a wannabe dictator crapping in the punch bowl. They fell apart because those who want to control the lives of others couldn’t let such a society exists because it demonstrates that having a State and those who run the State are not necessary.
The Free Territory in southern Ukraine had no government, not like what you see today or even back in the early 1900’s. And what finally did in the Black Army (the militia for the Free Territory) was the Red Army’s treachery. During a temporary truce the Black and Red Army defeated the White Army, as soon as that was done the Red Army arrested and executed most of the command staff of the Black Army. Bringing in even more forces the Black Army was defeated. But the point is that up to that point, it was working. People were not starving, there was not chaos in the streets, it was not like Somalia today. Afterwards, when the Reds won, farms were burned, people were arrested, many were executed, and when Stalin finally secured his grip on power tens of millions died.
No, they didn’t fall apart due to internal reasons–i.e. a wannabe dictator crapping in the punch bowl. They fell apart because those who want to control the lives of others couldn’t let such a society exists because it demonstrates that having a State and those who run the State are not necessary. [emPHAsis added]
Uh, and what part of EVERYBODY do you not understand? (I should add that EVERYBODY also includes all future legal entities not yet born.) Plus, a primary purpose of government is to defend its citizens from encroachment from outside groups. The Free Territory failed in that regard, spectacularly so.
Dave, a solid, concise paragraph. You’ve just got to wonder why someone couldn’t see the logic in this.
“Big Government = Disaster.”
We had little government (size) in the 1920s. Even smaller, IIRC, before the Depression of the 1870s. Explain.
Steve
“You’ve just got to wonder why someone couldn’t see the logic in this.”
Because some us read history and remember it. History is full of banking crises and collapsed, defaulting economies with smaller governments than ours. Throughout most of history, agricultural economies have dominated, which helped to (usually) mitigate the worst of those effects. Not true any longer.
Steve
In case anyone does not know how to look it up, here is a nice CATO paper demonstrating the size of government during the 1920s. Note that the size of govt actually dropped quite a bit during the 1920s. Shrinking government, increasing inequality. What could go wrong?
http://www.cato.org/pubs/journal/cj16n2-2.html
Steve
Okay, so shrinking government, increasing inequality. So let’s try increasing government! How’s that working out for ya? Oh, I guess it’s working out fine for you, doctor. Perhaps the SIZE of government isn’t the problem or the answer.
“Perhaps the SIZE of government isn’t the problem or the answer.”
Perhaps what it does or does not do is more important, along with how well it performs.
Steve
Guys, I realize I tossed a bomb and didn’t come back to respond, and I will, but I’m just exhausted tonight. Long, long day.
Can someone please define for me some metrics to differentiate between “big” and “small” government. How are they distinguished other than ideology? Thanks.
Good point, but I doubt you will get agreement. For example, the number of federal workers has hardly changed for about 40-50 years.
Steve
However, over the same period and, particularly, over the period of the last 15 years the number of contractors has exploded. I think a better metric for the growth of the federal government than number of employees is employees plus contractors.
BTW, that’s the metric we should be using for determining how large our armed forces are. We don’t have as many enlisted soldiers and sailors as we once did but when you add the number of military contractors to the number of actual troops in uniform the number is astonishing.
Whatever government we have, of whatever size, it will be owned by the rich so long as we insist on the nonsensical notion that corporations are people and that they can funnel unlimited amounts of cash secretly to politicians.
The reason the rich and big business buy pols is to bend the government to their will, obviously. Their goal cannot logically be to make the government less likely to aid the rich and big business. Their goal can only be to get the same services from government that they now get, with less regulation, and at a lower cost to them.
The logical result of “reducing the size” of government, so long as that government remains a wholly-owned subsidiary of the rich and big business, would be the elimination of those aspects of government that do not directly benefit the rich, while retaining all those aspects of government that do benefit the rich.
They want downsizing in government for the same reason businesses are downsized: they want to maximize profits by cutting out anything that does not directly serve their needs. In other words: screw the poor, screw the middle class, government should not just be 90% the tool of the rich, it must be absolutely 100% the tool of the rich.
The libertarian argument is naive nonsense.
steve,
Dave’s right – we’ve substituted contractors for a lot of things that military and government people used to do. Some of that makes perfect sense, some doesn’t. And that’s really my point. Looking at this problem from the perspective of “more vs less” doesn’t really lead anywhere, but it makes for good political posturing.
Michael,
I think the nexus between political contributions and especially “corporations as people” and political power isn’t as simple as you’ve made it out to be. The largest political contributors are, by far, various labor and union organizations, dwarfing anything the Koch brothers can do. Yet unions are rolling over their opponent. Clearly there is a lot more at work here.
Secondly, it seems to me that if the problem really is as you’ve defined it – that the government is owned by the rich – then it doesn’t make a lot of sense to me to give that government more authority, especially since a lot of those rich people got rich thanks to rent-seeking.
Whatever government we have, of whatever size, it will be owned by the rich so long as we insist on the nonsensical notion that corporations are people and that they can funnel unlimited amounts of cash secretly to politicians.
yes, the rich never controlled government before corporations were people. right-o.
“Drew, it’s possible he just doesn’t like you, or that he thinks you are wrong.”
Icepick – Its a given he doesn’t like me, and thinks I’m wrong. But if you’ve been around here awhile, and aren’t tone deaf, you can interpret the quality of the invective. I actually like him, and sparring with a nimble mind. However, I think he’s dead wrong so much of the time.
“Secondly, it seems to me that if the problem really is as you’ve defined it – that the government is owned by the rich – then it doesn’t make a lot of sense to me to give that government more authority, especially since a lot of those rich people got rich thanks to rent-seeking.”
This is soooooo close. Its owned by the powerful, not necessarily the rich. But it matters not. Whether the unions, the banks, GE, the trial lawyers, the farmers etc……..its foolish to give government more authority when its actions will be so controlled by those narrow, self-interested entities. (Can you say “Solyndra?”) Despite Reynolds’ tirades, this has been my position for decades. I hold no brief for “the rich.” Liberty is my guiding philosophy.
“. I think a better metric for the growth of the federal government than number of employees is employees plus contractors.”
Me too. On defense you should also add in Homeland Security and the portion of the DOE that goes to maintenance of nukes, a quite large number (in dollars). It troubles me when I see bright guys like Arnold Kling suggesting that cutting federal employee salaries will make a huge difference when we really need to be addressing pensions and contractors as or more.
Steve
“Perhaps what it does or does not do is more important, along with how well it performs. ”
This is the argument that Alex Knapp makes. Its seductive in a vacuum. Anyone care to make the case that the size of government doesn’t correlate with its scope of activities? And anyone care to make the case about performance?
Perhaps we should start with the endless war: the “War on Poverty.”
Icepick,
The Free Territory did defend its citizens, or did a pretty good job until an ally turned on them. If an ally turned on the U.S. at a critical point would that indicate that Democracy is a failure?
Ahhh and steve shows up with a well disguised utopian argument. Actually, if you look at both the Great Depression and the Long Depression you’ll see that part of the problem was mismanagement of monetary policy by…well, you know the answer.
Drew,
Plus Michael likes scotch. That counts for alot.
I’d also argue that the larger the government the more resources it is going to have control over. And government tends not to generate its own revenues. At the very least government, the larger it gets, will cause increasing lost output via the deadweight loss. And since the deadweight loss increases with the square of the tax rate, the higher the taxes, the less efficient our economy is.
Or, to put it differently the less output and employment we’ll have. Even in the best of all possible worlds, once government gets too big, it becomes a drag. That is if we think that there is a optimal size for government (i.e. we need roads, laws, air traffic controllers, and other things that are public goods and have significant external effects) and that increasing government up to that optimal level actually increases the efficiency of our economy, once you go beyond that point government is a drag.
And that is the best case scenario, IMO.
Consider this, what if during the Revolutionary war, just as we were defeating the British the French turned on us and Conquered the colonies. Would that make the ideas that the Deceleration of Independence and later the U.S. Constitution unworkable and/or silly? Or that we’d be the victims of treachery?
To that I would add something I’ve mentioned (probably all too frequently) here before: bureaucracies do not scale linearly but at n log n.
“Plus Michael likes scotch. That counts for alot.”
Indeed. Its almost a get out of jail free card…….
To SV’s post – exactly.
And: “To that I would add something I’ve mentioned (probably all too frequently) here before: bureaucracies do not scale linearly but at n log n.”
Amen. There is a reason we buy small, and not large, companies (and why we never became a megafund)……they can be molded in our vision. Big companies? Not so much.
But if you’ve been around here awhile, and aren’t tone deaf, you can interpret the quality of the invective.
Sorry for the newbie mistake.
@@
The Free Territory did defend its citizens, or did a pretty good job until an ally turned on them. If an ally turned on the U.S. at a critical point would that indicate that Democracy is a failure?
If in so doing the turning of an ally actually destroyed the US government, that would be great evidence that the US government failed in its duties. It does not mean that democracy itself is a failure unless all such democracies always failed.
How have anarchistic governments fared in this matter?
Also, do you really think the Red Army would NOT have crushed them eventually?
Its seductive in a vacuum. Anyone care to make the case that the size of government doesn’t correlate with its scope of activities? And anyone care to make the case about performance?
Are you making the case that WHAT the government does isn’t important, just the size?
Would that make the ideas that the Deceleration of Independence and later the U.S. Constitution unworkable and/or silly? Or that we’d be the victims of treachery?
It would mean the system of government was not up to the challenge. If it happened EVERY SINGLE TIME such a government was attempted, it would be indicative that something might be wrong with the type/form of government.
Don’t economists ever look to the real world for experimental results?
“The largest political contributors are, by far, various labor and union organizations, dwarfing anything the Koch brothers can do.”
You miss some of the most important contributions, jobs. The wealthy folks like Koch, and to be clear I am not sure they are any worse than others, provide jobs to politicians and their family and friends. That never shows up in contributions. They also finance think tanks and other astro-turfed groups that do not show up directly in contributions.
Steve
And before you get to it, yes, we have a small sample space of attempted ‘anarchistic’ governments. But they do fail, and for the same reason – outside powers overrun the place. I see nothing to prevent that from happening every single time.
Furthermore, the relatively quick failure of these areas just means we don’t see what other kind of internal pressures might build up and ultimately destroy them. The fact that so far they’re always destroyed from without doesn’t mean they wouldn’t ultimately destroy themselves if left in isolation.
They also finance think tanks and other astro-turfed groups that do not show up directly in contributions.
And this doesn’t happen with unions or universities? Please.
“Ahhh and steve shows up with a well disguised utopian argument. Actually, if you look at both the Great Depression and the Long Depression you’ll see that part of the problem was mismanagement of monetary policy by…well, you know the answer.”
Nope. I am looking at the period before the Depression. In the 1920s we had small, shrinking government, about 4 1/2% of GDP. We had lowered marginal rates putting a lot of money into the hands of the job creators. The result? The Great Depression. (Yes, I know the Friedman and Schwatz argument, but they are looking at the response to what happened, not what created the initial downturn. ) If you look at the 1800s, you see frequent panics, at a time when govt was very small. If you want to argue that smaller government will lead to prosperity, you should be able to offer evidence, not conjecture.
Steve
Ok, I cant resist this.
” part of the problem was mismanagement of monetary policy by”
Smaller government?
Steve
“And this doesn’t happen with unions or universities?”
Sure it does, but if you are a politician and you sent your kid to some elite university, what kind of job are you going to try to get them? Who has those kinds of jobs? Inner city school teacher or trader on Wall Street? When that politician retires, where does he go for work? GM assembly line or UBS?
Steve
steve, how about Obama’s wife’s work at the UofChicago Hospital? That was pretty lucrative stuff for a state politician and then junior senator fresh to DC.
and steve, the Fed has managed monetary policy for both the GD and the GR, not to mention any number of lesser receessions along the way. Not to mention the ongoing cluster fuck that is the EU, and its handling by the EU Commision, the ECB, the IMF, etc. Or is that all a small government disguising itself as a large government?
†part of the problem was mismanagement of monetary policy byâ€
Smaller government?
And what evidence do you have that larger governments would do it better? Again, the Euro-zone crisis would seem to be evidence against that. Or do they need to double the size of their governments, too?
“steve, how about Obama’s wife’s work at the UofChicago Hospital? ”
She was a Harvard Law grad. I dont think many of those work at Walmart. However, it is possible Obama was a factor in her getting that job. If we had smaller government, do you think it less likely a hospital would want to promote the wife of a politician?
“and steve, the Fed has managed monetary policy for both the GD and the GR, not to mention any number of lesser receessions along the way. ”
The Long Depression occurred before the Fed existed. We had many recessions before it existed. There have been many banking crises and recessions throughout the history of the world absent central banking. The common factor would be what? How would it be made better with smaller government?
Steve
steve, Obama’s wife got a big raise at her job – right after US Senator Obama ear-marked a few million in extra apprpriations for her employer. Funny that.
As for how smaller government help recessions – I don’t care. How would a larger government help them? FDR greatly expanded the role of government, and for that he got what? More depression? Fail.
The reality is this – economies expand and contract. That is the nature of economies. To think otherwise is stupid. Government can help or hinder the economies under its perview. Sometimes that means more, sometimes less. It’s not like there haven’t been examples of smaller governments (lower regulations, lower taxes, etc) that haven’t helped economies. There are also examples of complete anarchy destroying economies.
So arguing constantly for smaller or larger for purely economic reasons is at best tiresome, especially when you give no specific reasons why you want more or less but simply say “More/less better, Mongo say”. Governments do have other functions than economic regulation/stimulation. Furthermore, governments have traditionally been the biggest threats to individuals and their liberties. This is demonstrated time and time again, pretty much everywhere.
So the questions are
How much government?
To what purpose?
How do we mitigate the damage that the government can/will do?
Is it sustainable for a reasonable amount of time?
and so on and so forth.
Note that the size of government impacts all the following questions, and those arguing for a smaller (or more fractured) government may well be doing so for reasons other than the purely economic.
Sweet Jeebus, don’t they teach civics in Junior High and High school anymore?
Umm, my point is that all of the bad things blamed upon big government happen when government is much smaller. I think there is some point where government becomes too large, but I dont know where that would be. I think we should mostly be figuring out what it is government should do, and how it should do it.
BTW, the hospital never got that money. Bad investment.
http://www.factcheck.org/2009/05/michelle-obamas-salary/
Steve
No, the government. Size wasn’t so much the issue in either of those cases, but the fact government pursued exactly the wrong kind of policies in both instances. Failing to act as lender of last resort, deflationary policies, etc. In the case of the Long Depression there was no Fed to blame it on. During the Great Depression the Fed bears a large part of the burden, but to some extent was hamstrung by the Gold Standard.
BTW this was a time when economists weren’t sitting around being asked for policy recommendations, by and large. Government had a much smaller role, but the role it did have, dealing with monetary issues, it sure screwed up.
Bullshit. The recession after the stock market bubble burst would not have been that bad if:
1. We weren’t on the Gold Standard–i.e. we could pursue an inflationary policy in the face of deflationary factors in the economy.
2. The Federal Reserve ensured bank liquidity when runs started.
3. FDR skipped most of his New Deal nonsense.
We didn’t do 1-3 and the result was taking a recession and making it something far, far worse…and expanding the size and scope of the government in a massive way.
See, this is the utopian argument. Nobody said that recessions would not happen with small government. Its bullshit.
As for the Friedman-Schwartz thesis, I think you need to re-read it.