View from the Top

I want to draw your attention to the remarks made by JPMorgan Chase CEO Jamie Dimon in his company’s annual report (PDF), particularly his assessment of our public policy needs.

The remarks made by Mr. Dimon open with a summary of JPM’s business position and follows that with his analysis of the impact of financial sector regulatory reform since 2008. In essence he thinks that the reforms have been effective. Although Mr. Dimon knows more about banking than I do, I think that in this passage:

The American public has the right to demand that if a major bank fails, they, as taxpayers, would not have to pay for it, and the failure wouldn’t unduly harm the U.S. economy. In my view, these demands have now both been met.

On the first count, if a bank fails, taxpayers do not pay. Shareholders and debtholders, now due to total loss absorbing capacity (TLAC) rules, are at risk for all losses. To add belts and suspenders, if all that capital is not enough, the next and final line of defense is the industry itself, which is legally liable to pay any excess losses. (Notably, since 2007, JPMorgan Chase alone has contributed $11.7 billion to the industry deposit fund.)

On the second count, a regulatory takeover of a major bank would be orderly because regulators have the tools to manage it in the right way.

he fails to distinguish between hypothetical capabilities and political reality. While in theory what he says may be true, in practice in the event of a financial crisis of the sort that occurred in 2007 there will always be irresistible political pressure to do something and that elected officials will respond by backstopping the banks.

And the managers of big banks know this. That’s an incredibly huge subsidy to banks which they exploit.

Absent an unimaginable sea change in American politics, I think there are only two ways of countering that political reality: we could nationalize the banks or we could break them up. Both of these are moves that I suspect that would horrify Mr. Dimon or, in other words, he likes things as they are very much, thank you (Mr. Dimon’s present pay package is $28 million per year).

However the most interesting part of his remarks are his observations on public policy considerations beginning on p. 32. His basic message is “…it is clear that something is wrong — and it’s holding us back”. He points out that not only is growth phlegmatic, productivity growth is at historic lows (if any of this were due to increased automation productivity would be rising not falling) and labor force participation has declined. Not only is it low by the standards of recent U. S. history, it’s lower than any other OECD country other than Italy.

Consider the graph at the top of this post. It clearly demonstrates that job growth and business investment are in lock step, with jobs lagging investment slightly, as you might expect.

But note the area that I’ve circled. Not only has business investment been below trend for most of the last 30 years the last five years have been anomalous. Business investment is more characteristic of a contraction than an expansion while jobs continue to increase as though we were in an expansion. That can’t be explained by inadequate consumption, technological unemployment (if that were happening business investment and productivity would both be increasing), or any other obvious cause. I’m at a loss to explain it unless we need to start looking at what that graph doesn’t show. It doesn’t show who has been hired, whether they were previously employed, or whether the wage at which they were hired is greater, less, or the same.

Although I don’t have the raw data to back it up, I think the likely explanations are that a) businesses are investing much, much less and spending much, much more on compensation for the highest paid staff and managers and b) many of those being hired are foreign and at lower wages than the workers they’re displacing. That’s the only way I can reconcile the graph above with the increase in top earners’ incomes. How else do you reconcile that with real median incomes decreasing?