As I made my rounds this morning I didn’t find a lot of blog-worthy material. You can’t make bricks without straw, you know. What I found was the regular bickering and sniping which I generally find pretty boring.
I did stumble across this study which I believe is from the Minneapolis Federal Reserve. Here’s the part I found interesting:
Third, regarding the characteristics of top earners, we find that the dominance of the finance and insurance industry is staggering, for both males and females: in 2012, finance and insurance accounted for around one-third of workers in the top 0.1 percent. However, this was not the case 30 years ago, when the health care industry accounted for the largest share of the top 0.1 percent. Since then, top earning health care workers have dropped to the second 0.9 percent where, along with workers in finance and insurance, they have replaced workers in manufacturing, whose share of this group has dropped by roughly half.
Finance, insurance, and healthcare are all highly regulated. If there’s a correlation between the degree of regulation of a sector of the economy and share of top .1% of income earners, it’s a positive one. In other words, if you’re concerned about income inequality, don’t expect the problem to get better by regulating the sectors of the economy with the most high earners more tightly.
The finance sector used to be much more regulated than it is now, and they made less money. The health care sector was much less regulated, and it made more. I am not sure that there is actually a case and effect here, but if there is , I would posit that less regulation means higher salaries.
Steve
I think it’s the opposite. The greatest effect of regulation is to limit entry.
“The greatest effect of regulation is to limit entry.”
How then to account for the cockroach-like expansion of PE firms? See, How Many Private Equity Firms Are There?. From the graph displayed, the number of PE firms in North America has more than doubled in the last 10 years (from 936 in 2000 to 1936 in 2014). To hear some folks talk, they’re being strangled by regulation.
Ooops. Sorry for bad html.
I was thinking more of banks. The number of banks has decreased by three times as many as the total number of private equity firms. Many fewer banks with much higher assets.
How much income inequality can be accounted for by private equity firms alone?
Investment banks. Basically, the same story.
BTW, Berkshire Hathaway is a conglomerate not a private equity firm.
“I think it’s the opposite.”
Then you assume the rule just doesn’t work for medicine and finance? Limited entry would kind of imply that when the finance sector was very strictly regulated, down to how much interest they could pay on deposits and how much a broker could charge, finance employees should have made a lot more. They didn’t. As medicine has become more regulated, you no longer see so many of those million dollar salaries so common in the 90s, which the Fed confirms with their study.
Steve
I think the argument could go either way – we really need more data. Also “regulation” in aggregate is too imprecise. One could have less regulation but lower inequality depending on the content and scope of the actual regulations. Or, one could have tons of regulations but little actual regulation which could lead o greater inequality (barriers to entry).
Also, there is government intervention besides regulation that is probably a factor, like government spending on health care, government support to the financial sector, government policies which incentivize people toward insurance, financial instruments and health care, etc.
Well, sam, as measured by dollars, the growth in allocations to PE has been huge. But it’s dominated by a relatively few big funds. Yesterday’s $300mm fund is today’s $3000mm fund. This is called yield chase by pensions and endowments.
As for the number of firms, every 1-2 man office that hangs out a shingle gets counted, including fund less sponsors. It’s an artifact.
We’ll just chalk this up to sam not knowing what he’s talking about. Oh, and in that vain, PE guys aren’t really financiers, like lenders, bond salesmen or investment bankers. Depending on how actively they are involved in portfolio companies they fall along a continuum from investors to managers. They just use credit to partially finance asset purchases. Kinda like a home mortgage. Are homebuyers financiers, sam?
What are you on about? The question raised was about regulation and barriers to entry. That’s what I responded to. Not anything about absolute dollars, etc. BTW, how’s that SEC investigation going?