In his NYTimes article, the Joy of Sachs, Paul Krugman underlines one of the fundamental business problems confronting the US. Is the US Government going to continue to “invest” in the Financial Industry by not making any meaningful regulations? Is the US going to allow crowding out of other industries by not controlling Financial compensation levels that a)averages 3 times more than any other US industry and maximums at 7 times any other US industry [several financiers took down $1.5Billion or more in total compensation while the Energy sector has a maximum at nearly $0.30B in annual pay packets]? Is the US going to allow the loose ways of the pre-Financial Meltdown to largely persist?
Krugman clearly delineates one of the major consequence of giving the Financial Industry kid-glove, laissez-faire treatment. Financial players will simply do another Financial Fiasco because a)there have been no adverse consequences for collecting huge dollops of Taxpayer supplied Moral Hazard Insurance [Goldman Sachs was the beneficiary of hidden bailout money through the AIG bailout, not directly part of the TARP, which added $9B to their coffers] and b)there is no evident Obama controls/regulations on just restarting up the same financial excesses that brought about the Resolution Trust, Long Term Capital, The DOT.COM Bust, and Mortgage Meltdown events at ever frequent intervals in the past 20 years.
To Krugman’s arguments I would like to add a)crowding out and b)distributive justice. As the Financial sector has risen in the past 9 years from 16% to 22% of all profits in US industry they are starting to crowd out other economic sectors such as manufacturing, construction, education and health care in competing for capital dollars for new innovations and investments [see here for details]. In contrast, the salaries and compensations in other industries are stagnant or declining. Thus while the US needs to attract the capital and entrepreneurs required for the green revolution, there is a marked disincentive since easier returns are to be found in the Financial sector. Likewise in attracting talent, Finance has only 5% of the work force but garners close to 20% of US wages [see here for basic data]. Meanwhile crucial job creation are stagnant or falling in industries like Manufacturing [employement down 17%, wages down 5.7% ], Construction[employment nudging up 3.2%] Information [employment down 4.0%, wages down 2.9%] from 2000 through 2005 while Financial wages are up 29%. Clear evidence of crowding out. As for distributive justice, fairness would argue that something is awry when top military personnel and medical professional, who make life and death decisions every day, earn wages that are respectively 1/100th and 1/40th that of top financial wage earners. Distributive justice would also question multi-billion dollar Financial pay packets when a)associated staff earn less than 1/1000th of that in annual compensation and the average US compensation is 1/60,000th.
Finally there is an interesting debate here on the “benefits” of the Goldman Profits and new Round of Bonuses.