Related to my previous post, as well as other recent discussion from Cowen and others. Graph taken from a commenter at Sumner's place (click for larger image).
I've been in a late night Twitter discussion with Steve Randy Waldman over that Sumner post. I summarized much of what I think about it in the post below, but Waldman (and others) think that rent-seeking behavior deserves a much greater role. I disagree, and I also disagree with Sumner on some key points, so here's more fully what I'm thinking right now. I think there are two major shifts, one political and one economic, that does the best job of explaining inequality and finance's role in it:
1. Sumner probably shouldn't've phrased things in terms of "discoverers", nor in terms of "deserve". The former conjures venture capitalists and start-up funding, and that is clearly at least part of what Sumner had in mind originally, but not all. The latter ascribes some normative aspect that i don't think he meant to convey. He would have done better to simply say that finance has done very well at responding to the incentives given them. Those incentives are shaped by a government that wants to please its constituents. Its constituents want funding for houses, for cars, for expensive health care and well-funded retirements. The government incentivizes finance to provide those things at relatively low cost, in exchange for subsidies of various kinds.
Is this capturing of rents? On the one hand, finance has profited very greatly from this arrangement. On the other hand, so have many others, from "subprime" folks who would never have gotten to purchase a home before, to real estate owners/developers, to construction workers, to millions of kids getting student loans. In other words, if there is a "public interest" in having debt spread through the system, can that political economy really be characterized as rent capture by bankers? It seems more nuanced than that.
This is not to suggest that finance doesn't lobby in favor of their interests. They do, as they would be expected to do. Sometimes they win, and their managers and shareholders (including those who invest their pensions and savings in the market) benefit from that. And surely there is some direct sleaziness that goes on, and outright fraud as well.
But that has always been true. That hasn't changed in the past 15-20 years. It hasn't changed in the past 500. It was true in the 1820s, and the 1950s, and the 1980s. What has changed is the rewards going to that sector, and not just in the U.S. You can't explain variation with a static variable. Which makes me think that there is an overarching, dynamic, structural economic story beyond the political dimension, which is my next point.
2. Finance was dealt a very good hand. Technological advances massively reduced transaction costs for capital allocation. Institutional advances -- e.g. the WTO and capital account liberalizations of the past quarter century -- have increased scale opportunities for capital allocation. And, yes, skills investments in things like quantitative finance have also pushed finance's PPF outward. The previously-established financial centers -- New York, London, Frankfurt -- took advantage of those developments. It's not that our generation's financiers on the whole were more gifted than those of previous generations; it's just that the world opened up for finance in a way it hadn't before.
Take an analogy. Professional baseball players make much more money than they used to make. Is this because they are better baseball players? Not necessarily. Is this because society values baseball more than it used to? Probably not, in any normative sense. It's because technological advances have made it possible to watch every game of every team at very low cost. Thus the audience increases, the demand curve shifts right, and the value of a baseball player's labor goes up. Yes, the superstars -- the Jeters and A-Rods and Buffetts and Soroses -- reap much of the reward, but even the average major leaguers and role players make much much more than they used to.
In fact, even if baseball players (financiers) were actually worse than they used to be in absolute terms, their remuneration could still go way up because of advances in other sectors, like technology, that allow them to reach a much larger audience. Going back to finance, there has been a huge global demand-curve shift, and economies that are capable of satisfying that demand (read: first-wave industrialized economies like the U.S. and U.K. that developed large, liquid, robust financial sectors a long time ago) have seen their economies orient more towards finance than in previous generations. We're exporting a lot of that finance as well, in exchange for agricultural and manufactured goods that are often facilitated by our finance sector. And it isn't just the Buffetts and Soroses that benefit, but the typical finance professional as well.
I think that that is what Sumner meant by "deserve" and "discovery" and "capital allocation". At least that's how I read him, and that's what my own thoughts are.
None of this is to say that finance is perfect, or even especially good at efficiently allocating capital to useful purposes. Obviously they mess up, quite horribly at times. Partially because their incentives are screwed up by markets, partially because their incentives are screwed up by public policy, and partially because they just make mistakes. But with the hand they've been dealt it would be almost impossible to not get paid off. And so they have been.
The normative question is whether this shift -- in which more of the economy in housed in finance rather than manufacturing or agriculture, with a concomitant rise in income inequality -- represents a problem for society. The positive question is whether these outsized gains for finance will be competed away once rising economies develop larger, stronger financial sectors of their own, and whether increased competition will lead to increased volatility in the system. This is already too long, so those will have to be the subject of other posts.
No comments:
Post a Comment