banker pay rent seeking finance bonus

Bankers Enjoy Economic Security Beyond Jobs So …
common wealth dividends disproportional

Let's pay dividends to everyone from our common wealth

Bankers do their thing where money gets created and controlled. Society could bestow everyone with such advantage. We trim, blend, and append two 2012 articles from (1) Financial Times, Jan 30, on banker wages by G. Tett and (2) On the Commons, Feb 16, on a social salary by P. Barnes (co-founder of OTC and Working Assets, author of Capitalism 3.0).

by Gillian Tett and by Peter Barnes

The public outrage at Stephen Hester’s bonus persuaded the Royal Bank of Scotland chief executive to turn down a pay award (£1m) that would be considered miserly by other bank bosses in the UK and the US.

In Japan or Sweden, foreign financiers’ salaries appear bloated. But perhaps a more relevant exercise is to peer at the US through a long historical lens.

Thomas Philippon and Ariell Reshef, two US-based economists, have found that, in the early 20th century, financial sector pay relative to the rest of the private sector was roughly at parity (for, crucially, employees with similar levels of education). But then it rose sharply until it hit 1.7 times in 1929, the year of the Wall Street crash.

That echoed a bigger increase in finance: the total cost of financial intermediation (all wages and profits paid to financial firms) had reached 6 per cent in 1930, up from just 2 per cent in 1870.

After the 1929 crash, this trend did not immediately reverse: for several years, financial pay remained high because pay in other parts of the economy fell and some bankers traded cannily during and after the crash. However, in the late 1930s the ratio slumped back towards parity and stayed there for the subsequent three decades; in the years following the second world war, American bankers were paid roughly the same as other professionals. But from the late 1970s onwards, a new cycle turned: the total cost of financial intermediation jumped to 9 per cent in 2010 from 4 per cent in 1950. The ratio of financial sector pay to pay in the rest of the private sector hit 1.7 times in 2006 – in a delicious irony, the same level as in 1929.

It is a matter of fierce dispute why banker pay swelled. Financiers are apt to credit the increased importance and complexity of finance. Many economists such as Mr Philippon, however, reckon at least half of the pay jump represents “rent seeking” (skimming off fees), not innovation.

As this year’s bonus round comes to an end, there are some hints of change. The sector is shrinking: an estimated 60,000 jobs were cut last year. Staff are being paid in stock deferred over a longer time, and pay appears to be falling -- but not enough to pacify critics.

To see the whole article, click here .

JJS: That was the history of banker pay. Could this be the future of everyone’s pay?

In Europe, there is growing interest in a minimum income that would be paid to all by the state. In the U.S., conservative author Charles Murray recently proposed a $10,000 guaranteed income, similar to Milton Friedman’s negative income tax, to replace welfare, food stamps, Social Security, and Medicare. I propose an income for all in addition to the existing safety net and separate from the federal budget.

To save America’s declining middle class, the answer politicians of both parties give is always the same: jobs, jobs, jobs. But today, automation and computers have eliminated millions of jobs, and private-sector unions have been crushed. On top of that, in a globalized economy where capital can hire the cheapest labor anywhere, it’s no longer credible to believe that America’s middle class can prosper from labor income alone.

So why don’t we pay everyone some non-labor income, the money that flows disproportionally to the rich? I’m not talking about redistribution but about paying dividends from common wealth.

One state -- Alaska -- already does this. Compared to other states, Alaska has the third highest median income and the second highest income equality.

Alaska’s model can be extended to any state or nation, whether or not they have oil. A source of revenue could be clean air, nature’s gift to us all. What if we required polluters to pay for permits to pollute our air?

We could charge corporations, say, 10 percent of their shares in exchange for “public liquidity” and other privileges -- limited liability, perpetual life, constitutional protections -- we currently grant to corporations for free.

We give free airwaves to media companies and nearly perpetual (and nearly global) copyright protection to entertainment and software companies. These free gifts are worth big bucks.

We give banks the power to create money out of nothing; they then charge us interest. This injects cash into the economy, but a comparable boost could be achieved by giving people the dollars.

There’d be no means test -- and no shame -- attached to these earnings, as there are to welfare. Nor any hint of class warfare -- Bill Gates would get his dividends along with everyone else.

The amounts paid would vary from year to year just as corporate dividends do. Since the revenue would come from common wealth, there’d be no need to raise taxes or cut government spending.

The United States isn’t broke; we’re a very wealthy and productive country. The problem is that our wealth and productivity gains flow disproportionately to the rich in the form of dividends, capital gains, rent, and interest. If we want to remain a middle class nation, that needs to change. Jobs alone won’t suffice. We need to complement wages with non-labor income from the wealth we all own.

To see the whole article, click here .

JJS: Not to nitpick, but the author left out perhaps the biggest common wealth, which is all the money we spend for the nature we use, for the land and resources. Nobody’s labor goes into creating those valuable gifts of nature, and because we have an equal right to life we have an equal right to a fair share of the value of goods created not by anyone’s labor or capital. Plus, when we pay “land dues”, then we pay compensation for excluding others and when we get back “rent dividends”, then we are compensated for respecting the exclusive use of others. This geonomic arrangement of the commons works morally and practically.


Editor Jeffery J. Smith runs the Forum on Geonomics and helped prepare a course for the UN on geonomics. To take the “Land Rights” course, click here .

Also see:

Should Goldman Give Back $2.9 Billion to Taxpayers?

Bonus Balls

Can DIY money be a stimulus?

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