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Ever Upward Trend for Bankers' Pay
Some people were outraged last week by a report that a member of the kitchen staff of bailed-out Wall Street firm AIG had received a $7,700 bonus.
Surely that was far less outrageous than the million-dollar bonuses paid to others at AIG who actually carried out the firm's financial business.
After all, the kitchen helper produced something that at least could be eaten. Apart from perhaps overcooking the Chateaubriand or leaving spots on the champagne glasses, what harm could the kitchen helper have done – compared to driving the world economy over a cliff?
Unbelievably, The Wall Street Journal reported last week that banks and securities firms are on track this year to pay their employees a record $140 billion – an amount that exceeds the peak year of 2007, just before they put the global economy into meltdown.
Pay for bankers and corporate CEOs has shot up dramatically in the past 2 1/2 decades, despite often weak performance.
Although the pattern is most extreme in the U.S., the pay bonanza has infected Canada, too. While the real incomes of ordinary Canadians have mostly stagnated over the past quarter century, those of the richest .01 per cent of Canadians have more than doubled, rising on average from $3.6 million to $8.4 million, according to Statistics Canada.
Is there anyone – beyond members of the financial elite and their relatives – who still believes extraordinary pay levels at the top are deserved or necessary?
Society has traditionally tolerated inequalities generated by the marketplace on the grounds that big incentives at the top are necessary to encourage economic growth. But how much is enough? CEO pay was much less generous (and taxes were much higher) in the 1950s and '60s – and yet those decades had much higher economic growth rates.
Intuitively, it's always seemed unfair that bankers make so much more than, say, nurses and teachers, whose contribution to society is more immediately obvious.
But neoclassical economic theory – which has long dominated western thought and shaped western societies – has taught us that each person's compensation reflects his marginal social contribution.
So the banker's high pay reflects his important role in creating efficient capital markets, which benefit society as a whole – or so the theory went.
But, as Nobel Prize-winning economist Joseph Stiglitz recently noted, bankers have now effectively refuted that theory. Stiglitz compares the contribution of bankers to that of the late Norman Borlaug, who saved millions of lives by improving agricultural productivity.
"If neoclassical theory were correct, Borlaug would have been among the wealthiest men in the world, while our bankers would have been lining up at soup kitchens."
But the financial meltdown hasn't shaken the faith of those on Wall Street – and Bay Street – who continue to defend huge pay packages, insisting that that's just the way the free market works.
Or is it simply that the elite have gained too much power in recent years, and use that power to increase their own rewards?
It's certainly a cozy world at the top, where CEO pay packages are decided by corporate boards made up of other highly paid CEOs, who are inclined to believe high pay reflects intrinsic worth. As they vote for ever higher CEO pay packages, they raise the standard for all CEOs.
If the kitchen staff got to set each others' salaries, one could imagine the cost of a good dishwasher might rise as well.