Many middle-class Americans are outraged by the bonuses Goldman Sachs is paying its top traders. The corporate media treat such outrage as "populist" irrationality or simple envy. CNBC's anchors worry that curbing bonuses will undermine banks' ability to do their jobs and thereby slow the recovery.
These worries are misplaced. The risks to long-term recovery lie in the continuing failure of Congress and the media to understand the role that investment banks played in the crisis.
The accusation of envy is especially misplaced. As a culture, Americans are extraordinarily enamored of the wealthy. The American dream is to become rich rather than to tax the rich. State lotteries reflect and feed these dreams. Redistributive taxes always have a hard sell in this country and can prevail only under relatively dire circumstances - often aided by the malfeasance of the rich.
The ethical case for taxing or limiting bonuses is not based on some abstract understanding of the tolerable level of social inequality. CNBC reminds its listeners that the banks have repaid their TARP funds and are therefore entitled to their profits.
These claims rely on considerable historical amnesia. Direct TARP subsidies to the banks were only the most visible favors from the Treasury and the Federal Reserve chief. Among the favors were an extension of deposit insurance to their money market funds and extending to these investment banks the right to the same kind of low-interest loans from the Fed available to community banks.
And all of this support was provided without the usual standards imposed on local banks. The large investment banks operate under continuing too-big-to-fail protection and with low-interest financing. Not surprising in an economy where many assets are depressed, they have been in a position to reap speculative albeit risky (to us) profits.
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The favorable treatment investment banks receive from government and the media becomes even more apparent when we think back to the auto bailout. Government and the media had no trouble demanding draconian reductions in autoworkers' contractually guaranteed wages and were scrupulous in tracing every dollar or favor extended by the government. Do you think a long-term loan at less than 1 percent to GM guaranteed by the Fed would not have elicited intense media scrutiny?
The scrutiny of autoworkers reflects not only a bias against the working class but perhaps even disrespect of those who actually make something. In the years leading up to the bursting of the tech bubble, pundits, even on the left, suggested America's economic future depended on "symbolic analysts" replacing all those manufacturing jobs. Even after that dream collapsed amidst the rubble of high-tech startups with no visible means of profitability, we continue to hear about the contributions that "innovative finance" makes to economic progress. All those surplus computers would have a new use.
But what has financial speculation brought us? Derivatives so complicated that even their creators can't untangle them tops the list. These innovations contributed to the housing bubble and also brought much of our financial system to the brink of collapse. But even before its collapse, economic growth in the U.S. was exceptionally slow.
So I am all in favor of reducing incentives to innovate in the world of high finance. A so-called Tobin tax, a small tax on the purchase and sale of financial assets is crucial. It discourages frequent speculative trading
but has little effect on long-term investment or garden-variety hedges against energy price increases. More broadly we need to look at the whole role of investment banking.
James Galbraith points out that U.S. economic growth was stronger and more sustainable when banking was plain vanilla. Banks accepted deposits and made loans to credit-worthy businesses and households. He reminds us that China limits banks to that role and even restricts the role of equity markets in corporate governance. Though Galbraith and most progressives would not claim China as any model - indeed the romance of an ideal, from the Soviets to Sweden to Japan to China, has long produced misery for the left - its experience does challenge our certainties about the role of deregulated financial innovation. Limiting not only the amount but also the structuring and source of bonuses is both ethically and economically warranted.