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Study: Wall Street Overpaid, Rent Seeking

Yet even more evidence to support the emerging consensus regarding our now dominant financial sector being bloated and useless. A study published in the Journal of Economics Perspectives highlights the surge in Wall Street pay since the 1980s despite little in the way of value creation and productivity. One of the consequences being increased inequality.

It confirms what Joe Stiglitz, Paul Krugman, and others have been saying – that Wall Street firms are not value creators but rent seekers.

In short, the financial sector illustrates that in one of the most important sectors driving top 1 percent incomes in recent years, there was an extraordinary divergence between what top managers took home and even what shareholders (surely a privileged group compared to the wider US economy) gained.

This type of divergence seems like powerful evidence to us that a substantial part of the extraordinary rise of top 1 percent incomes is not a result of well-functioning markets allocating pay according to value generated, but instead resulted from shifting institutional arrangements leading to shifting of rents to those at the very top.

The study claims that 30-50% of pay premium in finance “seems due to rents.” Or what has been appropriately called “socially useless activity.”

Hamilton Nolan over at Gawker sums it up nicely.

What they’re saying here is that the average Wall Street rich guy does not deserve all the money he’s making, and you can tax the fuck out of him without causing a significant drop off in his performance, because he’s making too much already, and what else is he gonna do, dig ditches?

Well, the banksters have dug quite a hole for our economy. But yes, manual labor is probably not in the cards – if they wanted honest work they wouldn’t be working on Wall Street in the first place.

The solution is as simple as it is politically impossible. Tax the banksters’ pointless profits and reinvest the money in public works and goods to stimulate the real economy. Unfortunately Wall Street knows how to play the game and cuts politicians in on the action. They even give the cops on the beat – SEC, CFTC, DOJ – jobs and benefits before and after their tours of duty. So good luck taking on the rackets.

Photo from Lobo512 under public domain.

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Dan Wright

Dan Wright

Daniel Wright is a longtime blogger and currently writes for Shadowproof. He lives in New Jersey, by choice.

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