One of the prime drivers of income inequality has been the ever-increasing amount paid to both CEOs and workers in the financial industry. In fact, according to the Economic Policy Institute, “Executives, and workers in finance, accounted for 58 percent of the expansion of income for the top 1 percent and 67 percent of the increase in income for the top 0.1 percent from 1979 to 2005.”
However, Jamie Dimon, CEO of JP Morgan Chase, America’s largest bank, doesn’t believe Wall Street pay has anything to do with growing inequality. Furthermore, he thinks efforts to realign the bad incentives in Wall Street compensation will turn the United States into communist Cuba:
DIMON: I don’t like the fact that we have an increase in inequality in the United States. But you better be very careful if you say we’re having that because I paid that person properly. All of you have the right to say ‘I want to be paid what I’m worth in the market.’ That’s perfectly fair…We all want an equitable society. We need to have a conversation about what makes it equitable. You can go do it the way that Cuba tried. Okay, well, then it will be equitable but everyone won’t have much. So you’ve got to be very thoughtful how you go about it. So I don’t see people say ‘I want inequity.’ I don’t want to make more money if everyone else makes less. We want to lift society up so everyone’s better off. That does not mean that people don’t have to pay people what they’re competitively worth. If you don’t want a free society then start dictating what compensation can be.
As a recent study in the Quarterly Journal of Economics showed, banker pay skyrocketed after the deregulation of the 1980s and 1990s, and also became “riskier and more backloaded.” And even some Wall Street heavywights have started to push back against outsized compensation. “I think the kind of money that’s made and the way it was flaunted — look it’s wrong. [...] The money was really unbelievably generous, to say the right word,” said former Morgan Stanley CEO John Mack.
The problem with ever-growing pay is not only that it contributes to income inequality (and often bears no relation to the success of the firm, as evidenced by former Citigroup CEO Vikram Pandit receiving $260 million to run his bank into the ground). Wall Street pay can also put the whole economy in trouble, if the incentives are to take huge risks that end up putting a systemically significant bank at the edge of collapse. Hence, the Dodd-Frank financial reform law gives the Federal Reserve the power to veto pay packages that might cause such a situation.