I don’t think it should come as a shock that the Obama administration’s efforts to reign-in or reform compensation policies at the big banks have run into some snags. For one thing, there’s are no real populist firebreathers on the administration economic team and that kind of shifts the balance of power in favor of the bankers. But most important of all, you don’t get to be an important person in the world of finance without being really, really, really good at figuring out ways to pay yourself a lot of money. That’s what the field is all about. And it’s extremely difficult for the government to catch up with the ingenuity that can be deployed when people’s livelihoods depend on it.
That said, we compensation reform aside, we actually have a well-established method of taking market distributions of income and trying to transmogrify it into a more just, useful, and welfare-enhancing deployment of social resources—taxes and public services. The world of finance has been the main driver behind the growth in inequality at the extreme high end, and establishing additional tax brackets with higher rates would help lean against that trend. So would something like the Obama administration’s proposal to curb the extent to which high-income individuals can shelter income from taxes through itemized deductions.
It strikes me as ultimately unlikely that the political process will be able to micromanage high finance in a way that strikes people as meeting the claims of justice. But the political process very much can collect tax revenues and use that revenue to finance things that we currently “can’t afford” like more widespread provision of health care services, better rail transportation, cleaner streets, more police officers, more and better pre-kindergarten, etc.