Banker Pay and the Crisis

The idea of reforming compensation practices at financial firms is even more in the air in Germany than in the United States, and this is apparently something Angela Merkel has been talking up in advance of the election. I wouldn’t really mind if we did this, but I’m pretty skeptical. For one thing, the empirical evidence that this is really the issue is quite weak. For another thing, clearly the reason bankers pay themselves so much money is that banking firms make so much money. They’re not going to just pile the money up on the roof and light it on fire. Huge finance profits imply huge finance compensation packages. Adopting new rules around compensation seems likely to create a few hours of extra work as people try to figure out how to get around the rules.

Conversely, if we adopted a new regulatory scheme that was effective at controlling bad behavior, that would probably reduce financial sector profits and lead to more reasonable salaries.

All that said, what I think people really need to do is confront the fact that obscene banker compensation is really a social justice issue rather than a financial regulation issue. Which is to say the sky-high pay seems wrong just as such rather than because there’s a specific bad incentives issue that needs to be corrected. And the solution to this is just taxes. When I met yesterday with some smug, arrogant, unapologetic Germany bankers I found it much less infuriating that meeting with smug, arrogant, unapologetic American bankers because I know the Germans are paying higher taxes and those taxes are going to finance a much more generous welfare state (bailouts for normal people, if you will) than we enjoy in the United States.