Higher Taxes: The Solution to Obscene Wall Street Profits

Ezra Klein uses some charts and graphs to demonstrate how profits and compensation have skyrocketed on Wall Street, and concludes:

The Dodd and Frank bills are not about changing how the financial sector works so much as changing how it’s regulated. And there’s a real need for regulation modernizing the powers of regulators, so that’s not necessarily a bad thing.

But the question is whether that’s a sufficient thing. Whether we also need legislation that is decidedly not in the financial sector’s best interest. Legislation that brings down their share of total domestic profits and forces down their relative wages and makes it less lucrative for smart college graduates to rush into investment banks. Legislation that leaves firms that are smaller and easier to unwind and that doesn’t offer massive rewards to people who develop complex and untested products and then sell them to other people who know even less about them. A financial industry, in other words, that looks more like the one we had after the Great Depression than before.

I don’t really understand this progressive passion for trying to micromanage the structure of the American economy. Consider two problems:

— Financial institution failures that cost taxpayers billions.
— Run-amok income inequality.

The policy response to the first is “regulation modernizing the powers of regulators.” And the policy response to the second is higher taxes to finance more and better public services. Is there really some third problem that trying to make Wall Street less profitable addresses? At the end of the day, insofar as people want to entrust their money to greedy risk-taking bankers, I would rather have those bankers be located in New York and paying taxes to the IRS that finance great schools and shiny new mass transit systems than have the bankers be located in Zurich and financing their schools and transit systems.

A financial system that poses systemic risks is a threat to the whole economy, and that’s what this legislation addresses. Inequality and the absence of social justice is also a big problem, but I think it’s a problem you address through taxes, transfers, and public services not through financial regulation.