City bonuses: a defence

Big City bonuses have come under (via) attack. It's time for a defence of them. Here goes:
1. They are (partly) a return for taking risk. I'd guess that many of the older recipients of big bonuses have been made redundant in the past, and would be again - at no notice - come the next downturn.
2. They're a return to what is unsatisfying work in many other ways.  If you want to see the nearest that rich countries can  get to legalized slavery, work for Goldman Sachs. Put it this way. I left the City over 10 years ago, and I don't regret it.
3. It's a competitive market. The profits made by, say, Goldmans could be competed away by other investment banks. And hedge funds and private equity firms are highly competitive businesses, with few barriers to entry.
4. The City does perform a useful function. Efficient risk-sharing and the allocation of capital cuts the cost of finance and so allows  firms to grow - hence creating jobs - that would not otherwise do so.  It's not necessarily the case that the caring professions really help people the most.
5. As professions go, the City is probably more open and meritocratic than most. I'd bet (a small sum) that the proportion of recipients of "obscene" bonuses who were privately educated is lower than the proportion of top journalists who were (pdf).
I suspect opponents of big bonuses are guilty of (deliberately?) conflating two very different things - the big money paid to chief executives, and bonuses earned by people working in the City. To me, the latter are acceptable, the former not.
Indeed, in one respect, the two are wholly opposed. Chief executives' big pay is (often) just a return to power and rent-seeking.  City pay is (often) set by a genuinely competitive market.
Now, it's easy to exaggerate here. I wouldn't argue that people in the City are more talented than those earning much less;  some are, but othodox fund managers are pretty stupid.  And in my experience there's a big element of arbitrariness (and office politicking) in bonus payments. Nevertheless, there are many worse things that the "left" should be complaining about.

Comments

[GeorgeNYC]

1) Risk?

What risk? The risk of NOT making several million dollars. The "risk" is actually being borne by the capital providers who are backing the traders.

2) "Unsatisfying work"

Tell that to my maid who worlks 12-16 hours a day for $10 a hour. That is nonsense. There are plety of "unsatisfied workers" who make squat. (which is the new slang for the American dollar).

3) "Competition"

Yea right. They are ALL making gobs of cash.

4) "Useful"

OK fine. But so do police, firemen, doctors, teachers, etc. WHy is it SO useful as to justify the loot.

5) "Meriticracy"

Fine so there is honor aming theives. That is great that Goldman is meritocratic. Tell that to the poor guys in the Midwest who work for Ford, GM, etc. What, if their company was more "meritocratic" they would still have a job? That is nonsense when the gains are going to such a small pioece of the pie, it does not matter that that little piece might be some model of "equality." What elitist crap. Poor you that you made your millions at such a horrible place. Tell that to the folks in Darfur. Maybe Goldman can open and offce there and we can get them all trading derivatives rather than killing each other. Hey what a great idea! That is what its all about anyway. Why tell them that they need to work and strggle to make real value when they can just trade "hot money" with each other.

Nice try. But I still do not buy it. And yes, it is undulterated envy that drives me. When was I ever told that if I want to make any money I should do NOTHING BUT go into finance. That is the problem.

[AntiCitizenOne]

George,
these people have done you no harm yet you want a third person to basically rob them.

I accept that coerced collectivism is basically trying to rationalise jealous violence, but perhaps you could be a little less blunt about it.

[GeorgeNYC]

Not really rob them, I view this as a symptom of a much deeper problem rather than the problem itself. More power to them for grabbing as much as possible. In fact, I would do the same thing as them My problem is the disequilibrium that this creates. Again, "Why do anything else?" is not just a rhetorical flourish but a valid question. If every student asks themselve that question now, image the number of people that are now going to want to go into finance rather than anything else. Why work for the government? Why even work for manufacturing? If you have any real choice, the answer is because the rewards are so dramitically different. WHile I know most physcal conservativs hate government, the simple fact is that we need good people to go into govermnent to provide basic services. We need talented managers who can create "value" out of those services. We need doctors and lawyers,etc. I know that the "market" dictates the value of these services. But when you have such a huge imbalance it discourages people to invest the time and effort in those jobs and professions. It certainly discourages the "best" people fro doing so (unless they are independently wealthy). Thus you stop having a true meritocracy and have a plutocracy.

[tom s.]

"George,
these people have done you no harm yet you want a third person to basically rob them."

As Woody Guthrie said, some will rob you with a six gun, some with a fountain pen. The trouble with right-wing libertarians (which I guess you are, AntiCitizenOne?) is they fail to recognize the fountain pen technique as robbery.

[AntiCitizenOne]

No Tom, the trouble is that you see someone making money and you get jealous.

[tom s.]

I'm jealous of many people for many things, but having loadsa money isn't one of them. Odd that you would think it is.

You say earn, I say steal - my assumption vs. yours I guess.

[Glenn Athey (angry economist)]

What is of interest to me is whether there's any major impact of city bonuses in terms of inflation in various sectors - housing especially. Or is it in fact, a load of media exaggerated codswallop?

Be interesting to see where the city bonuses go in terms of where spent, or saved etc - look at direct expenditure, secondary and multiplier effects etc etc.

[CB]

I think city work is far from the "closest to legalised slavery" you will find. Evidence for this
1) you get paid (very well)

2) You can leave when you like (The fact that you did leave proves this.

I don't care what those idiots get paid really, if it drives the wheels of our economy in some way then I can put up with it, but don't compare those pampered city boys to slaves, it's offensive to people who actually don't get a choice in how they live their lives.

[alex]

guys, the problem here is that just pointing out that these people make tons of money isn't a justification for saying they are making it unfairly.

Now, I do think the point about CEO salaries is correct, in that they are paid more money than they actually bring to the company.

But people in Ibanking are making TONS of money for their companies, who basically make money in a very competitive environment (as stated in the post). There are almost no barries to entry (the multitude of financial institutions prooves this) and the firm is capturing a ton of surplus from economic activity it facilitates.

So the question you have to ask yourself is this: do you want that money to go to the employees or to the stockholders, or the capital. I say that due to the competitive nature of banking employment, the fact that the employees get so much of the profit (and even then it isn't a huge percentage) is a good thing.

The same argument applies to atheletes, they are making their teams tons of money, so why shouldn't they be compensated to the full value of it.

Now, if you care about income inequality, and I do, you try to fix the problem with things like taxation and engendering social equality in leiu of income equality. "The Winner Take All Society" did a great job addressing this point. In super competitive environments, you are going to have people who are compensated tremendously, and there isn't a lot we can do about it (note, the lack of true competition is a problem with CEO hires so that doesn't apply).