Berkeley CSUA MOTD:Entry 45498
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2006/12/26-30 [Politics/Domestic/California, Finance/Investment] UID:45498 Activity:nil
12/26   Thomas Sowell's take on the fixation of income disparity.
        http://csua.org/u/hs4
        \- this is such a bullshit essay. he is mischaracterizing the
           "it makes no sense" line. the question is about equillibria
           and looking for explanations for "out-of-equillibria" behavior.
           for example for sports stars or hollywoods starts, there is
           actually an explanation offered for the giant paychecks of
           megastars, and that is the "winner-takes-all" or "superstar"
                                        \_ "prize economy" is the phrase
                                           you are looking for
           theory [i dont know anything about sports, but the rough
           explanation is megastars like MJ dont just help you win games,
           MJ sell tickets, sell merchandise, sell the brand ... simlarly
           if you hire tom cruise-level stars, they arent just fulfilling
           an acting role, but casting them serves as advertising etc ...
           people magazing, entertainment tonight etc will advertise your
           movie because you have cast tom cruise. i.e. there are not
           really many substitutes for these types. there are a limited
           number. YMWTGF(sherwin rosen, economics of superstars).]
           this is more what an honest discussion of compensation issue
           and trends looks like: http://csua.org/u/hs5
           and to go from "these salaries seem historically high" to
           "govt dept of regulation salaries" is obviously a textbook
           strawman.
           also the "famous essay" about the pencil was actually made
           famous by milton friedman. i dont think it was especially
           famous until he talked about it in his free to choose show.
           \_ Everyone should be paid according to their needs.  Sorry,
              I just read Atlas Shrugged. ;)
2025/07/09 [General] UID:1000 Activity:popular
7/9     

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csua.org/u/hs4 -> www.townhall.com/columnists/column.aspx?UrlTitle=a_dangerous_obsession&ns=ThomasSowell&dt=12/26/2006&page=full&comments=true
Post Your Comments The media and academia are continuously obsessed with "gaps" and "disparities" in income. As one talk show host put it, "It makes no sense" that a corporate executive makes over $50 million a year. Ninety-nine percent of all the things that happen in this world "make no sense" to any given individual. Do you understand how your automobile's transmission works? John Shannon, deputy space shuttle program manager points to a model of the shuttle's external tank during a briefing at the Kennedy Space Center in Cape Canaveral, Florida July 3, 2006. A pencil-sized crack in the foam insulation on the shuttle Discovery's external tank cast doubt on NASA's plan to launch July 3 REUTERS/Rick Wilking (UNITED STATES) Do you understand how aspirin stops headaches? Years ago, a famous essay pointed out that nobody knows how to make a simple lead pencil. That is, there is no single individual anywhere who knows how to grow the wood, mine the graphite, produce the rubber, and manufacture the paint. Complex economic processes cause all these things to be done and coordinated by a wide variety of people, just in order to produce something as simple as a lead pencil. Multiply that by a hundred or a thousand when it comes to the complexity of producing a car or a computer. If you cannot understand something as simple as making a lead pencil, why should you be surprised that you don't understand why someone is making a lot more money than somebody else? Moreover, if this obsession with income disparities is to be something more than mere hand-wringing or gnashing of teeth, obviously the point is that somebody ought to "do something" to change what you don't understand. Usually that means that the government -- politicians -- should impose policies based on your ignorance of what is going on. Can you imagine anything more dangerous than allowing politicians to decide how much money each of us can earn? Of course, such political control of incomes is usually advocated only to deal with "the rich." But, when income taxes were imposed in the early 20th century, they applied only to "the rich" and they took a very small percentage of their income. Once the floodgates are opened to this kind of political power, however, we have seen with the income taxes that they not only spread far beyond "the rich," they took a serious share of even middle class incomes. Moreover, the income tax has spawned an intrusive bureaucracy, creating so much complexity and red tape that millions of ordinary citizens have to go get some accountant to fill out the forms for them -- and then sign under penalty of perjury that it was done right. If you knew how to do it right, you wouldn't have to go to somebody else to have it done, would you? Incidentally, it took a Constitutional amendment to enable the federal government to impose an income tax. The people who wrote the Constitution were wise enough to understand what a dangerous thing it would be to allow government to take money from people just because those people had it. Unfortunately, "progressives" were foolish enough, or envious enough, to single out "the rich" for a process that would inevitably spread across society and become insatiable in its demands. Today's "progressives" want to expand political control of incomes even more. They call it "social justice" but you could call it Rumpelstiltskin and it would still mean politicians deciding how much money each of us can be allowed to have. It is also worth noting that the people who are said to be earning "obscene" amounts of money are usually corporate executives. There is no such outrage whipped up when Hollywood movie stars make some multiple of what most corporate executives make. This is social or ideological bias added to envy and ignorance. It makes quite a witches' brew on which to base national policy. Lofty talk about "social justice" or "fairness" boils down to greatly expanded powers for politicians, since those pretty words have no concrete definition. They are a blank check for creating disparities in power that dwarf disparities in income -- and are far more dangerous. Flagwaver writes: Tuesday, December, 26, 2006 12:31 AM I have no problem... and if a CEO makes the company a gang of money, then he is worth every penny that the company pays him. I don't see Rob Reiner, Babs Streisand, Jean-Francois Kerry, or Teddy Kennedy lining up at the IRS offices trying to give any extra money to the G! They will go thru hell and high water to keep their money safe from the government, while braying for the OTHER rich folks to have to pay more in taxes. These clowns can't figure out how to decipher a copy of the Constitution, so why should THEY have any say in the financial matters of the citizens. Flag as Offensive Savage99 writes: Tuesday, December, 26, 2006 1:03 AM Flagwaver When i got my first job i was really hot when i found out some other guys were getting more money for the same work. Then i remembered how great it felt and how lucky i was to get a much better job than i anticipated. Right then i decided that someone else's better luck had nothing to do with my good luck. Guess i was a natural born optimistic self-confident conservative. And next time i negotiated salary, i was somewhat more experienced and tougher. Flag as Offensive Goshawk writes: Tuesday, December, 26, 2006 1:04 AM Flagwaver Your so right! In addition, the Liberals never question the outrages salaries (of our tax money) the politicians pull down for producing absolutely nothing! Flag as Offensive Asgeorge writes: Tuesday, December, 26, 2006 1:21 AM You wanna lower taxes? Sowell writes, "Today's 'progressives' want to expand political control of incomes even more. They call it 'social justice' but you could call it Rumpelstiltskin and it would still mean politicians deciding how much money each of us can be allowed to have." According to the "Analytical Perspectives" book of the Budget of the United States Government, Fiscal Year 2007, 30% of the budget goes to current military expenditures, while a further 19% goes to paying past expenditures (veterans' benefits among other things). The United States currently accounts for 48% of the world's military spending as we fight this "War on Terror" against poorly trained, poorly educated Islamic fundamentalists armed with obsolete Soviet equipment. html But of course it's convenient to talk about taxes as though we're talking about the pet projects of ivory tower elites or the social redistribution aimed at the undeserving poor. Why look at the facts when it's easier to just blame the usual suspects? UncaAlby writes: Tuesday, December, 26, 2006 2:30 AM Asgeorge -- Serious Question: Yah, that's a nice little website there, it even includes spreadsheets so you can do your own percentage calculations. So I don't know where you're getting this 30% number from. We can argue whether it makes sense to out-spend adversaries, both current and potential -- and we can certainly make an issue over how much we spend to protect current allies (so they don't have to) -- but I don't think that's the point today. I've asked this question on these forums before, and if I got a serious answer, I must have missed it. My question is this: What part of the Federal budget expenditure would you cut OTHER than defense? Considering that, regardless of whether we spend too much or too little, or how we rank in the world -- among everything else we spend money on, defense is at least mandated by the Constitution, while nearly everything else is not. In other words, at least we're SUPPOSED to spend money on the military. Assume your assessment is correct, and a third the budget goes to the military. Most of the rest goes to things where the Constitutionality is questionable at best. Flag as Offensive Lydia writes: Tuesday, December, 26, 2006 5:18 AM Liberals are always so jealous of others. Liberals possess all the money needed to equalize things (an equalization that can never remain equal)between themselves and the poor but they don't want to give them their money. We've learned recently that conservatives, especially religious conservatives, are more benevo...
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csua.org/u/hs5 -> www.economist.com/debate/freeexchange/2006/12/arnold_kling_asks_a_good.cfm
asks a good question about investment banking salaries: Why aren't the rents at the high end of the income distribution competed away? I can see how doctors earn rents--there are obvious barriers to entry. And the field of entertainment generates winner-take-all results, in part because being popular makes you more popular. But a lot of the big money is in finance--investment banking. One would expect more people to go into investment banking and compete away those rents. The market solution to income inequality would be more investment bankers. His answer is that bright people are choosing to do things they find more rewarding than proofreading pitch books at 3 am. On an hourly basis, being an investment banker is probably the most lucrative legitimate job on earth, depending on how one rates the legitimacy of being a third-world dictator. There are a lot of freshly minted MBA's out there who want to be investment bankers, but while many are called, few are chosen. And there are a very large number of former associates and VP's cast aside by the bulge bracket "up or out" policy. So why are there so few bankers sipping from the river of IPO and M&A profits running through the world's financial capitals? Possibilities: 1 Investment banking is harder than it looks. Institutional human capital is very, very important, which makes it hard to start a new company. Whole departments are known to decamp to other banks, taking all of their institutional capital with them; Given that the requirements for operation are a computer, a platinum level frequent flyer status, and a subscription to a few research services, this seems unlikely. Plus on the buy side, hedge fund startups with the same sort of requirements (minus the air travel) do this all the time. Essentially, investment banking looks deceptively simple, but in fact requires expensive complimentary assets which operate as barriers to entry. This may be a partial explanation, but the second activity has gotten rather dangerous lately, and the investment banking premiums remain. Anyone who wants to operate an investment bank had better had lots of contacts at the SEC, and preferably a good job to offer the regulators when they leave the agency. They also need a very expensive compliance system and a lot of knowleageable compliance officers to run it, a bunch of lobbyists and lawyers to argue their case in court and in parliament, and rich former bank presidents to get elected to office. This is also a possible partial explanation, but does not explain the global reach of the bulge brackets, although the consolidation of IPOs in a relatively small number of exchanges could make a difference. I suspect that this isn't a factor, although this suggests that there is some sort of gross failure in the regulatory system resulting in insufficiently full disclosures. This has the advantage of being parsimonious, but also suggests that the managers couldn't find anything to do with 7% of the IPO value that would ultimately raise the value of their equity compensation. If this is true, the whole public company thing needs a rethink. Readers are of course invited--nay, begged--to offer their thoughts. cgi/830 Comments SIR - 1 Incomes for finance companies might also be a case of winner-take-all. If asset markets are really efficient, then lots of money would go to those few investment bankers who make lucky bets. Of course, if markets really were efficient, one would imagine that people would all just buy index funds, reducing the demand for financial services personnel. Posted by noahpinion at December 12, 2006 7:41 PM 2 Two comments: The hourly pay of a first/second year analyst is not all that great, and they are the ones who will be working until 3-4 in am. So as an incentive to keep the analysts through the first tough years there needs to be the big prize one can achieve (or dream of) in the later years of a career. Still, the drop out rate in the first years is quite high (some are simply physically exhausted, others want more rewarding things in life). Investment banking is not so easy, especially at the higher levels where bankers have to win mandates and bring in business. I would assume that the supply of those people is rather limited. Posted by lagrange at December 12, 2006 7:45 PM 3 noahpinion - - Index fund investors are free riders in the sense that index funds actually make the market less efficient. "Dumb money" that doesn't overweight/underweight based on perceived prospects of an industry or company acts as an anchor for prices. If everybody only invested in index funds, there would be no supply or demand for individual stocks, and prices would remain stagnant. Posted by the_watcher at December 12, 2006 9:08 PM 4 This is a complicated question, but it's important to make a distinction between high compensation for bankers and high levels of profitability for investment banks. Part of this probably is a principle-agent problem, but within the banks themselves, not within client corporations, because the issue seems to be more the compensation of senior bank employees, not the profitability of the investment banks. It would perhaps be in the interest of investment banks to have a larger supply of highly trained investment bankers, thereby decreasing the salaries that are their largest cost component. Senior investment bankers, however, are interested in driving out as many potential competitors as possible, which they do by imposing ridiculous lifestyle demands and arbitrary up-or-out policies. This artificial supply constraint supports the huge payouts to bankers, while reducing profitability to the banks. Posted by richb at December 13, 2006 4:47 PM 5 Also - Kling does not take into account the "risk adjusted" compensation levels. He easily forgets the 2001-2002 when I-bankers were the first to get laid off. Posted by Coolguy001 at December 13, 2006 9:41 PM 6 There seems to be a fair bit of talk about IPO's when in reality, investment banks have a much wider revenue stream. Having said that, Hank Paulson, I believe, mentioned a few years ago that 80% of GS revenue comes from 20% of the bankers (or traders). Therefore, talking about average bonus levels may be a bit misleading. Posted by adam at December 14, 2006 5:14 PM Free exchange login Login In order to prevent abuse, we require users to register with us in order to comment. Join the discussion Free exchange registration Register In order to prevent abuse, we require users to register with us in order to comment. Registration is free, and takes less than a minute - simply fill out the following form. terms & conditions of this site Create Comment Post a comment Comments Preview Post The moderators reserve the right to delete comments which do not advance the discussion. Trade We Recommend Comment of the week "The endless, fruitless debate over income inequality distracts from a far more useful discussion. Much of the opprobrium attaching to income inequality is actually a dislike of the inequalities in power and influence that go with it. In undemocratic societies there is little difference between income and power: the rich rule and the rulers make themselves rich. Even in moderately democratic countries -those with representative government - the rich are in a better position to peddle influence than the poor. They may offer elected representatives the soft bribe of employment in post-political life. Collectively, they and their friends are likely to be over-represented in all branches of government. Legislators, even from poor backgrounds, seem to aspire to the lifestyle of those they meet during their political careers. In very democratic systems - those US states with citizens' initiatives, or Switzerland with its direct democracy - there is little correlation between wealth and power. In Switzerland, any group able to gather 50,000 signatures may seek to veto legislation and those able to gather 100,000 may initiate it. Indeed, some Swiss communities compete to attract the mega-rich by offering special deals on their local taxes. Income inequalities may be justified on the grounds that incentives are needed to encourage...