Monday, April 20, 2009

Hypercapitalism

The New York piece on the plight of our financier overclass is chock full of delicious sentences. I particularly liked the douche who thinks someone should paid well simply because he graduated from fancy school. And I say this is a graduate of a fancy school! You've got to do something with that degree, man! Which brings me to my second favorite sentence, the guy who whines "No one complains when Julia Roberts pulls down $25 million per movie or A-Rod has a $300 million guarantee." I have a piece of news for this fellow.

Lots of people complain about salaries for top celebrities and sports stars.

But let's set that to one side; after all, I don't even think Alex Rodriguez is underpaid! Professional baseball generates tons of revenue because people enjoy the game of baseball, enjoy having a winning team, and enjoy seeing guys hit the ball over the fence. The primary alternative, then, to A-Rod's high salary is for the Steinbrenner family to get richer. Likewise if Julia Roberts didn't get a cut of box office revenue, it would just mean more money for MPAA members.

So why do even pro-A-Rod folks like me feel differently about Wall Street? I'll give you two reasons. The first, I'll admit, is a lack of visibility into the distribution industry's compensation. We hear about the guys at the top of the heap who earn eight and nine-figure salaries. But we don't know how many people earn just above six figures, or how many college hires work two years of eighty-hour weeks at below-market wages only to have their bosses fire them suggest they go to business school. And aside from the traders and strategists, there are a host of other folks running these businesses whose compensation we don't know much about either.

The second reason is the larger reason that Wall Street Is Different. In case of both A-Rod and Julia Roberts, there's a straightforward choice between revenue going to labor (the employees) or going to capital (ownership). A-Rod is not going to make decisions about how the Yankees negotiate their next TV contract or set ticket prices. Julia Roberts is not going to set the advertising budget for her next film or convince AMC Theater's to charge less for popcorn. This is why I can muster at least a smidge of sympathy for the more self-aware folks in the New York article; after all, labor has to fight for its share of the revenue, right? But on Wall Street, labor is the capital; the guys doing the trading are making direct decisions about what the firm does with its money. They're also explicitly or implicitly taking a share of the profits, but they don't seem to suffer adverse consequences in the event of losses. In addition, the high margins in finance make it appear that its one of the few industries that is immune to competitive pressures found almost everywhere else. Nothing ever seems to be drive salaries or prices/fees down; the whole thing has the feel of a one-way ratchet. Of late I've thought this has been due to increased consolidation resulting in too little competition, but I have no way prove that wild-ass theory.
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