In every life we have some trouble,
But when you worry, you make it double.
Don't worry, be happy.
You may recall the above lyrics from a song made famous by Bobby McFerrin. If President Obama is looking for some background music for his Saturday addresses to the nation, “Don’t Worry, Be Happy” would fit nicely. Those Saturday talks have more in common with high school pep rally speeches than with serious discussions of actual issues, such as the economy.
For a more realistic take on the economy, we can turn to Tyler Cowen of George Mason University. The latest issue of the American Interest has an article by Cowen entitled “The Inequality That Matters.” One hopes that the President will read it.
Cowen’s article chides those commentators who claim that contemporary American income inequalities are a menace to the health of the Republic. The inequality that we should be concerned about, he says, is the massive gap between the financial sector and the rest of the economy.
Cowen points to research indicating how “[f]rom 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits…This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.”
Once the industrial wonder of the world, the US is becoming better known for exporting toxic, intangible financial instruments than for its tangible physical output.
As Cowen explains it, the economic incentives for America’s financial sector are such that traders, hedge fund managers and other mathemagicians try to make enormous profits through risky bets “against big, unexpected moves in market prices.”
When you make money according to this strategy, you are a Wall Street hero. And when you lose, asks Cowen, “what’s the worst that can happen? Your bosses fire you, but you will still have millions in the bank…Furthermore, if everyone else made more or less the same mistake… you’re hardly disgraced. You might even get rehired at another investment bank, or maybe a hedge fund, within months or even weeks.”
All you need to do to get back into the game is show you can stay ahead of the “underpaid, undertrained regulators” who are trying to monitor you.
Should you make a horrendously bad bet – one that imperils the health of the financial institution where you work, or your co-investors, etc. – Cowen reminds us that the government will bail you out, one way or another. And other economic sectors will have to eat the costs of your gamble.
All this adds up to a situation where “we no longer can constrain excess financial risk-taking,” according to Cowen. The ability of financial whizzes to identify, exploit and reap massive profits from risky opportunities before the general public even knows they exist, Cowen argues, is the real driver of American income inequalities.
Cowen concludes by saying he believes that “income inequality will likely continue to rise and we will search in vain for the appropriate political remedies for our underlying problems.”
Cowen’s pessimism regarding “political remedies” does not quite ring true. The problem with the “political remedies” that could be used to counter risky behavior on Wall Street isn’t that they have been tried and found wanting – it’s that they haven’t yet been given a real chance to work.
Instead of a latter-day Pecora Commission to drag the financial sector’s more sordid practices into the sunlight, and to name names, we have the paper-tiger Financial Crisis Inquiry Commission.
Instead of President Franklin Roosevelt’s powerful rhetorical flourishes about how “gamblers and speculators are no longer the most honored element in our economic life,” we have President Obama’s half-hearted criticisms of Wall Street's more shady operators.
And instead of tough new legislation, in the spirit of the Glass-Steagall law, to crack down on risky speculation…well, we have to content ourselves with the near-beer known as Dodd-Frank.
As Shakespeare put it in Hamlet: “Diseases desperate grown, by desperate appliances are relieved.” Strong remedies, especially political ones, may be just the prescription that America needs.