Alternet: Why Do People Who Work in Finance Earn So Much More Than the Rest of Us?

[Hissyspit]

http://www.alternet.org/story/149634/why_do_people_who_work_in_finance_earn_so_much_more_than_the_rest_of_us_?page=entire

Alternet / Les Leopold

Jan. 21, 2011

Why Do People Who Work in Finance Earn So Much More Than the Rest of Us?

Most Americans rightly sense that our middle-class dominated economy has devolved into a system of financial socialism by and for elites.

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1. Why do people in the financial sector make so much more money than the rest of us?

Mainstream economists claim that your income reflects the economic value you produce -- at least in free and open markets. But are proprietary traders, for example, really 100 times more valuable than neurosurgeons? In the UK, some economists say no: The British New Economics Foundation calculates that "While collecting salaries of between £500,000 and £10 million, leading City bankers destroy £7 of social value for every pound in value they generate."

Let's try a back-of-the envelope calculation of Wall Street's net social value. Compare their bonuses and profits for roughly the last five years (about $500 billion) with the economic losses produced in the financial crisis the bankers caused (about $4 trillion in value destroyed, not counting the ongoing travails of the 22 million people who haven't yet been able to find a full-time job). For every dollar "earned" on Wall Street, about 8 dollars were destroyed. (In case you're suffering from financial amnesia and forgot how the financial sector single-handedly caused the economic crisis, please see The Looting of America. Chapter One can be found gratis on AlterNet.)

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4. Where does all their wealth come from?

There are only two possible sources for all the money the financial sector is spewing: The bankers are either creating new wealth or they're siphoning off wealth from the rest of us. Hedge fund honchos like to boast about how they weren't bailed out and therefore are entitled to their enormous hauls. (The top 10 in 2009 earned an average of $900,000 an HOUR. The top 25 earned as much as 658,000 entry level teachers.)

But our noble hedge fund managers have a great deal of difficulty accounting for what I call their "paradox of productivity." You see, there's supposed to be a connection between the productivity of your employees and your profits. Apple Corporation, for example, earned about $6 billion in 2009 by expertly engaging its 35,000 employees. (They went on to earn $6 billion in the last quarter of 2010 alone.) Along the way they offered us an array of popular new products that people are enjoying and putting to use. Appaloosa, the hedge fund, earned about as much as Apple in 2009 by speculating on god knows what. But it has fewer than 250 employees and it's not at all clear what these individuals added to our economy -- certainly not the iPad. How can 250 workers, no matter how wise and talented, produce as much real worth speculating on stuff as 35,000 Apple employees can make inventing, manufacturing and marketing useful products? They can't. So hedge funds must be siphoning off wealth from elsewhere, not creating it themselves. (If you think I'm wrong, please prove otherwise, because I haven't found a single book or paper about hedge funds, even from insiders or academics, that explains this paradox of productivity.)

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[RandomThoughts]

1. They are griffters.

[Ozymanithrax]

2. One reason is that these people handle millions, sometimes billions...

in a year. And they are not paid by us for work on our economy, but by their employers for working on the employers behalf. If Appaloosa brought in about 6 billion, with 250 employees, which is the same as 35,000 Apple employees brought in for their owners/investors, there is much more incentive to pay those employees more.

You should not confuse what a company does for our economy, because that is not an issue in their pay scale. It is what the employee does for the owner investors that makes the difference. As long businesses, whether they be Apple, Appaloosa, or the hot dog vendor on Broadway are privately owned, they are not run for the benefit of society, but for the owners. Society benefits indirectly from the ventures.

[CreekDog]

12. yeah but it's backwards

all the incentives are for the ways you can move money around, because the critical thing has become not what you can make, but how it affects the stock price over a course of several days and financing.

it's completely backwards.

everyone who is learning capitalism the way it's done and taught today, will realize it's completely broken.

Adam Smith wouldn't recognize it.

[Ozymanithrax]

15. That is because we don't practice classic Capitalism...

we just call it that for convenience. Monopolies and near monopolies are allowed to flourish to take advantage of economies of scale. Companies that once made things, hire factories in China or elsewhere to make their products at a fraction of the cost they would incur here. All those Apples, Ipods, Ipads, and other Apple products are made in China and only designed here. That way, Apple avoids the overhead of running large factories and can make a higher profit.

You are right, Adam Smith would not recognize the current system. Adam Smith did not conceive of Consumerism, nor did he imagine a world where it is cheaper to move whole factories to another country and ship things back.

The system has created vast amounts of money, and so a whole new group of people that do nothing but push money around have come into existence.

There really is no name for our system, and it isn't fair.

[Initech]

3. They're siphoning wealth.

[Silver Swan]

4. I am very naive when it comes to finance and economics

I always pictured most "business" as groups of people throwing money back and forth, with other groups trying to grab some as it passes overhead.

I did not understand why such activity should have any value at all.

While trying to learn more about business, I decided my original view wasn't that far off.

[young_at_heart]

5. Lining their own pockets at the expense of others doesn't bother them

Vanity Fair had a story about these people and showed photos of their obscenely huge mansions in Greenwich, Connecticut. I checked it out on Google Maps and nearly threw up. One of the houses there is 32,000 sq. ft. and looks like a huge palace on Google Maps. The houses there cost in the millions because these people cashed in during the Bush years.

[Skink]

6. they understand the Sopranos better than most.

[snappyturtle]

7. My intial answer to the question without reading the thread is that:

they steal! Now, I'll go back and see if that's the opinion of the thread.

[Clyde39]

8. A testament to greed

The 25 best-paid hedge-fund managers took home an average $363 million in 2005, nearly twice what they made just two years earlier.

[NightWatcher]

9. The same reason Krispy Kreme employees get the best doughnuts?

When no one's looking...hot, fresh, now, (chomp) gone.

[RadiationTherapy]

16. I agree with you. Why do bartenders get free drinks at other bars?

People take care of each other. It is cronyism.

[kenny blankenship]

10. Go find out how money is actually created in our system. Not useful "value" or "good" - just MONEY

Now ask yourself if a largely private spigot for creating ever larger streams of money out of thin air is not a system that is going to be prone to abuse? Indeed it was practically designed to be abused. Eventually a mafia like organization grows up around the money source, and monopolizes it for its own enrichment. It naturally takes politics and law enforcement down with it along with the national economy, making reform impossible and even unthinkable.

[blindpig]

11. correction

Bankers do not create any wealth, value an only be derived from labor.

[DCKit]

13. Thanks Hissyspit. Though I really didn't need anything more to be angry about today.

It is, however, an excellent primer.

[Taitertots]

14. Because there is currently no better way to get money from savers to investors

So savers give their money to the people who they expect will earn the highest returns on their savings.