The Rents of Wall Street

The Rents of Wall Street

There’s nothing wrong with doing well (or even very well) financially, but when your windfall can be attributed to regressive regulations at the expense of taxpayers and the economy at large, it’s safe to say that at least some of your gains have been ill-gotten–the result of political, not business, acumen.

The list of policies that benefit the financial sector at the expense of the “real economy” is too long to fully flesh out here, but one of the symptoms is outsized compensation for those working in the financial sector. A new report from the Office of the New York State Comptroller gives a laundry list of statistics related to financial sector profits and compensation. Here are a few of the most eye-catching:

Profits totaled $13.7 billion in the first half of 2018, the highest level since 2010 (2011 after adjusting for inflation).

The average salary (including bonuses) increased by 13 percent to $422,500 in 2017 (the highest since 2008 and higher than in any other major industry).

Net revenues grew by 4.5 percent in 2017, the largest increase in five years. Growth was even stronger in the first half of 2018 (8.6 percent).

The securities industry in New York City added 10,600 jobs between 2010 and 2017, bringing employment to 176,900 jobs, the highest level in a decade.

The average salary in the industry was 5.5 times higher than the average in the rest of the private sector in New York City.

While the share of income from trading activities has declined (indicating lower levels of leverage), the share of income from wealth management tripled since 2009 and now accounts for over a quarter of industry revenue. Because you can’t beat the market in the long run, these fees to wealth management advisers represent rents coming from investors, in many cases from retirement saving accounts.

For a succinct take on these findings, The Financial Times puts it best:

In 1980 the ratio of average securities compensation to the rest of the private sector was 2 times. By 2000 that had spiralled up to 5 times. In 2017 that ratio hit 5.5 times, fast approaching the record 6 times achieved in 2007 and 2008. Risk-taking has undoubtedly been curbed on Wall Street. It is curious the sector still produces such fat remuneration for workers. The policy failure is disturbing.

Again, there’s nothing wrong making money hand over fist. But when you can attribute your fantastic gains to handouts and favorable regulations rather than the invisible hand, it is reasonable to call this compensation a “policy failure.”

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By |2018-09-19T08:53:59-07:00September 19th, 2018|Blog, Financial Regulation|