Unemployment, Desert, and the Banks

Ben Bernanke has recently discovered that little has changed at the banks since the financial crisis began:

The Federal Reserve, six months into a compensation review of the country’s 28 largest financial companies, has found that many of the bonus and incentive programs that economists say contributed to the worst financial crisis since the Great Depression remain in place, according to people briefed on the examinations.

For a bit of perspective on the resultant inequalities, check out the Institute for Policy Studies’ findings on bank employment and compensation since 2008:

Since the beginning of 2008 . . . the 20 U.S. banks that have received the most bailout dollars have laid off 160,000 workers. The 100 top executives at these 20 banks, in 2008 alone, collected a combined $791.5 million in personal compensation.

2009 was not a bad year for top bankers, either.

There are few better examples of “unjust deserts,” as Alperovitz and Daly’s work shows. In their research, they

demonstrate that up to 90 percent (and perhaps more) of current economic output derives not from individual ingenuity, effort, or investment but from our collective inheritance of scientific and technological knowledge: an inheritance we all receive as a “free lunch.” . . . [T]here is no reason any one person should be entitled to that inheritance.

The argument is even stronger in the case of the banking system, which relies on all manner of implicit subsidies from public authorities in order to thrive.

What’s truly jawdropping about these statistics is Washington’s lack of will or ability to do much about them. Brad Delong worries that the nation’s capital has become an “imperial city,” with little connection to or concern about most citizens:

The last time we had an oversupply of workers of this magnitude was 1983, during the Reagan-Volcker disinflation. . . . Washington, D.C. was in a panic. . . . Everybody had a plan to reduce unemployment. . . .Nothing comparable is under way today.

[W]henever I wander the halls of Washington these days, I can’t help but think that something else is going on—that a deep and wide gulf has grown between the economic hardships of Americans and the seeming incomprehension, or indifference, of courtiers in the imperial city.

Have decades of widening wealth inequality created a chattering class of reporters, pundits and lobbyists who’ve lost their connection to mainstream America? Has the collapse of the union movement removed not only labor’s political muscle but its beating heart from the consciousness of the powerful? Has this recession, which has reduced hiring more than it has increased layoffs, left the kind of people who converse with the powerful in Washington secure in their jobs and thus communicating calm while the unemployed are engulfed in panic? Are we passively watching an unrepresented underclass of the long-term unemployed created before our eyes?

There are two major problems for the economy which the banks are at the center of, and which Prof. Delong’s work cogently addresses. First is the issue of inequality and long-term unemployment. Given the enormous leverage the US government has over the banks, should it choose to use it, the banks’ decision to lay off large numbers of people and hypercompensate their top executives must be seen as having something like the imprimatur of the government. Chalk up another few points for the “zero net fiscal stimulus” interpretation of Obama-era macroeconomic policy.

The second problem we face is a misallocation of workers and skills, toward sectors of dubious value. Economic analysis should focus, at the very least, on sustainable productivity gains, and not just GDP maximization. A net loss of 160,000 workers from our “three-card-monte meets Ender’s Game” financial sector may on net be a good result, as Delong and Cohen’s book “The End of Influence” suggests. But if this creative destruction of jobs is not matched by a bold industrial policy to re-employ the redundant, it threatens merely to accelerate the economy’s downward spiral.

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