Wall Street is expanding, and the economy is worse off for it.
The thing Deborah Jackson remembers from her first interviews at Goldman Sachs is the slogan. It was stamped on the glass doors of the offices in the investment bank’s headquarters just off Wall Street, the lure of the place in two words, eight syllables: “Uncommon capability.”
Jackson joined Goldman in 1980, fresh from business school and steeped in the workings of government and finance. She found crackerjack colleagues and more business than she could handle. She worked in municipal finance, lending money to local governments, hospitals and nonprofits around the country. She flew first class to scout potential deals — “The issue was, can you really be productive if you’re in a tiny seat in the back?” — and when the time came to seal one, she’d welcome clients and their attorneys to Manhattan’s best restaurants.
Above: Deborah Jackson, center, founder and chief executive of Plum Alley, works with staff members in New York. Jackson spent two decades on Wall Street and now works to develop and support women’s businesses.
The clients would bring their spouses and go to shows. Everyone drank good wine. Her favorite place, in the heyday, was the 21 Club, which felt like an Old World library and went heavy on red meat. More than the perks, Jackson loved the work — the shared struggle of smart people trying to help the country, even as they banked big money. “It was all about solving problems,” she said.
Years later, she would come to see it differently, growing disenchanted with an industry she didn’t think was fixing much anymore.
Economic research suggests she was onto something. Wall Street is bigger and richer than ever, the research shows, and the economy and the middle class are worse off for it.
ABOUT THIS SERIES: The American middle class is floundering, and it has been for decades. The Post examines the mystery of what’s gone wrong and shows what the country must focus on to get the economy working for everyone again.
There’s a prominent theory among some economists and policymakers that says the big problem with the American economy is that a lot of Americans don’t have the talent to compete in today’s global marketplace. While it’s true that the country would be better off if more workers had more training — particularly low-skilled, low-income workers — that theory misses a crucial, damaging development of the past several decades.
It misses how much the economy has suffered at the hands of some of its most skilled, most talented workers, who followed escalating pay onto Wall Street — and away from more economically and socially valuable uses of their talents.
The financial industry has doubled in size as a share of the economy in the past 50 years, but it hasn’t gotten any better at its core job: getting money from investors who have it to companies that will use it to generate growth, profit and jobs. There are many ways to quantify how that financial growth-without-improvement hurts the economy.
In 2012, economists at the International Monetary Fund analyzed data across years and countries and concluded that in some countries, including America, the financial sector had grown so large that it was slowing economic growth. Using a different methodology, the most prominent researcher on the size and economic value of Wall Street, a New York University economist named Thomas Philippon, estimates that the United States is sinking nearly $300 billion too much annually into finance.
In perhaps the starkest illustration, economists from Harvard University and the University of Chicago wrote in a recent paper that every dollar a worker earns in a research field spills over to make the economy $5 better off. Every dollar a similar worker earns in finance comes with a drain, making the economy 60 cents worse off.
It’s not that finance is inherently bad — on the contrary, a well-functioning financial system is critical to a market economy. The problem is, America’s financial system has grown much larger than it should have, based on how well the industry performs.
To understand how and why that is, think of money as water and the financial system as a series of pipes. Ideally, the pipes deliver the water from people who have stockpiled it (investors) to people who want to put it to productive use (entrepreneurs, executives, home buyers, etc.).
Over the past half-century, America’s financial industry built a whole bunch of new pipes. The sector grew six times as fast as the economy overall during the past three decades. Other advanced countries didn’t see anywhere close to that growth in their financial sectors.
Some of America’s growth was driven by Washington. Lawmakers kept encouraging financial innovation, which built a market for smarter investment bankers. They did that by changing the tax code to encourage businesses to hire financial whizzes who could spin ordinary income into certain, preferred types of investment income, and by loosening restrictions on the kinds of financial activities that the titans of Wall Street could engage in.
Extra pipes attracted better plumbers — the more the finance industry grew, the more it tugged at highly educated workers. Philippon is a French economist at NYU’s Stern School of Business. He and a co-author, Ariell Reshef of the University of Virginia, have shown that from the end of World War II until the early 1980s, finance was just like any other desk job: The average Wall Street worker was paid about as much as the average worker in the private sector and was only slightly more educated.
But starting at about the time that Jackson joined Goldman, when Congress began tweaking investment-tax rates, Wall Street started drawing more educated workers. This made the average finance salary go up — from less than $50,000 a year in 1981 (which is about $100,000 in today’s dollars) to more than $350,000 a year in 2012.
Salaries rose even faster in the mid-1990s. The average finance worker began to earn more than a similar non-finance worker who had the same amount of schooling. Wall Street executives began to command salaries several times the rate that non-finance executives could.
In sheer dollar terms, it became irrational for almost any qualified American graduate to pass on a Wall Street job. By the mid-2000s, finance workers earned about 50 percent more than they would have in a similar job anywhere else in the economy. There are almost twice as many financial professionals in the top 1 percent of American income earners today as there were in 1979, according to researchers from Williams College, Indiana University and the Treasury Department. Almost 1 in 5 members of the top 0.1 percent work in finance.
You might think finance workers earned all that money because they were selling new and improved financial products that delivered more value — that helped get money more efficiently from investors who had it to entrepreneurs who could put it to profitable use. Research suggests that’s not the case.
A few years ago, Philippon set out to study 130 years of financial-sector performance. He expected to find that performance improved as the industry grew in recent decades.
Philippon tracked the fees that banks and other asset managers take when they move money between investors and borrowers. In theory, the managers should charge less as their technology improves, because they become more efficient and more competitive with one another. (Or, if they charge the same amount, they should generate better returns for investors.)
