Edward Hadas

The dangerous aristocrats of finance

Edward Hadas
May 29, 2013 14:21 UTC

In many ways, the financial world has changed remarkably little in the five years since the 2008 financial crisis. Yes, banks, brokers and other intermediaries are neither as profitable nor as popular as in the pre-crisis years. However, the industry is still arrogant, isolated and ridiculously lucrative. Leading financiers look more like pre-revolutionary aristocrats than normal businessmen.

Pay is the most obvious sign of this privileged social position. Consider JPMorgan, a fairly typical financial firm in terms of remuneration. Last year, the annual compensation per employee was $192,000.

That already seems high, but the measure includes the majority of employees whose pay is bunched around the $45,000 average for non-supervisory U.S. workers in finance. Assume that two-thirds of Morgan’s employees were in that group. For the rest, the people at the top and upper middle of the company, that leaves an average pretax reward of $485,000 – more than 10 times the norm of the lower orders.

Few senior hedge fund managers, successful inter-broker dealers or other high earners in finance see themselves as seriously overpaid. They are wrong.

The rewards for financiers are excessive by three standards. First, professionals with comparable skills earn much less. Second, financiers are paid far more than is merited by their contributions to the common good. It is telling that the most richly rewarded financial activities – trading, advanced financial engineering and sales – are more likely to subtract than to add economic value. Finally, there is the matter of justice. Penance was in order after the industry’s foolish behaviour in the years leading up to the crisis. But instead of sackcloth and ashes, or bread and water, there are designer clothes and helicopter skiing, caviar and champagne.

Apple, hypocrisy and stakeholder tax

Edward Hadas
May 22, 2013 14:00 UTC

Apple is the latest multinational to feel the heat on cross-border tax management. The news that the tech giant used Irish law to lower U.S. tax payments should not have been surprising. After all, “Do no evil” Google had no second thoughts about recording what were essentially British sales as Irish, for the sake of a lower tax rate. It’s hardly likely that Apple, which has cultivated a certain anti-establishment air, would have hesitated.

Indeed, until a few months ago, I don’t think there was a corporate treasurer anywhere who would have taken justice into account when deciding on tax strategy. At most, there might be worries about bad publicity, but the well-established corporate practice of tax dodging had generated little attention.

And who would complain? Lower taxes on profit bring benefits to most people connected with companies; the money that doesn’t go to the government goes to workers, customers and shareholders. Besides, most experts who understand the arcane rules of international taxation are paid to use them to keep payments down.

Keynes, fertility, and growth

Edward Hadas
May 15, 2013 13:43 UTC

“Keynes was a homosexual and had no intention of having children. We are NOT dead in the long run … our children are our progeny.” This tirade came from Niall Ferguson, the financial historian, Harvard professor and pundit, speaking in the third capacity at an investor conference two weeks ago. Though largely misguided, part of that comment is interesting. The idea that fertility has something to do with economics is due for a revival.

The sexual slur, for which Ferguson apologised, is tedious, as is the wilful misunderstanding of John Maynard Keynes’s quip: “in the long run we are all dead”. That was a complaint about the glib willingness of rival economists to endorse temporary suffering, which Keynes thought was largely unnecessary, for the sake of some distant good, which he thought was far from certain to arrive.

But Ferguson’s comment assumes, correctly, that our economic activity cannot be separated from an almost biological desire to create a good society which will endure into the future. In other words, there is a valid analogy between our biological drives to survive and reproduce and the economic desires to satisfy our needs and to thrive, now and in the future. Economists have captured the close ties of biology and society with two different images: growth and fertility.

Rana Plaza and union labels

Edward Hadas
May 8, 2013 14:34 UTC

The 1911 Triangle Shirtwaist Factory was a turning point in the history of American labour relations. It led directly to a slew of new laws on safety and labour practices in New York State, and indirectly to a less exploitative approach to industrial labourers throughout the country. Last month’s Rana Plaza disaster in Bangladesh, where the collapse of a clothing factory killed more than 700 people, demonstrates that the lessons need to be learned again, this time on a global scale.

It is not a coincidence that both these accidents involved the garment trade. This is an industry of mostly small, poorly capitalised companies, which jostle against each other in a long and rapidly shifting supply chain. Retailers shop around aggressively, suppliers sub-contract freely and the price pressure is relentless. No one takes responsibility, and it can seem like almost everyone involved is irresponsible.

It does not need to be like this. In the first few decades after Triangle, the common good increasingly prevailed in the clothing trade in the United States, and eventually in other rich countries. Trade unions protected workers, customers learned to pay enough for their clothes to support fair wages, and price competition was muted.

In favour of much less trading

Edward Hadas
May 1, 2013 13:40 UTC

It was front page news in the Wall Street Journal. For three long hours last week, there was no trading on the Chicago Board Options Exchange, the home of S&P 500 stock index options and the Vix volatility index. The Journal quoted a trader: “It was very, very unnerving”. Risks went unhedged. Experts worried about the effect of a more grievous software fault on an even more important exchange. What would happen then?

Almost nothing. Imagine a worst case scenario: a hacker closes down all the exchanges for a full month. All portfolios of stocks, bonds, options, futures, currencies and commodities are exactly the same on June 1 as on May 1.

What would the outage change? The prices at the end of the “exchange holiday” would presumably be about the same as they would have been otherwise. The lost income of brokers and traders with superior insight or information would be matched by the foregone losses of their counterparties. As for the economy, a few new issues of bonds and shares would have been delayed a few weeks, but the losses would be more than matched by gains: the absence of frenetic trading would remove a significant distraction for business people.

Debt debate in need of upgrade

Edward Hadas
Apr 24, 2013 14:31 UTC

In retrospect, last week’s debunking of one of the key conclusions of Kenneth Rogoff and Carmen Reinhart about government debt looks inevitable. The whole story, from the initial lavish praise for the Harvard professors to the current harsh criticism, is a sad reminder of the power of ideology in the angry debate over economic policy.

In 2011, the two eminent professors claimed to show a tipping point for government borrowing. If the debt amounted to more than 90 percent of GDP, the GDP growth rate was typically much slower than in more fiscally prudent countries. When Thomas Herndon, a mere graduate student at the University of Massachusetts, redid the maths this year, he also found a correlation between higher government debt and slower growth. But there was nothing remotely like a tipping point.

The new paper was a blow to the politicians who relied on the Rogoff-Reinhart 90 percent line to support fiscal “austerity” (smaller government budget deficits). But they were always foolish to trust a study which drew a universal conclusion from a small sample of countries in vastly different situations.

Make business ethics less boring

Edward Hadas
Apr 17, 2013 13:53 UTC

Business ethics is too bland. That thought crossed my mind during a quite good speech on the topic by Vincent Nichols last week at St Paul’s Cathedral in London.

The Catholic Archbishop of Westminster said many things, but his main idea of how to improve businesses can be summed up in one sentence: “All businesses big or small should be able to demonstrate how they are making the world a better place through providing goods that are truly good, or services that truly serve people, and, by doing so, create employment and fair returns to investors, whilst minimising harm”.
A few moral relativists or free-market ideologues might argue with that, but most business people think they are already behaving as the archbishop thinks they should. They usually see themselves as well-meaning cogs in a basically benign economic machine which provides people with a remarkable array of desired goods and services, and does so efficiently, safely and in a way that is fair to workers and the world.

That self-image is fair. Most businesses in developed economies do work to a quite high ethical standard.

In favour of the living wage

Edward Hadas
Apr 10, 2013 12:05 UTC

In the United States and some other developed economies, wages for the least well paid are too low. A mandatory living wage is the best way to redress this injustice.

The idea of minimum wages is well accepted, but the American $7.25 an hour does not meet the simple standard of providing enough to support the worker who earns it. For an adult in New York State, self-support requires 55 percent more, $11.25 an hour in a full-time job, according to The MIT Living Wage Calculator. And a just minimum should really be enough to raise a family – something closer to the $23.58 an hour required to support a single wage-earner with one child.

The minimum wage is one part of the remarkably complex pay system found in all developed industrial societies. Economists often suggest that wages are determined by market forces, the supply and demand for labour, and by employers’ calculations of the value of labour. But actual wages influence both the market and the perceived value of labour. It is more accurate to include market forces and economic value somewhere in the middle of the long list of factors which contribute to the ever-shifting social agreement on pay levels. This agreement is established in the mysterious way that all social orders are built – the powerful push, the weak resist, traditions are followed and evolve, justice is respected and flouted, market forces and economic calculations nudge.

Poverty and renunciation

Edward Hadas
Apr 3, 2013 14:10 UTC

“Go into the street, and give one man a lecture on morality, and another a shilling, and see which will respect you most.” Samuel Johnson said that in the 18th century, but the general preference for money over preaching is sufficiently strong and timeless that his wry quip remains pertinent. Most economists take Johnson’s sentiment too seriously. They assume that people always want more shillings and always resist wealth-denying morality. That is a serious error.

Consider, for example, the enthusiastic response from around the world to the material renunciations of Pope Francis. The crowds cheered when the new leader of the Catholic Church said he wanted a “poor Church for the poor”. His decision to stay in simple lodgings and wear simple clothes amounted to turning down shillings for the sake of giving a morality lecture, but few observers were bothered. On the contrary, it was welcomed as a pertinent comment on the excessively materialist values of modern society.

The need to be “for the poor” is eternal and universal. In every society there will always be people who cannot thrive without help from others. Despite Dr Johnson’s comment, the need for conscience-pricking discourses on the topic, papal and otherwise, is equally timeless. Otherwise, it would be too easy to find plausible but ultimately selfish reasons not to help out.

Banker-think in welcome retreat

Edward Hadas
Mar 27, 2013 09:45 UTC

For once, investors have got it right. In 2008, their panic turned a financial crisis into a long multinational recession, but they have mostly yawned right through the drama in Nicosia. They hardly twitched at a stream of warnings from investment banks and pundits: bank deposits are no longer sacrosanct; the European Union has been exposed as despotic and incompetent; the Russians are coming; the Russians are going; capital controls will destroy everything; “bail in” (taking losses on loans that cannot be repaid) is the end of the world as we once knew it.

Such talk was out of proportion. Cyprus is a small country – its GDP would put it at 116 on the Fortune 500 list of the largest quoted U.S. companies – with a financial sector that had expanded excessively for two decades, almost entirely by attracting flight capital from Russia. A national financial collapse was both insignificant and merited. Besides, the EU and the International Monetary Fund had a plan to deal with the collapse: a combination of financial help from other countries and managed pain for depositors in Cypriot banks.

Alarmists could not deny all this, but they invoked the great demons of financial crises: precedent and contagion. That was silly. Cyprus was obviously a special case, and the European Central Bank was clearly determined, and able, to keep its problems from spreading. Even if Cyprus had left the euro zone, there would have been no dangerous precedents or grim effects, just a demonstration of a bizarre desire for economic self-harm. For everyone else, Cyprus would still be like a flea-bite – scratch for a minute and forget about it.