Opinion

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.

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.

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.

Obesity and the unhealthy economy

Edward Hadas
Mar 13, 2013 15:11 UTC

Obesity is a matter of free choice – no one forces people to get fat – but few people are happy with the result. In the last few decades, the freedom to eat has too often turned into slavery to the immoderate desire for more.

In the United States, the world leader in obesity, the trend toward higher body weights began more than a century ago. Researchers John Komlos and Marek Brabec show that the average body mass, weight adjusted for height, has moved upward fairly steadily – from too low for optimal health right through optimal to the current too high level. Most visibly, and alarmingly, the gap between the heaviest 30 percent and the rest has widened significantly in the last few decades. There is no end in sight.

The problem of obesity is an adverse side effect of one of the greatest economic liberations ever, the freedom from want of food. Until shortly before 1900, food shortages were nearly always and everywhere a lively possibility, and all too often a grim reality. Now, although inadequate nutrition still blights the lives of more than a billion people in the world, residents of developed economies enjoy food in excess.

Morality and monetary policy

Edward Hadas
Mar 6, 2013 13:22 UTC

Monetary policy these days is complicated, ineffective, and quite possibly immoral. The complexity is inevitable; there is no simple way to ensure that the supply of money and credit is appropriate in a large modern economy. The ineffectiveness is evident: central bankers let that supply grow too fast before the 2008 financial crisis, and have unable to return monetary conditions to normal since then.

The moral lapses may be subtle, but I believe the lack of attention to the common good in the management of interest rates and the monetary system causes three serious problems.

 1) Dangerous freedom

Imagine a world in which anyone can use anything as a currency. This perfect monetary freedom would be a disaster. With strangers, I would only be willing to deal in gold, or some other scarce substance that could be carefully measured, because I would have no way of evaluating verbal or written promises to deal fairly. I might be able to trust members of my social group in economic transactions, but only because our monetary freedom was balanced by strong social constraints; they would be punished if they tried to cheat me.

Salvation through work

Edward Hadas
Feb 27, 2013 14:58 UTC

“It has been computed by some political arithmetician that if every man and woman would work for four hours each day on something useful, that labour would produce sufficient to procure all the necessaries and comforts of life … and the rest of the 24 hours might be leisure and happiness.”

When Benjamin Franklin wrote that in 1790, the American thinker was a few centuries ahead of his time. But the modern economy is so productive that everyone would have far more “comforts” than were available in Franklin’s day, even if the standard working week were shrunk from 40 to 20 hours. The four-hour day, though, isn’t on the horizon. Benjamin Kline Hunnicutt, a professor of Leisure Studies at the University of Iowa, explains why not in a fascinating new book, “Free Time, The Forgotten American Dream”.

For more than a century, labour activists continually demanded – and were granted – shorter working hours. By the 1930s, futurologists were sure that the trend would continue. Workers wanted more leisure time, and, thanks to ever more efficient machines, they could have it, while still enjoying steady improvements in the material standard of living.

The knots of development

Edward Hadas
Feb 6, 2013 15:35 UTC

Why are so many poor countries stuck with huge economic problems? Why, for example, are there so many unemployed young people in Egypt – 41 percent of 19-24 year-olds? The poor state of British housing can help answer these questions. 

By developing world standards, the British housing system works quite well. In Egypt, it takes 77 bureaucratic procedures in 31 offices, and between six and 14 years, to get legal approval for construction of a new house, according to the 2012 doctoral dissertation of Abdel Hamid El Kafrawy of the University of Glasgow. The result: housing is in chronically short supply and 65 percent of the population live in unregistered and untaxed buildings. 

For a rich country, though, the UK does remarkably badly. Construction has been inadequate, at half the modest target rate set by the government in 2007. The relatively few new houses and apartments which are built are mostly relatively small – new American houses have almost three times as much floor space and new French houses have 45 percent more, according to a 2009 study by the British Commission for Architecture and the Built Environment. And rental and mortgage payments for these under-sized living quarters take a higher share of income in the UK than almost other developed country. 

  •