The return of the plutocrats

By Felix Salmon
December 3, 2009
TARP repayment give it a bit more wiggle room in terms of CEO compensation, thereby broadening the field of potential successors to Ken Lewis? Will General Motors be able to find a CEO when it's state-owned and therefore probably won't be able to pay a typical private-sector salary? Will Goldman Sachs be able to persuade shareholders that its $16 billion bonus pool is reasonable?

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It’s December, which means it’s bonus season, and time for more than the usual amount of bellyaching about pay. Will Bank of America’s TARP repayment give it a bit more wiggle room in terms of CEO compensation, thereby broadening the field of potential successors to Ken Lewis? Will General Motors be able to find a CEO when it’s state-owned and therefore probably won’t be able to pay a typical private-sector salary? Will Goldman Sachs be able to persuade shareholders that its $16 billion bonus pool is reasonable?

Meanwhile, there’s an even bigger row over pay at state-owned banks across the pond, with RBS’s directors threatening to resign en masse if the Treasury vetoes its bonus plan.

The underlying problem here is a fundamental disconnect between the plutocrats and the people. Politicians and their constituents simply have no time any more for people paying themselves multi-million-dollar salaries, especially when the companies in question only exist in their present form thanks to hundreds of billions of dollars in government interventions.

Back in March, at what was in hindsight the low point for both the markets and for political sentiment more generally, I genuinely feared class warfare. I don’t think we’re there any more: it’s hard to keep that angry for that long, and feelings have become a little more muted. But that doesn’t mean that the anger has disappeared entirely.

We’re at a fork in the road right now. People who were comfortable with seven- and eight-figure salaries a couple of years ago have a natural tendency to want to return to the status quo ante; the rest of us see a once-in-a-lifetime opportunity to bring executive pay down to the kind of levels which normal human beings can relate to. Given that the pay levels of old clearly did no good and colorably did a great deal of harm, that doesn’t sound like an unreasonable request. But there aren’t any mechanisms in place to make it happen, and when the likes of Kenneth Feinberg try to impose some kind of sense and order, the immediate reaction is to try to wriggle out from under his oversight.

So the plutocrats, it seems are going to win. They had a nasty couple of years, by plutocrat standards, and in a handful of companies operating under de facto state control they don’t quite have the free rein they would ideally like. But the system as a whole hasn’t changed, and those who thought that it might can’t quite believe how naive they were.

29 comments

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When exactly did they leave?

“Given that the pay levels of old clearly did no good”That’s a given? I’ve heard arguements about how the high pay had downsides, and even that the downsides outweighed the good ones. But to say they did *no* good? That’s something that should be backed up. If not here, at least a link to a post about it.

drewbie, i’m trying to imagine what “good” you think was done by a system in which financial products were sold, marked to model, and bonuses paid as a result of the model-marking? as far as i’m concerned, what we had was a conspiracy to commit fradulent conveyance….

Posted by howard | Report as abusive

I never thought the real risk of class warfare was in 2008 or early 2009. The real risk is towards 2011, 2012 when there’s a sizeable portion of the population that’s been out of a job for a long time or are underemployed. And that will not look good for Obama if he can’t tap into that anger to get reforms passed.We’ll also have to see what happens to places like Spain, Ireland, Iceland and England to see how the popular anger will develop. I have some friends in Spain and the situation there is extremely dire, especially for young people.BTW that Bloomberg article about Goldman and guns was hilarious in a very disturbing way.

Posted by Guillaume | Report as abusive

I suspect a 70s-licious 90% top marginal tax rate would have the desired effect, and we’d also have the chance, as you note above to see how elastic the US tax system is. I don’t know whether changes to the US tax system followed the same lines as Thatcher’s cuts in the 80s, but I’m surprised at how little discussion of top marginal tax rates there is in the US, at least compared to the UK (where the new 50% band attracted a fair amount of discussion, although its revenue-raising prowess attracts scepticism). Or is it now widely accepted that these are counterproductive in terms of revenue-raising. Might, then, supporters of higher rates on top earners be presenting them as an aid to financial stability, even if they hit certain classes of hyper-successful entrepreneurs?

Robbing banks with a gun is for chumps when you can do it with a suit and tie.

Posted by Salutati | Report as abusive

Why are so many people afraid to call their bluff? Let them resign! Let them all go to Galt’s Glutch. They are a lot more replacable than they think they are. What they do is not rocket science.

Are you writing about economics or ethics?Once upon a time we would have let informed investors, customers and suppliers work out what the market would bear.Now, I’m excited about legal pressure to make some of these people more informed.

Posted by Pete Cann | Report as abusive

Felix, this post is weird. We’ve had 30 years of unrelenting class warfare against people who produce useful things for a living. Now they are all unemployed or too poor to buy anything, and Wall Street is wondering who they can fleece next for their outsize pay.None of that is disputable. Now, do you “fear” that somehow the class war will become symmetrical, like it was in that brief window from 1940 to 1979? What, exactly, would be bad about that?Would it hurt the US to have universal health care, fully funded schools, higher college graduation rates, solvent pension funds and financial integrity?What exactly do you fear?

Posted by Dollared | Report as abusive

Howard-Are you blaming the system on the high pay? That the housing / credit bubble was a result of a few high salaries?Not every banker is a crook, and some of them deserved their pay. Just like any other job, some people will always make more than they should.

drewbie, the housing bubble was the housing bubble: we’ve had them before. what made it a systemic crisis was the extent of leverage and the degree to which bonuses based on mark-to-model accounting encouraged what i (as i’ve noted) believe was nothing less than a criminal conspiracy to commit fradulent conveyance.i have nothing against high incomes as such (and to go a step further, i’ve got nothing against securitization as such) but when those high incomes are based (as so many were) on heads-i-win-tails-you-lose scenarios set up by oligopolies (and surely, if the world of investment banking isn’t an oligopoly, benefitting from all the advantages that accrue to oligopolies, then the term has no meaning left), i’ve got a serious problem.now there were a lot of factors that contributed, and the ability of investment bankers to package dreck and claim it was dross and walk off with an 8-figure bonus was surely a major one.now, i’ve answered your question, you answer mine: what was the upside there that high pay provided? and if preventing the systemic risk means more generally curbing perverse pay incentives, then i’m going to favor curbing perverse pay incentives (and live with whatever disincentive that has on attracting smart people looking for big bucks into finance rather than, say, high tech, where you don’t get paid on the come).

Posted by howard | Report as abusive

er, sorry, drewbie, “package dreck and claim it was gold!” packaging “dreck” and claiming it was “dross” would have been a major step forward in honest selling!

Posted by howard | Report as abusive

Obama should do with the bank execs what Reagan did with the air traffic controllers. Fire them and see who cares. I’d take their jobs and do just as well, except I have a higher handicap.

Posted by RZ | Report as abusive

“that doesn’t sound like an unreasonable request.”Yes, much like a robber who is demanding a man’s wallet because he thinks he has too much money is simply making a “reasonable request.” (After all, the man DOES have more money than the robber).Sheesh, if actual class warfare ever did erupt, it would be instigated by thugs like this author. Authoritarians abound in the “progressive” movement.

Posted by Tillyosu | Report as abusive

it’s completely stunning to me that in a country whose political parties have both been corporate captured for years that anyone actually felt that anything was really going to change in the first place

The rest of us see a once-in-a-lifetime opportunity to bring executive pay down to the kind of levels which normal human beings can relate to.Why is it important that corporate executives and successful bankers make salaries that normal people “can relate to”? What does being able to “relate” to someone’s salary really mean?I can’t “relate” to the amount earned by many professional athletes and entertainers, many people probably can’t “relate” to what I make, and many people in other countries will never “relate” to what the average American earns. I’m not sure why any of that is, in itself, a problem.

Posted by Dave in NYC | Report as abusive

And if you don’t like what these companies are paying their employees, vote with your wallet. Don’t use their products or services. Don’t buy their securities or invest in funds that own them. Don’t allow your pension to be invested in them.

Posted by Dave in NYC | Report as abusive

Class warfare has already started and the plutocrats won.

Posted by Suz | Report as abusive

Those who throw about words like “plutocrat” are usually those who dream about, or proselytize for, class warfare.There’s at least as much wealth being distributed downward from the productive to the low/no income unproductive than there is being transferred upward.

Posted by Mike | Report as abusive

That these bankers are actually “producing” something is false. They only produce methods of gaming the banking and financial systems to maximize their bonuses. I’m all for real capitalism, this isn’t it. It’s corporatism – socialize the losses, privatize the profits.

Posted by Suz | Report as abusive

Mike wrote, “There’s at least as much wealth being distributed downward from the productive to the low/no income unproductive than there is being transferred upward.”Nope.First, let’s note that those in the FIRE sector are not productive, but rent-seeking parasites.Second, most of the wealth transfers from the productive are _upwards_, since most such transfers are in the form of payment of economic rent, and most (on a dollar-weighted basis; not all) rent collectors are relativel wealthy.

Posted by liberal | Report as abusive

Drewbie wrote, “Not every banker is a crook, and some of them deserved their pay.”Nope.(1) The banks and shadow banks get options for free, in the form of implicit government guarantees.(2) Actual banks are granted the privilege to create money out of thin air, loan it, and pocket the interest.

Posted by liberal | Report as abusive

What Dollared said.The class warfare since 1980 has been unrelenting, and waged by the rich against the poor and middle class. The bank bailouts seem to have been contrived at every step to perpetuate this situation.God forbid the bottom 95% get in a few good licks of their own against the elite.

Posted by MDC | Report as abusive

Dave wrote, “I can’t “relate” to the amount earned by many professional athletes and entertainers, many people probably can’t “relate” to what I make, and many people in other countries will never “relate” to what the average American earns. I’m not sure why any of that is, in itself, a problem.”The point is that the taxpayer is funding outsized salaries in the FIRE sector. The entire sector is one giant parasitic rent-collecting rathole. Thus, salaries in the FIRE sector are not earned, but rather stolen.Professional athletes earn their salaries, except to the extent that the professional sports sector as a whole is on the public teat in the form of public funding for stadiums, etc.

Posted by liberal | Report as abusive

Dave wrote, “And if you don’t like what these companies are paying their employees, vote with your wallet. Don’t use their products or services. Don’t buy their securities or invest in funds that own them. Don’t allow your pension to be invested in them.”LOL!The little guy faces a much harder collective action problem than the banksters do.The _only_ way (empirically speaking) for the little guy to solve his collection action problem is via government action.

Posted by liberal | Report as abusive

Tax the shit out of them.Go back to Eisenhower marginal rates for income over one million a year.

Posted by Grytpype | Report as abusive

Why is it important that corporate executives and successful bankers make salaries that normal people “can relate to”? Because, dear Dave, *I* as a taxpayer have to pay the tab when the Ponzi scheme goes smash. That’s what folks mean by “heads I win, tails you lose” – the current system has transferred the risk to the government.All I can get from your side is that you think these big executives should be rewarded for devising ways to transfer risk to the government. By the same token, you should approve of successful mafiosi and drug lords, since they too have made scads of money by finding successful ways to game the system. If that is what you believe, that’s all well and good, but don’t expect taxpayers like myself to cheer them on.Athletes aren’t getting bi-weekly cuts from my paycheck to get their big bucks. These executives are. That’s why it is important to bring their salaries down to reasonable levels IF WE HAVE TO BAIL THEM OUT. Government exists to benefit the governed – when the governed are fiscally liable, they have every right to punish bad performers.

Posted by LittlePig | Report as abusive

You still haven’t shown, liberal, how upwardly transferred rent exceeds the tens of billions transferred yearly in the form of entitlements from the middle and working classes downward to benefit-seeking parasites a/k/a “the underprivileged.” The productive get it from two directions.

Posted by Mike | Report as abusive

There was a class war. We (the rich) won. Ha Ha.

Posted by Richie Rich | Report as abusive