Political appointees and the revolving door

By Felix Salmon
January 7, 2011
Justin Fox has a smart piece on the revolving door today.

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Justin Fox has a smart piece on the revolving door today. “There doesn’t have to be a problem with a revolving door between government jobs and non-government jobs,” he writes, and indeed the movement back and forth between the public and the private sector “has for most of the nation’s history been more strength than weakness.” The problem, he says, is specific to Wall Street, which pays so much better than any other area of the economy.

With that kind of pay differential, Wall Street inevitably begins to emit a giant sucking sound as it hoovers up smart, self-interested people. This is apparent at top business schools, in physics Ph.D programs — and in Washington, where smart out-of-office (or just burned-out) government officials who want to secure their family’s financial future before either retiring or heading back into public service now flock to Wall Street jobs. Larry Summers did. Rahm Emanuel did too. John Snow did. Bill Daley did. Phil Gramm did. Harold Ford Jr. did. Peter Orszag is doing it. Heck, I’d probably do it if I were in their shoes. Gene Sperling, to be fair, didn’t go so far as to become a banker. But on the whole, if you believe that people respond to economic incentives, you have to believe that Wall Street’s artificially high pay scales have come to have a big impact on decisionmaking in Washington — and that this is an unhealthy development for our democracy and our economy. So making a stink over Sperling’s Goldman paychecks is, under the circumstances, a perfectly appropriate thing to do.

It is is also, of course, a mostly ineffectual thing to do. He’s got the job. But now that he’s got it, maybe he should try to figure out what to do about the chasm between Wall Street pay and compensation in the rest of the economy.

But there’s the rub. Government is perfectly capable, were it so inclined, of shrinking the financial sector and making it much less profitable. Banks could become highly-regulated utilities, bonus culture could be eradicated, hedge funds would no longer be exempt from SEC rules about transparency and investor protection, private-equity honchos would have to pay income tax on their income, leverage would be discouraged in the tax code by eradicating the tax-deductibility of interest, and so on and so forth. The economy might lose a bit of possible debt-fueled upside, but it would be much less fragile and much less prone to banking crises.

If that happened, then the huge gap between what people earn on Wall Street and what they earn everywhere else would disappear: we’d be back in the 1970s, essentially, when the best and brightest went into all manner of different industries.

But it’s not going to happen, because the public servants who could enact such a change currently have the ability to earn millions of dollars per year when they leave DC. Government work pays well, but not that well. The real value of a government position, especially in the economic team, is in the marginal net present value of all those juicy future earnings that you’ll be offered upon your departure from the administration. And so any reforms aimed at shrinking the financial sector would do massive damage to the economic health of the reformers themselves. And those reformers are wonks, remember: precisely the kind of people who consider probability-weighted future earnings to be genuinely valuable things.

In that sense, the revolving door is arguably less distasteful when it swings the other way, from Wall Street to Washington. People like Hank Paulson or Bill Daley have already made their Wall Street millions, and so the marginal net present value, to them, of taking a government job is probably negative. The problem in these cases is that after so many years on Wall Street these people have internalized the worldview of the financial sector, where banks create value and bonuses are great and what’s good for Goldman Sachs is good for America. They’re not going to gut the very system which was so good to them. (Although in rare cases they’ll tinker at the margin, as Gary Gensler is doing at the CFTC.)

One solution here, I think, is to radically reduce the number of political appointees in the economic team. It’s impossible to have a successful career at Treasury or the NEC, because all the top jobs are political: when the president changes, especially when there’s a change of party, all the old appointees get kicked out. As such, every senior appointee is always going to have, in the back of their head, the question of what they might do next. It’s not a question we really want them to have, since right now Wall Street is always going to be on everybody’s shortlist.

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