Why aren't there more investment bankers?
By Arnold Kling
From World War II through the 1970s, while most Americans were getting solid raises every year, the incomes of the richest 1 percent were doing only a little better than inflation. Since the 1980s, the two groups have switched places. The affluent have received huge gains, and everyone else’s pay growth has slowed down. For the last six decades, in other words, the American economy has been much more of a zero-sum game than we might like to believe.
I think that the term “zero-sum game” is probably off. We have absorbed well over tens of millions of immigrants in this period, and my guess is that the economy has been positive-sum for them.
But what all this handwringing about the income distribution is missing is a story about competition. Why aren’t the rents at the high end of the income distribution competed away?
I can see how doctors earn rents–there are obvious barriers to entry. And the field of entertainment generates winner-take-all results, in part because being popular makes you more popular.
But a lot of the big money is in finance–investment banking. One would expect more people to go into investment banking and compete away those rents.
The market solution to income inequality would be more investment bankers. Why aren’t there more investment bankers?
I am pretty sure that all of my daughters could master finance if they wanted to. Both economic theory and my wife are telling them that they should major in accounting, but none of them will do so. I may be naive, but I suspect that there are a lot of people who could raise their incomes by going into investment banking. They are not prevented from doing so, but they choose other careers as a matter of taste.
This leads to the hypothesis that wealth is becoming more concentrated because fewer people are focused on achieving enormous wealth. My daughters, by not competing, enable the people with investment banking jobs to earn high rents.
In short, the distribution of wealth represents differences in taste. Many people prefer jobs with less income and more of other characteristics.
I think that many people steer away from finance and accounting as a matter of taste. But people who choose different occupations are not all satisfied with simply making their own choice and letting other people make their choices. Just as there are people who believe that it is in bad taste to smoke or drive an SUV, there are people who believe that it is in bad taste to be an investment banker. And just as there are people who want to see government do something to punish smokers and SUV owners, there are people who want to see government punish those who choose high-income careers.
UPDATE: a commenter makes a good point, which is that many investment bankers are not in the top income bracket. It might be that if there were more investment bankers, the more run-of-the-mill six-figure incomes would be competed down, but the incomes of the superstars might remain the same. I don’t know enough about what generates the really high rents in the industry to know whether more competition lower down would lead to less spectacular rents at the very top.