I get the feeling that Brian Griffiths’ words at a panel discussion in London Tuesday might go down in history as some kind of let-them-eat-cakish landmark. Said the economist, a former Margaret Thatcher adviser who was raised to the peerage in 1991 and has been helping make ends meet since then by toiling away as a vice chairman (read: guy who participates in panel discussions and stuff) of Goldman Sachs International:
We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all.
Griffiths is of course right that at some level there is a tradeoff between inequality and prosperity. The prospect of making more money than others gives us incentives to work harder, to take more risks, to be more inventive—all of which makes the economy grow much faster than it would if we were all perfectly equal, financially speaking. And the presence of large pools of money in private hands enables valuable investment and philanthropy.
But the argument that ever-growing inequality will make us ever more prosperous really doesn’t hold up. Neither does the more specific argument—to take Griffiths’ statement in context—that gigantic paychecks at Goldman Sachs and other Wall Street and City firms are good for the rest of us. I don’t know that there’s any incontrovertible proof that they’re bad for the rest of us, either, but the standard Wall Street credo that its people get paid so much because the work they do is of such great value to society doesn’t seem so convincing these days.
What’s interesting is that, when Wall Street first began booming in the 1980s, there was lots of outcry about the big paychecks—and the fact that the financial sector was siphoning away grads from top business schools who previously would have gone into industry. But by the late 1990s everything seemed to be working so well, economically speaking, that even those not on Wall Street payrolls grew comfortable with all the multimillion-dollar paychecks. I remember a session at the American Economic Association annual meeting in 1997 where Yale’s William Nordhaus mused aloud that maybe all the criticism had been wrong, and maybe all these youngsters getting paid so much on Wall Street were getting paid so much because they truly were doing a great job of steering capital to where it was most needed.
Later that year came the Asian currency crisis, the first in a series of financial meltdowns that seems to have culminated—for now, at least—with the Panic of 2008. There were also some big-time, world-changing increases in prosperity during that period, mainly in China and India. But those are both countries where the activities of Goldman Sachs and its ilk are pretty tightly restricted. In the U.S., where the financial-sector paychecks have been the biggest, we’ve been going backwards, general-prosperity-wise, since 2000.
So I don’t entirely buy what Griffiths is peddling anymore. But who cares about me: the more telling verdict is the mocking attention his words got all over the world. Then there’s all the other stuff going on: Kenneth Feinberg cracking down hard on paychecks at a few bailed-out companies, the Wall Street Journal (a ‘Heard on the Street’ writer, not the editorial-page guys, but still) arguing for a windfall profits tax on banks, British regulator after British regulator saying that more needs to be done to rein in the financial sector. A month ago it seemed like Wall Street’s surviving firms might be able to get away from last year’s near-catastrophe scot-free. Now I’m not sure about that.