A black hole for our best and brightest
Wall Street is expanding, and the economy is worse off for it.
NEW YORK — The thing Deborah Jackson remembers from her first interviews at Goldman Sachs is the slogan. It was stamped on the glass doors of the offices in the investment bank’s headquarters just off Wall Street, the lure of the place in two words, eight syllables: “Uncommon capability.”
Jackson joined Goldman in 1980, fresh from business school and steeped in the workings of government and finance. She found crackerjack colleagues and more business than she could handle. She worked in municipal finance, lending money to local governments, hospitals and nonprofits around the country. She flew first class to scout potential deals — “The issue was, can you really be productive if you’re in a tiny seat in the back?” — and when the time came to seal one, she’d welcome clients and their attorneys to Manhattan’s best restaurants.
Above: Deborah Jackson, center, founder and chief executive of Plum Alley, works with staff members in New York. Jackson spent two decades on Wall Street and now works to develop and support women’s businesses.
The clients would bring their spouses and go to shows. Everyone drank good wine. Her favorite place, in the heyday, was the 21 Club, which felt like an Old World library and went heavy on red meat. More than the perks, Jackson loved the work — the shared struggle of smart people trying to help the country, even as they banked big money. “It was all about solving problems,” she said.
Years later, she would come to see it differently, growing disenchanted with an industry she didn’t think was fixing much anymore.
Economic research suggests she was onto something. Wall Street is bigger and richer than ever, the research shows, and the economy and the middle class are worse off for it.
ABOUT THIS SERIES: The American middle class is floundering, and it has been for decades. The Post examines the mystery of what’s gone wrong and shows what the country must focus on to get the economy working for everyone again.
Chapter 1: Why America’s middle class is lost
Chapter 2: The devaluation of the American middle class
Chapter 3: The college trap that keeps people poor
Chapter 5: What’s killing entrepreneurship?
Chapter 6: What went wrong, and how to fix it
There’s a prominent theory among some economists and policymakers that says the big problem with the American economy is that a lot of Americans don’t have the talent to compete in today’s global marketplace. While it’s true that the country would be better off if more workers had more training — particularly low-skilled, low-income workers — that theory misses a crucial, damaging development of the past several decades.
It misses how much the economy has suffered at the hands of some of its most skilled, most talented workers, who followed escalating pay onto Wall Street — and away from more economically and socially valuable uses of their talents.
The financial industry has doubled in size as a share of the economy in the past 50 years, but it hasn’t gotten any better at its core job: getting money from investors who have it to companies that will use it to generate growth, profit and jobs. There are many ways to quantify how that financial growth-without-improvement hurts the economy.
In 2012, economists at the International Monetary Fund analyzed data across years and countries and concluded that in some countries, including America, the financial sector had grown so large that it was slowing economic growth. Using a different methodology, the most prominent researcher on the size and economic value of Wall Street, a New York University economist named Thomas Philippon, estimates that the United States is sinking nearly $300 billion too much annually into finance.
In perhaps the starkest illustration, economists from Harvard University and the University of Chicago wrote in a recent paper that every dollar a worker earns in a research field spills over to make the economy $5 better off. Every dollar a similar worker earns in finance comes with a drain, making the economy 60 cents worse off.
It’s not that finance is inherently bad — on the contrary, a well-functioning financial system is critical to a market economy. The problem is, America’s financial system has grown much larger than it should have, based on how well the industry performs.
To understand how and why that is, think of money as water and the financial system as a series of pipes. Ideally, the pipes deliver the water from people who have stockpiled it (investors) to people who want to put it to productive use (entrepreneurs, executives, home buyers, etc.).
Over the past half-century, America’s financial industry built a whole bunch of new pipes. The sector grew six times as fast as the economy overall during the past three decades. Other advanced countries didn’t see anywhere close to that growth in their financial sectors.
Some of America’s growth was driven by Washington. Lawmakers kept encouraging financial innovation, which built a market for smarter investment bankers. They did that by changing the tax code to encourage businesses to hire financial whizzes who could spin ordinary income into certain, preferred types of investment income, and by loosening restrictions on the kinds of financial activities that the titans of Wall Street could engage in.
Extra pipes attracted better plumbers — the more the finance industry grew, the more it tugged at highly educated workers. Philippon is a French economist at NYU’s Stern School of Business. He and a co-author, Ariell Reshef of the University of Virginia, have shown that from the end of World War II until the early 1980s, finance was just like any other desk job: The average Wall Street worker was paid about as much as the average worker in the private sector and was only slightly more educated.
But starting at about the time that Jackson joined Goldman, when Congress began tweaking investment-tax rates, Wall Street started drawing more educated workers. This made the average finance salary go up — from less than $50,000 a year in 1981 (which is about $100,000 in today’s dollars) to more than $350,000 a year in 2012.
Salaries rose even faster in the mid-1990s. The average finance worker began to earn more than a similar non-finance worker who had the same amount of schooling. Wall Street executives began to command salaries several times the rate that non-finance executives could.
In sheer dollar terms, it became irrational for almost any qualified American graduate to pass on a Wall Street job. By the mid-2000s, finance workers earned about 50 percent more than they would have in a similar job anywhere else in the economy. There are almost twice as many financial professionals in the top 1 percent of American income earners today as there were in 1979, according to researchers from Williams College, Indiana University and the Treasury Department. Almost 1 in 5 members of the top 0.1 percent work in finance.
You might think finance workers earned all that money because they were selling new and improved financial products that delivered more value — that helped get money more efficiently from investors who had it to entrepreneurs who could put it to profitable use. Research suggests that’s not the case.
A few years ago, Philippon set out to study 130 years of financial-sector performance. He expected to find that performance improved as the industry grew in recent decades.
Philippon tracked the fees that banks and other asset managers take when they move money between investors and borrowers. In theory, the managers should charge less as their technology improves, because they become more efficient and more competitive with one another. (Or, if they charge the same amount, they should generate better returns for investors.)
That’s how it works with, say, your laptop: As the technology improves, you can either buy a better computer for the same price as your last one or you can buy a clone of your last one for less.
In finance, Philippon found, the opposite is true. Financial firms pocket about 2 percent of the money that passes through their hands. That’s basically unchanged from the price of finance in 1920, and it’s actually an increase from the mid-1960s. “It seems that improvements in information technologies over the past 30 years have not necessarily led to a decrease” in the price of financial intermediation, he concluded in the paper.
What that means is that the growth of complex financial products has served primarily to boost income for the firms themselves, Philippon said. A new paper from researchers in the United Kingdom supports his findings. It analyzes decades of data on individual workers and finds no connection between financial professionals’ specific skill sets and why they make so much more money than similarly skilled workers in other industries.
Those finance pros could have been doctors or researchers or product engineers. They could have gone into the business of solving human problems, commercializing big ideas and creating jobs. Almost anything they could have done, by Philippon’s calculations, would have added more value — more growth and job creation — to the economy.
Today, fewer top graduates are heading to Wall Street than a decade ago, possibly because of the fallout from the financial crisis. But the industry still makes up just under 8 percent of the economy, two percentage points above what Philippon calls the optimal size of the sector, given its performance. It’s still adding workers.
Deborah Jackson works with staff member Joan Costello in New York.
Deborah Jackson spent 21 years in the financial industry after she left Columbia Business School. Gradually, over 10 or 15 years, she began to suspect that her industry had stopped caring about solving problems.
She left Goldman in the 1990s for a boutique firm; she later launched an investment-banking practice focused on health-care technology. Her next itch to move was different — more existential. Shortly before the 2008 crisis, she left finance for good.
“It just lost its interest for me,” she said. “It just became work instead of enjoying what I was doing.”
When Jackson left Wall Street, she called it retirement. She day-traded to keep her brain engaged. But she knew she wanted to get back into the business world, somewhere she could solve problems again, where she could make a difference.
Then, in the course of some volunteer work, she started meeting female entrepreneurs, and she was taken with their ideas and energy. She co-founded an accelerator program for women building new mobile technologies. She helped organize an all-female “hackathon,” where programmers get together to build something cool from scratch. She rented a home in the Hamptons and invited 18 women, all skilled coders, to start at 10 p.m. on a Friday. They worked around the clock until 4 p.m. Sunday, building an interactive game to show the horrors of sex trafficking.
Finally, she hopped into the job-creation space. She founded Plum Alley, a company focused on spurring innovation and job creation among female entrepreneurs. It can help them find money to get started (through a six-step plan to tap potential donors in their social networks) and help them find customers (through an online shopping site). She hired three highly educated women, then four more. The company recently moved to an office on Park Avenue South.
Jackson had found the meaningful work she’d been looking for, using knowledge in finance to try to create value in the economy. She had taken a risk and started a business. She’s already thinking about expanding the company to help start-ups grow and thrive. “It kind of reminded me of the early days,” she said. Like back at Goldman, all those years ago. Solving problems.
Coming in Chapter 5: If the shoes don’t fit, find a better way to make them