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That was then, this is now
In the early 1970s, investment banking still maintained a relatively even balance between job satisfaction and the accretion of wealth. The thirty-nine Morgan Stanley partners were paid $100,000 a year and considered that they were well compensated. Parker Gilbert recalls commuting with a couple of colleagues when they were in their early thirties and hearing someone say:"If we could only make $5 million, we could retire and play golf."
Anyone lucky enough to have inherited a million dollars in 1970 could buy an apartment on Park Avenue -- four bedrooms, two maids' rooms, living room with wood-burning fireplace, dining room, kitchen, and library -- for under $100,000. In 1971 corporate raider Saul Steinberg bought one of the most expensive apartments in the city, at 740 Park Avenue, for $250,000.
That is from Patricia Beard, from Blue Blood & Mutiny: The Fight for the Soul of Morgan Stanley.
It is an interesting question -- to say the least -- how we got from there to here. Most of all, the contemporary world is immensely better at allocating talent and maximizing the value that talent can create (admittedly some of this is paper shuffling value, it is not all social value). That is one of the fundamental productivity shifts behind the rise in income inequality; people with that pro-golf attitude simply couldn't make it to the top today, and back then many would-be earnings superstars were held in chains by sheer social stupidity, lack of access to the right training, or inability to connect with the proper social networks.
If you work in investment banking and don't want to play by those rules, "the system" is happy to hit the hyperspace button, send you back to Butte, Montana, and feed you bananas and milk. However no one is going to boil you in oil.
Let's be glad all those people -- many of them silly -- slave so hard on our behalf.
Posted by Tyler Cowen on October 17, 2007 at 04:05 AM in History | Permalink
Comments
I think it's a tragedy that so many very bright and energetic people go into investment banking. One of my school friends came near the top of his year at Oxford and went to work for Goldmans. He left after two years to become a barrister (which was always his intention) and his comment was that the work they do there simply isn't that hard. They get the best because they can pay for the best and in that situation - why not? Surely society would be better off if they put their brains and energies to better use though.
Posted by: Finnsense at Oct 17, 2007 4:39:43 AM
I have a friend who's an Investment banker. The profession will likely take ten years from his life. Like many others Ibankers, he has no real social life. He deserves every penny he gets.
Posted by: thehova at Oct 17, 2007 7:17:43 AM
So are the Joes in the middle class better off now?
I just finished reading one of the books from yonder right margin, More Sex..., which basically said in chapter two that what the
Great Depression amounted to was a bunch of people having to live temporarily at the standard of the previous generation, and that
our current growth rate extrapolates to people living on about a million bucks a day of current dollars within 100 years.
But then I also come across stuff life this in the press:
"Life is harder now, some experts say"
http://www.msnbc.msn.com/id/21309318/from/ET/
I realize there may well be no end to the fallacies and false impressions I'm susceptible to, but was it not true that middle class
couples got by in a middle class fashion on one income 35 years ago, and it now takes two?
My wife and I are both set to enter the workforce as a teacher/librarian combo (unless someone bites on my life of crime prize:
half the procedes on the first 20k of any scheme that doesn't make me a violent offender or get me caught--please email the address
in the link) and attempt to live in Cali and crunching the numbers is a little scary.
I don't suppose either teacher or librarian were too comfortable a single-income job a generation ago. But together would they have more
easily yielded a middle class life?
Posted by: Different Jeff at Oct 17, 2007 7:49:49 AM
So are the Joes in the middle class better off now?
I just finished reading one of the books from yonder right margin, More Sex..., which basically said in chapter two that what the Great Depression amounted to was a bunch of people having to live temporarily at the standard of the previous generation, and that our current growth rate extrapolates to people living on about a million bucks a day of current dollars within 100 years.
But then I also come across stuff life this in the press:
"Life is harder now, some experts say"
http://www.msnbc.msn.com/id/21309318/from/ET/
I realize there may well be no end to the fallacies and false impressions I'm susceptible to, but was it not true that middle class couples got by in a middle class fashion on one income 35 years ago, and it now takes two?
My wife and I are both set to enter the workforce as a teacher/librarian combo (unless someone bites on my life of crime prize: half the procedes on the first 20k of any scheme that doesn't make me a violent offender or get me caught--please email the address in the link) and attempt to live in Cali and crunching the numbers is a little scary.
I don't suppose either teacher or librarian were too comfortable a single-income job a generation ago. But together would they have more easily yielded a middle class life?
Posted by: different jeff at Oct 17, 2007 7:52:05 AM
jeff...you could live as a middle class family *not* in california as a teacher+librarian...
Posted by: shawn at Oct 17, 2007 8:21:39 AM
Jeff,
What's changed is that land values now capture a much larger portion of the rents of being an American (and living the American dream vis a vis white picket fence 3 bedrooms etc). Ask people of your parents generation what they paid for their first home, what rent was the year before and what they earned either year and compare with today. The portion of income devoted to shelter has risen (quite dramatically on both coasts). Consider the rust belt where you have a much better chance of making the numbers a lot less scary.
Also consider that "middle class living" has increased substantially from what it meant a generation ago. My parents generation (married in the early 70s) rented until they were 30, cooked 90% of meals at home, didn't have cable TV, drove a used econobox to the grocery and biked to work, and had a garden). Almost none of those things are true of my friends. I'm the oddity for knowing how to cook, and not having cable/sattelite.
Posted by: nelsonal at Oct 17, 2007 8:30:15 AM
My parents generation (married in the early 70s) rented until they were 30, cooked 90% of meals at home,
As far as I can work out, there are plenty of places in the US where due to transportation costs, the cost of actual raw materials for making home cooked food has risen dramatically.
Posted by: Chris Stiles at Oct 17, 2007 8:49:37 AM
"I realize there may well be no end to the fallacies and false impressions I'm susceptible to, but was it not true that middle class couples got by in a middle class fashion on one income 35 years ago, and it now takes two?"
For middle income then equal to poverty line of today, yes. I bet you could use one income to live at the poverty line today still.
If you are skeptical, just think of all the things that you can buy today with one low income that didn't even exist then.
Posted by: liberty at Oct 17, 2007 8:59:22 AM
Nelsonal - Good point about relative land values. $100K in 1970 would be around $400-500K today; this prices you out of most of Brooklyn that was considered unlivable in 1970.
On the other hand, dismissing the questions of poverty and inequality with arguments like "it was harder back in my day" and "if you think it's hard being poor in America, try Mauritania" seems intellectually unsatisfying.
Posted by: Allan Friedman at Oct 17, 2007 9:12:59 AM
"My parents generation (married in the early 70s) rented until they were 30, cooked 90% of meals at home,"
I'm getting old enough to think differences like these are important. I mean, another blog talks about home loan practices "going back to the 50's and 60's" like that's a bad thing.
What, we can't be a full nation of zero-down, don't cancel the lease on the BMW, lifestyle optimists?
In other words, how much of the progress Tyler sees comes from better allocation of talent, and how much was just borrowed from the future? How much of the "wealth" explanation is really "debt?"
Posted by: odograph at Oct 17, 2007 9:16:38 AM
All I know is my daddy walked uphill bothways 10 miles to school without shoes. :).
Posted by: MrBeefy at Oct 17, 2007 10:00:51 AM
Geez MrBeefy, why didn't his parents just take out a 6 year loan on a big SUV with LCD TVs in the back seats? Then he could get a ride to school! Heck, make it a Hummer.
Posted by: odograph at Oct 17, 2007 10:04:31 AM
I wasn't saying it was harder or easier back in the day, rather that what was considered a normal lifestyle then would be considered similar to poverty line living today. Our expectations have increased (I know I eat out far more than my parents did, and my mom figured out that each of us kids spend more on Starbucks than she spent on a month's food for our family of 4 (granted inflation makes the comparison less meaningful, but I'd guess as a % of income it's scarily close) and both shift the available resources for other activities.
My guess would be that away from the coasts, a family can still afford a pretty similar lifestyle to what families had in the 50s and 60s on a single middle class income, but that few would consider that a middle class lifestyle, today.
Posted by: nelsonal at Oct 17, 2007 10:37:45 AM
Are we really better off that the brightest are becoming investment bankers and hedge fund managers?
For example, is there any proof that they even outperform the market after adjusting for volatility?
Posted by: Person at Oct 17, 2007 10:43:01 AM
nelsonal: middle class people these days certainly don't own much before age 30. Hell, 30 is seen as very young to own one's own home, probably makes you the first in your social circle. And forget about kids.
A garden is a luxury good, not a money-saving technique.
Cable TV costs effectively nothing, and once again, middle class and has time for TV? Not on the coasts!
Posted by: michael vassar at Oct 17, 2007 10:44:54 AM
"Are we really better off that the brightest are becoming investment bankers and hedge fund managers?
For example, is there any proof that they even outperform the market after adjusting for volatility?"
Investment bankers put together financial deals, more or less. They do not invest money.
Active asset management is always up for debate. There is "proof" both ways.
Posted by: Johnny Debacle at Oct 17, 2007 1:16:10 PM
It appears to me that we would have been better off if the investment bankers had not created exotic forms of mortgage backed funding that made mortgage lending seem safer than it really was thus leading to excessive amounts of house building.
Posted by: sort_of_knowledgable at Oct 17, 2007 2:27:27 PM
In the 1970’s I quietly lived sans Park Av. address, BMW and was cooking 90% of my meals while my boss was making $100,000
Today, I can not really afford either of those things and still cook 90% of my meals while my boss makes $20 million bonuses.
Yet, I should not have the audacity to complain.
By the way, arguing that lack of social life and working weekends justifies huge salaries is silly. Most Chinese laborers work 70 hr weeks and can barely afford their daily rice.
Posted by: Happy Camper at Oct 17, 2007 2:57:41 PM
Yet, I should not have the audacity to complain.
Get to the nearest bathroom, find a mirror, and complain as long as you like to the person you see in it.
Posted by: diz at Oct 17, 2007 3:18:08 PM
The comment I have the most problem with is Tyler's last one: "Let's be glad all those people slave so hard on our behalf".
I'm not sure they're really doing much for us. Its like lawyers. Sure, your lawyer helps you. But do lawyers as a whole help us? Well, lawyers and judges have done a lot of work to make sure that the legal system is really complicated, the stakes are really high, and it reaches into a lot of branches of life. So we have to pay them lots of money to litigate for us, but I'll bet we could reach a similarly just set of outcomes at far less expense. Problem is, to a large degree, lawyers and judges make up the rules.
Then you can talk about CEO's. Why are they paid so much? Well, the board decides. But maybe the board is composed of CEO's. They like it when they get paid a lot, so they pay their CEO a lot and he returns the favor for them somewhere else.
Now in the financial world, you have to go through Wall Street. But how much of the wealth they extract is for services performed and how much is through the operation of a large oligopoly? That is the question that needs to be asked.
Posted by: mpowell at Oct 17, 2007 7:15:32 PM
Person,
Obviously, Wall St, on average, isn't beating the market. But look at how much the market has changed since the early 70s:
Transaction costs on equities have gone from several percent to almost nothing.
Mutual funds charge 25bp rather than 20%+ loads.
Spot FX is basically free.
Swaps, etc, have hugely reduced companies financing costs.
Everyone gets a credit card - retail commerce is so much easier than w/ checks.
ATMs cross the world. Do you remember exchanges and traveller's checks?
Cross-border investment is much simpler.
And so on...
Yes, WS has had its fiascos in the last thirty years, but its removed an awful lot of friction while getting rich.
Posted by: gorobei at Oct 17, 2007 7:30:14 PM
Great Depression amounted to was a bunch of people having to live temporarily at the standard of the previous generation.
I asked my mother, born in 1920, what the depression was like for her, and she said she didn't really notice it. Her own mother grew up in a sod house in Texas, the farm in Oklahoma gave out early on, and the family moved in a covered wagon -- all in the early part of the twentieth century. So I suppose her family was still living as the previous generation did until the late thirties.
Posted by: chuck at Oct 18, 2007 3:05:30 AM
Johnny_Debacle: Yes, I'm aware that investment bankers put together deals, but that doesn't mean they can't be compared against "investing in the market". That is, if I take the total amount spent on investment bankers for deals and subtract that from the dollar-weighted average return on those deals, how does it compare to investing in an index fund covering the same region and capitalization? This would tell us whether the marginal value of an investment banker's labor is positive i.e. if they allow you to earn a higher return than investing in an index fund.
As for the evidence "either way", can you refer me to the evidence showing the average actively managed dollar outperforming an index of equivalent volatility?
gorobei: The question is not whether "Wall Street beats the market" but whether paying these high salaries on average gets you a better return on your money. (See above in this post for a test.)
And the changes you listed are great, but I'm not sure what they have to do with investment bankers and hedge funds.
Posted by: Person at Oct 18, 2007 7:53:36 AM
The tragedy is that our best and brightest learn financial "management" and move bits around and get compensated hugely. When the highest and best use for those minds would be in science, inventing or discovering new and better ways to accomplish things and getting rich from that. But that takes time, luck and building a company. So they choose the more lucrative, more sure result in investment banking. Their choice is rational for sure. But the net result is just a change of allocation in wealth, not a creation of wealth and opportunity. They gain personally, but society as a whole loses.
Posted by: techreseller at Oct 19, 2007 12:07:31 PM
I found this link at MattXIV of 4 Lights Blog during the Shock Doctrine discussions http://myslu.stlawu.edu/~shorwitz/Good/myths.htm.
Giving full credit to Matt I offered as a resource for this discussion.
Posted by: briandrpm at Oct 20, 2007 4:44:09 PM
