As a follow-up on the previous post, it's a lot easier to abstractly say that Wall Street compensation should fall than it is to, well, lower it. Closing the hedge fund loophole is a no-brainer, but specifically taxing a particular industry is pretty dicey. In a follow-up Washington Post chat, a reader asked Pearlstein for "other ways" to reverse "the Wall Street arms race on pay." Pearlstein's answer, I think, was pretty weak.
I don't think this is something government can or should solve. What it will require is for leading companies like Goldman Sachs to use recessions like this one to unilaterally disarm -- to announce that they are going to a new structure for compensation which, in reality, would also turn out to be a lower level of compensation. The hope would be that everyone else, out of economic necessity, would follow along rather than try to take advantage of Goldman. It is a common leader-follower arrangement that you see in lots of markets. What Goldman could also do to support this is to lower its prices as well, so that competitors would risk losing customers if they don't follow the lead. Can anyone be sure that would work? No. Is it risky? A bit. But if it doesn't work, Goldman can also quietly respond to instances when competitors try to use higher pay to lure away its best performers. But it could also allow some people to be picked off and acknowledge that the skills many of these people have aren't so unique and the people aren't as irreplaceable as they think they are.What the arms race in pay is about is really herd behavior.
That last bit is an important point: These skills aren't so unique and these people, we now know pretty definitively, were not that good. But Wall Street will continue trying to judge applicants relative to one another. And unless Goldman Sachs develops an alternative criteria that favors a previously unwanted set of applicants, they're not going to want to miss out on what the industry has identified as the best talent. At base, this isn't so much herd behavior as a collective action problem. If everyone pays high salaries, everyone else has to pay them too. A single bank opting out of the competition would simply put itself at a competitive disadvantage. The only way to solve a collective action problem is for all the actors to do it voluntarily -- an unlikely outcome given that a few dissenters could amass critical advantages -- or for an outside actor, like the government, to force them to do it. But how you do it is not, I think, clear.
