Getting Rich

Via Tyler Cowen, a paper attempts to see who's earning the big bucks:

We consider how much of the top end of the income distribution can be attributed to four sectors – top executives of non-financial firms (Main Street); financial service sector employees from investment banks, hedge funds, private equity funds, and mutual funds (Wall Street); corporate lawyers; and professional athletes and celebrities.

Their analysis suggests that "Main Street" CEOs -- the heads of firms outside the financial sector -- comprise a relatively small proportion of the super-rich (obviously, CEOs earn a good deal of money) citing such factoids as "the top 25 hedge fund managers combined appear to have earned more than all 500 S&P 500 CEOs combined (both realized and estimated)."

Comments

Not exactly shocking news.

Some spin it as the rise of the "service industry" or "America's dominance in financial services" but the "carry trade" and other cyclical factors suggest that it's more of a "bubble time" phenomenon.

Posted by Meh | July 22, 2007 12:15 PM

Its pretty simple, we've become a rentier economy. Expect the next administration to be handing out hereditary titles if we keep going in this direction.

Posted by Ed | July 22, 2007 1:29 PM

This is a good example of what Kevin Phillips refers to as the "financialization" of the economy. This is the process in which an economy moves from making money from making things (manufacturing) to making money from moving money around. He points out that this is a characteristic of empires that are in decline. The process leads to distortions in the economy, as powerful people are richly rewarded for activities that don't actually produce anything of value. Eventually, the whole house of cards collapses.

Posted by beckya57 | July 22, 2007 2:34 PM

Beckya57,

Well, we should remember that the two most recent examples of financialization that Phillips uses - the Netherlands and the UK - are among the wealthiest countries in the world today. Yes, they lost their empires, but every other European country also lost their colonies as well (in fact, Japan lost it's own colonies too during a massive process of industrialization). It's hard to say that the endpoint for either of those nations was particularly bad.

There's an argument by Elbaum and Lazonick that would tend to note that, in fact, the problem was not that the UK financialized, but rather the specific form of that financialization - that most of UK investment was directed towards buying the bonds of emerging market countries. The US was high financialized or even more so by the early twentieth century - no British financier ever held as anywhere near as much power as JP Morgan, or even Harriman, Clarence Dillon, Augustus Belmont, Henry Villard or Jay Gould. But these US financiers primarily focused on the US industrialization process.

Posted by burritoboy | July 22, 2007 3:48 PM

Beckya,

The demise of American manufacturing has been greatly exaggerated by those who are seemingly emotionally invested in seeing America's decline. U.S. exports of goods were up 16% in 2006, and 67% of these were manufactured goods (many of them high-tech), according to this article:
ECONOMIC VIEW: Catching A Wave of High-Tech Exports (New York Times, March 11, 2007).

We are a world leader in finance (although Britain may be overtaking us with its more pragmatic regulatory scheme), but our export sector is also booming. I suspect if a Democrat were President right now, more attention would be given to this boom.

Posted by Fred | July 22, 2007 6:51 PM

Arms and equipment certainly are manufactured goods but shipping such items to Iraq shouldn't be considered an "export."

Posted by tulips | July 23, 2007 3:05 AM

Mildly clever, Tulips. Now you can read the article for the real answers.

Posted by Fred | July 23, 2007 8:22 AM