Arnold Kling  

Questions for Goolsbee and Samuelson

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On Radio Free Megan, Austan Goolsbee (now an adviser to Barack Obama) discusses, among other things, the role of regulation in financial markets.

Using his 20/20 hindsight, Goolsbee tells us that the mortgage market should have been better regulated. I do not recall reading any op-eds by Goolsbee in 2005 calling for tighter mortgage market regulation.

To his credit, so to speak, Goolsbee is saying right now that credit card markets need more regulation, because they could end up like the mortgage market. But Megan never asks him to spell this out. Is there fraud in the origination of credit cards, the way there is in mortgages? In credit cards, what is the equivalent to the role played by rising house prices and speculative home purchases in the mortgage market? Are there credit card brokers who operate like mortgage brokers? Are there AAA-rated securities backed by credit card debt that are potentially going to be downgraded?

What regulations, exactly, does Goolsbee think are needed right now in the credit card market? Should the government tell the credit card companies to ration credit? Should it tell credit card companies to accept fewer applications, which means turning down some good borrowers? Does the government know something about credit card origination that the credit card companies don't know, so that the government could make just as many good loans but fewer bad loans? What is this information that the government has?

Maybe if Megan does another interview, she can ask these questions.

Speaking of being disingenous, Robert J. Samuelson writes,


Just why investment bankers and traders out-earn, say, doctors or computer engineers is a question I've never heard convincingly answered. Are they smarter? Unlikely. Do they contribute more to the economy? Questionable.

...Indeed, many Americans may conclude that capitalism has run amok.


Does Samuelson think that we need government regulators to set compensation in the economy? Does he have some suggestions for investment banking firms for ways to structure compensation packages?

Few things can be said with greater confidence than that compensation systems in America are badly flawed. But it is the nature of compensation systems to be flawed. The perfect compensation system has never been developed, nor will it ever be developed.

If you have some ideas about effective compensation schemes, then why don't you become an executive or a consultant to corporate boards?


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CATEGORIES: Business Economics



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TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/791
The author at A Stitch in Haste in a related article titled Yet Another Faux Externality Anecdote writes:
    I was saving this recent Dilbert strip for a future Sidebar Sidetrack, but I'm going to post it now instead:

    [Tracked on January 23, 2008 9:50 PM]
COMMENTS (6 to date)
Horatio writes:

"Just why investment bankers and traders out-earn, say, doctors or computer engineers is a question I've never heard convincingly answered. Are they smarter?"

The bankers and traders in NYC probably are smarter. Investment banks and hedge funds recruit from the top schools. The average doctor or engineer did not go to a top school.

"Do they contribute more to the economy?"

Yes.

Alex J. writes:

Traders look like they earn so much because you are only looking at the successful ones. You don't see all of the traders who've gotten cashiered.

TGGP writes:

This from Robin Hanson on regulation is excellent.

Snark writes:
If you have some ideas about effective compensation schemes, then why don't you become an executive or a consultant to corporate boards?

Because Mr. Samuelson would earn much less under any effective compensation scheme proposed to reform outrageous salaries.

John V writes:

Snark,

LOL. That was good!

dWj writes:

That "are they smarter?" bit drove me nuts when I first saw it. I've heard the theory that the high number of marxists in academia can be explained by the belief that intelligence per se should be highly compensated in a fair world, and academics figure they're the smartest people in the world and aren't the richest, so capitalism must be wrong. Well, on a small scale, as you note, there are many individuals who make a lot more or less than they probably should -- Lloyd Blankfein, for example, is probably underpaid -- but on a large scale, compensation is much closer to optimal than it would be if everyone were paid their IQ.

I've known too many smart people in general who seem to think way too highly of that particular character trait. That it does correlate with things that are worthwhile does not give it value except insofar as it contributes to those worthwhile things. You've been given a chance to contribute to the world in ways that others might not be able to, and to be compensated for it; if you choose instead a line of work that gives you less money, that's a perfectly honorable choice, but the "less money" bit doesn't come unbundled from the reasons you chose that line of work.

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