Commenting on my recent column, Paul Krugman wonders if I somehow missed the financial crisis of the past few years. He seems to think the crisis proves that the titans of Wall Street earn much more than the value of their contributions.
I will be the first to admit that measuring the social value of the financial sector is hard. But let me offer a few observations:
1. In thinking about the social value of the workers in the financial system, it is as important to keep in mind long-run growth as well as short-run fluctuations. Financial intermediation plays a key role in growth. And a case can be made that for human welfare, growth swamps fluctuations. (Robert Lucas most famously made this argument.)
2. It is too facile to blame the financial crisis entirely on Wall Street. In the recent edition of my favorite intermediate macro textbook, there is a case study of who bears responsibility for the crisis. It concludes there is no single culprit but lots of blame to spread around. (See page 580 of Chapter 20.)
3. It would be a mistake to think that the rich had it easy during this crisis. According to the Saez-Piketty data, during the downturn from 2007 to 2009, average income fell 17 percent, but the incomes of the top 1 percent fell 36 percent. Wall Street titans at the center of the crisis such as Dick Fuld and Hank Greenberg reportedly lost 90 percent of their net worth. To be sure, they started off at a much higher base than most people, but let's not pretend the bankers got off scot-free.