Chris Blattman

Every time someone takes a job in finance, somewhere in the world a puppy dies

Russ Roberts interviews Daron Acemoglu on EconTalk. In general, “interview with Daron Acemoglu” is a good indicator you should listen to something. This is no exception.

In general, they talk about Raghuram Rajan’s argument that growing US inequality is behind the current financial mess. Acemoglu disagrees about the politics.

The bit I found most interesting? The skepticism both held for finance jobs and the public good.

Neither expresses anything quite like my post title (one of the pleasures of having a blog is freedom of hyperbole–indulge me) but neither has a high regard for the exorbitant returns to finance careers. Neither buys the argument that greasing the wheels of capitalism merits the rewards (and at GMU!). And both seem to think the global economic and social product would be better if more of us became entrepreneurs (and, presumably, economists). I do not disagree.

The political economy of high finance wages would make an interesting read. Is it written? I have a feeling it’s an insider game. And the monitors? Shareholders look more like drunken gamblers than management overseers. But I am way out of my speciality.

Acemoglu’s original talk, sans finance denigration, here.

In the meantime, I admit I must be part of the problem. The biggest employers of Yale undergrads? Investment and retail banks. But I am doing my best to steer towards other careers less detrimental to puppies.

7 Responses

  1. Bradley, normally I think that Tyler Cowen is both brilliant and level-headed, but his explanation in that piece of how the financial sector is gaining at the expense of the US government is frankly a little bizarre. He says that “in essence, we’re allowing banks to earn their way back by arbitraging interest rate spreads against the U.S. government”. Where, exactly, is the arbitrage opportunity? Does he not think that long-term interest rates are the (risk-neutral) probability-weighted expectation of cumulative short-term interest rates? If not, he should certainly give an explanation.

    If so, it’s still possible that banks are able to make money off the term structure via their greater capacity to bear risk. But if so, this is exactly what they’re *supposed* to be doing: engaging in maturity transformation to bring down long-term interest rates. It’s not as if the US government or the Fed wants a large spread between short-term and long-term interest rates: in fact, the Fed is currently engaging in a massive program to make that spread smaller. This is difficult for the Fed — which must rely on minor portfolio balance effects — for precisely the same reasons that banks cannot make easy profits off the yield curve.

    In short, that piece has seriously shaken my faith in Tyler Cowen. Perhaps he’s right in some way that I don’t understand, but it all seems like a very fundamental misunderstanding on his part.

  2. Here are the recent data on Yale students’ plans after graduation. See especially the last figure in the report, which indicates that the percentages of students going into “business and finance” and “education” were about equal in 2006 and 2008.

  3. if anything those two articles show that more people are going to education in 2010 than in 2009, but doesn’t say anything about whether those who go to TFA will then go to banking. It would be interesting to see a survey that interviews the 2009 seniors this summer and ask about their plans, because a lot of people do use TFA as gap years before going to banking, grad school, medschool, etc.

  4. “Neither buys the argument that greasing the wheels of capitalism merits the rewards (and at GMU!).”
    well Russ certainly believes that Wall Street earnings are inflated by the Fed & government bailouts & moral hazard, hence his paper title, “Gambling With Other People’s Money.” That’s hardly against the libertarian grain. Just to be clear, the outrage is not just that your finance job kills a puppy, but a puppy that you do not own.

    “In the meantime, I admit I must be part of the problem”
    I wouldn’t necessarily assume you’re part of the problem. I recall Duflo wrote a VoxEU piece in late 2008 lamenting that finance sucks up too many creative people, and the world will be better with fewer bankers: that’s just basic economics with a fixed choice set and prices moving closer to social cost. But I question the conclusion that if compensation in finance were limited, young rent-seekers would suddenly engage in puppy-promoting activities, rather than devoting their creativity toward new ways to profit handsomely from puppy-killing.

    y11 — and what share of those TFA employees will end up in banking anyway? Here are the Harvard numbers for share of education vs. finance last 2 years. I doubt Yale is much different:

  5. Actually, the biggest employer of yale undergrads now is Teach for America and other teaching organizations… but still a lot of seniors go into i-banking and consulting. It might also be the case, though, that Teach for America is the largest single employer, but that banking is still the sector to which most people go (since there are many banks that recruit, but only one large educational organization).

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