High Incomes Produce High Costs

I’m really not sure what to say about Gabriel Sherman’s piece in New York magazine documenting the petulant outbursts of Wall Street bankers, other than to echo the general observation that the disconnect in understanding between bankers and everyone else is truly remarkable. I do want to make one particular point though concerning the notion that living in New York necessitates obscene levels of pay.

“You can’t live in New York and have kids and send them to school on $75,000,” he continues. “And you have the Obama administration suggesting that. That was a very populist thing that Obama said. He’s being disingenuous. He knows that you can’t live in New York on $75,000.”

That was an argument I heard over and over: that the high cost of living like a wealthy person in New York necessitates high salaries. It was loopy logic, but expressed sincerely. “You could make the argument that $250,000 is a fair amount to make,” says the laid-off JPMorgan vice-president. “Well, what about the $125,000 that staffers on Capitol Hill make? They’re making high salaries for where they live, maybe we should cut their salary, too.”

A similar point is made earlier in the article when noblesse oblige is recast, or perhaps more accurately, reinterpreted, as trickle down economics, but you really can’t make this type of argument without acknowledging that the absurdly high incomes of bankers help create the “cost structure” for “not optional” expenditures like “40,000 private schools and “a summer home within an hour or two commute from Manhattan.” The whole enterprise becomes a cyclically developing self-fulfilling prophecy to meet the ever expanding incomes of the ultra wealthy. If the ultra wealthy are simply very wealthy, then the costs of the services these people consume will go down, and so too with them, the costs of living for everyone else.

Obviously, there are also a lot of other ways to respond to these arguments — for example, I think it’s more likely that an entire office of Congressional staffers makes $150,000 than one does alone, or that nobody is talking about capping income, or that even if a staffer did make $150,000, it’s not likely to produce pervese incentives that topple the financial system, etc. — but I always think it’s important to make this point anytime someone who’s fabulously wealthy complains about the need to spend money on luxury items.

UPDATE: In the article, you get the clear sense that many bankers — at least those interviewed — held firmly to the belief that their money-like-substance creation was inherently valuable, and that the public will rue the day the bankers left. So just in case you were wondering, you’ll want to know that on average, managed funds performed more poorly between 2004 and 2008 than market composites.


2 Responses to “High Incomes Produce High Costs”

  1. truevcu Says:

    As much sense as this argument makes, it’s so easy to turn it into an endless “chicken or egg?” debate that it’s pretty much impossible to bring it to bear on the general public.

  2. Jon Says:

    I think it’s less a “chicken or egg” scenario than you think. Think about it in terms of the real estate market. One of the reasons real estate is especially expensive in New York city is because there is demand for absurdly expensive places to live. Those places, of which most of their value can be ascribed to their location, would still exist in those locations, and there would still be a “most wealthy” class to live there. But because the most wealthy are so much wealthier than everyone else, it drives up the value of these properties and in doing so, exerts upward pressure on housing in general. If there were less money to go around, these prices would be lower, and prices would cascade downward.

    It’s similar to a problem of inflation, but because the ultra high wages tend to be concentrated in a few sectors, the inflation is spread evenly and the poorer denizens of New York thus have a relatively harder time with upward trajectory of prices.

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