The President’s State of the Union address tonight will continue a conversation about the problem of growing inequality. If we are going to reverse the trend and set this country on a path toward broadly shared opportunity and prosperity, steps to rein in Wall Street excess and reshape the rules of the game for the financial system will need to have a prominent place on the To Do list.
In many areas, the rules remain badly rigged, allowing the movers and shakers of finance to enrich themselves in ways that too often make most Americans more vulnerable and insecure. The swollen wealth and power of Wall Street drains resources from economic activities that support families, communities, and real-economy businesses. The financial world ends up making far too much of its money through insider advantages, self-dealing, and wild speculation, leading to bubbles and bursts from which others invariably seem to suffer most of the damage.
Wall Street pay packages play a hefty role in skewing the income picture all by themselves. The increased inequality of recent years has been driven, in large part, by the extraordinary income and wealth gains of a tiny slice of the population. Within that small group of Americans, executives, traders, fund managers and others associated with the financial sector loom large, comprising about a seventh of the highest-earning one percent and accounting for about one fourth of their income gains over the past thirty-plus years. That’s not counting the vast number of lawyers and consultants with financial sector clientele, or the great many nonfinancial executives who seem to make most of their money these days through stock options and short-term financial plays. Together, corporate executives and financial sector employees account for well over half the post-1980 income growth of the top 1 percent and more than two-thirds of the even more remarkable gains of the top 0.1 percent. (See The Engine of American Inequality.) Just this week, we learned that JPMorgan Chase CEO Jamie Dimon will be receiving a $20 million paycheck – a 75 percent hike – for a year in which his company had to fork over billions in settlements for an array of misdeeds committed at others’ expense.
What can be done? Without any further Congressional action, bank regulators and the Administration can and must prioritize the rigorous enforcement of the financial reform laws already on the books. That includes writing strong rules to carry out as-yet-unimplemented parts of the Dodd-Frank Act; putting existing rules into practice; and holding financial institutions – and their leaders – seriously accountable when they break the law.
To cite one example of particular relevance to the problem of extreme and entrenched inequality, regulators need to carry out section 956 of Dodd-Frank, which prohibits big-bank compensation practices that encourage excessive risk taking – the kind of payment schemes that fueled the gambling rampage behind the financial and economic meltdown of 2008. The law gave federal bank regulators an implementation deadline of May 21, 2011, for this rule. More than two-and-a-half years later, all we have seen is a woefully inadequate draft rule calling for a too-short delay between the awarding and the payout of bonuses for a limited number of senior executives. Not enough to get the job done.
Congress could of course do more. On executive pay, it could pass the The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act, introduced by Senators Jack Reed (D-R.I.) and Richard Blumenthal (D-Conn.). That bill will finally put teeth into a twenty-year-old law meant to cap the tax deductibility of executive pay at $1 million a year. Congress can also make the financial system simpler and safer by enacting the 21st Century Glass-Steagall Act, a bipartisan proposal to restore the division between commercial banking and the casino world of trading and speculating. And it could pass a Wall Street speculation tax so that the financial world comes closer to paying its fair share.
The financial sector currently generates about 30 percent of the nation’s total corporate profits, but pays only about 18 percent of corporate taxes. One reason for that discrepancy: unlike ordinary Americans, who pay sales taxes on all manner of goods and services, Wall Streeters face no such tax when they buy and sell securities. Even a very small tax would raise hundreds of billions of dollars over ten years, while nudging the financial system away from excessive speculation, and back towards its rightful role as an engine of private and public investment. (See Narrowing the Income Gap Without Another Bust.)