Echoes Alumni Newsletter - Fall 2011

Occupy Wall Street: Q&A With Professor Arindrajit Dube

Assistant Professor Arindrajit Dube, who is also a research fellow at the Institute for the Study of Labor (IZA) based in Bonn, has focused his research on low-wage labor markets and minimum wage, fiscal policy and local multipliers, health care reform and employer mandates, political economy of conflict, immigration and occupational change, and the impact of unionization. This fall he discussed the Occupy Wall Street movement with his colleague Assistant Professor Marta Murray-Close.

Q: What is Occupy Wall Street all about?

Dube: The share of income going to the top 1% is around 17%, which is near an all-time high in the last century. Last time we saw this was the Great Depression, following a bout of deregulation. The top 0.1% takes in between 7% and 8% of the national income. We know this from tax data. The economists who were pivotal in generating this information are Saez and Piketty.

So who are these people who take such a large share of income? Entrepreneurs? Not so much. Over 25% of the top 0.1% are in directly to the financial sector; when you factor in indirect ties such as lawyers etc, it's even larger. So it's important to understand why people are making what they are in the financial sector, and to understand what has happened to the financial sector. Prior to the 1980s, finance was boring. Then we began an era of "exciting finance" and deregulation, an era captured by Gordon Gekko, in the movie Wall Street. Actually, Gordon Gekko would only be modestly rich by today's standards. He may have said "greed, for the lack of a better word, is good," but Lloyd Blankfein of Goldman Sachs would probably find his earnings to be quaint.

The financial industry as a share of the economy nearly tripled between 1980 and 2010. At the same time, there were huge increases in financial pay. This has been studied by Philippon and Reshef, who find that pay and labor-market rents in the financial sector are tied to deregulation. So what were people being paid to do exactly? Mainly, they were being paid to come up with more and more complicated financial derivatives. In exciting finance, people were getting paid a lot to write complicated, contingent assets to redistribute risk and hedge against risk. They were getting paid to create markets for new financial products.

Q: What's going on in the financial sector now?

Dube: Very little has changed since the crisis. People thought these complicated products were worth a lot, but they were wrong. These assets were priced in a way that led to speculative bubbles. So banks blew things up, and they didn't collapse because the government bailed them out. What might we hope and expect to see happen? That the financial sector repays society for the damage that was done. But that hasn't happened.

Q: Has there been any change?

Dube: Compensation in the financial sector is higher today than ever before. The financial sector has resisted changes. They were able to get away with that because there's a revolving door between government and the financial sector. The political pull the financial sector has, both with this administration and the previous administration, is strong. Financial compensation has stayed strong while we have 9% unemployment and accelerating foreclosures. This is the background against which Occupy Wall Street should be understood.

Q: What are the protesters asking for?

Dube: First and foremost, they're trying to change the conversation from "How much government should we should cut?" to "Why are we in this mess and who should pay for it?" A common theme is that the elite in this country are the only people who are doing okay. They're benefitting at the expense of the rest of the economy. This is morally and economically problematic.

Q: How is it economically problematic?

Dube: The worst thing we can do in a major downturn is redistribute from borrowers to creditors.

Q: What do you think Occupy Wall Street can accomplish?

Dube: Some of it is already happening. We're not still talking about how much government we should cut. There's increasing talk of raising taxes on the rich. There are a variety of policy responses one can imagine—for example, forbearance on debt of various sorts. Some of this has already been done by the Obama administration, via executive orders for helping homeowners and students. But it didn't' get done until there were people shouting about this. We've also seen people switching from larger banks to smaller local banks. I'd chalk that up to an initial success of Occupy Wall Street.

Going forward, there are both additional policy changes one can imagine via tax policy or restructuring of debt and foreclosures in response to what Bebchuk and Fried call the "outrage constraint." The outrage constraint is what top executives can pay themselves without eliciting public or media pressure. The outrage constraint has eroded a lot in the last 30 years. An important thing Occupy Wall Street can do is to rebuild the outrage constraint, and reshape fairness norms more generally.