Power-suits on Wall Street, the New York State comptroller announced last week, have just finished collecting $18.4 billion in bonuses for 2008. The news quite rightfully shook up President Barack Obama. He forthrightly denounced this bonus binge as “shameful.”

But let’s be clear. Wall Street’s bankers and traders and merger makers have no shame. They have expectations. They expect annual rewards in the six and seven figures. They feel entitled to them.

This sense of entitlement, the rest of us need to remember, hasn’t always so dominated the Wall Street psyche. So what went wrong? In this week’s Too Much, we take a look at the historical record.

We also take a peek at last week’s doings at Davos, the Swiss ski resort that every winter hosts the year’s largest get-together of the world’s rich and powerful. This year’s big Davos news: They still don’t get it. We explain why.

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Pity the poor yachtsman. Over the past year or so, the world's seas have become considerably less friendly. First came the pirates, spreading angst with their Uzis and AK-47s. Then came the taxes. The European Union is now going after luxury yacht owners who've conspired to avoid the EU’s value added tax, a consumption tax levied at various stages of a product’s production and distribution. Tax authorities have so far checked the purchase records around 322 yachts. They found suspicious activity with 225. The largest penalty assessment so far levied: almost $13 million . . .

Are the wealthy turning stealthy? Reporters are detecting a new reticence within the ranks of America’s most financially favored, a concerted effort to “play down” their affluence. In high-end retail hotspots from Rodeo Drive to Fifth Avenue, well-heeled shoppers are asking that their luxury purchases be packed in plain white bags — or shipped to their homes “so they can walk out of the store without any bags at all.” Rich people, notes Barbara Lazaroff, the business partner of restaurateur Wolfgang Puck, “want to look as though they are respectful that this is a recession.” Not all rich people apparently. In Paris last Monday, for the opening of “Couture Week,” fashionistas at Dior unveiled 39 sumptuous ensembles, some with price-tags into the hundreds of thousands. Smiled Sidney Toledano, Dior's president: “The demand for very high-end products continues to be very strong. Very rich people are not suffering from the crisis.”

Our global super rich don’t literally live in their own parallel universe. It just seems that way, especially when the talk turns to “space tourism.” Last month, the celestial entrepreneurs at Xcor, a California company, gave the world’s wealthy still another route into the heavens. In 2010, the companyannounced, deep pockets will be able to blast into suborbital space for just $95,000. That’s less than half the $200,000 Virgin Galactic will be charging, also starting next year, for rides in a seven-passenger spacecraft that will feature five minutes of weightlessness. But the gold standard for would-be interplanetary plutocrats remains the $35 million jaunts available through Space Adventures, a U.S.-based outfit that started selling seats on Russian rockets in 2001. The company has so far sent six hardy souls to the International Space Station. None of them have yet taken a space walk. For anyone who wants to step outside, Space Adventurers is charging an extra $10 million fee . . .

The new Congress sworn into office last month has plenty of new faces — and plenty of new wealth, the Center for Responsive Politics reported last week. Newly elected lawmakers hold a median net worth of $1.8 million, over twice the $815,000 median for returning incumbents. Observes the Center’s Sheila Krumholz: “The new blood in Congress is mostly blueblood. In this troubled and troubling economy, Congress remains short on lawmakers who can personally relate to what the average American is going through financially.”

U.S. Senate Finance Committee chair Max Baucus from Montana is now drafting legislation that would end the uncertainty over the future of the federal estate tax — and lock in place the current George W. Bush bargain-basement tax rate on the fortunes America’s super rich leave to their heirs. A generation ago, the top estate tax rate on grand fortunes stood at 77 percent. The Bush 2001 tax cut has lowered this year’s top rate to 45 percent. Senator Baucus wants that 45 percent made permanent. After deductions, the Center on Budget and Policy Priorities noted last week, the actual tax rate on large estates amounts to far less than 45 percent. If the Baucus freeze becomes law, the Center calculates, estates over $20 million would face taxes that average “less than one-quarter” of estate value. Senator John Kyl from Arizona wants to see estate taxes even lower. His proposal would drop the estate tax to 15 percent. Under current law, estate taxes will revert back to pre-George W. levels — a 55 percent top rate — in 2011. The Baucus approach would, over the next decade, cost the federal Treasury $609 billion. The cost of the Kyl plan: nearly $1 trillion. The only beneficiaries: the three out of every 1,000 Americans who die with fortunes large enough to trigger estate tax liability.

Quote of the Week

“I am mad. We have bunch of idiots on Wall Street that are kicking sand in the face of the American taxpayer.” Senator Claire McCaskill (D-Missouri), January 30, 2009, detailing her new proposal to cap executive pay in firms that get bailout dollars at $400,000, the same pay that goes to the President.

New Wisdom
on Wealth

Joseph Stiglitz, How to Rescue the Bank Bailout, CNN, January 26, 2009. A Nobel Prize-winning economist explores the “underlying problem” in the financial meltdown: the “huge gap between private rewards and social returns,” most specifically the “huge paychecks” that have gone to bank managers.

Roger Catlin, What Recession? Judging by TV shows, we're all filthy rich, Hartford Courant, January 27, 2009.

David Pauly, Lewis, Thain, CEO Cult Torched in Crisis Bonfire, Bloomberg, January 29, 2009. How CEO arrogance nurtures ignorance.

Dan Rodricks, A new low for corporate greed, Baltimore Sun, February 1, 2009. Have we seen the the “last gasp of Reagan era get-mine greed”

The Global Wealthy to Our Rescue?

Russian Prime Minister Vladimir Putin delivered the opening keynote address last week at the annual World Economic Forum in Davos, Switzerland, before an elite gathering that included a record 1,400 CEOs from around the world and over 40 heads of state.

Putin fit right in. His remarks would strike all the right notes — and anticipate the themes that would bounce around throughout the forum’s five days.

Only “mutual trust,” Putin would assert, can bring the world out of global economic meltdown, along, of course, with an ongoing commitment to making the world safe for big-time investors.

“We are convinced that those who create attractive conditions for global investment today,” Putin declared, “will become the leaders in restoring the world economy.”

And creating those “attractive conditions,” Putin would explain to a reporter who asked him “if the shrinking number of billionaires was a positive to be taken from the credit crisis,” means keeping the world a place where grand fortunes can continue to accumulate.

Putin has had highly publicized run-ins, over the years, with several Russian super-rich “oligarchs.” At Davos, he vigorously protested his image in the West as a “billionaire slayer.”

“It was never my goal to stamp out billionaires,” Putin pronounced, adding that should anyone, acting within the law, gain a billion or two, then “God bless him.”

Putin would not entertain, even for a moment, the possibility that the chase after billion-dollar fortunes may have somehow contributed to the global economic meltdown. Neither would any other mover and shaker at Davos.

The forum’s endless panels and speeches systematically ignored the impact of grand accumulations of private wealth on the world economy. One session did promise a look at “Hard Lessons about Global Imbalances,” but the “imbalances” in question turned out to revolve around currency reserves, not top-heavy concentrations of income and wealth.

Forum organizers titled another session “Threats to Society.” Did maldistributions of income and wealth count as a “threat”? Not quite. The panel focused instead on “illegal drugs and counterfeit goods,” the global increase in “illicit activities and transnational crime.”

This studied silence on the concentration of the world’s wealth should hardly count as any sort of surprise. That wealth, after all, has been concentrating in the pockets of the same wealthy who drop in on Davos every year. These exalted souls could hardly be expected to acknowledge the consequences of their own fortunes — and how they’ve amassed them.

But those consequences remain the biggest hurdle to global economic recovery. A world where wealth has tilted overwhelmingly to the top, where average people must go deep into debt to get by, where grand fortunes translate into the political power that stymies needed reforms, will forever be unstable.

At Davos, the rich and their retainers did their best to fudge that reality. They worked hard to strike a sober, problem-solving pose. They spent less on parties. One top global public relations executive, Howard Rubenstein, even suggested that business leaders should pay, out of their own pockets, for the half-hour helicopter ride from the Zurich airport to the Davos snowy slopes.

“They should avoid anything that appears super fancy or super rich,” the PR expert intoned, “or thumbing their noses at taxpayers during a time of austerity.”

On that score, the world’s bankers and corporate leaders largely succeeded last week. But they still face a more daunting task: reclaiming their credibility in a world no longer so easily vowed by riches and those who hold them.  

“The wealth creators of recent years,” summed up two British journalists covering the Davos scene, Ashley Seager and Larry Elliott, “have suddenly become the wealth destroyers.”

Engineers and Financiers: Who Rates What?

Thomas Philippon and Ariell Reshef, Wages and Human Capital in the U.S. Financial Industry: 1909-2006. National Bureau of Economic Research, January 2009.

You have to be smart to be an engineer, well-educated, too. And the work engineers do often raises questions that might make the difference between life and death. Can this bridge span withstand this much wind? Or traffic? Our safety depends on engineers getting the answers to questions like these exactly right.

Working on Wall Street, in high finance, also takes a certain level of smarts. Lots of numbers. Lots of uncertainties that need to be factored in to any analysis. So who should make more, the engineer or the financial analyst?

Over recent years, the “market” has answered that question with a thundering verdict. College grads fortunate enough to gain a Wall Street foothold have been collecting annual bonuses that double, triple, and more the regular paychecks of the nation’s engineers.

For 2008, we learned last week, the 168,000-strong Wall Street workforce pocketed bonuses that averaged $112,000, a wildly misleading figure since some of Wall Street’s gainfully employed took home not a penny in bonus and others took home considerably more. Those bonuses came in a wipeout of a year that saw Wall Street firms lose $35 billion on their basic operations.

But here’s something almost equally surprising. A generation ago, people employed in America’s finance industry made no more than engineers.

We have a fascinating new paper from economists Thomas Philippon and Ariell Reshef to thank for this insight. Their key finding: Financial sector compensation ran “excessively high” until the early Great Depression, then tumbled down to earth, the same earth occupied by engineers and other Americans with similar education levels and skills.

The resulting pay equity lasted until the 1980s. Ever since, pay in finance has far outpaced pay in similarly demanding professions.

What explains this up-and-down variation? Philippon and Reshef point, above all else, to deregulation. In the 1980s Congress began wiping away the regs New Dealers had legislated to end the speculating and high-finance flim-flam that had helped bring on the Depression.

This wave of deregulation ended everything from interest rate ceilings to rules that kept commercial and investment banks from scratching each other’s backs at the public’s expense.

All these changes, in turn, opened the way for what economists call “innovation” and “financial creativity” — and increased the demand for “highly skilled,” highly paid labor.

But innovation simply connotes something that’s new, not necessarily something that’s good. The “collateralized debt obligations” and the other “creative” securities that have proliferated over recent decades have all been innovative — and dangerous. A “good chunk” of contemporary Wall Street innovation, as Philippon observed in a recent interview, has been “really a waste” for society.

Inequality always is.

Stat of the Week

How low can taxes on America’s rich go? This low: The IRS revealed last week that America’s 400 highest-income taxpayers averaged $263 million each in 2006 and paid just 17.2 percent of that, or $45 million, in federal income tax. In 1992, America’s 400 richest averaged only $46.8 million in income and paid 26.4 percent of that in tax.

Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org.