Big Wall Street Bonuses Carry a Hidden Cost for Society

Ending excessive Wall Street bonuses is an immensely popular idea, but the American people don't get to vote on how much Wall Street pays its people. And while they do get a vote on who represents them in Washington, theirs isn't the only vote -- or even the most important one.

Money is a far more important influencer of what happens in Washington than what happens at the ballot box. It doesn't really matter who is elected in Washington: Virtually all politicians need corporate cash to fund their reelection campaigns, and the biggest single source of that cash is Wall Street. From 1999 to 2008, Wall Street spent more money on politics than any other industry -- $5 billion on campaign contributions and lobbying.

So if Wall Street firms want to pay their people big bonuses, they'll go right ahead and keep doing it. Why do you think nothing made it into the final version of the financial reform law to limit Wall Street pay?

But that doesn't mean Americans will stop wanting their elected officials to take action to rein in Wall Street. Bloomberg reported Monday that 71% of Americans want to ban big bonuses for Wall Street banks that took bailout money, and 17% feel it would be a good idea to slap a 50% tax on bonuses over $400,000. Moreover, 76% of Republicans surveyed favored a government ban on big bonuses at companies that were bailout recipients -- a higher percentage than Democrats or independents.

Wall Street Should Pay to Cut the Deficit It Created

What's most interesting to me about these poll results is how popular the idea is that Wall Street should be a big contributor to reducing the $1.3 trillion federal budget deficit. The logic behind this thinking seems to be that because Wall Street greed was the biggest cause of the financial crisis -- and the deficits that resulted from the stimulus efforts and bailouts that were required to keep the economy from collapsing further -- Wall Street should sacrifice some of its excessive compensation to pay down those deficits.

According to Bloomberg, here are the ways that the polled Americans thought we should reduce the deficit:

• 70% of Americans want a tax on Wall Street profits;

• 43% want to freeze education and medical research spending;

• 33% would cut farm subsidies,

• 25% favor a new gas tax; and

• 15% would cut Medicare health insurance for the elderly.

I think the notion of having people vote directly on how the government spends money is an interesting one. Unfortunately, it is not particularly responsible unless every voter wants to become an expert on government finance. And it will never happen.

Wall Street Levies a Tax on America's Human Capital

Meanwhile, it's pretty clear that Wall Street firms don't care enough about what the American public thinks to change their bonus practices, and now that we've bailed them out, they will keep on spending enough of their profits in Washington to keep their good thing going. If Wall Street stopped paying big bonuses, it would lose its best people, and then it would stop making such huge profits. This would make fund-raising harder for Washington politicians, so they're not going to let that money-machine break down.

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But it is worth asking whether Wall Street serves any useful purpose beyond making its workers immensely wealthy. According to a recent article in the New Yorker, the short answer is no. The writer points out that the one thing Wall Street does that helps society is raise capital for new businesses through initial public offerings. But it has done very little of that since the dot-com boom in the 1990s, and the rest of Wall Street's activities involve trading for its own profit -- often against its customers' interests.

This criticism is largely valid, but the article misses the biggest burden that Wall Street places on society -- the claim it makes on some of the world's most talented people. The simple reality is that many of the smartest people from the world's top universities are spending their time on Wall Street because there is no quicker way for them to make vast amounts of money.

This means that all that talent is being siphoned away from more socially useful activities, such as curing diseases or inventing new technologies that make life better for people. Even if that popular 50% tax on Wall Street bonuses were levied -- and it never will be -- it wouldn't stop Wall Street from levying its own gigantic tax on the world's human capital.