Say the words “banker pay” to your average voter or politician and these days you will hear an angry hiss. After all, nothing stirs up so much resentment against modern capitalism as the sight of financiers still reaping fat rewards despite failing institutions. On Sunday, the public outrage at Stephen Hester’s bonus persuaded the Royal Bank of Scotland chief executive to turn down a pay award (£1m) that would be considered miserly by other bank bosses in the UK and the US.
However, is it possible to imagine a world where banking pay – and banking – is radically slimmed down? Anybody living in countries such as Japan or Sweden would undoubtedly say “yes”; in those economies, foreign financiers’ salaries appear bloated. But perhaps a more interesting – and relevant – intellectual exercise is to peer at the US through a long historical lens; to imagine, if you like, a banking pay version of Back to the Future.
Take a look, for example, at the work by Thomas Philippon and Ariell Reshef, two US-based economists. They have researched trends in banker pay over the past 150 years and found that, in the early 20th century, financial sector pay relative to the rest of the private sector was roughly at parity (for, crucially, employees with similar levels of education). But then it rose sharply until it hit 1.7 times in 1929, the year of the Wall Street crash.