Matt Yglesias and I are debating whether the CEOs of major financial institutions are walking away from the financial crisis laughing, or whether they have actually been punished by the failure of their firms and loss of their jobs. Matt makes the standard liberal case for moral outrage:
Megan McArdle's made to me the case that the movers and shakers on Wall Street have taken a bath on all this and are plenty sad as is. But I don't think that's quite right. For one thing, if you had $20 million stashed away somewhere and lost 95 percent of that, sure you'd be pretty sad. But you'd still have a million bucks in the bank which is a lot more than most people. And what's more, during the fat years you'd been enjoying very high ongoing levels of consumption. Merely losing most of your savings doesn't come close to making the overall experience a negative one -- you'd need to be brought down to less than zero to make up for those years worth of high on the hog consumption slows. Specifically, to distinguish the issue at hand here from a pure quest for revenge, we need to ask ourselves what the current state of play make a titan of finance think about the way he's been running his business. What you want is for people to look back and say "well, I wished I'd managed the firm more responsibly at the margin." But I'm afraid the real retrospective analysis is "well, I wish I'd managed the firm less
responsibly and soaked up more leverage-laden profits back when the going was good -- after all, the whole thing was going to blow up anyway and I was going to come out ahead anyway."
I think this misses the upside of diminishing returns: after some point, the CEOs of major institutions simply are not primarily worried about their consumption.
Matt is reasoning the way he or I would about a contract: if the worst thing that can possibly happen to me is that I walk away with $5 or $10 million, then I'm pretty happy, and perhaps liable to behave irresponsibly. But if I have, say $5 billion, walking away with that kind of money looks very different. I don't primarily think of my earning as a way to keep a roof over my head and some food on the table; those wants are so well satisfied that they basically don't register.
I think it's important to note that if this weren't true, the social safety net really would be the sort of devastating economic and moral toxin that some nineteenth century theorists claimed. If all people cared about was avoiding the possibility of outright starvation, then Sweden would be a country of wild risk-takers and epic slackers. And indeed, on the margin, there are people who don't bother to invest anything in their lives once their most basic material needs are covered. But most of us care deeply about not failing, even though we are unlikely to actually die of want should that failure take place. If Matt or I lost our jobs tomorrow through spectacular malfeasance, our lives would immediately become uncomfortable and annoying in myriad ways. But after radically downsizing our consumption, it's likely that both of us would survive, and neither of us would miss any meals. Nonetheless, we show up for work, and avoid obvious risks like invective-laden rants about our employers.
(I pause to note that my employers are, in fact, gems of people. That was just an example)
So I'm not sure how much extra incentive mileage we'd get out of taking all, rather than merely most, of the fortunes of CEOs who piloted their banks into the financial reefs. Some, clearly, because everything matters on the margin. But enough to prevent the financial crisis? I doubt it. CEOs, like the rest of us, are keenly interested in not getting fired and losing most of their stuff, which is the logical outcome of putting your bank into liquidation. Note that this does not settle the question of whether we should take the rest of their money--justice might demand confiscation even if prudence doesn't. It simply tells us on which grounds we ought to decide that question.
Now, I think a lot of liberals often mix up these claims with simple outrage that those CEOs are not, in fact, reduced to total penury. But the justice and the incentive problems are separate problems. It may well be totally just to take every last dime from them (and I imagine that shareholder lawsuits will do exactly that). But that frequently morphs into a muddy complaint that if these CEOs had suffered more, we wouldn't have had the crisis. The one does not follow from the other. There are many injustices in the world; almost none of them cause financial crises.
I know that my trolls are already mentally penning long whines that I have entirely missed the point--that their wealth is outrageous, that justice is important! Indeed it is. But it seems to me that it is also important to settle the empirical question of how such excessive risk taking could be prevented in the future. If we allow our outrage to convince us that taking every last dime from the bank presidents will help with that task, and this is not actually true, then we are simply setting ourselves up for more problems in the future.