A provocative report by the New Economics Foundation has made an effort to put a price tag on the broader costs and benefits of various types of work. As quoted in the Financial Times (hat tip Swedish Lex), the leader of this effort put it:
Pay levels often don’t reflect the true value that is being created. As a society, we need a pay structure which rewards those jobs that create most societal benefit, rather than those that generate profits at the expense of society and the environment.
But where this study gets interesting is that it attempts to measure the costs of the looting that the banksters just pulled off:
The authors assume the financial crisis and recession would not have happened without City bankers engaging in risky, opaque and complex transactions. Applying a guess about the cost of the recession on the rest of society, they estimate top City bankers des-troy £7 of value for every £1 they are paid privately.
This of course, not only said that top financiers took advantage of the rest of us, but they did so very inefficiently. But they still appear to be more efficient than AIG Financial Products was (in terms of money extracted relative to value destroyed). If we assume that $30 billion of the AIG rescue was for its securities lending operation, and $100 billion plus went for AIGFP. If they were to have destroyed $10 for every $1 they earned, that would still imply average pay of over &8 million each for every person at AIG FP for three years. Now of course, that $100 billion includes loans, and one can charitably assume that there could be some recoveries, but I would not hold my breath. But then we have also omitted the collateral damage (no pun intended) from the AIG meltdown.
This line of reasoning says the 50% surtax on banker bonuses is warranted; indeed, perhaps a 95% surtax would be even better to discourage people from joining this line of endeavor.
I would be pretty certain that the NEF effort is at best a rough cut. However, it raises important questions that I hope others pursue. I sincerely hope that this NEF exercise leads others to sharpen their pencils and come up with more refined efforts of what the meltdown cost us collectively versus the bankers’ take.
Believe it or not, there is some consolation to bankers. Advertising execs are deemed to be even more destructive (although not meeting the likely AIG level).
Next, they look at pay versus collective benefits for hospital cleaners:
The report says good hospital cleaners prevent the spread of infection, saving lives and protecting the wider health of the public. The authors calculate they provide £10 of benefits for which they are directly paid only £1.
Since we accept that manufacturing can result in externalities (pollution), I don’t see why it should be at all a stretch to think that the same could not apply to service industries. And the “right” solution, from an economist’s perspective, to externalities are taxes to impose the full social cost of the goods on the manufacturer, or regulations to make them make low or no-externality products.
The BBC gives a longer-form summary:
A total of six different jobs were analysed to assess their overall value. These are the study’s main findings:
The elite banker
“Rather than being wealth creators bankers are being handsomely rewarded for bringing the global financial system to the brink of collapse
Paid between £500,000 and half a million and £80m a year, leading bankers destroy £7 of value for every pound they generate”.
“Both for families and society as a while looking after children could not be more important. As well as providing a valuable service for families, they release earnings potential by allowing parents to continue working. For every pound they are paid they generate up £9.50 worth of benefits to society”.
“Play a vital role in the workings of healthcare facilities. They not only clean hospitals and maintain hygiene standards but also contribute to wider health outcomes. For every pound paid, over £10 in social value is created”.
The industry “encourages high spending and indebtedness. It can create insatiable aspirations, fuelling feelings of dissatisfaction, inadequacy and stress. For a salary of between £50,000 and £12m top advertising executives destroy £11 of value for every pound in value they generate”.
“Every pound that a tax accountant saves a client is a pound which otherwise would have gone to HM Revenue. For a salary of between £75,000 and £200,000, tax accountants destroy £47 in value, for every pound they generate”.
Waste recycling workers
“Do a range of different jobs that relate to processing and preventing waste and promoting recycling. Carbon emissions are significantly reduced. There is also a value in reusing goods. For every pound of value spent on wages, £12 of value is generated for society.”
The research also makes a variety of policy recommendations to align pay more closely with the value of work.
These include establishing a high pay commission, building social and environmental value into prices, and introduce more progressive taxation.