That was then, this is now

In the early 1970s, investment banking still maintained a relatively even balance between job satisfaction and the accretion of wealth.  The thirty-nine Morgan Stanley partners were paid $100,000 a year and considered that they were well compensated.  Parker Gilbert recalls commuting with a couple of colleagues when they were in their early thirties and hearing someone say:"If we could only make $5 million, we could retire and play golf."

Anyone lucky enough to have inherited a million dollars in 1970 could buy an apartment on Park Avenue — four bedrooms, two maids’ rooms, living room with wood-burning fireplace, dining room, kitchen, and library — for under $100,000.  In 1971 corporate raider Saul Steinberg bought one of the most expensive apartments in the city, at 740 Park Avenue, for $250,000.

That is from Patricia Beard, from Blue Blood & Mutiny: The Fight for the Soul of Morgan Stanley.

It is an interesting question — to say the least — how we got from there to here.  Most of all, the contemporary world is immensely better at allocating talent and maximizing the value that talent can create (admittedly some of this is paper shuffling value, it is not all social value).  That is one of the fundamental productivity shifts behind the rise in income inequality; people with that pro-golf attitude simply couldn’t make it to the top today, and back then many would-be earnings superstars were held in chains by sheer social stupidity, lack of access to the right training, or inability to connect with the proper social networks.

If you work in investment banking and don’t want to play by those rules, "the system" is happy to hit the hyperspace button, send you back to Butte, Montana, and feed you bananas and milk.  However no one is going to boil you in oil. 

Let’s be glad all those people — many of them silly — slave so hard on our behalf.


I think it's a tragedy that so many very bright and energetic people go into investment banking. One of my school friends came near the top of his year at Oxford and went to work for Goldmans. He left after two years to become a barrister (which was always his intention) and his comment was that the work they do there simply isn't that hard. They get the best because they can pay for the best and in that situation - why not? Surely society would be better off if they put their brains and energies to better use though.

So are the Joes in the middle class better off now?

I just finished reading one of the books from yonder right margin, More Sex..., which basically said in chapter two that what the
Great Depression amounted to was a bunch of people having to live temporarily at the standard of the previous generation, and that
our current growth rate extrapolates to people living on about a million bucks a day of current dollars within 100 years.

But then I also come across stuff life this in the press:
"Life is harder now, some experts say"

I realize there may well be no end to the fallacies and false impressions I'm susceptible to, but was it not true that middle class
couples got by in a middle class fashion on one income 35 years ago, and it now takes two?

My wife and I are both set to enter the workforce as a teacher/librarian combo (unless someone bites on my life of crime prize:
half the procedes on the first 20k of any scheme that doesn't make me a violent offender or get me caught--please email the address
in the link) and attempt to live in Cali and crunching the numbers is a little scary.

I don't suppose either teacher or librarian were too comfortable a single-income job a generation ago. But together would they have more
easily yielded a middle class life? could live as a middle class family *not* in california as a teacher+librarian...

My parents generation (married in the early 70s) rented until they were 30, cooked 90% of meals at home,

As far as I can work out, there are plenty of places in the US where due to transportation costs, the cost of actual raw materials for making home cooked food has risen dramatically.

Nelsonal - Good point about relative land values. $100K in 1970 would be around $400-500K today; this prices you out of most of Brooklyn that was considered unlivable in 1970.

On the other hand, dismissing the questions of poverty and inequality with arguments like "it was harder back in my day" and "if you think it's hard being poor in America, try Mauritania" seems intellectually unsatisfying.

All I know is my daddy walked uphill bothways 10 miles to school without shoes. :).

I wasn't saying it was harder or easier back in the day, rather that what was considered a normal lifestyle then would be considered similar to poverty line living today. Our expectations have increased (I know I eat out far more than my parents did, and my mom figured out that each of us kids spend more on Starbucks than she spent on a month's food for our family of 4 (granted inflation makes the comparison less meaningful, but I'd guess as a % of income it's scarily close) and both shift the available resources for other activities.

My guess would be that away from the coasts, a family can still afford a pretty similar lifestyle to what families had in the 50s and 60s on a single middle class income, but that few would consider that a middle class lifestyle, today.

nelsonal: middle class people these days certainly don't own much before age 30. Hell, 30 is seen as very young to own one's own home, probably makes you the first in your social circle. And forget about kids.
A garden is a luxury good, not a money-saving technique.
Cable TV costs effectively nothing, and once again, middle class and has time for TV? Not on the coasts!

It appears to me that we would have been better off if the investment bankers had not created exotic forms of mortgage backed funding that made mortgage lending seem safer than it really was thus leading to excessive amounts of house building.

Yet, I should not have the audacity to complain.

Get to the nearest bathroom, find a mirror, and complain as long as you like to the person you see in it.


Obviously, Wall St, on average, isn't beating the market. But look at how much the market has changed since the early 70s:

Transaction costs on equities have gone from several percent to almost nothing.
Mutual funds charge 25bp rather than 20%+ loads.
Spot FX is basically free.
Swaps, etc, have hugely reduced companies financing costs.
Everyone gets a credit card - retail commerce is so much easier than w/ checks.
ATMs cross the world. Do you remember exchanges and traveller's checks?
Cross-border investment is much simpler.
And so on...

Yes, WS has had its fiascos in the last thirty years, but its removed an awful lot of friction while getting rich.

Johnny_Debacle: Yes, I'm aware that investment bankers put together deals, but that doesn't mean they can't be compared against "investing in the market". That is, if I take the total amount spent on investment bankers for deals and subtract that from the dollar-weighted average return on those deals, how does it compare to investing in an index fund covering the same region and capitalization? This would tell us whether the marginal value of an investment banker's labor is positive i.e. if they allow you to earn a higher return than investing in an index fund.

As for the evidence "either way", can you refer me to the evidence showing the average actively managed dollar outperforming an index of equivalent volatility?

gorobei: The question is not whether "Wall Street beats the market" but whether paying these high salaries on average gets you a better return on your money. (See above in this post for a test.)

And the changes you listed are great, but I'm not sure what they have to do with investment bankers and hedge funds.

I found this link at MattXIV of 4 Lights Blog during the Shock Doctrine discussions

Giving full credit to Matt I offered as a resource for this discussion.

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