We read a lot about income inequality these days, and how extraordinary wealth is accumulating in the hands of very few people. While there have been numerous descriptions of why that might be, I’d put it this way: it now takes fewer hands in fewer places to build a valuable enterprise. Over a century ago, the industrial revolution replaced much human labor with machinery, but even then, working class people were necessary to build the reapers, steam engines, sewing machines and automobiles. Today it increasingly only takes some combination of: a good idea; access to some combination of venture capital or private wealth funding; access to data; and access to computing power, perhaps rented through a cloud.
Thus, it is now possible for a very few people to get very rich without the help of a lot of other people. And to do it in one place.
In finance, we see this most noticeably in hedge funds, private equity and venture capital funds, and to some extent, fintech. And, of course, in so-called “private offices” where a very small number of individuals work to increase the wealth of an even smaller number of individuals. Outside of finance, the same trend is prevalent among digital businesses whose core value proposition is replacing the work of people with the work of machines.
In marked contrast, consider how large banks democratize wealth:
- Large banks are all publicly traded. Thus, their profits flow not to a few owners but rather to tens of millions of people who own their stock either directly, or indirectly through pension funds or mutual funds.
- Large banks employ a lot of people. In fact, the eight largest U.S. banks collectively employ over 1.1 million people. The chart below shows how many people a bank would be able to hire as a result of an additional $10 million investment. It calculates that metric for large banks, and for other leading financial and technology firms. For example, a $10 million investment at Citi would correspond to an additional 13 workers, while at Netflix would not be enough to hire a single employee. (Note that by definition this chart includes only publicly traded companies, and thus does not include hedge funds or venture capital firms. Their numbers would be roughly zero.)
Source: Market cap sourced from publicly available data as of April 15. Employee numbers from 2018 regulatory filings.
- Large banks employ the middle class. The median income of employees at the eight largest US banks is approximately $77,043.79.1 And that’s for a workforce of over a million people. Of course, you will never see a hedge fund manager receiving a Congressional lecture about whether he pays more than the minimum wage to the lowest paid people at the firm. That’s because hedge funds generally employ few if any low-wage people. While the difference between CEO compensation and that of the lowest paid worker in a firm is a perennial topic of interest, particularly for banks, note that many companies in finance and tech have solved that problem by simply not hiring lower-paid workers. It’s like the old saying: the best way to improve morale is to fire all the unhappy people.Of course, another consequence of employing a lot of people is that no one person makes a truly disproportionate share. Look at the list of the Forbes 400 and you will see about a hundred people in finance – but not one of the banking CEOs who testified last week.
- Large banks employ people around the country. Large banks have branches and other offices all around the country and employ local residents in each of those locations to serve those customers. For example, at the end of 2017 Bank of America operated branches in more than 4600 locations across 34 states. And importantly, the communities in which banks operate and employ local residents are diverse and include low- and moderate-income areas. In contrast, most large tech, fintech firms and the hedge fund industry concentrate their businesses in a small handful of wealthy communities around Silicon Valley and the New York City suburbs.
So, in a rational world, those who care about income inequality would be smiling on the banking industry as a place where good jobs are plentiful on both an absolute and relative basis, and where the fruits of labor are shared broadly. Yet last week, at the House Financial Services Committee, we saw instead considerable enthusiasm for halting their growth, increasing their capital costs, and further tightening their regulation.
For those who care about income inequality, it was a bad day.
Disclaimer: The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Bank Policy Institute or its membership, and are not intended to be, and should not be construed as, legal advice of any kind.
[1] Calculation refers to the weighted average of the medians.
