Wall Street Pay

Today's reading from the NY Times website: On Wall Street: All Reward, No Risk by William D. Cohan.

For the life of me, I can’t figure out why Wall Street bankers, traders and executives get paid so much money year after year for doing jobs that rarely require them to innovate, enlighten or put their own capital at risk, and have the nasty habit of periodically sinking our economy.

After a two-year stint as a reporter on a daily paper in the early 1980s, I worked on Wall Street for nearly two decades, and quickly discovered that I could make more money in one year as a banker than I could in a lifetime as a journalist. And that was when I was a relatively junior banker. By the time I was a managing director, the pay — and the pay spread — was astronomical.

Curiously, though, the amount of time and energy I devoted to the two professions on a daily basis wasn’t all that different; both were totally demanding. While it was true that as a banker I generated revenue, or helped to generate revenue, and as a journalist, the publisher likely figured I was part of a cost problem, the discrepancy in pay never made much sense to me since I always had trouble imagining a newspaper without writers.

Now, after six years of writing about Wall Street — including two lengthy books — I remain at a total loss to explain the pay phenomenon. What’s worse, even the most modest slights when it comes to pay on Wall Street — “The guy next to me got a $2 million bonus, why did I only get $1.9 million?!” — is enough to reduce someone to tears. Indeed, I have yet to encounter a person on Wall Street who can, with a straight face, justify his compensation on other than the most painfully tone-deaf grounds, usually along the lines of how they “add value” for their clients....

This was a key paragraph for me:

Do Wall Street firms exist for the benefit of their shareholders, like other public companies, or do they exist primarily for the benefit of the people who happen to work there? The answer to this rhetorical question is painfully, and sadly, obvious. No other large public companies pay out anywhere near as high a percentage of revenue to their employees. But where is it written that this madness has to continue? Why does a financial engineer have to get paid exponentially more than a real engineer?

It does fascinate me how we value different kinds of work...

My Stimulus Tax Cuts

Did you get a tax cut in 2009? No? Are you sure? According to this article, a lot of people don't realize they got a tax cut: From Obama, the Tax Cut Nobody Heard Of.

At Pig Pickin’ and Politickin’, a barbecue-fed rally organized here last week by a Republican women’s club, a half-dozen guests were asked by a reporter what had happened to their taxes since President Obama took office.

“Federal and state have both gone up,” said Bob Paratore, 59, from nearby Charlotte, echoing the comments of others.

After further prodding — including a reminder that a provision of the stimulus bill had cut taxes for 95 percent of working families by changing withholding rates — Mr. Paratore’s memory was jogged.

“You’re right, you’re right,” he said. “I’ll be honest with you: it was so subtle that personally, I didn’t notice it.”

That was kind of the point: economists hoped people would be more likely to spend small amounts of money they got each month, as opposed to a lump-sum payment that they might just sock away in the bank. Whether or not that strategy was right is debatable, but politically, an invisible tax cut doesn't help the current administration's reputation.

I did realize that something was going on with my taxes because I had to adjust the repeating paycheck deduction transactions I enter in Quicken, but I'd never stopped to think about how much it came to. I just checked: in January, February and March of 2009, I was having $935.56 in Federal taxes withheld from each paycheck. After the Obama tax cut kicked in, that dropped to $891.14 in April 2009 and beyond, a decrease of $44.42 per month, or 4.7%. It's hard to calculate the total effect for all of 2009 because I maxed out my 401k before the end of the year, and of course taxes withheld are not the same as actual taxes paid after you factor in refunds, but I'd guess it might have totaled a couple hundred dollars in the end. I don't have the energy to dig up my tax returns and do all the math right now, but the actual terms of the tax credit are basically this:

In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.

This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

More details here.

Compare that to back in 2008, when Bush issued his one-time stimulus checks: I got $19.70.

Neither of these windfalls was enough to make me change my behavior-- I'm fortunate enough to be able to save a good chunk of my income, and my spending decisions are made within an overall sense of what I want my budget to be, and other random factors of whatever I happen to want to spend money on at various times. But if I was living paycheck to paycheck and spending all the money I had, Obama's tax cut would have stimulated consumer spending more than Bush's.

Of course there are much larger debates going on about what's going to help our economy and whether tax cuts are a good idea, who should get them, etc. etc.-- I won't get into all that, but regardless of the bigger picture it's frustrating that so many people either aren't aware of facts or actively spread disinformation about Obama's actions on tax cuts.

Income Inequality

I liked this article from the New York Times: Income Inequality: Too Big to Ignore

During the three decades after World War II, for example, incomes in the United States rose rapidly and at about the same rate — almost 3 percent a year — for people at all income levels. America had an economically vibrant middle class. Roads and bridges were well maintained, and impressive new infrastructure was being built. People were optimistic.

By contrast, during the last three decades the economy has grown much more slowly, and our infrastructure has fallen into grave disrepair. Most troubling, all significant income growth has been concentrated at the top of the scale. The share of total income going to the top 1 percent of earners, which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 percent.

Yet many economists are reluctant to confront rising income inequality directly, saying that whether this trend is good or bad requires a value judgment that is best left to philosophers. But that disclaimer rings hollow. Economics, after all, was founded by moral philosophers, and links between the disciplines remain strong. So economists are well positioned to address this question, and the answer is very clear.

This part echoes what I've said here myself about the bar being raised for everyone when we're exposed to the spectacle of how the rich spend their ever-increasing wealth:

The rich have been spending more simply because they have so much extra money. Their spending shifts the frame of reference that shapes the demands of those just below them, who travel in overlapping social circles. So this second group, too, spends more, which shifts the frame of reference for the group just below it, and so on, all the way down the income ladder. These cascades have made it substantially more expensive for middle-class families to achieve basic financial goals.

It's to everyone's benefit to have a healthy middle class:

The middle-class squeeze has also reduced voters’ willingness to support even basic public services. Rich and poor alike endure crumbling roads, weak bridges, an unreliable rail system, and cargo containers that enter our ports without scrutiny. And many Americans live in the shadow of poorly maintained dams that could collapse at any moment.

Ultimately, the article concludes that increasing income inequality doesn't benefit anyone-- the rich people who benefit from it aren't really happier, and everyone below them on the ladder isn't happier, and the costs to society affect us all. This doesn't mean that "income equality" is the goal, as those paranoid about communism and socialism may fear-- there will always be rich people and poor people, but when the division between them grows too out of proportion, we all suffer.

If you want to read more about the negative effects of income inequality, I recommend the book The Spirit Level: Why Greater Equality Makes Societies Stronger.

A Tree Grows in Brooklyn

I recently read A Tree Grows in Brooklyn for the first time-- it's an extraordinary book, and full of so many interesting thoughts about money. The main character is Francie, a little girl growing in Brooklyn in the early 20th century. Francie's father is a charming alcoholic who can never keep a job for very long, so they're always poor and scrambling for whatever money they can get. Francie and her brother sell old rags or metal (I forget which) to a junk dealer in order to get a few cents of pocket money for themselves, and here's what Francie does with hers:

Arriving at the store, she walked up and down the aisles handling any object her fancy favored. What a wonderful feeling to pick something up, hold it for a moment, feel its contour, run her hand over its surface and then replace it carefully. Her nickel gave her this privilege. If a floorwalker asked whether she intended buying anything, she could say yes, buy it and show him a thing or two. Money was a wonderful thing, she decided.

Here's an excerpt from a scene describing the family's mealtimes, where they each drink a cup of coffee. Francie often doesn't drink hers and her brother wonders why she's even given one. Here's Francie's mother's response:

"Francie is entitled to one cup each meal like the rest. If it makes her feel better to throw it away rather than to drink it, all right. I think it's good that people like us can waste something once in a while and get the feeling of how it would be to have lots of money and not have to worry about scrounging."
This queer point of view satisfied mama and pleased Francie. It was one of the links between the ground-down poor and the wasteful rich. The girl felt that even if she had less than anybody in Williamsburg, somehow she had more. She was richer because she had something to waste.

As she grows older, Francie is constantly aware of the need to save money. Her mother has learned this lesson from her grandmother, who insists that she should save whatever money she can, hide it in a coffee can nailed to a closet floor, and never touch it until someday there's enough to buy some land:

"It is winter, say. You bought a bushel of coal for twenty-five cents. It is cold. You would start a fire in the stove. But wait! Wait one hour more. Suffer the cold for an hour. Put a shawl around you. Say, I am cold because I am saving to buy land. That hour will save you three cents worth of coal. That is three cents for the bank...."

And then there's this painful scene, where Francie wants to win a beautiful doll that is being given away at her church by a girl from a rich family. They announce that it will be given to a "poor little girl named Mary" and Francie wants it so badly that she raises her hand and lies about her name, while having to publicly acknowledge that she's poor. As she leaves the church with her prize, she is tormented by the other poor girls:

Francie's eyes smarted with hot tears. "Why can't they," she thought bitterly, "just give the doll away without saying I am poor and she is rich? Why couldn't they just give it away without all the talking about it?"
That was not all of Francie's shame. As she walked down the aisle, the girls leaned towards her and whispered hissingly, "Beggar, beggar, beggar."
It was beggar beggar, beggar, all the way down the aisle. Those girls felt richer than Francie. They were as poor as she but they had something she lacked-- pride. And Francie knew it. She had no compunctions about the lie and getting the doll under false pretenses. She was paying for the lie and for the doll by giving up her pride.

If you've never read this wonderful book, I highly recommend it, and not just for the insights on money and class. There's great historical detail about old New York, and it's a fascinating portrait of a girl's coming of age.

3rd Quarter Recap

I've fallen behind on my monthly recaps-- the last one was for June, so today I'll just catch up by doing a summary for July-September.

Income:
I got some retroactive pay relating to my recent raise, so my income was high this quarter:
Salary $25,831
Interest Income $87
Other Income (employer 401k contributions) $775

Expenses:

Taxes	$6,908
Housing	$2,290
Dining	$2,003
Travel	$1,038
Misc	$931
Clothing	$747
Business expense	$694
Utilities	$686
Medical	$409
Gifts Given	$286
Household	$260
Subscriptions	$194
Education	$100
Outflows - Other	$80
Charity	$50
Entertainment	$41
Bank Charge	$36

Some notes:
Housing was lower than usual as I got a refund of over-escrowed property taxes
Dining and Travel are a bit out of whack because I took a 10-day vacation with Sweetie, and we still haven't worked out who owes whom what. But it was a relatively cheap vacation since I got the tickets with frequent flyer miles.
Miscellaneous includes a few hundred dollars spent on some prints during the trip, one of which was for Sweetie.
The business expense is for work and will be reimbursed.
I was surprised to see that Clothing was so high, but then I remembered that I'd bought some shirts and a dress that cost almost $150. It's funny, I never wear dresses but I saw that one and just had to have it! Now I need an occasion at which to wear it...
Outflows Other was the fee for renewing my driver's license, which I'd forgotten to categorize.

My net savings for the 3 months were $9,938, more than a third of my gross income.

As for net worth, as of the end of September, it was $448,062, an increase of $40,883, or about 10% from the end of June.
Cash, CDs, Bank Accounts: $69,355
Stocks/Mutual Funds (non-retirement): $22,236
Bonds: $5,091
Retirement Accounts (401k and Roth IRA): $272,805
Home Equity: $81,490
Credit Card (paid in full every month): $2,915

I'm starting to feel too cash-heavy again. I need to shift some more money into more aggressive investments, but I've been lazy about doing my research. Part of me wants to invest in some individual blue-chip stocks again if I can find some that seem undervalued, but the other part of me remembers that I've had mixed luck with that in the past, and thinks I should just go with some more Vanguard funds!
And as usual, home equity is a rough estimate. I decreased my valuation back in June, and occasionally see other stats that make me think I could raise it a wee bit again, but I'm not going to worry too much about it. I have wondered if I should re-finance my mortgage, though...

Anyway, the numbers are all pretty good-- the important thing is that I'm controlling what I can control and consistently adding to my savings, even though I've been sort of on financial auto-pilot for the last few months. But it's time to dig a little deeper into the investing side of things again, to make sure I'm using my savings well. Onwards and upwards!

Good News: Raise, Promotion, Inheritance

A little happy news! I was promoted and got a raise of a little over 6 percent. The percentage seems a bit small for a promotion, but I wasn't going to quibble over it, especially as I've yet to be asked to do anything more in exchange for my more exalted title!
It's funny, I've often felt conflicted about my career ambitions-- on one level, I do want to make more money, do fulfilling work, and feel that my efforts are publicly acknowledged by a prestigious title. But another part of me worries about hitting what I think of as "the responsibility wall." In part, this is an anxiety about exceeding my level of competence, and failing after years of succeeding. But it's also about not wanting to work too hard! I have a life outside my job, and I want to have time for activities I enjoy and not feel like work consumes all my energy. It's an issue I'll continue to mull over, but for the moment, I guess I have the best of all worlds!

It actually feels like a bit of a milestone-- I've reached a level in my career that I wasn't sure I'd ever attain. And although my total compensation including bonus has been over $100k for a few years now, this is the first time my actual salary will rise above $100k-- I'm not sure why this means anything to me, but it does!

One sad thing about my promotion is that I can't help wishing it had happened before Great-aunt Minnie died. She was the first person I would have wanted to tell, because I know how proud of me she would have been. Quite coincidentally, I also just got word via my sister that it looks like my share of the inheritance may be around $15,000, which means Minnie's total estate must have been over $180,000, even though she never owned a home. I'm even more impressed that Minnie managed to have so much money saved at the end of her life, and I feel very lucky to benefit from her wisdom and generosity in this unexpected way.