How to reign in Wall Street

Matt Ylgesias and Kevin Drum had a back-and-forth today that relates to my call for more progressive tax instruments to pay for stimulus/bailouts and entitlements (including an expanded role in health-care).

Yglesias says we can use tax policy to attempt to put downward pressure on Wall Street compensation which might be a factor in limiting personal avarice as an incentive for rampant and irresponsible risk taking.

we actually have a well-established method of taking market distributions of income and trying to transmogrify it into a more just, useful, and welfare-enhancing deployment of social resources — taxes and public services....It strikes me as ultimately unlikely that the political process will be able to micromanage high finance in a way that strikes people as meeting the claims of justice. But the political process very much can collect tax revenues and use that revenue to finance things that we currently “can’t afford” like more widespread provision of health care services, better rail transportation, cleaner streets, more police officers, more and better pre-kindergarten, etc.

Drum comes back and argues that as a practical matter 50% is an upper bound and that in terms of effective tax rates, we'll likely see much less than that actually paid. He goes on to say that tax policy is a broad-brush.

Overall, there's not much question that Wall Street bankers are going to continue to be paid astronomical sums as long as the firms they run are making astronomical profits. And that's the key problem. Tax policy can help — though it's a pretty broad brush — but the fundamental problem is that the finance sector in the U.S. is so damn big. And it's seemingly an unstoppable juggernaut: Wall Street income may have been down last year, but even the biggest economic collapse since World War II hasn't made even a medium term dent. A mere year later, the overall size and profitability of the finance industry is on track to be about the same size as it was during the boom years.

I remember when the collapse was happening Jared Diamond said that societies that came back from collapse had one thing in common, a shared history of pain. Suffering up and down the income spectrum served as a warning to reform or die. I'm worried that there just hasn't been enough pain for the rich. Like Drum said, it's back to business on Wall Street, with no sign of meaningful regulation (Bernanke was afterall just re-nominated).