The idea that too big a share of corporate profits flowed to finance, and how it influenced financial firms, and their ability to influence the economy as a whole has been talked about a lot. "By the middle of this decade, it accounted for a third of corporate profits." There's a different way we need to look at this.
Imagine you make no money one year, then 167k, 379k, 439k, 505k, 710k, 864k and then bam, you lose 2.76Million. How would you describe your 8 year run? You end up +270k, or 34k/yr - ignoring inflation. Not terrible, but below median.
That is Merrill Lynch's performance from 2001-2008, with a couple zeros lopped off to make it make sense for a family's income. ML's earning's from 2001-2008
While I agree with Prof. Krugman's idea that finance became overweighted, I think he misses a point that their profits from 2003-2007 were illusory. If you took the total 2001- profits, would finance still be 33% Using ML as a datapoint, their average earnings were less than 7% of their 2005 earnings. This would put finance closer to 5-10% of profits for the 00's.
The bigger problem is not people making money in finance, but when the earnings are based on actions that will eventually blow up. If you book profits in 05-07 of $100M on a loan or transaction, but then it loses you $500M in 08, you were not doing a good job in 05-07, and should not have gotten a bonus, let alone a large salary. This is Taleb's picking up nickels in front of a steamroller. Sure they were huge golden nickels, but that steamroller was huge too.
Goldman Sach's CEO says that if you pay bankers with restricted stock, they will think longer term - if a ML banker had all his money in ML stock, he would not have fared well. I say that ML should not have been able to book profits in such a way as they disappeared faster than they appeared. If ML's profits were closer to cash-flow reality, there would not have been as much money for oversized salaries.
You can't effectively legislate how companies compensate employees, and excessive taxation hurts many fields outside of banking. But you can set accounting standards so that profits today cannot disappear tomorrow. So that companies need to account for the possibility of loss and only book profits for cash they actually take in, not what they might potentially take in, also accounting for risk.