As the debate over financial sector reform has escalated during the past several weeks, many of the wonks discussing the subject have missed the fact that any reform's success is likely to be determined not by Wall Street or Washington but by those studying in the classrooms of universities across America. This may seem unlikely since the problems that led to the Crash of 2008 were due to lax federal regulation and irresponsible risk-taking by powerful financial institutions. Yet in order to prevent a future collapse of such gigantic proportions, policymakers must enact legislation that realigns the perverse incentives that currently drive thousands of the nation's brightest young minds into an industry that provides minimal benefits to society and has become a leviathan controlling the fate of the nation's entire economy.
It is not difficult to understand why work in the financial sector is so alluring to many students. After all, the sector's share of U.S. business profits immediately preceding the 2008 crisis was nearly 35 percent according to MIT economist Simon Johnson. New York University's Thomas Philippon estimates that, as of 2007, the average employee in the financial sector received a real wage that was almost double what the average worker in the rest of the American economy made. Working in finance also offers individuals an unparalleled opportunity at upward mobility - successful traders and managers can ascend from the upper-middle class to millionaire status, and in the process they often make connections with members of the nation's political and social elite. This is a potent combination of incentives that makes studying finance while in college a very attractive option for students who are eager to secure a route to comfortable employment upon graduation. It is certainly more appealing than obtaining a degree in the humanities or social sciences, two fields that typically feature jobs offering salaries that are a little more than half of what can be made when starting off in finance. Even studying law or medicine pales in comparison to finance since a career in either of those fields requires a substantial amount of post-graduate education.
Thus, it should not be surprising that a recent ranking done by The Princeton Review shows that Business Administration and Management/Commerce is the most popular undergraduate major at American universities. Accordingly, the University conferred 325 undergraduate degrees in the area of commerce during the 2008-09 school year, more than it did for any other major. Furthermore, according to the Commerce School's own statistics, 42 percent of third-year students and 49 percent of fourth-year students studying commerce at the University as of July 2009 had chosen finance as their first concentration. Considering that the second most popular concentration, accounting, was only chosen by 18 percent of students from each class, this is a strong indication that the popularity among students for business educations is being fueled by an increased desire for careers in finance.
Many people would look at those numbers and conclude that there is nothing wrong - after all, the selection of an undergraduate major is an intensely personal decision and it seems crass to suggest that majoring in finance is somehow wrong. But when one considers the damaging effects that the rise of the modern financial sector has had on America during the past 25 years, it becomes clear that the growing popularity of education in finance is feeding into a vicious cycle that will continue to enrich a select portion of individuals at the expense of the rest of American society. Although would-be financiers might contend that the industry is necessary to power the American economy by making loans and investments that allow small businesses to flourish as well as by financing the homeownership and retirement portfolios of middle-class families, the reality is that the financial sector was perfectly capable of filling those rolls before its profits exploded and it became the most lucrative part of the nation's economy. For example, during the 1960s when America experienced its most sustained and broad-based period of economic growth, the financial sector's profits made up only about 12 percent of total U.S. business profits. Since the 1980s, however, that number has exploded while the median household income for Americans has grown at a rate that is a fifth of what it was during the era of small finance.
Two additional misfortunes have occurred as a result of the fantastic new economic opportunities that have been made available to people in finance. First, individuals on Wall Street have been pushed to take ever-wilder risks in order to capture a share of the financial sector's expanding profits. Second, students who might otherwise have pursued careers in fields such as law, teaching or medicine that provide definitive benefits to society have instead chased the wealth of Wall Street and have wound up contributing to the nation's economic upheaval. There is only one sufficient response that policymakers can give to this situation - they must attack the obscene profitability of the financial sector so that the American economy may once again be geared toward the common good and so the passions of young minds might once again be redirected toward the things that truly matter.
Matt Cameron's column appears Thursdays. He can be reached at m.cameron@cavalierdaily.com.
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