Photograph by Victor J. Blue/Bloomberg

Union Square in New York on May 1, 2012, a last hurrah for Occupy Wall Street.

May Day came and went last week, and despite the occasional signs on New York lamp-posts promising a return for Occupy Wall Street, downtown wasn’t exactly gripped by the kind of International Workers’ Day rage that gripped some other world cities. In the months leading up to the presidential election last year, the protests filled the airwaves and the 99 percent chants seemed to define and crystallize the national debate. So what happened?

For one thing, there was the response of authorities. At its home in Zuccotti Park in New York Occupy faced an ever-tightening net of aggressive policing. In other places, like Oakland, Calif., the response made protests a dangerous place to be–and probably succeeded in sending the message that attending the protests would put you in direct confrontation with cops. You can watch the video here if you’ve forgotten that part.

Nonetheless, the basic 99 percent vs. 1 percent theme of the Occupy protests remained a significant factor through the election. The modest recovery after the financial crisis actually made things worse for the 99 percent: If you look at the latest numbers from Emmanuel Saez and Thomas Piketty, the economists most associated with the inequality discussion, you’ll see in the years 2009 to 2011 their real income actually shrank. That’s why Mitt Romney’s crack about the “47 percent” of unproductive Americans struck such a chord, and proved to be one of the pivotal moments of the election.

Then the meme atrophied. The language of Manichean battle between rich and poor mobilized protesters in the street and energized the latent resentments of those watching them at home — on both ends of the political spectrum. It didn’t do anything to define what should happen next. It turned out that being angry at the rich or the institutions that fund their wealth is not the same as agreeing on what to change or how to change it.

The Atlantic’s Derek Thompson discusses a new study (Saez is one of four authors) that helps demonstrate that difference. The study is genuinely surprising, and it’s worth looking at Thompson’s post. The short version  is that as people are given more information on the history of the income gap — some of it with a frankly propagandistic pro-tax, pro-redistribution slant — they become more likely to agree that inequality is a problem. Persuading people that inequality is a problem, however, will not persuade them to raise taxes on the rich. In fact, in some cases it actually made poorer respondents less willing to support redistribution.

Leave aside the psychological explanations of the study (Thompson doesn’t find them convincing and neither do I) and focus on the result: anger at the rich does not necessarily lead folks to conventionally left-wing or right-wing viewpoints.

That matches what we’ve seen in the actual debate around inequality. In politics, the rhetoric of rage at the 1% can be–and indeed, has been–marshaled with equal fervor by both the left and the right. The moneyed elites attacked by the left morph easily into liberal elites scorned by the right. One man’s “Wall Street fat cat” is likely to be another man’s “New York limousine liberal.” Movements like the Tea Party are as anti-1% as Occupy Wall Street. They just see taxes and income redistribution as hobby horses of the elite.

This may be the crux of the issue: Occupy Wall Street found its focus not in changing things for the 99 percent (or the bottom 47 percent, or 20 percent; it doesn’t matter where you draw the percentile line) but in sticking it to the one percent.

To some degree, when it came to making cuts at the top, the income gap crusade, which preceded the Occupy movement,  succeeded. That’s especially evident in Europe, where the “rip-off initiative” passed in a landslide in Switzerland and Eurozone bonus caps are close to reality. These measures have advanced with the support of (largely conservative) shareholders who have seen high CEO pay as an investor protection issue.

The bad news for those who focus on inequality is that the somewhat awkward alliance with shareholders will not take them any further. Look at the chart at the right. It comes from a study by University of Chicago professor Steven Kaplan.  The chart shows chief executive pay as a share of big companies’ stock market value. That has stayed stable for decades; outsize as CEO pay has become, it’s still a small part of the total value of the typical company. There are good arguments for why running a company with a market value that’s ten times bigger doesn’t mean you should get paid ten times as much. They don’t matter because ultimately shareholders don’t have enough skin in this game to care all that much.

That’s why the CEO pay fight won’t yield more than symbolic changes in the broader income gap. What the Occupy movement, as well as vigorous critics of inequality like Saez and Piketty, wanted was not just a few cuts at the top, but a major transfer of wealth to those lower down. The experiment that Thompson cites demonstrates how hard it is to get from riling people up about inequality to persuading them to back that kind of change.

The general approach of Occupy and its sympathizers mirrors that of Franklin D. Roosevelt’s famous first inaugural address. Roosevelt attacked the banks and those who ran them with a religious fervor: “The money changers have fled from their high seats,” said Roosevelt, “in the temple of our civilization.” You can see the similarities with the anti-bank jeremiads of Occupy. For the Occupy movement, the lingering memories of the 1930s, down to the Hoovertowns, were clearly one of the key inspirations.

That rhetoric doesn’t resonate in the same way now. The attack on the rich struck a chord both with the right and the left; in the “Obamacare” debate both sides claimed to represent the real America opposed to Wall Street and Washington. For Occupy, the “Wall Street” half of that equation matters more; for the Tea Party, the “Washington” half. Neither has found it easy to turn the principle of opposing the establishment into policy.

Saez and Piketty have often pointed out that the share of income going to the top 1% is greater now than at any time since the 1930s. That theme had a powerful resonance for the Occupy movement, who believed that the class-war tinged rhetoric could be deployed again today to garner support for a new war on poverty. So far, a year and a half after the Occupy protests, the evidence is that it can’t.

Photographer: Chris Goodney/Bloomberg

A community college, probably more typical view of the U.S. college experience than ivy-covered walls.

In an absorbing story today, Bloomberg’s Kathleen Howley reports on how super-sized student loan debt has locked 30-something Americans out of the housing market. It’s an unusual look at how the pieces of the consumer economy intersect, and how problems in one place turns into damage in another.

Howley highlights the burden on people with hefty private student loans; they owe more money than those with just government-guaranteed loans–and pay higher interest, too. That’s worth a closer look. Contrary to what many would guess, the volume of private student loans has actually fallen since 2008 (chart’s below, courtesy of the Consumer Financial Protection Bureau).

The credit crash, as well as public backlash, took some of the air out of the private student loan market. In particular it cut the high-interest rate financing at for-profit schools, as lenders realized that they were unlikely to be repaid. Much of the private loan meltdown we’re seeing now is the overhang of loans coming due, often with years of capitalized interest.

One other important aspect of the problem: By far the worst crisis is not the cost of graduating from college. It’s the cost of not graduating. The Atlantic‘s Derek Thompson  has pointed out repeatedly, and correctly, that college remains an excellent investment. It’s not, though, if you don’t finish it. Many of those in the worst boat are those who went to for-profit schools that have (or, at least until recently, had) a heavy share of high-rate loans and a low graduation rate. That is not a very big share of students–but subprime wasn’t the biggest share of the mortgage market, either.

Photographer: Simon Dawson/Bloomberg

The lights of Canary Wharf, kept on, perhaps, by bankers working late to justify their bonuses.

For most white-collar workers, there’s a compensation tool that accomplishes almost everything we want from incentives. It comes at the end of a year of good performance. It encourages employees to stay longer to realize its full benefit over several years. It can be deployed as needed to retain key personnel.

It is the “raise.”

Years ago, in the upper echelons of corporate life, the plain old raise gave way to “incentive pay.” To some extent, pay reformers brought it on themselves. Through the tax code, the U.S. in 1993 largely eliminated pay over a million dollars that wasn’t tied to performance. For CEOs, compensation experts like Harvard’s Michael C. Jensen pushed the pay-for-performance line. One of the key justifications for big CEO pay? The need to compete with bonuses on Wall Street.

Now on Wall Street and in the City, the places where the mega-bonus emerged, it seems to be on its way out, helped along by European legislation. And no document explains why better than the report on Barclays’ business practices released last week. Prepared by Rothschild vice chairman Anthony Salz, the report, which hasn’t gotten much attention in the U.S., includes a wealth of detail about how much bankers get paid.*

So let’s get to the good stuff.

Managing directors at Barclays’ investment-banking unit get paid a base salary. It’s typically £150,000 to £300,000. Whether you think that’s high or low may depend on your income bracket. Now here’s what comes on top. For the average managing director, according to the report, the bonus was 350% of base salary in 2011 and 210% in 2012. That means £150,000 to £300,000 turns into £675,000 to £1.3 million for 2011, or just about $1 million to $2 million. That’s down about about 30 percent for 2012. A related data point: In 2010, 728 employees received over £1 million ($1.5 million); 428 did so in 2012.

Maybe the most stunning number in the Salz review is that in 2007 bonuses made up 94 percent of managing director pay. That’s slipped down to 78 percent in 2011** and 68 percent in 2012. The report notes that the change reflects both increases in base pay and reductions in bonuses. It’s hard to unpack the numbers further; there’s no handy clip-and-save guide. It isn’t surprising that Barclays wasn’t eager to provide one.

Here’s what’s clear: Nobody truly believes anymore that those bonuses were anything but just another word for “really big salary.” The clincher: Only 32 percent of Barclays investment-banking employees thought that pay reflected performance. That share is lower than at other Barclays units, a sign that the people getting the big bonuses had a good sense of how thin the fabric of “incentives” was.

All the restrictions now put on bonuses after the recent backlash–longer vesting periods, payment over several years–make them work more and more like raises. So why are investment banks eager to continue them at all? Maybe because the bonus is a way of paying out a much larger share of bank profits as compensation in really good years than the company could afford in ordinary ones. In effect, this gives the senior employees some of the benefits of being part of a partnership, a structure that investment banks abandoned with the Lazard Ltd. IPO in 2005.

Now British bankers are sobbing that new European rules limiting bonuses to two times salary will spell the end of London as a financial center. That’s not the case. As you can see from the latest Barclays numbers, many managing directors are already close to that point. Remember: a bonus that is two times salary means that salary is just one-third of your compensation.

Does all this mean more top bankers and traders will head off to start their own boutique shops and hedge funds? Yes. The big-bonus era gave them the benefits of both public ownership and private partnership. They could sell the cake and eat it, too, going public and continuing to pay themselves as much as they pleased. Now more of those bankers and traders will have to choose between the safety of big shareholder-owned companies and the prospect of ginormous pay.

Here’s what the decline of bonuses will not mean: any substantial shift in the share of money going to the proverbial 99 percent. This blog has already explored the reasons for the massive growth of banking compensation. Investment banks now have a few more people collecting a lot more in fees. That won’t really change. The difference: Where now top employees get a greater share of the profit, more will shift to shareholders. That takes us back in the direction of a status quo that stood for many years before the bonus era.

That’s a real change, just not the kind that many of those in the anti-bonus fight imagined. The campaign against bonuses started out as one for social and economic equality. It’s ending up succeeding as shareholder protection.

*Along with a few hints that might remind readers that it was Barclays that commissioned his work. An introductory note says that “despite the problems, there are many really good things about Barclays — not least that the overwhelming majority of its people are focused on doing their best for its customers.” Undoubtedly. We’ll stipulate that.
** The review says that bonuses were 350% of managing director pay in 2011. I derived the 78 percent from that.

Photograph by Wang Zhongju/Color China Photo/AP Images

Inside the factory of a Foxconn subsidiary in Zhegzhou, Henan Province

Bloomberg’s Kevin Hamlin and Xin Zhou today bring readers to central China, where they chase down factories spreading to new locales as employers fight China’s labor squeeze. They find that even far away from the centers of industry, a limited pool of young workers has extracted higher wages from factory jobs–and is pushing for more gains. And that’s sending powerful ripples through the world economy.

Some context is useful here. U.S. research on Chinese manufacturing shows hourly wages going from the equivalent of 62 cents an hour in 2003 to $1.36 an hour in 2008. Today’s story cites more recent numbers from a Japanese survey that put the average base monthly wage in Guangzhou at $352 a month and $317 in Shenzen. That Guangzhou wage is the equivalent of $2.20 an hour for a 160-hour month.

There are many sources for numbers on China’s wages, not all of which agree precisely (China’s National Bureau of Statistics shows somewhat smaller increases). Even if all the numbers aren’t exactly comparable, the pattern is extraordinary. In less than a decade, wages have probably more than tripled. Hamlin and Zhou find that with factory workers expecting raises, workers’ pay is likely to rise still further.

Try to imagine something similar in a developed economy such as the United States, where factory wages have remained flat, and you start to see the level of social change involved. No, really: Try to visualize that. Some numbers will help. In January, 2003 the average U.S. manufacturing industry wage was $15.61 an hour. So imagine that instead of going up to $19.28 an hour (just short of keeping up with inflation; $15.61 would be $19.78 in current dollars) they had gone up to $46.23. How would the U.S. change if the typical factory worker was making close to fifty dollars an hour?

If you think about this mainly in terms of where to locate factories, this may strike you as a problem. Indeed, China’s cost advantage over the United States, Europe, or South Korea is dissipating, especially compared to Vietnam and Bangladesh. That potentially shifts the flow of trade and pushes up prices around the world.

That, however, is just one (albeit important) part of the macroeconomic story. The other part involves consumption and standards of living. From that point of view ultimately the increases in wages in China will be good for the world economy.

A lot of attention has already been paid in the media to the emergence of China’s small urban upper class, evident in all the stories about real estate bubbles and luxury consumption. The growth of China as a fully developed economy, however, depends on a much broader increase in salaries and living standards, not only for an elite but for factory workers. The bottom line here is that China is far too big to take the path of South Korea and Singapore and bring itself up to first world standards of living through exports. At some point the main driver of growth in China will have to be consumption in China itself. Rising wages are a big step in that direction.

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Photographer: Elin McCoy/Bloomberg

A tasting of wines from Margaux. Unlike some older Bordeaux, these are not too expensive for any sane person to drink.

In the current issue of Bloomberg Pursuits, Bloomberg wine writer Elin McCoy writes about Domaine de la Romanee-Conti, the ne plus ultra of fine Burgundy. The latest release of DRC’s flagship wine, the 2009 vintage, sells for $15,000 a bottle, older bottles for as much as $2,000 an ounce.

Still, as McCoy points out, DRC has been outperforming other wines at auction, largely because of the Burgundy craze among Chinese collectors. All of this raises a question that goes beyond DRC: Do the prices for top wines bespeak a bubble?

Take a look at the chart below, which shows the Liv-ex Fine Wine 100 Index of prices for 100 frequently traded high-end wines back to July, 2000. You’ll see that for five years it stayed flat, rising 265 percent through the middle of 2011 before slipping down. Over the last few months the wine market seems to have resumed its ascent.

Source: Liv-ex data, via Bloomberg terminal

The Liv-ex Fine Wine 100 Index peaked in 2011. There’s still room for it to go down further.

Does that mean that it’s now reached its natural level, or that the bubble is still filled with air? The hard thing about bubbles is that there’s no decisive answer to whether you’re in a bubble until after it’s over. In periods of high prices, there’s generally no shortage of folks ready to say that prices have just reached a permanent new plateau. So it is with wine. The growth of the global ultra-rich is one reason prices could have gone up.

That said, I’m skeptical that the number of folks actually drinking wine at $1,000 a sip has exploded. Yes, there’s a new Chinese market, but it seems to be driven largely by people who are more interested in the investment value of their cellar than the liquid in their glass. McCoy has covered that vividly. At the end of 2011, she wrote about Chinese banks funding wine purchases. Let’s assume that the impulse to open a nice wine with dinner dissipates when you’ve financed your cellar with borrowed money.

Wine prices are now already about 20 percent below their peak. It’s tempting to assume that now that having leveled off they’re set to rise again. Don’t count on it. Rarely is the first sharp descent the true end of a bubble. On this subject, it’s hard to beat the conclusion of McCoy’s 2011 story, so I won’t even try. She wrote then, “My nickname for the Chinese wine investment market? Duchang. It means ‘casino.’” That was right near the very top of the market. There’s still plenty of room to keep falling.

The National Council Chamber in the Federal Palace, Bern. Swiss legislators now must work out how to implement the ‘rip-off’ resolution.

In his new book Thinking, Fast and Slow, the Nobel-winning psychologist Daniel Kahneman, demonstrates how when people are confronted with difficult questions, they tend to get around them by answering easier ones. You can’t find a better example than the just-passed Swiss referendum on abusive pay.

The ‘rip-off’ initiative–yes, that’s the official name of the voter proposal–garnered an overwhelming 68 percent support among Swiss voters. Driven by a series of corporate scandals and outsized pay packages, the Swiss approved a requirement for shareholder votes on pay and bans signing bonuses and golden parachutes. The news that pushed the proposal over the top, according to most accounts, was Novartis AG agreeing to pay outgoing chief Daniel Vasella $78 million in a non-compete agreement.

So what did the vote actually accomplish? That’s where the hard question/easy question part comes in.

The complicated question underlying the executive pay debate is “What do 21st century economies do about the startling growth of inequality?” Think about that one for a couple of seconds. Have an answer in mind? No? Well, that’s why it’s a complicated question.

The easier question here: “Do you think a chief executive should be paid $78 million to get lost, or just to show up?” That’s the one that Swiss voters answered. The outcry over Vasella’s exit package had already killed the Novartis deal. The voter initiative codifies the public’s anger at this deal and kills similar ones in the future.

Does this do anything to deal with the complicated question? Not really. What the Swiss vote amounts to is a shareholder protection measure. Except that it’s a shareholder protection measure that (as Dealbreaker’s Matt Levine has also pointed out) most shareholders weren’t asking for. Overall it might mean that top executives get fewer outsized payouts. It could also mean that mediocre and entrenched executives stay on longer. There are sometimes good reasons to pay signing bonuses, though probably fewer good reasons for golden parachutes.

In the debate over the Minder initiative, Swiss Justice minister Simonetta Sommaruga said that giant pay packages do “enormous damage to social cohesion in our country.” That the growth of inequality damages social cohesion is almost inarguable: the greater the differences in income, the greater the gap in outlook.

The real gap in income to worry about, though, isn’t between ultra-rich chief executives and the merely rich tier below them. It’s between the wealthy and everybody else. To be clear: that doesn’t mean that a sweetheart $78 million golden parachute payment is defensible. It means that getting rid of such payments for corporate officers doesn’t address the social cohesion problem.

Like many other efforts to rein in bonuses and executive pay, the Swiss initiative, if it succeeds at all, will succeed in shifting some money from executives to shareholders. There’s just no reason to think that this will shift any more money into the hands of those shouldering the biggest burders of inequality — ordinary workers.

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Photographer: Price Chambers/Bloomberg

Mountain ranges like the Grand Tetons took millennia to grow to their present size. Wall Street bonuses? More like 25 years.

New York State yesterday released its annual report on Wall Street pay, reporting that the average New York City securities industry bonus went up eight percent last year, to $121,890. Surprised? Didn’t think so. That Wall Street bonuses went up is roughly as unexpected as an airplane getting delayed at O’Hare: it doesn’t happen every time, but you can usually bet on it.

That climb has made Wall Street bonuses the focus of the current debate about inequality. The $121,890 average includes bonuses for everyone from secretaries to traders and senior executives. For those last categories alone, the numbers would be much, much higher. I’ve taken the New York State Comptroller’s report, which lists bonuses all the way back to 1985, and adjusted the numbers to 2012 dollars, to account for inflation.

The result: Since 1985 the average securities industry bonus in the city has risen about four-fold. There’s a big jump from 1990 to 1991, when bonuses went from about $27,000 in real-dollar terms to $52,000, and a series of further increases from there. Bankers and traders in a bad year now earn much more than they did in a good one. You can see the chart to the right.

So what accounts for the rise in Wall Street pay? Defenders of the compensation status quo tend to point to increased productivity. Foes ask, reasonably, what the heck folks on Wall Street do that makes them worth so much more. There’s some data in the report that goes a long way toward explaining the increase — though probably not nearly as far in justifying it.

The next chart uses the numbers from the state report and the Securities Industry and Financial Markets Association to compare the total inflation-adjusted bonus pool for New York City to the number of industry workers in New York. You’ll see right away that the second part just doesn’t change much. In 1985, the industry had about 130,000 employees in New York. Last year, that number was 169,200 (fewer than in 1997, and barely more than the 163,000 workers in 1987).

Meanwhile, the bonus pool has risen in real-dollar terms from $4.1 billion to $20.1 billion. The industry and its profits have grown with the economy, which has roughly doubled in size since 1987 (and financial services has grown more). The number of highly-paid New York-based employees has not.

The economists Robert H. Frank and Philip J. Cook anticipated this kind of trend in their book “The Winner Take All Society.” For a long time, I resisted the idea that the economy had changed in ways that brought the big rewards to the top of the pyramid. For one thing, I thought, every superstar, whether in banking or movies, creates work for many other folks. In addition, I assumed that if fewer highly skilled employees were needed to do the same job, then supply and demand should dictate that those employees would earn less.

The New York City data, though, are compelling. University of Chicago economists Steven N. Kaplan and Joshua Rauh have theorized that the main reason for the rise in Wall Street pay is that “asset managers, investment bankers, lawyers, and top executives now apply their talent to much larger pools of assets.” The bonus charts support that explanation.

You can argue about whether there’s something special about those folks, or whether they’ve just gotten lucky. You can’t argue with the math, which shows unequivocally that income at the top is growing because essentially the same number of people are splitting greater profits.

Next week I expect I’ll take a more careful look at this, moving beyond New York City. There are other factors to consider, like the drop in the city’s share of industry employment from about 30 percent in 1992 to 21 percent now. Nonetheless, I suspect the general principle that the jobs at the top of the economic ladder are becoming ever more lucrative as their industries scale up without adding staff will hold up. If so, that reveals some truths uncomfortable for both sides in the debate over incomes at the top. For the harshest critics of Wall Street. the fewer employees/more profits explanation isn’t exactly the cloak-and-dagger conspiracy they might wish for.

On the other hand, for those who think that all is just hunky-dory on the inequality front, this isn’t exactly a pleasing result either. Fewer people sharing more profits means Wall Street employees may be more “productive” — but not in any way that non-economists understand that word. It’s not that they work harder or have somehow gotten vastly smarter. It’s just that it doesn’t take many more people to do a $300 million deal than a $50 million. That basic fact does a lot to explain why incomes on Wall Street have grown. It doesn’t do anything to make it seem fair.

Bloomberg News/ Laura Segall

A development in Gibert, Arizona, in the Phoenix metro area

Welcome to the Phoenix, Arizona, edition of The Market Now. Two Bloomberg stories in the past two days included powerful on-the-ground reporting in Phoenix. They make for a telling study in contrasts.

Today, Heather Perlberg reports on the Phoenix homeowners emerging from underwater mortgages. Perlberg kicks off the narrative with a homeowner who finally saw prices recover enough that she could sell the house her family had outgrown, pay off the mortgage and upgrade to a larger place. Though prices are still well below their 2006 peak in Phoenix, they’re recovering fast.

Also from Phoenix comes yesterday’s article by Jeff Green and Amanda J. Crawford about the increase in the payroll tax. They pull in tight on a high school teacher whose $60 a month payroll-tax increase means cutting bills by shopping for groceries in the junk-food aisles of the dollar store. Dinners out are out of the question.

The two stories together neatly sum up the mixed economy. Investors and homeowners have benefitted from low interest rates and the Fed’s efforts to jump-start the housing market. Big investors in Phoenix have known that for a while, as this Bloomberg story noted in October. Those improvements in the investment climate haven’t been matched by gains in middle-class income.

The chart above, using Phoenix data from the St. Louis Federal Reserve, gives you some idea of the long-term trend in incomes and home prices. The black line in Phoenix’s per capita income, the red is home prices. You can see just how far home prices outstripped incomes in the boom. There’s room for a recovery, but not to anything like those boom-era levels.

That’s the reason that, as regular readers know, The Market Now has been skeptical of the housing rebound. Low rates will boost housing, and perhaps easier mortgage standards may too as banks turn on the lending spigot. Over the long term, though, home prices will keep rising only if disposable incomes do, too.

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