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A Post-Finance Job Market

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Harvard economist Ben Friedman isn't the first to suggest that the financial sector does some serious damage to the rest of the economy by siphoning off the most talented graduates and putting them to work "ensur[ing] that microscopically small deviations from observable regularities in asset price relationships persist for only one millisecond instead of three." But he takes it a step further and implies, though doesn't quite say, that this drag might mean that "the increased efficiency our investment allocation system delivers" fails to outweigh the costs of running it.

I would like to believe this. It fits with a lot of my biases. But I think people need to consider the counterfactual here. These Ivy League graduates aren't being tricked into finance. They're gravitating toward money and status -- even at the cost of horrible hours, unpleasant jobs and that curious hollow feeling that comes after you trade your dreams of being a helpful person for a nice loft in Midtown.

If the financial sector is somehow shut down, or radically shrunk, they'll just go to the next most profitable industry. Doctors get paid a lot, but there are sharp constraints on supply, so you'd just have more competitive medical schools, as opposed to more doctors. We'll have a lot more lawyers. Many more management consultants. Potentially more engineers and researchers, though those gigs require specialized graduate education -- frequently in the hard sciences -- and I'd imagine there's not too much overlap between college kids interested in organic chemistry and college kids who end up in finance at 23.

Which is all to say, it's not obvious that we'd have a sudden influx of talented people doing useful things for society. That said, we should be able to test this hypothesis soon enough. If there's not already a serious study examining Ivy League graduates in a year when the financial sector opportunities dried up, 2009 is going to offer some good data for anyone interested in writing one.

Photo credit: Bill O'Leary -- The Washington Post.

By Ezra Klein  |  August 27, 2009; 3:34 PM ET
Categories:  Solutions  
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Comments

The fallacy in Friedman's argument is the assumption that it's the most talented people who are going into financial careers. It's probably not surprising that a Harvard economist believes Harvard students are the most intelligent and most talented in the country, but that's not proof.

Posted by: TXAndy | August 27, 2009 3:51 PM | Report abuse

"it's not obvious that we'd have a sudden influx of talented people doing useful things for society"

You are right here. But even in Finance, my original reaction like what you discuss here, is not applicable - the reason being after a blip, the bonus culture in Finance is thriving. When you have glowing reviews about Goldman Sachs and Lloyd Blankfien in latest issue of Time; I doubt there is anything changed in finance as far as money making goes. This is despite what many of us would like a different case to be or thought it would be different automatically.

The rule of finance – “heads I win, tails you lose” is perfectly intact. Barney Franks, Chris Dodds and Tim Geithner of the world can hardly change anything here.

Bottom line - there is no reason for bright minds not to go into Finance. It is still extraordinarily lucrative profession with very, very limited down side.

Posted by: umesh409 | August 27, 2009 3:54 PM | Report abuse

I would also be interested in evidence for or against claims that the financial industry is sucking up our brightest minds.

Posted by: Drew_Miller_Hates_IDs_That_Dont_Allow_Spaces | August 27, 2009 3:54 PM | Report abuse

In their defense, a loft in Manhattan is really nice.

Which are the jobs that are apparently "useful to society" that we have a shortage of? We have plenty of engineers and scientists, and we're always willing to import more. There are many more applicants to medical school than we have spots, and if you're going to say that more people should work for think tanks and non-profit NGOs, the truth is that they have more applicants than positions and hardly enough money to pay people with.

I guess that leaves government jobs... we can always use top talent in the state department and in oversight/regulatory agencies. But still, it's a pretty sad testimony to society if the only way you can get talented people to work in government is if they have no place else to go.

Posted by: constans | August 27, 2009 3:59 PM | Report abuse

"I'd imagine there's not too much overlap between college kids interested in organic chemistry and college kids who end up in finance at 23."

Then why would you expect most of these people to become doctors instead?

Posted by: SteveCA1 | August 27, 2009 4:05 PM | Report abuse

How about running a real business? A friend of mine is a computer programmer (trained at Harvard coincidentally). He's worked on several worthwhile projects such as helping to invent the laser printer. Then he went into finance because, as he put it, the bonus alone was several times what he used to make in a year. Last I heard (and he can't say because of NDAs) he was working on software that basically front-runs the municipal bond market.

Posted by: bmull | August 27, 2009 4:37 PM | Report abuse

"I'd imagine there's not too much overlap between college kids interested in organic chemistry and college kids who end up in finance at 23."

There's actually a lot of overlap between engineering and finance, however. They even call it "financial engineering." Both require quantitative skills, problem solving skills, work ethic, teamwork. In fact, a large percentage of the students going into finance majored in electrical engineering as undergrads.

However, what drives these students is money and prestige (and don't underestimate the latter). If there were well paid, "sexy" engineering jobs in Manhattan there would be plenty of students with talent and background to be fantastic engineers.

Posted by: CarlosXL | August 27, 2009 4:56 PM | Report abuse

"Potentially more engineers and researchers, though those gigs require specialized graduate education -- frequently in the hard sciences -- and I'd imagine there's not too much overlap between college kids interested in organic chemistry and college kids who end up in finance at 23."

Actually, you'd be surprised. I'm in grad school in a hard science, and a lot of people I know in the field were thinking about "getting out for a few years, making some actual money, then getting back to science", especially those with quantitative skills. It's quite probable that a lot of people who otherwise would have gone into science went into finance for the easy money for a few years and never got out.

Also, I don't know what this "best and brightest" minds thing is about either. From what I've seen: they do hire a lot of bright people. But they also hire a lot of not-so-bright people. And a lot of the brightest minds go and do other things. So it's really just a way for those in finance to congratulate themselves; or maybe it's what lay people assume because people making so much money MUST be the best and brightest.

Posted by: goinupnup | August 27, 2009 5:12 PM | Report abuse

Anecdotal, but I graduated from MIT in 2006 with a degree in Chemical Engineering. I'd estimate that a third of my graduating class went straight from school to finance/consulting. I suspect that a large fraction of those would have done something else had finance/consulting not paid quite so well.

Posted by: temp9gj93 | August 27, 2009 5:12 PM | Report abuse

I think a lot of us who either went into high-tech finance, or had school mates who did, agree that Ezra is mistaken here: there is quite a lot of overlap between people who do that and people who do mathematical sciences, and shutting down the useless lucre of finance would probably be quite a boon for engineering and science. Having (after a close call) chosen the latter path though, I'm happy to have the competition thinned by wall street.

Posted by: Ulium | August 27, 2009 5:35 PM | Report abuse

An economist and a blogger are speculating on the social utility of investment bankers. It sounds like the beginning of a joke.

Posted by: tomtildrum | August 27, 2009 6:17 PM | Report abuse

As a former organic chemistry graduate student, I can say that finance/ consulting are hugely popular alternatives to academia/pharmaceutical research. I think about 25% of PhD students went in to consulting from the Harvard chemistry department during the years that I was there (2005-2008), and McKinsey had a very strong recruiting presence, which made it seem that consulting was the main alternative to a lab based research career.

Posted by: Miriam3 | August 27, 2009 6:18 PM | Report abuse

Ten years ago, Capital One cold called me to offer me a job finance job, mainly because I was a PhD in Engineering and a member of the American Statistical Association -- so engineers and finance go back a long way together

Posted by: williamcross1 | August 27, 2009 6:38 PM | Report abuse

To begin with you have to understand I'm a real intellectual snob. I am 71 now, but I spent my entire career in research mathematics. I had plenty of opportunities to go into more lucrative fields. One of my collaborators now runs a hedge fund and his income was $7.1 Billion in the last 3 years. Also nobody appreciates money more than I. I like fine wine, great houses, expensive cars, and important artwork.

The point is that these other fields were not as intellectually stimulating as mathematics. Maybe I made the wrong choice. Maybe I was just too old fashioned. But if I could do it over, I night have made better investments, but I would have still sayted in math.

Posted by: lensch | August 27, 2009 6:43 PM | Report abuse

It's interesting that neither Ezra nor commenter constans consider jobs in the productive sector of the economy. They mention engineering/research, but they don't even consider that MBA's might consider going to work for Main Street companies that actually produce things.

It is highly revealing about why things are falling apart and why we're in the financial mess that we're in....Financial markets and instruments are necessary because they provide necessary capital to the productive sector of the economy. However, since the mid to late 80s, we've seen the financial sector become an end in and of itself, independent of the productive sector.

However, this segment of the economy doesn't provide any inherent value in the absence of the productive sector, so seeing the financial sector grow to something like 40% of our markets must necessarily be unsustainable...Sadly, I really think that unless the "best and brightest" return to jobs in the productive sector instead of financial jobs and management consulting, we're screwed as a nation...

Posted by: AnonymousInMA | August 27, 2009 11:12 PM | Report abuse

constans,

ya let's get MORE government. Government doesn't DO anything. They just regulate, enforce laws and spend money.

How many multiple government agencies do we need that do the same thing? Where these employees get paid $100,000+ salaries for what? Did I hear right that house aides make $150,000+. And then they're getting bonuses on top of that?? AN AIDE FOR GOD'S SAKE. They don't vote for the laws, they don't run for anything, THEY"RE BASICALLY PAID INTERNS!!

Posted by: visionbrkr | August 27, 2009 11:48 PM | Report abuse

visionbrkr,

The White House aides that make more than $100k aren't interns, they are policy advisors, the chief of staff, the head speechwriter, etc. I'm completely fine with compensation between $150-200k for the people the president relies on. Also, the president froze the salaries for everyone above $100k this year. Insignificant benefit, but a nice gesture towards cost control.

Also, having bright government employees is important because it ensures that they can effectively regulate. SEC lawyers need to not only keep up with what Wall St. lawyers are doing, they need to try and stay ahead. Same for any other agency. Smart bureaucrats are a great way to maximize the efficiency of regulation. I think even small government conservatives can agree that IF the government is going to regulate, it might as well do a good job. And that's not even counting the benefits of having smarter teachers and cops.

Posted by: etdean1 | August 28, 2009 10:01 AM | Report abuse

Not exactly on point, but Jesse Rothstein and Cecilia Rouse have a paper examining the impact of reducing the debt loads of graduates at a certain prestigious university. They found that subsequent employment in public interest work went up, but it didn't seem to reduce the numbers going into finance or consulting.

http://www.princeton.edu/~jrothst/workingpapers/rothstein_rouse_120108.pdf

Posted by: jec3 | August 28, 2009 10:12 AM | Report abuse

visionbrkr, it's no one ever chose to join the SEC or the State Department because they couldn't make it in insurance sales. It's clear you have no idea what expertise in government is for, so your glib but ignorant all-caps ranting isn't really needed (seriously, top-tier white house staff being called "paid interns"?)

I think that Ezra just doesn't get the dynamic. You go into finance because you want to make a lot of money. In the absence of finance jobs, people will choose other high-paying professions, displacing some members of the current crop of people applying to med school and law school. The reason chemical engineers leave for finance is that they realized that finance paid much better than chemical engineering (a really well-paying job). If the finance jobs dry up, those graduates will start looking at the relative merits of ChemE vs. Medical school or patent law.

Lots of people talk about a "green jobs economy," but I have a bit of a wait-and-see attitude towards that one. You can't look at the decimated finance sector and then predict that graduates who would have done that will end up taking jobs in a sector that doesn't really exist yet.

Posted by: constans | August 28, 2009 10:23 AM | Report abuse

Also, I should add that we are seeing more medical schools being opened, and the health care sector is on track to expand more and more. I don't see any contractions there anytime soon.

Still, I think the US made a conscious choice to have its economy focus on finance, and I can't imagine that's going to change. The current crop of graduates staying away from finance may well be an anomaly: in 5 years, we may well return to previous patterns in job choices by graduates of top-tier schools.

Posted by: constans | August 28, 2009 10:27 AM | Report abuse

etdean1,

I'm absolutely fine with those making policy decisions having salaries that match the best and the brightest in the private sector. In fact in some ways they should make more so they can stay one step ahead of them in terms of regulation. But I'm talking about the house aides who I never realized make $150k and more and now got bonuses to help pay student loans? Why does someon that makes $150k a year need help with student loans??? I'm sorry when there is so much poverty, unemployment out there this is a waste. What exactly do these people do??? Oh and before someone complains that I'm partisan I'd be 1000% against it as well if and when it was or will be a Republican doing it.

Posted by: visionbrkr | August 28, 2009 10:40 AM | Report abuse

visionbrkr, name the house "aides." Specifically. Who are they and what do they do? You claimed that their status was akin to being an "intern." Why do you think that? Sounds like someone sent you a chain e-mail that set you off and now you've been worked into a froth over something you were told to get resentful about.

Also, please tell me where your law degree is from and where you acquired your years of legislative expertise.

Posted by: constans | August 28, 2009 10:47 AM | Report abuse

constans,

again you demean me but that's fine. this has nothing to do with insurance sales but again you deflect the question of what it is YOU do. I'll post in caps when I feel its necessary, OK? i'm not talking about white house staff i was talking about the house aides who got bonuses back in May who make up to $150k+ and then got student loan deals. I'm not as politically savvy as you and pseudo are but again I'm not PAID to be am I?

Oh and constans, I've made it just fine in insurance sales. I'd say the same for you but you still don't answer my question. Why is that?

Posted by: visionbrkr | August 28, 2009 10:48 AM | Report abuse

constans,

again you can make fun of me all you like. I really couldn't give a crap. I don't have a law degree obviously, do you? how would I know if you did or didn't?

Here's the report that I read through no email chain at all. Its from the Washington Times which admittedly seems conservative but does that make it any less wrong if the info included in it is correct? If its wrong then i'll gladly admit its wrong. But again I'm the one that's being honest here and you're the one in the shadows.


http://www.washingtontimes.com/news/2009/aug/25/exclusive-house-boosts-pay-top-aides/?source=newsletter_must-read-stories-today_headlines

Posted by: visionbrkr | August 28, 2009 10:54 AM | Report abuse

zzzzzzzz. Imagine, all i have to do is ask constans what he or she does and then silence. well maybe he or she had something to do. I wonder if there's some rule (like there is with police officers) that they can't SAY they're not police officers to criminals. Is it legal for paid bloggers to admit this, that they're paid to come onto websites and make their opinions seem like genuine opinions as opposed to paid viewpoints to promote their party's agenda no matter which side does it???

Posted by: visionbrkr | August 28, 2009 11:10 AM | Report abuse

You're very demanding of my attention, visionbrkr. I'm only here to smack you out of your ignorance and blinkered, limited perspective.

Posted by: constans | August 28, 2009 11:18 AM | Report abuse

constans,

no I'm just demanding of the truth. you've attacked me and my career. I'm just asking what yours is (about 5-10 times now) and you STILL have yet to answer. Why is that? I told you what I did to my ridicule by you?

Posted by: visionbrkr | August 28, 2009 11:26 AM | Report abuse

and I'd be curious to ask how much you get paid to, as you call it "smack me out of my ignorance and blinkered, limited perspective?"

As you know I'll need a new career soon so I'm just wondering how it pays? Is that so wrong?

Posted by: visionbrkr | August 28, 2009 11:28 AM | Report abuse

I'm very skeptical that most of these folks are talented (as opposed to connected) in the first place.

Posted by: TWAndrews | August 28, 2009 2:34 PM | Report abuse

The comments to this entry are closed.

 
 
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