Mr. Coggan also talked about the allure of working in the financial sector, which attracts the brightest minds in math, economics and even the natural sciences. A friend of mine the other day was telling me about a recent Cambridge graduate who earned a PhD in biomedical engineering. She could have contributed tremendously to scientific fields like medicine and physiology, but instead, she went to work as an analyst for Goldman Sachs. At LSE, I see equally brilliant people all the time who tell me, "Yeah, I'm really interested in poverty reduction in Africa, but I've only applied to Goldman Sachs and BCG." It's a shame that such an unproductive sector, i.e. banking/finance, has such a monopoly on smart people. Mr. Coggan is convinced that the gilding is about to wear off, though, and that all these would-be doctors and mathematicians and academics will be re-attracted to the pursuit of knowledge, rather than the creation of money.
Paul Krugman also brought up this issue of misappropriated human capital, citing a post by Greg Anrig (an excellent post, which I encourage you to read now) at the Century Foundation. Really intelligent people are being forced to sit in front of a computer for their entire careers, helping rich people move their money around to find the lowest possible tax rate. According to Krugman, the fact that the tax system is so complicated is "bad economics" because it diverts more human capital (i.e. smart people) into an industry (i.e. accounting/finance) than a less distorted market (i.e. with a simple tax code) would normally require. Put simply, complicated tax codes mean really smart people have to be employed to figure it out, when they could (and, normatively, should) have have been employed elsewhere in more productive careers. Anrig's fourth point sums this up nicely [italics added for emphasis]:
4. The tax-favored treatment of capital gains is a notorious source of complexity in the tax code, diverting the energies of highly paid accountants and lawyers into wasteful efforts to shelter the incomes of wealthy clients from taxes. The elaborate tax forms known as Schedule D ("Capital Gains and Losses") and Form 8949 ("Sales and Other Dispositions of Capital Assets") provide a superficial glimpse at how the differential tax treatment of capital gains can suck up enormous quantities of time and money for the well-heeled and their tax pros. But much more costly and wasteful than the tedious forms are the strategic energies engaged in manipulating income flowing to the wealthy in ways that minimize tax liabilities....
[The shifting primary source of capital gains from stocks to "pass-through" entities] has required an enormous investment of brainpower, administrative work, and other energy that has profited individuals engaged in those activities without any discernable payoff to the rest of society. Little of that unproductive work would continue if capital gains were taxed at the same rates as earnings from work.There's obviously a need for smart, well-trained financiers. We need people to understand things like the derivatives class I sat in on this morning, which almost made me jump out of a window. Finance is playing and will will continute to play a huge role in environmental and development initiatives (For a really excellent book on this, click here.), but we don't need millions of Excel experts whose job prospects rely on convoluted tax laws. In a similar vein as Anrig's tenth point, society shouldn't glorify the financial analyst whose only job is to expand
I'm glad this debate has found its way into the mainstream.
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