The U.S. finance industry is less efficient than ever.
Investment banks take the biggest share of income in history, while the cost of the services they do has actually stayed the same when measured for time and inflation, according to a recent study by Thomas Philippon at New York University.
Phillipon says that today's Wall Street is not as competent as generations before:
I find that the unit cost of intermediation has increased since the mid 1970s and is now significantly higher than it was at the turn of the twentieth century. In other words, the finance industry that sustained the expansion of railroads, steel and chemical industries, and later the electricity and automobile revolutions seems to have been more efficient than the current finance industry.
He also asserts that the cost of what banks do, investing assets, hasn't changed that much:
I find that this (annual) unit cost is around 2% and relatively stable over time. In other words, I estimate that it costs two cents per year to create and maintain one dollar of intermediated financial asset.
While their compensation has skyrocketed, even as technological advancements make their jobs easier:
The income share grows from 2% to 6% from 1870 to 1930. It shrinks to less than 4% in 1950, grows slowly to 5% in 1980, and then increases rapidly to more than 8% in 2010. Surprisingly, the tremendous improvements in information technologies of the past 30 years have not led to a decrease in the average cost of intermediation, or at least not yet.
This study certainly adds credence to the idea that bankers are over-compensated.
Here's a graph showing the finance industry's share of income over the past 150 years: