In fairness to Krugman, he does pay lip service to the issue in the current environment -- barely. In a single sentence, he both raises and dismisses arguments of supply and demand, writing, "Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?"
If Krugman doesn't believe supply and demand are playing a role in determining compensation, what wisdom does he have for us? What explanation can the 2008 Nobel laureate offer his readers? Krugman's insight: "The real reason financial firms are paying big again is simply because they can."
Because they can. This is Krugman's contribution to the debate?
Compensation in the banking sector is an important topic being debated in the White House, on Capitol Hill, and in boardrooms across the US and Europe. Shouldn't we be able to expect a more serious analysis from one of our leading economists?