Overrated

Above the Market: Berkeley economist Brad DeLong has noted that our industry accounted for 2.8 percent of domestic GDP in 1950 compared to 8.4 percent of GDP in 2011.“[I]f the US were getting good value from the extra…$750 billion diverted annually from paying people who make directly useful goods and provide …

Above the Market: Berkeley economist Brad DeLong has noted that our industry accounted for 2.8 percent of domestic GDP in 1950 compared to 8.4 percent of GDP in 2011.“[I]f the US were getting good value from the extra…$750 billion diverted annually from paying people who make directly useful goods and provide directly useful services, it would be obvious in the statistics.”In other words, the financial services industry should provide value in a demonstrable way, especially because wages and other forms of remuneration in the financial sector have grown so enormously since 1980. But there is precious little evidence that it has done so.

Good research suggests that our industry has become ever more sophisticated and complex over the past three decades or so but to little effect.In fact, fully 2 percent of GDP has been wasted in the pointless hypertrophy of the financial sector – we got paid more but didn’t produce more – evidence that America’s financial system is less a device for efficiently sharing risk and more a device for separating customers from their money. Moreover, there is no correlation between stock market valuation measures or GDP and Wall Street rewards.

In related news, financial development, while helpful to economies early, fairly quickly becomes a drag on overall growth as time passes because it competes with other sectorsfor scarce resources, including talented workers.In the words of Adair Turner: “There is no clear evidence that the growth in the scale and complexity of the financial system in the rich developed world over the last 20 to 30 years has driven increased growth or stability.”

In my view, this lack of economic productivity, while bad news for the economy and amajor cause of rising income inequality, might still be acceptable (or at least defensible) if there were evidence that the financial sector provided real help to investors generally and to individual investors in particular.Unfortunately, we have seen no such evidence…

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