graphs at:
http://economix.blogs.nytimes.com/2013/06/11/financialization-as-a-cause-of-economic-malaise/
Economix - Explaining the Science of Everyday Life
June 11, 2013, 12:01 am
‘Financialization’ as a Cause of Economic Malaise
By BRUCE BARTLETT
Bruce Bartlett held senior policy roles in the Reagan and George H.W.
Bush administrations and served on the staffs of Representatives Jack
Kemp and Ron Paul. He is the author of “The Benefit and the Burden:
Tax Reform — Why We Need It and What It Will Take.”
Economists are still searching for answers to the slow growth of the
United States economy. Some are now focusing on the issue of
“financialization,” the growth of the financial sector as a share of
gross domestic product. Financialization is also an important factor
in the growth of income inequality, which is also a culprit in slow
growth. Recent research is improving our knowledge of
financialization, which has yet to get the attention of policy makers.
According to a new article in the Journal of Economic Perspectives by
the Harvard Business School professors Robin Greenwood and David
Scharfstein, financial services rose as a share of G.D.P. to 8.3
percent in 2006 from 2.8 percent in 1950 and 4.9 percent in 1980. The
following table is taken from their article.
They cite research by Thomas Philippon of New York University and
Ariell Reshef of the University of Virginia that compensation in the
financial services industry was comparable to that in other industries
until 1980. But since then, it has increased sharply and those working
in financial services now make 70 percent more on average.
While all economists agree that the financial sector contributes
significantly to economic growth, some now question whether that is
still the case. According to Stephen G. Cecchetti and Enisse Kharroubi
of the Bank for International Settlements, the impact of finance on
economic growth is very positive in the early stages of development.
But beyond a certain point it becomes negative, because the financial
sector competes with other sectors for scarce resources.
Ozgur Orhangazi of Roosevelt University has found that investment in
the real sector of the economy falls when financialization rises.
Moreover, rising fees paid by nonfinancial corporations to financial
markets have reduced internal funds available for investment,
shortened their planning horizon and increased uncertainty.
Adair Turner, formerly Britain’s top financial regulator, has said,
“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.”
He suggests, rather, that the financial sector’s gains have been more
in the form of economic rents — basically something for nothing — than
the return to greater economic value.
Another way that the financial sector leeches growth from other
sectors is by attracting a rising share of the nation’s “best and
brightest” workers, depriving other sectors like manufacturing of
their skills.
The rising share of income going to financial assets also contributes
to labor’s falling share. As illustrated in the following chart from
the Federal Reserve Bank of St. Louis, that share has fallen 12
percentage points since its recent peak in early 2001 and even more
from its historical level from the 1950s through the 1970s.
Labor Share of Nonfarm Business Sector
The falling labor share results from various factors, including
globalization, technology and institutional factors like declining
unionization. But according to a new report from the International
Labor Organization, a United Nations agency, financialization is by
far the largest contributor in developed economies (see Page 52).
The report estimates that 46 percent of labor’s falling share resulted
from financialization, 19 percent from globalization, 10 percent from
technological change and 25 percent from institutional factors.
This phenomenon is a major cause of rising income inequality, which
itself is an important reason for inadequate growth. As the
entrepreneur Nick Hanauer pointed out at a Senate Banking, Housing and
Urban Affairs Committee hearing on June 6, the income of the middle
class is critical to economic growth because of its buying power. Mr.
Hanauer believes consumption is really what drives growth; business
people like him invest and create jobs to take advantage of
middle-class demands for goods and services, which must be supported
by good-paying jobs and rising incomes.
According to research by the economists Jon Bakija, Adam Cole and
Bradley T. Heim, financialization is a principal driver of the rising
share of income going to the ultrawealthy – the top 0.1 percent of the
income distribution.
Research by the University of Michigan sociologist Greta R. Krippner
supports this position. She notes that financialization exacerbates
the well-known problem of corporate ownership and control: while
corporate assets are owned by shareholders, they are controlled by
managers who often extract an excessive share of corporate profits for
themselves.
One main source of income for financial executives is fees paid to
financial asset managers, according to the Princeton economist Burton
G. Malkiel. Among the best compensated of these are hedge-fund
operators, who typically receive 2 percent of the assets under their
control plus 20 percent of any increase, annually. (Additionally, they
reap special tax benefits that are widely viewed as unjustified.)
Professor Malkiel has long been a fierce critic of actively managed
funds, which seldom deliver better returns than an investor could get
by simply buying low-cost index funds. Over the decade ending in 2011,
index funds easily outperformed actively managed funds, in part
because of the low fees on the former and high fees on the latter.
Among those pointing their fingers at financialization is David
Stockman, former director of the Office of Management and Budget, who
followed his government service with a long career in finance at
Salomon Brothers and elsewhere. Writing in The New York Times, he
recently said financialization was “corrosive” and had turned the
economy into “a giant casino” where banks skim an oversize share of
profits.
It’s not yet clear what public policies are appropriate to deal with
the phenomenon of financialization. The important thing at this point
is to be aware of it, which does not yet appear to be the case in
Washington.
Copyright 2013 The New York Times Company
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your
own way and let people talk.) -- Karl, paraphrasing Dante.
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