‘Financialization’ as a Cause of Economic Malaise

[Scuba]

http://economix.blogs.nytimes.com/2013/06/11/financialization-as-a-cause-of-economic-malaise/

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.

...

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.



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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.

[on point]

1. This should be considered as a tax or friction on the economy

Last edited Tue Jun 11, 2013, 11:55 AM - Edit history (1)

Just like all the neo econs want to consider regulations or wage increases. The finance sector provides little value but has created a monopoly rent extraction situation. They need to be cut back dramatically to reduce their friction load on the economy and better match the slight value they provide

Start with higher tax rates, transaction taxes and tax all income equally.

[Scuba]

2. Excellent. Thanks for posting.