Writing in the New York Times, Bruce Bartlett lays out the case that the growth of the financial sector is one of the reasons the economy is growing so slowly:
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.
Read the whole thing.
His argument is quite closely related to the one I’ve been making for some time around here about the healthcare sector: massive federal subsidies, declining returns to scale, driving investment away from other sectors (that employ more people) towards itself. At this point just these two sectors account for more than a quarter of the entire economy and they have a lot fewer than a quarter of the people working them.
It is always nice when the smartest people in the world take notice of reality. Are they really this dim, or is this willful blindness?
This is about pundits/experts in general not Bruce Bartlett specifically. He may actually have an outstanding record.
There is also this:
“The U.S. employment “sag†of the 2000s is widely recognized but poorly understood. In this paper, we explore an under-appreciated force contributing to sluggish U.S. employment growth: the swift rise of import competition from China. We ï¬nd that the increase in U.S. imports from China, which accelerated after 2000, was a major force behind recent reductions in U.S. manufacturing employment and that through input-output linkages with the rest of the economy this negative trade shock has helped suppress overall U.S. job growth.”
http://conference.nber.org/confer/2013/LMs13m/Acemoglu_Autor_Dorn_Hanson_Price.pdf
I always have trouble with one of the sub-arguments Bartlett makes, that high compensation in finance channels skilled workers away from other fields. Without some idea of the direction job flows would naturally take, I find such claims theoretical at best. Would they be surgeons? Computer programmers? Teachers? Plumbers?
PD:
As I’ve also been saying for some time. Here’s an important snippet from your link:
That’s only possible through currency manipulation of one sort or another.
“I find such claims theoretical at best. Would they be surgeons? Computer programmers? Teachers? Plumbers?”
Seems pretty solid to me. If the finance sector soaks up just 5% of GDP instead of 8%, they need many fewer workers. They soak up a high percentage of kids from our elite schools and kids at the top of their classes. Those kids would be doing something. Not sure it matters what they would be doing.
The really bad part of this is that we werent getting much in the way of good, new products. If the mortgage bubble had produced a new kind of mortgage that was cheaper and/or better, they way most new products find a niche, we would have come out of the bubble much better off. Instead, they created crappy products that made them a ton of money but were bad for consumers.
Steve
“Would they be surgeons? Computer programmers? Teachers? Plumbers?”
From what I’ve read, they would be nuclear physicists and mathematicians.
I always have trouble with one of the sub-arguments Bartlett makes, that high compensation in finance channels skilled workers away from other fields.
Lots of guys with PhDs in physics and applied mathematics have gone into hedge funds in recent decades. Let’s see, your choices are lots of hard work that MAY get you a tenure track position (which you may or may not get) vs. lots of hard work that WILL get you a high level of compensation with an outside shot at being a centimillionaire (or better). Hmm, what to do, what to do…. What’s bad is that a lot of the people doing that are coming from the best schools, too.
At this point just these two sectors account for more than a quarter of the entire economy and they have a lot fewer than a quarter of the people working them.
Yeah, but they’ve got the right KIND of people working in them, the kind with connections and the money and the will to use them to further the interests of elected officials, and the haze of hangers-on around the elected officials. All in return for a certain quid pro quo, of course….
In this paper, we explore an under-appreciated force contributing to sluggish U.S. employment growth: the swift rise of import competition from China.
Wow, you mean letting China have unfettered access to our markets without reciprocity might have bad consequences for American workers and factories? Who could’ve guessed!
Bartlett does link to a study that he says supports his contention, but the study does not address the point directly, and from skimming it all I can find is a claim that the financial sector uses much more technology than other sectors. I think this could mean that there are IT people that might have worked in other sectors, which is easy to imagine since their jobs/skills are not financial sector specific. (And the purported need for more H1B visas suggests a shortage [of IT people willing to work at the correct wage])
@Icepick, but what is the counterfactual story about these “PhDs in physics and applied mathematics” if they didn’t go into finance? Are they working in Universities, blocking tenure tracks for other PHDs? Particularly in a bad economy, its hard for me to see how shrinking one sector necessarily contributes to opportunities in another. So the Harvard PhD takes the job of a Michigan PhD and so on . . . and I don’t have any reason to believe that one would be better at his job than the other based upon school, unless the job entails sucking up to Harvard grads (i.e., government).
Necessarily, no. But there’s a pretty good likelihood. Think of it this way. Let’s say that there’s one sector in which you’re guaranteed (emphasize: guaranteed) a 10% return on your money. In the rest of the sectors you’ve got a 50% change of a 1% return and a 50% chance of losing everything. Which sector do you invest in?
It’s possible in that manner for one or two sectors, underwritten or nearly underwritten by federal and state governments, to suck up a lot of investment. Investment that might under other circumstances be going into other sectors and producing more jobs.
Don’t underestimate the importance oi sucking up to other Harvard types in the quest government for funding! Those grants just don’t approve themselves.
But what you describe would probably be what would happen. The idea is that eventually these big, educated brains would end up doing something else useful – like working for the NSA hunting enemies of the state. (You know, Republicans.)
Which gets to another sector of the economy that over-produces thanks to a confluence of easy rhetoric and governmental and financial sector self-interest: higher education.
Why would a group of bright, motivated people need to necessarily do stuff we are already doing? With such a pool it is possible we might even see some innovation and some real start ups. What if Bill Gates had gone to school during a financial boom? Does he start Microsoft or go make millions at an investment bank?
Steve
steve, that’s why people have been lamenting the growth of the financial sector. Charlie Munger was complaining about this quite a while back, as have others. On the one hand, i is a vast waste of talent. On the other hand, it is easier to get rich in the financial sector skimming off the flow than it is going out and changing the world. When gambling, it’s always best to work for the house unless you can set up your own.
Seriously, you can fight for ternure, or you can create a start-up and hope to “make it”, or you can become this guy. That’s what the incentives are, although most don’t know about them. I don’t think anyone at UF’s math department talked about this kind of stuff. Hell, if I’d known about THESE careers I’d have gone into applied math. I could have gotten into the game soon enough that I could have helped crashed the world economy. Damn it, I hate missing out!
Is Bill Gates an indispensable guy? I don’t think so. That may underlie some of my skepticism here; I think the indispensable person is rare (George Washington comes to mind), so the potential harm from misapplication of talent is speculative.
I also believe people have a general reckoning of the colors of their parachute, and are more likely to seek to optimize occupation within a given area. Limiting doctor compensation is most likely to make nurse practitioner jobs more attractive, not moving to North Dakota to be a wildcatter. The definition of “financial services” used in the attached link broadly covers everything from hedge fund manager to local car insurance agent.
I think there are alot of interesting points, observations and conjecture here, but as a “root cause” guy Dave hit the issue in the essay. It starts with government intervention through subsidy, and by standing idly by as China manipulated its currency, which, I would note, was probably allowed since they were financing government. All else follows.
To be sure, money attracts brains. And different industries have different employment intensities. Or even the same industry – think the hallowed family farm vs modern agri-business. But markets have this funny way of sorting it all out…….until government types swoop in to “fix things.” (snicker)
As a concrete example: our firm deals almost exclusively in manufacturing. Small companies: $30 – $300MM. We can compete against the Chinese. Make them bigger and better; employ more. But along comes the government and D-F, and its effect is to drive those like us out in favor of the mega-firms. Textbook. While some contemplate their navel and muse about Bill Gates or tenure tracks……..get practical and think how government is destructive to your stated desires.