By Justin Lahart
8.4%: The financial sector’s share of gross domestic product.
Given everything that’s happened, surely the financial sector’s role in the economy is smaller now than it was before the recession hit, right?
Wrong.
Combined, finance and insurance firms accounted for 8.4% of U.S. gross domestic product last year, according to the Commerce Department, eclipsing the peak it hit in 2006. In 1950, the financial sector accounted for just 2.8% of GDP.
The growth in finance over the past 60 years hasn’t, by and large, been a bad thing. While from the outside, what financial workers do — take money from one pot, skim some off the top, and put it into another pot — seems meaningless and, to some people, outright wrong, it does serve a purpose. Deploying capital to the places where it can be best used helps the economy grow. And since the financial sector bears some risk in doing that, it should get a piece of the pie.
But that only goes so far. New research by New York University economist Thomas Philippon suggests that the financial sector is enormously outsized. He finds that, despite all the advances in information technology since the 1980s, the financial sector has become steadily less efficient: All that it has been gained from increased computing power and vast communications networks has been taken away, and then some, “by increases in trading activities whose social value is difficult to assess.”
The upshot, says Mr. Philippon, is that finance’s share of GDP really ought to be about two percentage points lower than it is now. The industry’s travails may be far from over.
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The expertise shines thogruh. Thanks for taking the time to answer.
There is not even a mention here of the Community Reinvestment Act or GAAP and non-GAAP and CAFR and Dodd-Frank, etc. In other fantasy tales I suppose there are those that think ObamaCare will also simplify things too and that the master plan of one public health insurance system will consolidate and simply for resource savings. I believe that like I believe in all the great campaign finance reform show trials from the past.
Financial services as a part of GDP?!?! What a joke. Wall Street creates nothing. They just shuffle paper around and take a cut, like the casino it is. It used to be about capital allocation for real value creation (and I suppose there still is a small component of that), but now its about fleecing the marks and stealing from the taxpayer.